Peter L. Berger's Blog, page 607

EU Corporatism Stifles Digital Age Promise

“Why is there no European Google?” It’s a question we’ve been asking—and exploring the answers to—for a while now. A piece today in Politico Europe indicates that some people on the other side of the pond might be starting to catch on to the key issues here, too. John Springford, a fellow at the Centre for European Reform, argues that:

Brussels mandarins bemoan the lack of a “European Google,” and think they can help create one. Fearing that it is engaged in a race to create online giants — and losing it — the EU is resting on an outdated economic idea: the “national champion,” elevated to the European level.

The European Commission’s strategy for the digital single market contains some good ideas: harmonizing online consumer protection rules, curbing “geo-blocking,” which is used to charge different prices in different countries, and reducing VAT compliance costs, to name a few.But the EU wants to liberalize while giving European companies a helping hand.

By a helping hand, of course, leaders in Brussels mean cracking down on the American competition, particularly Google. It’s corporate welfare by way of regulation. Not surprisingly, it winds up in practice being the opponent of liberalization, protecting large corporations on the old European model from their modern competitors. The results are not good:

Manufacturing productivity on both continents grew at 3 percent a year between 1995 and 2007; but services productivity grew at 3 percent a year in the U.S., and just 1.3 percent in the EU. The difference was mostly due to a surge of American information technology investment.

And as we’ve pointed out before, there’s a significant gap between the U.S. and EU when it comes to the emergence of “unicorns”—start-ups that reach a valuation of $1B.The “third industrial revolution” of the digital age is creating a lag in Europe, where the legal and cultural climate is not conducive to the kind of creative destruction from which successful tech companies emerge.

It’s good to see these issues get a bit of organic attention in Europe, and even more heartening to see some of the correct diagnoses being made as to why there’s no “European Google.” But nobody should underestimate the scale of the shift that would be required on “the Continent” to adjust for the 21st century a corporatist model that dates back to before Bismark and Colbert.

ACA Rate Increases Go National

Earlier this year, when insurers across the country put in requests for big rate increases for their ACA plans, some hoped that state regulators, who have the power to review requests, would not approve the biggest price hikes. An early sign from Oregon was not encouraging—and now an article in the WSJ confirms the bad news:

Kentucky Insurance Commissioner Sharon Clark approved the 25.1% increase requested by the Kentucky Health Cooperative, the largest insurer on the state’s insurance exchange […]

Oregon’s Laura Cali allowed an average 25.6% increase for Moda Health Plan Inc., the biggest plan on that state’s exchange. In Ohio, Lt. Gov. Mary Taylor approved a 14.5% increase from Medical Mutual. In Michigan, BlueCross BlueShield won approval for the average 11.4% increase from insurance director Patrick McPharlin.In Idaho, insurance director Dean Cameron said that an average 23% increase by Blue Cross of Idaho Health Service Inc., was disappointing but “not unreasonable” and that he didn’t have the power to stop it.

The article is quick to point out that not all states are seeing high increases; indeed, some states are only seeing small upticks. But the trend is showing in enough states that it should worry ACA supporters. They might be quick to point out that consumers won’t have to bear the full brunt of these increases because federal subsidies make the care more affordable. But that response reveals a classic—and dangerous—band-aid approach to policy. Pumping more money into an unsustainable system by subsidizing consumption might make things somewhat better for consumers in the short term, but it’s an approach that yields diminishing returns as the system begins to groan under its own weight.

Ukraine Gets Its Debt Deal

The rumors yesterday were true: Ukraine has signed a deal with its creditors that includes a 20 percent haircut on the face value of a debt that totaled almost $18 billion. In addition, the deal will extend the maturity of the debt by four years, with interest rates set at 7.75 percent. The deal was signed after weeks of tense negotiations between Ukraine’s Finance Minister Natalie Jaresko and representatives of various private bondholders, among whom the largest was Franklin Templeton.

Ukraine now gets some breathing room to sort out at least its looming obligation to Russia, to which it owes $3 billion by the end of December. But as we noted yesterday, the hole Kiev finds itself in appears to be too deep for this restructuring deal to make a material long-term difference. According to Bloomberg’s analysis, serious reform is the only way to get the country back on track.And though Ukrainian President Petro Poroshenko has been touting progress on this front, it doesn’t look like much meaningful headway is being made. Taras Kuzio, writing at Foreign Policy’s Democracy Lab, paints a damning picture of Poroshenko’s record thus far. The article is very much worth reading in full, but here’s a taste:

Any effort to declaw Ukraine’s oligarchs has to start with the country’s notoriously corrupt energy sector, which has sucked billions from the budget. Perhaps the most visible of the country’s energy tycoons is Dmytro Firtash, who began trading gas in the 1990s with the support (as he admitted to the U.S. Ambassador to Ukraine) of mafia don Semyon Mogilevych, who is wanted by the FBI. Firtash and the other members of what has been called the “gas lobby” have successfully cultivated mutually profitable ties with all of Ukraine’s presidents (including Poroshenko), the prosecutors’ office, and the security services […]

In fact, Poroshenko has a long record of collaborating with Firtash that goes back to Leonid Kuchma’s presidency prior to the 2004 Orange Revolution. Less than a month after the Euromaidan revolution, Poroshenko travelled to Vienna with boxing champion (and now mayor of Kiev) Vitaliy Klitschko to seek political support from Firtash, who was awaiting trial there over U.S. demands to extradite him to face corruption charges. While they were in Vienna, Poroshenko and Klitschko struck a deal granting the leaders of the “gas lobby” (Firtash, former Energy Minister Yuriy Boyko, and Yanukovych’s Chief of Staff Serhiy Lyovochkin) immunity from prosecution in exchange for the oligarchs’ support — in the form of money, media, and connections — for their political ambitions. “We got what we wanted — Poroshenko as president and Klitschko as mayor,” Firtash bragged to the Viennese court.

Ordinary Ukrainians are no fools. Recent polls found that 72 percent of respondents think the country is heading in the wrong direction, and most strongly disapprove of Poroshenko’s handling of every portfolio apart from relations with the EU. The country’s “misery index”, calculated by combining inflation rates with unemployment, is second only to Venezuela’s, and most people just aren’t seeing the kinds of changes that make a difference in their lives.

Kuzio concludes by saying that if current trends continue, Ukraine’s Euromaidan revolution could easily be remembered in the same way as the Orange Revolution of more than a decade ago: a failure that allowed counterrevolutionary, pro-Russian politicians, represented at the time by the person of Viktor Yanukovych, to stage an electoral comeback. Some things are different this time around—open conflict is festering in Ukraine’s east, and there is evidence that a new Ukrainian pro-European national identity is slowly being born—but Kuzio’s point is worth considering. History never repeats itself exactly, but neither should those of us who wish the best for Ukraine be convinced that this time is altogether different.

Rumor: Ukraine Debt Deal To Be Signed Tomorrow?

The rumor mill is churning away as the September deadline approaches for Kiev to cough up the dough for a massive sovereign debt repayment to a team of international creditors led by Franklin Templeton. The latest news, Bloomberg reports, has Ukrainian bond valuations soaring on the rumor that a deal to restructure the debt under terms reasonably favorable to Kiev is set to come out tomorrow:

The nation’s $2.6 billion of notes maturing in July 2017 gained 2.16 cents to 55.54 cents on the dollar at 7 p.m. in Kiev, headed for the biggest daily gain since July 2. Ukraine’s Novoye Vremya magazine reported Wednesday that a debt deal will be signed tomorrow, citing an unnamed source in Ukraine’s Finance Ministry. “There is no deal yet,” Finance Ministry spokeswoman Daria Marchak said by phone from Kiev. A spokesman for the creditor committee declined to comment.

A deal would end five months of negotiations between the war-torn nation and a creditor group led by Franklin Templeton. The sides appeared to come closer to reaching an agreement this week when a person with knowledge of the negotiations said they are considering a 20 percent cut to face value, half of what Ukraine was originally demanding of bondholders.

Across the hall at Bloomberg View, however, expert commentator on all things Ukraine and Russia Leonid Bershidsky, whose coverage of the ongoing crises has been quite solid, puts things in grim perspective, arguing Ukraine is too corrupt for the rumored debt deal to affect Kiev’s bottom line very much. After running through the results of a series of Bloomberg’s own analyses and surveys that lay out a much more pessimistic economic forecast for Ukraine than even the IMF is projecting, Bershidsky gets to what he identifies as the real insurmountable obstacle: the untaxability and unchangeability of Ukraine’s corrupt “shadow economy”.

Ukraine does have one reliable growth engine: its shadow economy. According to a recent paper from the economy ministry, in the first quarter of 2015, when the official economy was in freefall, the shadow sector increased its share of official GDP by 5 percentage points year-on-year, to 47 percent. That is a modest estimate based on an average from several methods, some of which are not particularly relevant to Ukraine. Measured by consumer spending and retail trade, the informal sector has swelled to 56 percent of GDP.

The two reasons for this expansion are corruption and tax evasion. The Ukrainian government is making a visible effort to combat graft — many official agencies have switched to transparent electronic procurement systems, and the newly formed National Anti-Corruption Bureau promises to send its first cases to court by the end of this year. Even so, businesses still complain of bureaucrats’ depredations, the national prosecutor’s office is locked up in a struggle between reformers and veterans used to the old ways, and the country’s notorious judicial system remains unreformed. Changes to the tax code are in the works, but these are insufficient to induce businesses to start paying payroll taxes instead of offering employees unofficial cash salaries.Bringing the shadow sector into the reportable, taxable economy would be far more important to growth than the proposed debt write-off. Given the nominal first-quarter GDP of $15.7 billion, the unofficial turnover (assuming a 47 percent shadow economy) reached $7.4 billion in those three months alone. Even the war in eastern Ukraine, the government’s perpetual excuse, means less to the nation’s future than this, much quieter war with the sizable part of the country’s population that cannot imagine living by the rules.

The rumored deal would certainly be at least a bit of welcome relief in Kiev—among all the other challenges it faces, Ukraine has to pay back a $3 billion Eurobond to Moscow due at the end of the year. But if Bloomberg’s (and Bershidsky’s) analyses are right, the kind of hole Ukraine finds itself is too deep for any kind of one-time haircut to fully address. In other words, a deal tomorrow would at best loosen the noose a tiny bit.

And let’s not forget: at time of writing, we’re still just talking about rumors here.

More Ominous Statistics for Higher Ed Industry

Barely a week goes by without the release of new statistics pointing to the utter unsustainability of America’s existing higher education model. Last week, we reported that, thanks rising default rates, Moody’s is considering downgrading securitized student debt—a $1.2 trillion (and growing) problem fueled in part by federal subsidies for overpriced graduate programs. This week, the National Association of College and University Business Officers released a report showing that despite ballooning sticker prices, private four-year colleges have stagnant revenue because they have been forced to boost “tuition discounts” (grants, aid, and scholarships) to keep enrollment up. Nonetheless, enrollment is barely growing. The Chronicle of Higher Education summarizes NACUBO’s findings:

Tuition-discount rates at private, nonprofit colleges have once again hit an all-time high, and appear to be holding down net tuition revenue, according to preliminary estimates from the National Association of College and University Business Officers’ annual survey…

Colleges might decide to provide more institutional aid as part of a strategy to grow enrollment, or increase net revenue, or both. If those were the outcomes participating colleges were going for, though, the strategy doesn’t seem to be working terribly well for them, at least not as a group.Forty-eight percent of responding colleges indicated that freshmen enrollment stayed steady or decreased between fall 2013 and fall 2014. Nearly a third reported steady or decreased enrollment for both freshmen and all undergraduates…Meanwhile, projected average net tuition revenue for full-time freshmen barely budged in 2014, growing by a projected 0.4 percent. Once inflation is factored in, it dropped by 2.5 percent. The net-tuition revenue trend for all undergraduates was similar.

The data point to serious trouble on the horizon for non-elite colleges, which are being squeezed the most. While more students are willing to play the sticker price (or something close to it) for selective institutions, non-elite colleges are forced to compete for students by jacking up aid further and further, and losing revenue as a result. As Time reported:

Nearly a third of schools—mostly large, selective, wealthy universities with plenty of applicants—didn’t increase their discounts last year, NACUBO reported. The most selective colleges on MONEY’s Best Colleges list—those with admissions rates of 33% or less—gave only about half of their students grants.

But that still leaves more than 1,000 non-elite private colleges attempting to attract students with ever-bigger scholarships or discounts off their ever-higher tuition. In fact, among the 736 colleges in MONEY’s rankings, nearly 100 award a scholarship to every single freshman. Those schools accept an average of 66% of applicants.

Higher education professionals are clearly concerned about the rising discount rates mean for the future of the industry. If revenue and enrollment stay flat, lower-tier colleges will be squeezed harder and harder, and perhaps some will need to close their doors.

At Via Meadia, however, we don’t think that a shock to the industry would necessarily be such a bad thing. As we wrote last week, the higher education industry is characterized by “a combination of federally mandated costs and controls, runaway cost inflation driven by insiders who keep jacking up the price, perverse market incentives in a warped marketplace, dysfunctional mandates, guild controls and crony regulations.” All of these factors have converged “produce a system in which costs are increasingly out of line with true value—and with society’s ability to pay.”The fact that discount rates are rising indicates that students are becoming less willing to go deep into debt to pay for an overpriced education that might not even the skills they need to pay it back. This might be bad news for the sclerotic higher education industry and its army of blue-model employees in the short term. But it could be good news in the long term, if it finally nudges the industry in the direction of meaningful reform.

Ban Ki-moon Worried About State of Climate Summit

The momentous (we’re promised) climate summit in Paris is almost upon us, and with talks scheduled to begin in just over three months, the chorus of discontent over a lack of preparation is growing. We’ve had everyone from the French president to the UN climate chief to the EU climate chief express dismay at stalling momentum and sluggish process in the run-up these last few months, but now the UN Secretary-General is getting in on the act. Reuters reports:

“We don’t have much time,” [United Nations Secretary-General Ban Ki-moon] told a news conference with French Foreign Laurent Fabius, who will preside over the Paris talks.

“I hope negotiators and ministers (will) look beyond their national interests which is why I’m asking world leaders to give a clear message to their negotiators that they should accelerate this negotiation.”

UN members were asked to make pledges to cut emissions at the national level prior to the Paris talks. These Intended Nationally Determined Contributions (INDCs), as they’re called, were meant to build a better foundation for negotiations than existed in the disastrous Copenhagen summit six years ago. But so far only 56 countries have followed through on their submissions, a dismal participation rate well below thirty percent.

That’s not the only worrying piece of news for the impending talks. With just ten days of official negotiations remaining before things begin in earnest, the draft text is still over 80 pages long despite concerted attempts to pare it down. The bloated document has been described as “bewildering,” but cutting out text is sure to alienate various stakeholders and nations involved. Still, the fact that delegates have been unable to significantly trim it should set alarm bells ringing.In fact, if we’re reading the tea leaves here, the Paris summit is shaping up to be little more than a better-publicized version of these annual meetings that produce plenty of talk but precious little by way of a concrete deal.

Venezuela’s President Scapegoats Colombian Immigrants

Facing a growing economic crisis, Venezuela’s President Nicolás Maduro has found a group to blame: illegal immigrants. The Wall Street Journal reports:

In recent days, Venezuela deported more than 1,000 Colombian citizens and closed key border crossings in the frontier state of Táchira, where Mr. Maduro declared martial law in several municipalities. The actions were allegedly aimed at cracking down on rampant smuggling of price-controlled Venezuelan goods into Colombia, a flow that aggravates shortages in Venezuela.[..]

“Who comes over from Colombia? It’s people practically without education,” Mr. Maduro said in a televised address last week. “I’m not offending Colombia, I’m just telling a truth…From Colombia, all of the poverty and misery is coming over with a people who are escaping for economic needs and fleeing war.”

And, of course, the crackdown comes complete with new, broad-based authorizations for warrantless searches and other, ah, useful governmental tools, like a prohibition of “unauthorized public assembly or protest.” All of this shows just bad a spot Maduro finds himself in as Venezuela’s crisis reaches a boiling point. While it’s true that Venezuelan goods do go to Colombia, the reasons why have much to do with the failures of Venezuela’s socialism, and the country’s problems are in any case about far, far more than immigration. Maduro’s attempt to scapegoat Colombians won’t change that.

But the anti-Colombian turn did also produce this moment of :

Internet memes depicting Trump with Maduro’s bushy black mustache have swept social media. Others show Maduro donning Trump’s trademark blond comb-over.

Maduro brushes aside the comparisons with the American billionaire.“They’re saying Maduro is like Donald Trump! Imagine,” he said during an hours-long television broadcast on Monday. “I don’t even have his hairstyle – and least of all his bank account.”

No, Mr. Maduro—that might be your predecessor’s daughter. Some have recently claimed that Hugo Chavez’s heiress has a net worth of $4.2B, or about the same as Donald Trump. (That report may not have been independently verified, but there is evidence going back that the Chavez clan has done quite well for itself—as most socialist leading families tend to do.)

Perhaps Maduro just needs a few more years on the job—if he can keep it.

Surging Shale Will Heat Homes for Cheap This Winter

It’s been a hot summer, but that hasn’t stopped the U.S. from stockpiling near-record amounts of natural gas in preparation for its use in heating this winter. The FT reports:

By the onset of winter, gas banked for the heating season is likely to approach or exceed 4tn cubic feet, surpassing a previous high set in 2012, analysts believe.

The forecasts are surprising, because this summer has been warmer than the last two and the 10-year norm, according to Commodity Weather Group. Power plants have consumed 4bn cu ft per day more gas than in 2014 as they meet air conditioning needs and turn away from coal as an energy source, according to Bentek Energy.

A strong supply of natural gas means cheaper prices, and for thousands of Americans that heat their homes with the energy source that’s going to mean lower heating bills this winter. (Similarly, the current glut of crude is forecast to put around $90 per month in the pocket of every American household.) That’s good news all around, but especially so for America’s poorest who will now see more money freed up in their budget in the coming months.

And of course, this all comes to us courtesy of shale. The EIA just revised its natural gas output expectations downward slightly through the rest of the year, explaining that “production from new wells is not large enough to offset production declines from existing, legacy wells.” But the short-term impact of that slight decline will be offset by the fact that our winter stores are well on their way to being full. Bring on the cheap heat.

Saudi, Iranian Executions Skyrocket

Executions are soaring in Saudi Arabia even as both external and internal threats have the KSA’s government feeling threatened. The Independent reported yesterday:

Saudi Arabia has executed at least 175 people in the past year, at a rate of one every two days, according to a report by Amnesty International.

The kingdom killed 102 convicted criminals in the first six months of 2015 alone, putting it on course to beat its 1995 record number for the calendar year of 192. Those killed included children under the age of 18 at the time of the offence, and disabled people.

Amnesty, which alongside the AFP news agency keeps a record of the number of people the Saudi government kills, said the execution rate suddenly surged in August last year and continued to rise under the new King Salman from January.

International legal safeguards and norms proportional punishment were both ignored, and some very horrible stuff—including the use of torture to generate confessions—is undoubtedly at work here.

Saudi Arabia is not alone. As regional unrest grows, leading powers in the area are cracking down internally. Tehran, for example, broke its own record on capital punishment last year, and is set to do so again this year. According to an Amnesty report released in June, Iranian executions are much higher than officially reported—over one per day, a pace that would mean over one thousand this year.Internal repression, human rights abuses—many of the leading concerns of Wilsonian humanitarians, in short—are often in the Middle East inextricably tied to the state’s perception of security concerns. Until the wars stop and regional sectarian concerns are alleviated, expect to see more news like this.

Doc Shock in CA: 75 Percent of ACA Plans Are Narrow

Seventy five percent of Affordable Care Act plans sold in California are considered to give access to narrow networks, according to a new study. That puts the Golden State in fourth place as the state with the narrowest networks behind Georgia, Florida, and Oklahoma. More, via the LA Times:

Nationwide, 41% of networks were labeled narrow, meaning they included 25% or less of the physicians in a rating area […]

To hold down premiums under the health law, big insurers such as Anthem Inc. and Blue Shield of California cut the number of doctors and hospitals available to patientDan Polsky, executive director of the Leonard Davis Institute of Health Economics at Penn and the lead researcher, said narrow networks can be an effective way to control medical costs.But he said consumers still don’t have an easy way to tell whether a health plan is narrow or not before enrolling.

Polsky concedes that narrow networks can be a good thing, but objects to how they have been implemented. And there is another issue at stake here, and that’s costs themselves. The purpose of narrow networks is to control costs, but early signs indicate that, at least in some places, premiums will go up in 2016, perhaps drastically.

As regulators sit down to review the large rate increases that insurers across the country have requested for next year, it’s too soon to tell how it will all shake out. In California, costs don’t appear to be a huge problem: 2016 will reportedly only see an average increase of four percent in California. But in Florida, one insurer, United Health Care, has requested an average hike of 18 percent, and Florida is one of the states the report says has particularly narrow networks. (And even in California, four percent one year, four percent the next, and it all begins to add up.)If premiums do indeed spike the way insurers have requested, especially if the spikes occur in some of those states that have narrowed their networks, the ACA will be a bill that has seen both narrowed networks and raised costs. Paying for more for less choice is a deadly combination.