Celebrating the Fall of the American Empire

Burning the Midnight Oil for the Next American Revolution
crossposted at Docudharma, ProgressiveBlue, MyLeftWing, and Agent Orange

As people look back to the decade just past, and as we look ahead to the long, hard job ahead of us, many people describe the decade in many different ways - tumultuous, chaotics, catastrophic, liberating, tragic, joyous - but it seems that nothing recycles so easily as a phrase, and so the punditry online seem to have settled on The Roaring Teens.

But consider how it could have all gone so badly wrong, had the American Empire not collapsed. Whether you were thrilled or dismayed by the Roar in the Roaring Teens, consider what might have happened to our revived Republic had history taken a different turn in the aftermath of the Currency Collapse of 2011.

It is this perspective I wish to offer, since I can recall the New Year of 2010 arriving, and I feared much of what did in fact happen in 2011 - and yet because I did not see the possibility of the liberation of our nation from our self-imposed shackles of Empire, I did not for a minute imagine what the decade would bring.
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The Currency Crisis

I recall people at the time writing about the risk that China would "unload" US Savings Bonds, as if China had bought the Savings Bonds as an investment. The reality was, of course, that they bought the bonds to keep the US$ expensive and the yuan cheap (well, to keep the renminbi cheap, in those days before full convertability).

The other reality, which was tracked by a different set of people with a different set of interests, was domestic Peak Coal for China. Late in the Do-Nothing Noughties, people heard promises from China that they would reduce carbon emissions and invest in carbon neutral technologies, but did not put two and two together: the speculation regarding peak domestic coal for China was very real, and was coming much faster than outsiders were allowed to understand.

And so, silently, stealthily, China shifted its "currency basket peg" away from the US$ and to the Euro and Yen and Pound Stirling and Swiss Franc and Australian Dollar. It was not entirely off the radar, but since they moved the peg itself to keep the yuan/US$ rate from moving very far, very fast, it was lost in the noise of the countless phony emergencies generated by the typical "news" infotainment of the Do-Nothing Noughties.

And it maybe that they would not have acted quite as they did, but the Federal Reserve controversy of the summer of 2011 broke out, starting as a gambit aiming for some advantage in some long forgotten policy fight over whether to do too little, too late, both, or nothing at all. And they were faced with the choice of whether to keep sliding their peg - and what they knew that would mean for domestic inflation, given their need for dramatically larger coal imports from the United States to tide them over as they kept ramping up their New Energy power sources.

And of course, with the limp US recovery from the recession barely over, compared to the strong European and Japanese recoveries, as far as maintaining their export surge, the Euro and the Yen were where it was at ... the US market didn't seem nearly as important as the possibility of buying cheap coal from Americans desperate to earn foreign exchange. It seemed very much as if the growth opportunities in the American market were behind China, not ahead.

And so, they stopped shifting their peg.

They, of course, had not been so short-sighted that they forgot their southern flank. Indeed, the currency basket peg had been developed by Singapore, and its spreading use across ASEAN in 2010 had seemed to be a technical issue, when it was not described as a "response to US pressure".

And while India was not "in on it", there were Indian officials who were watching their rival and sometime adversary more closely than many others, and had already started arguing the case for the switch. In the face of the dramatic fall of the US$ in the summer of 2011, India adopted a currency basket peg with an unspecified but clearly only token US$ component.

Five years before, the world had been roughly half floating and half pegged, and the pegs were mostly to the US$. By the fall of 2011, the world was half floating and half pegged to hidden baskets that very clearly had very few US$ in them.

As Jon Stewart asked, "Why do they call it floating when all we are doing is sinking?" - leading, lest we forget, to calls for his resignation and return to the Comedy Channel from the ever more strident and ever less relevant conservative movement.


What happened was not inevitable

This is not to refresh anyone's memory - all of this is quite familiar. It is to bring the events to the forefront and ask, what if we had clung to Empire in the face of this crisis?

It seems so obvious today. Our ability to afford what turned out to be over a thousand foreign bases had been eroding for decades. And now, with a dollar trading at €0.34, ¥46, £0.32, 0.40 Swiss Franc, A$0.57 - the costs were exploding.

(Actually, take a moment and reflect on that - ten years ago, most of those would have been quoted as how expansive or cheap they were in US$, not how expensive or cheap the US$ is in the hard currencies of the world.)

And so the wise heads of the two establishment parties put together an austerity budget that would allow the US to continue paying the exploding costs of these establishments - and the consensus cracked.

It started with a filibuster in the Senate by some faction pursuing some narrow partisan advantage, as was normal for the decades just past. And so it was bounced over to the House.

But Congressmen are skittish, and the new Congressmen on both sides of the aisle from the "kick the bums out" wave of 2010 were in no mood for a grim austerity budget. The radicalized right wing of 2010 entered another of their rages on "wasting our money protecting German wealth from the damn Russkies". A bloc of Democrats who had held on by the fingernails in 2010 based on an uptick in "Green Jobs" were not about to cut back on their lifeline.

The so-called "Progressives" of the day, a motley mix of progressives, social liberals, and moderate Wall Street Democrats, fractured in the Great Defense Budget fight (wasn't it LIVE-FREE? In those days, if the name sounded good, that was supposed to replace actual sound legislation). So did the smaller Populists. But the balance from both took up the war cry of the radical right wing fringe.

They hit on covering the budget black hole - under the arcane rules of the day - by withdrawing from Europe by May 8, 2015, the 70th Anniversary of Victory in Europe day. Some clever soul called it the "Seventy Year Itch for a Real Victory Parade", quickly shortened to "The Victory Parade Strategy", and by then the dam had broken.

The administration fought it, the Pentagon Establishment fought it, but first a wave of primaries were won on promises paid for by retreating from this or that piece of foreign soil, and then a wave of general election victories won, on both the right and the left, and there was nothing to do but to accommodate it. The new House would not fund the foreign bases, and there was no way to make them.


Why Did We Ever Fear a Currency Collapse?

What is important to recall, as we look back at this glorious throwing aside of the shackles of Empire, is that it could have all come undone. A disaster, another Lyon Bombing, except in LA, and it might have all come apart.

Instead, the second impact of the great Current Collapse was felt. Fewer foreign students came to the US hoping to win a US green card - but when foreign students compared US Universities to the cost of foreign study at British or German or French or even Australian Universities, they kept coming, and then started coming in larger numbers.

Most of the rest of the world was not seriously affected by the Currency Collapse - it was, indeed, a US Dollar Collapse. The Canadian Dollar and Mexican Peso suffered collateral damage, but most countries were largely unaffected.

And so US machine tool exports boomed - often to unexpected locales and in competition with Chinese rather than European or Japanese producers. Foreign film-makers came to California to film movies set in Berlin and Paris and London and Sydney - to save on production costs. Japanese and German industrial software firms set up offshore branches in Silicon Valley in California and the Information Corridor in Massachusetts.

The US slipped toward into a recession in 2011, but was pulled out again in 2012 by the export surge.

A critical part of the Victory Parade coalition had been from Great Lakes and Midwestern states battered by two decades of import-for-profits "globalization", clinging desperately to the slender reed of hope offered by so-called "Green Jobs". Those policies seemed like more too little, too late on their own. But they met the rising tide of US$ oil prices, the wave of Chinese take-overs of US coal companies aiming at shifting US coal to export markets, the export boom, and US production capacity started growing at headlong rates.

And that relentless growth in investment, of course, was a big part of the Roar in the Roaring Teens.


But It All Might Never Have Happened

But count the number of ways it could have failed to happen. Suppose that the Federal Reserve controversy was successfully hushed up and papered over, as the Great Bank Robbery of the Noughties was first papered over with a flood of liquidity, then turned into an economic crisis, then finally lost sight of in the relentless generation of new mini-emergencies from the adrenaline addicted infotainment media of the era.

Suppose that the Currency Collapse had not happened in the aftermath of a "kick the bums out" election, or suppose that the "kick the bums out" sentiment had not spilled out the way it did to hit Congressmen in both parties.

Suppose that the Progressives or Populists in the House had held together, and held together on the basis of support for the Austerity Budget, which would have thrown the US into a deep recession and, so close to the previous one, quite possibly a "Not Nearly So Great" Depression.

Suppose that the Lyon Bombing had happened in LA, or St. Louis.

And its not like the new media in 2011 played the positive role that it now remembers. The heady days of 2013 and 2014 cast a rosy glow back to 2011 - but in 2011 itself, the new media were "going ballistic", as we used to say. The sky was falling, it was the administrations fault, the Republicans fault, the Democrats fault, an evil plot by the Chinese, an evil plot by the Illuminati using the Chinese as their cover story.

Once the breakthrough was made, the new media played a useful role in the wave election of 2012, and once that election was won, an even more useful role in winning more useful than useless "peace dividends".

Indeed, I have encountered peace activists who blame the early flailing around of the New Media for the "lost opportunity of 2011".

The "Victory Parade", after all, primarily involved Eurasia. We left Japan, but not Australia. We left Europe, but our presence in southern Africa grew. Most Caribbean states would be hard pressed to pin point the fall of the American Empire, since it feels like no such thing in Jamaica or Trinidad. Even today, the Department of the Navy oversees the largest navy on the face of the globe,dominating the Caribbean, west and south Atlantic, the east and south Pacific. The Department of War oversees bases on four continents.

And of course, Climate Chaos presses us ever harder. Certainly, we seem better placed to address it than it ever seemed we would, especially following the nationalization of US coal mines, and the "Two Centuries of Coal" conservation strategy that followed.

But all but the most incurable optimist will now admit that "better placed than before" may well end up being barely good enough for many and simply not good enough at all for many as well.

Still, nearing retirement, I am above all things a Pragmatist with a Capital P. Compared to the total mess that we could have made of things - and the total mess we would have made of things, if we had continued down the course set in the Kamikaze Nineties and the Do-Nothing Noughties - we are in far better shape than we had any right to expect.

And so, reflect on what damage could have been done if, instead of bringing down the Empire - the Empire we could not call be name while it lasted - we had wasted the Teens on a hopeless effort to save it. If not in Depression we would be teetering toward it. If not at war, we would have been lurching toward it. If not in climate hell, we would have been slipping inexorably toward it.

So tonight, let us raise a glass of near-export quality sparkling wine, and give a rousing toast for the Fall of the American Empire.

Midnight Oil: Forgotten Years

Few of the sins of the father,
are visited upon the son
Hearts have been hard,
our hands have been clenched in a fist too long
Our sons will never be soldiers,
our daughters will never need guns
These are the years between
These are the years that were hard fought and won

Contracts torn at the edges,
old signatures stained with tears
Seasons of war and peace,
these should not be forgotten years
Still it aches like tetanus,
it reeks of politics
How many dreams remain?
this is a feeling too strong to contain

The hardest years, the darkest years,
the roarin years, the fallen years
These should not be forgotten years
The hardest years, the wildest years,
the desperate and divided years
We will remember, these should not be forgotten years

Our shoreline was never invaded,
our country was never in flames
This is the calm we breathe,
this is a feeling too strong to contain
Still it aches like tetanus, it reeks of politics
Signatures stained with tears,
who can remember
We've got to remember

The hardest...
Forsaking aching breaking years,
the time and tested heartbreak years
These should not be forgotten years
The blinded years, the binded years,
the desperate and divided years
These should not be forgotten years,
remember

Aint Gonna Study War No More

Burning the Midnight Oil for the Arc of the Sun

I guess its natural, as an advocate for transport cycling and for transport systems like High Speed Rail, light rail, and Quality Buses that support cycle transport, that among the enemies of our long term national interest, that I tend to focus on the Oil Patch and their allies.

But, what would our economy be like if we didn't study war no more?

Consider just official Federal Defense Spending, in 2005 dollars and as a Percent of GDP (to closest 0.1%) (BEA):

• 1995: $476.8b, 5.2%
• 2000: $453.5b, 4.0%
• 2005: $589.0b, 4.7%
• 2008: $659.4b, 5.0%

You can see right there why it was necessary to have Bush rather than Gore elected as President in 2000, and why the two candidates on the Democratic side in favor of expanding the size of the army were the two finalists in the Democratic primary contest to clean up for the mess that Bush made of things.

Direct Federal spending on "Defense" goods and services was heading south of 4%, and that could not be tolerated.

Suppose we transitioned to a cap on "Defense" spending of 3%. That would be plenty for naval forces to defend sea lanes, though maybe not for maintaining the current level of amphibious assault forces ... it would be plenty for air forces for continental defense, though of course we might have to scale back on overseas air bases ... it would be plenty for armed forces for continental defense, though of course we might have to scale back on overseas air bases.

It would, indeed, be plenty to retain the biggest military force on the face of the planet. Just not necessarily enough to allow us to invade one country while planning to invade another one.

And at the present size of GDP, it would be about $400b in direct government Defense spending, which would free up about $260b annually to invest in actual national defense.


What would we be giving up

There is one thing that we would certainly have to give up under this plan: the Carter Doctrine:

The region which is now threatened by Soviet troops in Afghanistan is of great strategic importance: It contains more than two-thirds of the world's exportable oil. ...

This situation demands careful thought, steady nerves, and resolute action, not only for this year but for many years to come. ...

Meeting this challenge will take national will, diplomatic and political wisdom, economic sacrifice, and, of course, military capability. We must call on the best that is in us to preserve the security of this crucial region.

Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.

The Persian Gulf is in Dar Islam, on the faultline in the biggest structural conflict within Dar Islam, between Shia and Sunni, southeast of a rising China, northeast of a rising India, southwest of a European continent slowly developing the accouterments of a nation state, and south of a Russia ruled by an oligarchy well versed in using foreign policy adventurism to distract from domestic authoritarianism.

And what is the Carter Doctrine? That we must maintain sufficient military force to assure access to the Oil of the Person Gulf for the global oil market, because if the supply is cut off, the price will go through the roof.

And then look at the Price Tag of that policy ... given that there is no other geopolitical challenge that we face that we could not meet with the military force that can be maintained on a budget of 3% of GDP ...

... $260b/year is a conservative estimate. Its just the economic cost of government purchases of "Defense related" Goods and Services. It entirely omits the economic commitment to a perpetual trade deficit in the Energy sector. It entirely omits the economic commitment to the "strong" (which is to say, anti-export) dollar exchange rates required to maintain the global base network of over 700 foreign bases. It entirely omits the economic cost of directing so much of our government spending into the destruction of global production capacity.

Greatest of all, it entirely omits the social cost of the militarization of US society.

So, $260b is a conservative price tag.


And what is the Real Cost of the Carter Doctrine

These are real resources of the nation being directed into the Military-Industrial sector of the economy. The question, then, it what kind of National Defense could we buy for $260b/year in terms of Energy Self-Sufficiency?

I have sketched some of these before in various forums:

we can spend $75b per year over the next six years to electrify the Dept. of Defense "STrategic RAil Corridor NETwork - STRACNET. That requires capital funding, but only when oil is cheap ... in the context of expensive oil, bonds to electrify STRACNET are readily self-funding through user charges. A form of crude oil import tariff that slides off as crude oil approaches $80/barrel would suffice to "fund" that. Or else, we can simply deficit spend for that ... since cutting off 10% of our demand for petroleum imports is an investment that pays for itself in multiple ways.

We can spend $75b per year over the next decade to build local electric transport corridors ... from trolley buses and Rapid Streetcars through conventional Light Rail and commuter heavy rail all the way to the mass transit niche for the biggest cities. Fund those projects on an 80:20 federal match, include both direct and indirect impacts on Energy Independence and Congestion Relief, and there will be no difficulty finding projects that justify the public investment. And, again, we can simply deficit spend for that ... if we can spent $1T+ on trying and failing to gain access to the last big pools of cheap crude oil in the world, we can definitely spend $750b on permanent alternatives to crude oil based transport.

We can spend $5b a year over six years on Electricity Superhighways to connect our main regional consumption grids to renewable resource areas. We can spend $20b a year on electric inter-urban transport over the next decade, from Express HSR through Regional and Emerging HSR to electric stopping trains. We can spend $25b a year on interest subsidies for Connie Mae finance for decentralized CO2 emission reduction and energy efficiency improvements, repaid out of the reduction in operating costs, on an ongoing basis.

And that's just $200b over the next six years, $120b over the decade. There's $60b left to add, rising to $140b by the middle of the next decade. If I was looking for a single program in addition to those sketched above, I would consider a wholesale conversion of our agricultural production subsidies and price supports into ecosystem conservancy payments for agricultural practices that preserve and rehabilitate the life support capacity of our continent.


Cost / Benefit Analysis

Lessee: for $260b a year, spent over a long enough time span, we can reach oil independence and Energy Self-Sufficiency. Meanwhile, even at the present levels of the military budget, we cannot guarantee that we have the military capacity to keep the Straits of Hormuz open. A couple of supersonic cruise missile strikes on a carrier task group and a couple of supersonic cruise missile strikes on some oil tankers, and the Straits shut down.

This really is the stage before the running of the numbers, where you work out which options allow you to reach the objective and which do not. The above may not be the preferred option, but its on the list for evaluation. Meanwhile, the Carter Doctrine does not reach the objective of Energy Security, so it does not get on the list for evaluation.


Conclusions

Waddya think, I can reach any conclusions here without your help? That's crazy talk.




Midnight Oil - My Country Video Clip

Who do the UK and Spain intend to Invade?

Burning the Midnight Oil for the Arc of the Sun,
posted from My Left Wing

Earlier this month, the BBC covered a growing debate in the UK on its defense stance, and in particular on its £10b ($16.5b at current FX rates) program to build two aircraft carriers displacing about 70,000 tons ... over three times the size of their current "cruiser" carriers, and larger than anything but the ~100,000 ton US behemoths.

The BBC said, with its typical understatement:

But it is not just that. Perhaps more than any weapons except nuclear ones, aircraft carriers tend to be seen as a statement of how a country views its military role in the world. And therein lies a lot of the controversy which seems to surround them.

Bringing back to my mind the question ... who exactly are the EU planning to invade?
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Crossposted to Docudharma, to be cross-posted from MLW to Agent Orange circa 5pm EDT, 2pm PDT



Last year, while following up a subthread in the European Tribune commentary to How will the EU manage the pending collapse of the US Empire? ... and thanks to the contribution from JakeS ... I came across some peculiarities in the national navies of EU countries.

I was looking at the "EU navy" idea, and following up on vessels in the fleets of EU nations that would qualify as "Sea Control Ships", in the modern parlance. From the Wikipedia:

A Sea Control Ship (SCS) is a type of small aircraft carrier designed and conceptualized by the United States Navy under Chief of Naval Operations Elmo Zumwalt in the 1970s.[1] The SCS was designed due to severe cuts in Navy spending, requiring a cheap, flexible platform that could provide convoy escorts and deliver limited air power to the field without tying up an enormous aircraft carrier during times of conflict.

Given that for defensive purposes, Europe would be an enormous aircraft carrier, in my view the Sea Control Ship encapsulates precisely what it is that the EU might want an aircraft carrier to do ... protect shipping from pirates plaguing a sea lane, or from aggressive militants in one or another cause in small boats with high explosive on board, provide helicopter support for a humanitarian crisis, anti-submarine defense, and et cetera.

I was thinking of two in an EU Navy, the HMS Illustrious and HMS Ark Royal, slated for decommissioning in the Teens. However, I was ignoring the Spanish and Italian Navies (see note 1) ... with the Príncipe de Asturias and the Giuseppe Garibaldi (and the larger Cavour to come).

Except ... joining the Príncipe de Asturias in the Spanish Navy will be the Juan Carlos I amphibious assault vessel, and replacing the UK Invincible-class light carriers will be the Queen Elizabeth class heavy carriers.

The proposed Queen Elizabeth Class


What is the Queen Elizabeth for?

What are these ships for? Well, according to Navy Matters:

The Invincible-class of carriers were designed for Cold War anti-submarine warfare operations, with an airgroup of mainly ASW helicopters plus a limited air defence capability provided by a small number of embarked Sea Harriers. This essentially defensive role is no longer appropriate and the emphasis with the Future Aircraft Carrier (CVF) is now on increased offensive air power and an ability to operate a wider range of aircraft in a variety of roles.

The CVF mission statement has been officially defined: "The CVF is to be a joint defence asset with the primary purpose of providing the UK with an expeditionary offensive air capability that has the flexibility to operate the largest possible range of aircraft in the widest possible range of roles."

It is expected that CVF will be tasked:

• As an early coercive presence that can promote conflict prevention through deterrence;


• As a flexible and rapidly deployable offshore base during expeditionary operations when airfields may be unavailable or denied, or when facilities ashore are still being established; and


• Contributing to the support of peacekeeping forces, and, when necessary, initiating offensive military action.

They are for fighting wars, or for "promoting peace" by (ahem), posing the credible threat of fighting a war. In other words, what is the "problem" with a "Sea Control Ship"? They are not what you want when you want to invade a country or fight somebody else's navy.

Of course, this is all described in a very generic way, but it also had the support of the Pentagon Foreign Policy. From the Wikipedia:

Giving evidence to the House of Commons Defence Committee, the First Sea Lord Admiral Sir Alan West explained that interoperability with the United States Navy was a factor in deciding of the size of the carriers as the firepower of the carrier's airwing:

[for a] deep strike package, we have done ...quite detailed calculations and we have come out with the figure of 36 joint strike fighters ...that is the thing that has made us arrive at that size of deck and that size of ship, to enable that to happen. I have talked with the CNO (Chief of Naval Operations) in America. He is very keen for us to get these because he sees us slotting in with his carrier groups. He really wants us to have these, but he wants us to have the same sort of clout as one of their carriers.

What is the Juan Carlos I for?

The Wikipedia, again:

Juan Carlos I (L61) -- a strategic projection vessel (Buque de Proyección Estratígica (BPE)), -- is a planned multipurpose warship for the Spanish Navy (Armada Española), similar to American LHDs of the "Wasp" class.

And what is the role of the LHD's of the Wasp class? From GlobalSecurity.org:

These ships conduct prompt, sustained combat operations at sea as the centerpiece of the Navy's amphibious strategy of "Forward ... From the Sea." They provide the means to deliver, command and support all elements of a Marine Landing Force in an assault by air and amphibious craft. In carrying out their mission, the ships have the option of utilizing various combinations of helicopters, Harrier II (AV-8B) Jump Jets and air cushion landing craft (LCAC), as well as conventional landing craft and assault vehicles, illustrating the LHD's flexibility. In addition to embarked landing craft, the ships carry four LCPLs and two utility boats. Off the landing beach, the ships can ballast more than 15,000 tons of seawater for trimming during landing craft launch and recovery operations in the well deck.

I don't see any record of a U.S. Chief of Naval Operations saying they would like the Spanish Fleet to have an amphibious assault vessel as its flagship, so that it can slot in to a group of Wasp-class USN vessels ... but I really don't think its necessary. After all, it's just the one.

There's no point spending the extra for all that amphibious assault capability for a vessel that is going to be restricted to a Sea Control Ship role ... a second ship of the Príncipe de Asturias class would not only be cheaper to build and equip, but its also cheaper to maintain two ships of the same class than two ships of two different classes.

And its an amphibious assault vessel. You bring one amphibious assault vessel into a hot spot, and you can expect the locals to get ready for an amphibious assault. Even the Ozzies, who are buying an amphibious assault vessel of the same design (under the cover name "Helicopter Dock"), went with two of them.

Of course, it doesn't have to be with the American fleet. The French have two Mistral class amphibious assault ships, and three smaller landing dock ships, the British have the HSM Ocean amphibious assault ship and two smaller landing dock ships ... underneath the offensive air power of a naval carrier group formed around a Queen Elizabeth class heavy carrier, its entirely possible for an EU-only force to put on a fairly scary amphibious assault task force.


So, who you gonna invade, again?

Which brings me around again to the question I posed at the European Tribune last year ... who is the EU planning to invade?

The US, that I can understand. After all, we have an overseas base network of 700+ bases. Maintaining that many points of presence in so many countries overseas requires interference with local affairs. Interfering with local affairs in that many countries ensures that large numbers of people and large number of groups of people are going to be pissed off at the US. And we have had thirty years to cope with the decline of our crude oil energy production by developing renewable sustainable energy sources, but instead we have just amped up our oil addiction ... and when an addict fights to hold onto a weapon, a natural presumption is they are holding it in case they need it to feed their addiction.

So, except of course for the central insansity of the base network itself and the refusal to fit our consumption to our biocapacity, it makes perfect sense for the US to pursue massive carriers capable of supporting offshore air strikes deep into a large continent, and amphibious assault groups for going in and coercing nations into being willing participants in the base networks.

But ... why does Europe need amphibious assault capabilities? Why does Europe need carriers better capable of supporting an attack role, rather than carriers that are "merely" good for defense?

I'm missing something here? Or perhaps these ships don't really make sense after all?

Notes

(Note 1. For the Italian Navy, I have an excuse ... until the 90's, the Italian Navy was not permitted to operate aircraft carriers. For the Spanish Navy, no excuse at all ... the Príncipe de Asturias is not even the Spanish Navy's first light carrier.)

Beware of Geeks Bearing VATs

Burning the Midnight Oil for a Brawny Recovery also posted at My Left Wing, cross-posted to ProgressiveBlue, Docudharma and more TBA

If you wander around the fringes of economic discussion on these Interwebs, you may encounter sites extolling the wondrous vitrues of the VAT. "If only we would adopt a massive VAT, our two decade long decline in manufacturing output would be gone, and we would be an exporting powerhouse once again." ... well, no, that would be a stereotyping of the argument. A real sample of the claims sound more like this, from tradereform.org:

I Squared R Element Company is in Akron, New York. It makes industrial heating elements which are used for many processes to make other things, including glass and computer chips. The company was the low bidder on a contract to export to China.

However, the company lost the bid. Why?

I squared R was told it did not include, in its bid, China's 10% customs duty or the 17% value added tax(VAT) that must be paid at the border.

All our goods pay a 17% VAT at the Chinese border. And the uninformed say we are a high cost producer. Chinese exporters also get a 17% VAT rebate, i.e. they get paid to export.

And, yes, I have picked out this quote to pick on VAT-uber-alles advocates, precisely because it focuses on the part of the argument that is simply wrong.

The protection against imports is the tariff, not the VAT. The Chinese company that beat out the producer in that other Akron also has to pay 17% VAT on its production. If omitting the 17% VAT alone was what made the Akron, NY producer the "low bidder", its simply lying to call them the low bidder ... its like two different companies in the same state competing for a contract, and one claiming to be the low bidder because they left sales tax off their bid, which the other company included.

That element of VAT advocacy is nothing but hypocritical posturing at some stage along the line ... though not necessarily on the part of a particular VAT advocate, since it may well be that a particular VAT advocate has been misinformed by hypocritical posturing polluting their sources of information.


VAT and Trade

The other part of VAT that is raised is the export rebate (again from tradereform.org:

Companies are put out of business because of VAT subsidies. Foreign exporters are paid to export, in the form of VAT rebates. The products are relieved of tax burden.

This is the real effect of VAT on trade. A natural side effect of heavy, regressive, indirect taxes is that it increases the costs of exports. That is true of VAT, over-taxing for Social Security or other payroll taxes, retail sales taxes, (hidden) wholesale sales taxes, stamp duties ... its a general effect of heavy indirect taxes.

Now, from the perspective of the wealthy, a massive benefit of heavy indirect taxes is that those with freely disposable income can normally duck out on paying the indirect taxes if they direct their income to wealth accumulation instead of consumption. So if the poor, who spend all of their income, are paying 20% of their income in indirect taxes, the very wealthy, who devote much of their income to perpetuating their status as a member of a stable aristocracy of wealth, would only pay 10% if they only consume half of their income, and the more of their income they devote to accumulating wealth and economic power, the less of their income is subject to tax.

Further impoverishing the working poor, and pushing the shrinking middle class toward poverty ... well, them's the hazards. However, from the perspective of the wealthy, there is a downside ... that nasty trade effect.

However, the WTO permits indirect taxes to be rebated on exports. We do this in the US for some of our indirect tax burden ... indeed, we do it on a state by state basis, with sales taxes assessed in one state one payable by residents of that state. But if a particular municipality in Ohio has a total of 7% of state, county and city sales taxes, any exports from Ohio to China have a 7% "export rebate".

VAT is as easy to rebate as retail sales taxes, because of the way it works. Each business pays VAT on its inputs, and collects VAT on its sales, and hands over to government the difference between what it collected and what it paid. In other words, the government receives the VAT on every step in the production chain on the increase in the value of sales over the value of outlays.

Since each step of the way, the VAT that is owed is a simple percentage of the sale price, computing the amount to rebate at the border is straightforward.

By contrast to China and most of Europe, in the US our biggest indirect taxes are payroll taxes, and we do not have a mechanism in place to rebate the payroll taxes.

The rebate of indirect taxes on exports ... that's the trade effect of a VAT. Claiming that there is an impact on the import side is as silly as if a Chinese firm claimed we had unfair protection against Chinese products because "The Wal-Mart between Kent and Ravenna in Ohio charges sales tax on imports!!!".


Pushing Progressive Options Out of the Frame

Now, if the US wishes to pursue the neo-mercantalist policies of China, most of Southeast Asia, and etcetera ... what would that policy package be?

• Peg our currency at a steep discount, for exchange rate stability and competitive advantage
  
• Levy steep indirect taxes on domestic consumption, and rebate those taxes on exports
  
• Maintain protective imports and discriminatory trade practices for those industries that we are trying to develop

Some of the people pushing for the VAT would happily accept that full package. Others, however, might criticize it.

The progressive critique is that neo-mercantalism is an effort to export our unemployment overseas by pursuing trade surpluses, at the expense of the standard of living of the majority of the our population. Some few at the top will benefit from successful neo-mercantalist policy, while for the majority of the population, its a policy of taxing domestic consumers to finance infrastructure used for domestic production and export production alike.

And just like old-fashioned mercantalism, neo-mercantalism only works if there are countries that are in a position to run sustained trade deficits. After all, one country's exports is another country's imports - so the whole world cannot run a global trade surplus with itself. If everyone pursues a trade surplus, then on average half must fail.

Back in the days of "paleo-mercantalism", that country running the perpetual trade deficits was Imperial Spain, possessor of two mountains of silver in Mexico and Peru, which could be acquired by merchants in other European nations by selling things to wealth Spaniards, and then used to buy into the lucrative Asian carrying trade. More recently, it has been trade deficits by the United States as we have progressively hollowed out our industrial capacity while maintaining consumption on the back of credit extended to us ... as a side effect of the cheap currency policy.

But one reason the world experienced a financial crisis is that the US was in a financially fragile position, where our financial sector did not have the resilience to withstand a nasty shock ... which came in the form of an oil price shock. And if the US is the country chasing trade surpluses ... how then plays the trade deficit role we used to play?

While balanced trade can be sustainable over the long term, trade surpluses for all is strictly impossible, They are more than unsustainable, they cannot happen in the first place. So a policy regime in which economic success requires trade surpluses is a policy regime that, by definition, dooms at least half of the economies in the world to failure.

The corporatist critique of that policy package is different. Pegging the currency at a steep discount undermines the economic strength of corporations earning income in that currency. Further, it makes the maintenance of a 700+ strong foreign base network more difficult, and so undermines the coercive force that can be deployed in support of corporate economic power. And protective tariffs in high income nations undermines the ability of large transnational corporations to benefit from their relative advantage in operating cross-border production systems.

So the only element from the neo-mercantalist policy package that seems appealing to the corporatist is the VAT itself.

Of course, when we read David Brooks extolling the virtues of the VAT in the NYT ... we can be confident that it is not in a policy package including an exporters exchange rate for the US$, nor one that includes a general revenue tariff on all imports.


Naive populism deployed against the interests of the populace

This is not to say that a VAT is an unambiguously bad thing. Any tax is an element of a tax structure, and what matters is the shape of the entire tax structure. This is, of course, itself a critique of much VAT advocacy, which treats the VAT as a good thing in and of itself, no matter what the context.

Consider two different scenarios:

• (1) A VAT is put into place in order to avoid restoring capital gains taxes to a two-tier structure, placing a SSI levy on incomes in excess of $250,000 and simplification of the personal income tax structure to close loopholes used primarily by those earning over $250,000
  
• (2) A VAT is put into place that is large enough to eliminate the 12%+ payroll income tax that funds Social Security and Medicare

These two VAT's have quite different impacts, both in terms of trade and in terms of impact on the working poor and the middle class.

In the first scenario, the relative tax burden is shifted onto the working poor and middle class. A VAT of, say, 10%, taken on top of the 12%+ payroll income tax, would mean that the working poor would be paying 22%+ of their income in taxes. And the rebate of the VAT is primarily a way to increase indirect taxation without making the trade impact worse ... there is no substantial trade loss from a two-tiered capital gains tax or from closing income tax loopholes, and a payroll tax on incomes over $250,000 is not going to affect the decision whether production facilities should be located in the US or some other country.

In the second scenario, the relative tax burden is shifted away from the working poor and the middle class. VAT is levied on all "Value Added", and not on wage and salary "Value Added" alone. This is a net progressive impact, and its stronger then the regressive impact of shifting the tax burden off of production for export ... so over-all, its a net progressive change.

Now, which of the two do you think David Brooks is really arguing for ... using VAT to shift more of the tax burden onto the working poor and shrinking middle class, or using VAT to shift the tax burden off the working poor and shrinking middle class?

Naive VAT advocacy which overstates the trade benefits of the VAT and is, underneath that, founded on the impossibility of all countries replicating the trade surpluses of China ...

... that form of VAT advocacy plays into the hands of the corporatist version of VAT, where VAT is used because we have started to reach the limits of sales tax and payroll tax, and some other mechanism is needed to drive regressive indirect taxes up still further.

There is no way to achieve a progressive use of VAT if the political alliance that is formed in support of VAT includes the paymasters of the David Brook's of the world ... because under that political alliance, VAT will be use as a regressive tool. And once the machinery of VAT collection is put into place, and people become accustomed to it, it becomes entrenched ... it is far easier to defend against VAT used in a regressive way than it will be to restructure the system once it is in place.

So Beware of Geeks Bearing VATs.