Canadian Observer

There is something so beautiful about the structure of public private partnerships. The public puts up the cash and indemnifies its private partner against a good deal of the risk and the profits…well they flow to the private purse. Check out this article in the New York Times. Yes PPPs proving that the private sector really is a more efficient pick pocket than your typical G-Man.

Idle contractors add millions to Iraq rebuilding

By THE NEW YORK TIMES

Published: October 25, 2006

Overhead costs have consumed more than half the budget of some reconstruction projects in Iraq, according to a government estimate released yesterday, leaving far less money than expected to provide the oil, water and electricity needed to improve the lives of Iraqis.

The report provided the first official estimate that, in some cases, more money was being spent on housing and feeding employees, completing paperwork and providing security than on actual construction.

Those overhead costs have ranged from under 20 percent to as much as 55 percent of the budgets, according to the report, by the Special Inspector General for Iraq Reconstruction. On similar projects in the United States, those costs generally run to a few percent….

In case you all missed this one the FT is reporting that MPs in England are questioning why it is that prince Charles is exempt from paying corporate or personal income tax on his main sources of income. In related news economists came out with a study which showed that taxes on Royalty cause a mis-allocation of hereditary titles and would create a non-Pareto optimal allocation of resources.

By Goodwin Ginger

The head of the Bank of Canada David Dodge sent our bullshit detector into the red when he uttered this rather unintelligible defense of Income Trusts:

“The work we have done in terms of capital markets, per se, is that probably, on balance, income trusts make capital markets somewhat more complete and somewhat more efficient.”

Hardly convincing. Dodge must have had to dig deep way back to his school boy days at Princeton to come up with this half hearted defense of income trusts. Just re-read that sentence: per se …on balance…somewhat more complete and somewhat more efficient.”

Lets take this from a probabilistic point of view. As completeness is really a property of efficiency we can rewrite the sentence to read: ‘The limited work we have done on capital markets is that probably on a balance (.51) trusts make capital markets somewhat (.50) more complete and therefore somewhat more efficient.’ The probability that Dodge thinks that income trusts make the capital markets more efficient can be calculated by multiplying the values (.51) X (.50) = (.2550). So even if we just disregard the fact that this finding is based on limited research and as such means that the conclusions are not robust (i.e., you cannot generalize from them) there is still only a one and four chance that Dodge believes income trusts will improve the efficiency of capital markets. Not much of a commitment from Dodge.

How the Globe and Mail managed to translate this into the headline “Dodge touts trusts’ benefits: Bank Governor says they make markets more efficient,” we do not know. Maybe they already have trust in trusts as an efficient mechanism for the intergenerational preservation privilege. Not usually a measure of market efficiency but hey if stretched you could fit it in to the definition.

Indeed if the Bank of Canada has been doing any research on how income trusts increase capital market efficiency you could have fooled us. At their website they list all their Working Papers going back to 1996 way before Dodge ever got the top job. There is exactly one paper which deals with income trusts and the question of the efficiency of capital markets is not raised let alone assessed in one of those prevaricating models so beloved by academic economists and so detested by the real world. It gets even worse. In the past 48 issues of the Bank of Canada Review (dating back to 1994) there has been only one article (not issue but article) on capital market efficiency and income trusts do not even make a salutary appearance. So if the Bank of Canada has been doing any research on the implication of income trusts on capital market efficiency it is the best kept secret since the days when they were targeting inflation without telling us what the target was.

How do you know when an orthodox economist is prevaricating? When he or she speaks like a politician. Per se, on balance that is somewhat our position.

Back in July we presented Herut Berhane’s article on the Ethiopia Somalia conflict. We invite our readers to compare Herut’s coverage with what has been passing in the Star as professional coverage of the conflict. This version of the article was reproduced in The Bullet

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Another Front? The Proxy War in Somalia

Herut Berhane

One of the more interesting things about the North American media coverage on the Middle East is the way it ignores the inextricable political and historical links between those countries located on the northern eastern part of the Red Sea with those located on its southern and western shores. Indeed, one cannot help but wonder if the same ethnocentric logic that imagines Israel as somehow an Ashkenazi, European and more civilized country, is also in operation when the people of Yemen, Sudan, Eritrea or Somalia become the forgotten actors of the Middle East region. This invisibility, of course, suits all the major power brokers in the region except those attempting to build non-sectarian, inclusive societies.

Fortunately for us, in the past week the BBC in addition to most other media outlets has reported that the Ethiopian army (the U.S. ally in the Horn of Africa region) crossed over into Somalia. Some euphemistically call the Ethiopian action an incursion while others call it an invasion. But, whatever one calls it the lack of analysis around the Ethiopian action shows how little people understand of the far-reaching tentacles of the ‘war on terror.’ Important links between events in the northern Red Sea nations and their southern compatriots need to be fleshed out. After all, as Alex de Waal has argued, the rise and fall of political Islam in the Horn of Africa in the 1990s had a tremendous impact on the Middle East region even before September 11th ever happened.

The New Conflict in the Horn of Africa

The latest developments in the Horn of Africa have occurred in the context of the recent military victory in Southern Somalia of the Islamic Courts Union (ICU). I have been told that ordinary people, especially women in Mogadishu, supported the ICU because the alternative they faced was the 15 year ineptitude of so-called secular warlords. These same warlords were recently supported by Ethiopia, the U.S. and the UN to form the present transitional government based in Baidao; yet, rather than bring order, warlords continued to act with impunity. In contrast, the rise of the ICU has brought a measure of stability to Mogadishu for the first time in 15 years. So, although some sections of the ICU would like to import a form of Saudi Wahabism into what is a largely Sufi, and therefore highly tolerant Muslim country, the victory of the ICU must be seen in this context as a partial victory for ordinary people.

However, under the pretext that the ICU are made up of hard core Wahabi type Islamists that threaten stability in the Horn of Africa as well as the transitional government in Somalia, the Ethiopian state has decided to move into Somalia. This is a weak pretext given that residents of Mogadishu have been waiting for 15 years for a transition. Today, it is clear that there is a complicated proxy war happening in the Horn of Africa (one that in fact has been happening since the 90s). In this war the U.S. plays a heavy hand despite their supposed absence from the scene after Black Hawk Down.

The Ethiopian state has traditionally been the strongest state in the Horn of Africa, even in the Ottoman and early European colonial era (until the 1930s). Also it is important in this present conflict to know that until the 1974 Ethiopian revolution the country’s state claimed to be a Christian orthodox state in communion with the pre-Chalcedonic, so called Oriental churches (Coptic, Armenian, etc.), and with unbroken rule since the 4th century. Whatever else this history/myth may be it allows the contemporary Ethiopian state to project a particular kind of Christian image to itself and to the West despite the fact that its demographics tell a different story: half of Ethiopia’s population is Muslim. More importantly, what we can see is that such a strategy of extraversion by the Ethiopian state, for what ever justified or unjustified reasons, radically changes the internal meaning of cultural identities; so that those who were once neighbours and who have little history of religiously based in-fighting are inclined to become enemies.

The U.S. and the Ethiopian Incursion

The other context to the Ethiopian incursion into Somalia (which often uses ethnic Somali Ethiopian soldiers) is thus the unfettered support of the Ethiopian regime by the U.S. government despite the fact that since May 2005 the Ethiopian state has arrested the entire opposition, social justice activists, and shot and killed hundreds of ordinary demonstrators. In fact, what is clear today is that the U.S. has decided that the present Meles Zenawi regime in Ethiopia is the only desirable strong man in the Horn of Africa. One may even go so far as to say that the U.S. indirectly instructed the Ethiopian regime to arrest any alternative vision and players for the region, and thus also to arrest his opposition members as well. The ICU is the first major sustained challenge to both the current Ethiopian state and current U.S. policy in the region. However, part of the price paid for their slight victory is that Somalia may well face a full-scale invasion. And equally important, the Ethiopian Prime-minister will continue to strengthen his hand in the region through the total demolition of the Ethiopian opposition, and all those who may have an alternative, inclusive vision for the region.

The current regime in Ethiopia is made up of a coalition of ethnically based parties led by the Tigrai Peoples Liberation Front (Tigrai is a predominantly Orthodox Christian area in Northern Ethiopia). Prior to 1992, the TPLF was a rebel group whose operations were based in both Sudan and Somalia. In alliance with the Eritrean Peoples Liberation Front (also dominated by ethnic Tigrai people) the TPLF fought a guerrilla war against the Soviet backed regime in Addis Ababa under the pretext of the right to self determination for Ethiopia’s various ethnic nationalities.

It is well documented that at the end of the Cold War and during the fall of the Soviet backed regime in Ethiopia in 1991/92, out of a number of stake holders, the TPLF was brought into the then secret peace talks orchestrated by the U.S. because no one could doubt their military contribution to the demise of the admittedly tyrannical regime of Mengistu Haile-Mariam. However, after the fall of Mengistu’s regime, rather than engaging in a public process of reconciliation, the U.S. treated the Ethiopian state as a prize the TPLF deserved to own as a reward for their contribution to ending communism. Thus, even in 1992 people who were opposed to organizing Ethiopian politics along ethnic lines were brutally killed, tortured and imprisoned. In the mean time, the leader of the TPLF was declared by Bill Clinton to be one of a new crop of African leaders committed to democracy.

One of the results of the 17 year civil war fought against Mengistu’s regime is that it allowed the TPLF and its allies to set up a highly trained military network. It is this network that allows the TPLF to retain power domestically. In addition, this network continues to be perceived by the west as the only institutionalized infrastructure strong enough to counter the so-called Islamist threat in the Horn of Africa. It would seem that the one thing the failed 1993 Operation Restore Hope (when their Black Hawk was downed) taught the Americans is that in order to win a war in Somalia you need soldiers who have an intimate knowledge of the lay of the land. Undoubtedly, the TPLF is the only large U.S. allied army that has that knowledge. Thus, after the failed U.S. operation in Somalia, the Ethiopian state took over as the main foreign intervener in Somalia. As reported by many including the International Crises Group, over the years, the TPLF has confirmed this status by keeping Somalia in a state of utter chaos.

In addition the Ethiopian state has also supported the setting up of Puntland (which is led by the current leader of the Transitional Government in Somalia) as an autonomous and separate state from southern Somalia. Moreover, when necessary, as the New York Times recently reported, the U.S. would supply cash and arms to secular warlords in Southern Somalia (even some of its former enemies) so that the internecine fighting would drag on.

If the end of the Cold War meant that the U.S. would set up in Ethiopia a highly centralized, ethnically based dictatorship, in Somalia it meant war by proxy, chaos and confusion. To be sure, for the people of either country it is sometimes hard to tell the difference.

Of course, it is also hard to imagine how the TPLF would continue to monopolize violence in the Horn of Africa if the U.S. and EU cut the 70% budgetary support it receives in the form of aid packages and loans. The U.S. tells itself that without the TPLF, a power vacuum would be created in the Horn of Africa that would lead to the rise of Islamists. At the same time, the West has all but ignored the massive non-sectarian demonstrations ordinary citizens in Ethiopia have held for the past year. Obviously the U.S. does not see that the people in the region may have other capacities and mechanisms to govern themselves. Nor do they see that by crushing and arresting non-sectarian political leaders (even if based in a religious or ethnic community) they give more breathing space to fundamentalist politics of all stripes. Contrary to the U.S. point of view in the region, and however naively, in the past year ordinary Ethiopians mobilized their own Orange/Rose/Cedar revolution. What they found out is that if Uncle Sam is not interested in regime change demonstrators will be thrown in jail, shot and disappeared.

Somali Democratic Space Blocked

What all this means is that it is impossible in the Horn of Africa for local people to use local institutions to solve problems that are seen by them as local. They become re-interpreted, in the final analysis today, as another of the sinister machinations of the war on terror. For instance, it is my understanding that some women’s organizations in the Horn welcomed the arrival of the ICU; yet, they also said that they would challenge the creation of any new law that claimed that they should dress and act in a tradition that has nothing to do with their mothers (Somali women traditionally do not veil themselves). Instead, local civil society groups favoured the broad interpretation of customary law (pre-Islamic) together with Sharia law, and western law as the basis of a new civil code in Somalia (as is happening in present day ‘British’ Somaliland). In any case this has been, willy, nilly, the practice since the colonial era, but always without the consent of ordinary folks.

Now, because of the Ethiopian/USA incursion into Somalia it is doubtful that we will ever hear the voices of those women who were the most likely people to be capable of articulating a just peace for the Somali people. These women could have used the space opened by the ICU to debate their fate, and international civil society groups could have supported them. Instead, under the current incursion by Ethiopia democratic space has been narrowed to a sliver, and it is most likely that we will have a winner takes all situation. Yet another form of authoritarianism may emerge where everyone will be the loser. In fact, since Ethiopia entered Somalia the ICU has walked away from the peace talks that were taking place in Khartoum and being hosted by the Arab League in conjunction with the African Union. But who would stay at the negotiating table when, behind your back you are being invaded?

If so much of the recent conflict in the Horn of Africa comes down to the ethnic antagonisms created by state manufactured strategies of extraversion, encouraged by the imperialist powers, then all we can hope for now is that in the near future, as in the past, the popular memory of constructive interaction between Somalis and Ethiopians will trump the call to arms issuing from either side of the long Somali/Ethiopian border. If this happens, perhaps soldiers from both Ethiopia and the ICU will simply refuse to follow the wishes of their commanders.

And they say marxist economists are slaves to the dead ideas of an old dead man.

Tim Duy

London, January 6, 1892.

There is no place yet in America for a third party, I believe. The divergence of interests even in the same class group is so great in that tremendous area that wholly different groups and interests are represented in each of the two big parties, depending on the locality, and almost each particular section of the possessing class has its representatives in each of the two parties to a very large degree, though today big industry forms the core of the Republicans on the whole, just as the big landowners of the South form that of the Democrats. The apparent haphazardness of this jumbling together is what provides the splendid soil for the corruption and the plundering of the government that flourish there so beautifully. Only when the land — the public lands — is completely in the hands of the speculators, and settlement on the land thus becomes more and more difficult or falls prey to gouging — only then, I think, will the time come, with peaceful development, for a third party. Land is the basis of speculation, and the American speculative mania and speculative opportunity are the chief levers that hold the native-born worker in bondage to the bourgeoisie. Only when there is a generation of native-born workers that cannot expect anything from speculation any more will we have a solid foothold in America. But, of course, who can count on peaceful development in America! There are economic jumps over there, like the political ones in France — to be sure, they produce the same momentary retrogressions.

The small farmer and the petty bourgeois will hardly ever succeed in forming a strong party; they consist of elements that change too rapidly — the farmer is often a migratory farmer, farming two, three, and four farms in succession in different states and territories, immigration and bankruptcy promote the change in personnel, and economic dependence upon the creditor also hampers independence — but to make up for it they are a splendid element for politicians, who speculate on their discontent in order to sell them out to one of the big parties afterward.

The tenacity of the Yankees, who are even rehashing the Greenback humbug, is a result of their theoretical backwardness and their Anglo-Saxon contempt for all theory. They are punished for this by a superstitious belief in every philosophical and economic absurdity, by religious sectarianism, and by idiotic economic experiments, out of which, however, certain bourgeois cliques profit.

F. Engels

By Goodwin Ginger
A couple of days back we weighed in on the BCE trust tax boondoggle. The point of our intervention was to cast doubt on the certainty of the law like connection that is drawn between decreased taxes and increased investment and thereby productivity gains. The Pencils got in an uproar: “read an introductory microecon text” the school boys pronounced. To which we replied “we have read that book” (they are all interchangeable; if ever there was a scam it is the new edition of this years micro/macro textbook racket/market). The problem is that in the real world capitalists make strategic decisions in an attempt to further different goals over different time horizons only a few of which are given by the neoclassical theory of the firm. Moreover, as prices and environments change, the initial calculations upon which the most rational of plans are drawn up shifts, sometimes in the right direction, but sometimes much further than any theory could have anticipated in the wrong direction. It should be noted that the law of Large Numbers does not ensure that the two sides of the ledger net out. For the Pencils out there that is what Keynes meant by uncertainty (you can read about it in a fourth year seminar).

The story of how capitalism works gets even worse when one tries to tell a macroeconomic narrative via the aggregation of the neoclassical firm. Moroever, bad public policy will also arise whenever the stylized representative firm is the basis upon which public policy is constructed. This is necessarily the case because in reality firms have bastardized utility functions owing to the fact that they are created over a shifting time horizon and a shifting environment in the context of uncertainty.  Public policy based on the representative firm is simply too daft to capture this essential aspect of reality.

The same can be said about the theory of comparative advantage built as it is on a stylized representative nation. Brad Delong, one of the leading neoliberals of our time (an honest man too; in so far as he really truly did /does believe in those fairy tales he retails from his lectern), seems to be having a crisis of faith. Why does Mexico not follow the developmental trajectory that neoliberal theory predicted it would have? Brad poses his intellectual conundrum thus:

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade. We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.

[…]

We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. We thus implicitly suggest that Mexicans would be far worse off today without NAFTA and its effects weighing in on the positive side of the scale.

That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.

The last sentence is painstakingly telling: not even Brad believes his pitiful counter factual that perhaps ‘Mexico would have been even worse off today had it not been for NAFTA.’

To figure out why it has not gone according to plan Brad has two options. On the one hand, he could take the preferred path of neoconservatives: “The best laid plans of mice and men and all that jazz.” Or, on the other hand, he could do the honest thing and think like a political economist and ask: Where did the money go? Answering the most basic question “who won and who lost” will take one much closer answering the “why” question than hand wringing over a doomed ontology of capitalism. Here is to keeping your stick on the ice.

Everyone who reads our blog knows that we hold Bob Rae in very low esteem. Spoiled rich kid, silver spooned socialist that turned conservative in his later years. So not much love from us. Warren “it takes one to know one” Kinsella made an interesting revelation in his smear on Rae. Yes only Kinsella can pack nine claims, eight lies, and one small but important grain of truth into one sentence.

Kinsella writes:

“That Bob Rae is too much like an NDP Premier who lengthened and deepened a recession, laid off thousands of nurses, oversaw countless businesses shutting down, caused massive economic and social dislocation, seemed indifferent to one of the most scandal-plagued administrations in Ontario history, and only tore up his NDP membership card when it had taken his ambition as far as it could reasonably go.”

It is the last claim that rings true to our ear. We wonder if Kinsella writes with a mirror by his keyboard?

By Goodwin Ginger

The BCE trust conversion has brought out into the open that old vexatious chestnut of “double taxation”. Strictly speaking double taxation occurs anytime tax is levied on the same earnings at two or more levels. Employees are all too familiar with double taxation. First your earnings are taxed at source in the form of income tax and then again when you make purchases in the form of sales taxes. Thus the government taxes the same stream of earnings twice. Of course the more common example of double taxation (common in that it is the only kind which seems to stick in the crawl of the business intelligencia AKA accountants) is corporate profits. If you look at our last post you can see how converting to a trust avoids so called double taxation.

The existing structure of corporate tax is set up according to the following logic: After all expenses of enterprise are deducted from revenue the residual is a profit of enterprise. So corporate income taxes are levied on net revenue not gross revenue as is the case with labour income. So if a corporation makes a profit of $10000 they are taxed at the rate of 35% = $3,500. If that corporation retains those earnings ($6,500) for the purposes of R&D, advertising, expanding output and hiring more workers that is the end of the tax story. However, should the corporation decide to distribute those after tax earnings to shareholders the shareholders will pay income tax on those dividends and this is what is commonly called double taxation.

But is this really an issue? If we look at from a different angle we can see that double taxation is designed to build incentives in to the decision making of workers and owners. On the workers side consumption taxes are an incentive to save. Now from the workers side this is a little silly as many workers have to spend close to 100% of their income in order to meet their cost of living. As such double taxation really means a higher effective tax rate (i.e., income tax plus sales tax) However, on capitals side taxation of dividend income is an incentive for owners to retain earnings within the enterprise instead of taking dividend income.

All this talk of double taxation though is misleading, a more rational way to look at double taxation is that it is not double taxation at all rather it is simply a process of establishing overall rate of effective taxation which is designed to reward some choices over others. To see this consider the rate of tax you pay as a variable rate with an upper and lower limit. Depending on the choices you make you are subject to an effectively higher or lower level of taxation. If workers buy cigarettes and alcohol we pay a higher rate of tax then if we buy groceries or school clothes. Should capital choose to take dividend income they will be subject to a higher rate of taxation than if they choose to retain earnings and grow their enterprise and take their reward as a higher share price (capital gains are taxed lower).

So the issue of double or even triple taxation as an inequity issue is really a red herring. What is up for serious discussion is who should pay for how much of what portion of the social cost of living. That is, should workers pay for the roads they use to drive to work or should owners or both? Should workers pay for their education which makes their employers money or should their employers? Should workers pay for their health care or should capital? Private business requires a lot of social resources, from sidewalks to courts to roads and so on, in an attempt to make a private gain and it is not at all clear why capital thinks that it should not have to pay for its end. Heaven knows the rest of us do.

And this is why the BCE trust conversion is such a boondoggle. As we pointed out BCE made a guaranteed profit in the past via its state granted telephone monopoly. The CRTC ensured that shareholders received a steady and secure stream of dividend income. When competition opened up they did the same in terms of the lease rates BCE could charge its competitors. Now after all the public support money could buy BCE is converting into a trust and stiffing us for a whopping 600-800 million a year in lost tax revenue. Taxpayers are getting zero out of this conversion. Not one job will be created; not a product will be brought to market; nor will there be any productivity gain realized at BCE. Rather shareholders will be 800 million richer and we will be that much poorer.

And this gives the lie to that old saw about how lower corporate taxes lead to higher growth. Trusts are structured to flow through cash back to investors and as such are a poor vehicle for growing the enterprise because very little cash is retained for future growth. Indeed the tax incentive @ 45% on retained cash distibutions by the trust from the trustee drive in the direction of the starvation of operations because any excess retained cash is taxed at a higher level than the standard corporate tax rate. All of this of course is going to lead to a call for lower corporate tax rates. Hence Trusts are a Trojan Horse for corporate tax cuts.

Once again we have to down our good read for those unwilling to follow a hyper link. Well here it is the Department of Finance’s simplified tax models.

Ok Pencils there it is do your own calculations. We are not going to pull the figures out of BCE’s 2005 to satisfy your curiosity. Do some work. Now if you will excuse us we have a bottle and a good read waiting for us .  And we might add our edition has a handsome embossed portrait of uncle Karl on the cover.