Testing The Limits on Wealth Inequality

In this post, I pointed out that we are going to see an empirical test of Piketty’s theory of rising wealth inequality. The theory itself is not well understood, and Piketty has revisited it since the publication of Capital in the Twenty-First Century, and published an economist’s dream of a paper in full mathematical glory here. The American Economics Association devoted space in its journal to arguments about the theory, giving Piketty an opportunity to discuss his theory in what I think is a very readable paper, and one worth the time.

He starts by saying that the relation between r, the rate of return to capital, and g, the rate of growth in the overall economy, are not predictive. They cannot be used to forecast the future, and are not even the most important factor in rising wealth inequality. The crucial factors are institutional changes and political shocks. Neither can the relation tell us anything about the decrease in the labor share of national income. He points to supply and demand for skills and education in this paper, as he does in his book, but this is a at best an incomplete explanation, owing more to the neoliberal view that the problems of workers are their fault than to a clear understanding of social processes in the US. A better explanation lies in tax law changes, changes in labor law and enforcement of labor law, rancid decisions from the Supreme Court, failure to update minimum wage and related laws, and government support for outsourcing and globalization.

What the theory does say is the subject of Part II.

I now clarify the role played by r > g in my analysis of the long-run level of wealth inequality. Specifically, a higher r − g gap will tend to greatly amplify the steady-state inequality of a wealth distribution that arises out of a given mixture of shocks (including labor income shocks).

In other words, as the raw number r – g increases, wealth inequality reaches a limit at a higher level, and income and wealth mobility become lower.

The important point is that in this class of models, relatively small changes in r − g can generate large changes in steady-state wealth inequality. For example, simple simulations of the model with binomial taste shocks show that going from r − g = 2% to r − g = 3% is sufficient to move the inverted Pareto coefficient from b = 2.28 to b = 3.25. Taken literally, this corresponds to a shift from an economy with moderate wealth inequality — say, with a top 1 percent wealth share around 20–30 percent, such as present-day Europe or the United States — to an economy with very high wealth inequality with a top 1 percent wealth share around 50–60 percent, such as pre-World War I Europe.

The inverted Pareto coefficient β is a measure of inequality used by Piketty and his colleagues. Here’s how he explains it in this paper:

That is, if β = 2, the average income of individuals with income above $100,000 is $200,000 and the average income of individuals with income above $1 million is $2 million. Intuitively, a higher β means a fatter upper tail of the distribution. From now on, we refer to β as the inverted Pareto coefficient.

The theoretical basis for this result can be found here, where Piketty and his colleague Gabriel Zucman provide a typical economists mathematical explanation. I’ve read some of this paper, but it is tough going.

The returns to capital, especially business capital, are quite a lot higher than the levels given in Piketty’s example. Here’s the chart:

real returns on capital
The returns to all capital after tax are about 7%. Paul Krugman put up a blog post saying that a realistic growth rate is about 2.2% at best for the next few years. This gives a difference r – g = 4.8%. Then using the equations on page 1356, we get an estimate that the inverted Pareto coefficient would be in the range of 11, which is a lot higher than the levels Piketty uses in the quoted material. By way of comparison, with that number, the average wealth of people with more than $10 million net worth would be $110 million. In the example Piketty gives for the top .1% with β =3.25, the figure would be $32.5 million.

Piketty notes that these coefficients are a rapidly rising function of r – g, which is apparently the case. In a recent paper, Emmanuel Saez and Gabriel Zucman estimate that the top .1% has a wealth share of 22% as of 2012, and there is every reason to think that has risen.

With Piketty’s general rule standing alone, there is no obvious limit to the level of wealth inequality, but in practice there are many practical reasons that it will level off. Some people will have more children, so the fortunes are divided into smaller shares. Some are lucky in investments and others aren’t. There are external shocks, wars and depressions. There are divorces, which split fortunes. Some people are able to earn high levels of labor income on top of capital income, increasing their wealth. Some die early, so their offspring are forced to spend more of their capital income to preserve their existing level of consumption. Others have expensive tastes and spend too much. These external forces eventually bring about a more or less static level of wealth inequality. Overall, this static level is higher when the fraction g/r is lower.

The time periods in the theoretical models used by Piketty and his colleagues are generational, they run 30 years. The big changes in wealth inequality began in the 70s, I’d guess, but became prominent enough that they were noticed in the late 80s and early 90s as the Reagan/Bush era tax cuts took hold, and regulatory structures were dismantled. By 2000, the final touches of formal deregulation were complete, and the Bush administration stopped enforcing most remaining laws leaving capital accumulation without restraint from legal pressure. It’s been about 15 years with little change, about half a cycle. The results follow the line Piketty and his colleagues predicted, and every year the new data supports their theories.

From this we can see that the coming empirical test is the maximum level of wealth inequality, or to put it another way, it’s a test of the downward pressures on the limits of wealth accumulation.

As a nation we have only taken the smallest possible steps to stem that tide, such as slow increases in the minimum wage, and tiny increases in taxes on the wealthiest to the extent they choose not to evade taxation in all sorts of allegedly legal ways. Neither of the presumptive candidates has any intention of making the kinds of changes necessary to change the outcome.

That brings us to the second empirical test: the level of wealth inequality that a civilized nation will accept before demanding change.

Or maybe the test is whether we are so cowed we won’t ever make any demands on our new lords and masters.

Update: for more on the uselessness of tweaks to the current system, see this interview by the excellent Lynn Parramore with Lance Taylor.

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Friday Morning: Mi Ritmo

Oye como va
Mi ritmo
Bueno pa gozar
Mulata

— excerpt, Oye Como Va by Tito Puente

This Latin jazz song was on the very first album I owned — Santana’s Abraxas. I have no idea what possessed my father to select this way back in 1971 because he’s not musically inclined. I prefer to think he was persuaded by the music store staff to buy it for me rather than think the cover art did it for him. To this day I don’t dare ask; I’d rather live with my illusion.

Perhaps he simply liked Oye Como Va by Tito Puente and decided I needed it. Maybe that’s what he wanted to listen to when I played the album over and over again, ad nauseam. The song is still easy to listen to even when played by a septuagenarian, isn’t it? Though Puente probably still felt the same way about this song in his last live performance as he did when he first recorded it in 1963.

The personal irony I’m certain my father never considered: the last line is a reference to a mixed race “mulatto” woman. That’s me.

Vamos, amigos!

Wheels

  • South Korea frustrated by Volkswagen’s response to Dieselgate (Yonhap) — Hard to tell how many VW passenger diesel cars with the emissions controls defeat tech have been sold in South Korea to date. Last year’s sales of 35,700 suggest VW needs to exert itself a little more than offer to recall a total 125,000 cars.

Technology Trends

  • Breakthrough in memory technology could change computing dramatically (IBM via YouTube) — I’m still trying to wrap my head around this; could be the simplicity of the underlying science seems so obvious I can’t understand why it wasn’t discovered sooner. Using polycrystalline rather than amorphous material, more data can be stored and in a manner which is stable and not prone to loss when electricity is cut. This technology could replace DRAM at flash memory prices. Imagine how quickly systems could begin processing if they could avoid seeking programs and data.
  • Google’s annual I/O event chary on enterprise computing (ComputerWorld) — Wonder if Google executives’ expressed intent to focus on the enterprise is a veiled threat directed at Oracle? The I/O annual conference didn’t have enough enterprise applications to satisfy the curious; is Google holding back? Or are there pending acquisitions to fill this stated intent, ones not yet ready for publication? I wouldn’t be surprised to see Google launch something on par with Salesforce or Zoho very soon. Google Drive components already compete with or are integrated with some of those Zoho offers in its small business offering.
  • Android’s coming to Chromebooks — finally! (Google Blog) — I’ve put off buying another laptop until this happened, guess I’ll look at the first three models on which developers will focus their development. The applications available for Android phones have been mind-boggling in number; it’d be nice to have the same diversity of selection for laptops. And then maybe desktops in the not-too-distant future? That would really make a dent in enterprise computing.

Cybersec

  • Security camera not password protected? Police may be able to tap it (Engadget) — Love the subhead: “Don’t worry, it’s supposed to be for a good cause.” Just add the invisible snark tag. Purdue University researchers found surveillance cameras could be tapped to allow law enforcement to monitor a crime scene. I don’t know about you but this sounds like a backdoor, not a convenient vulnerability. If the police can use it soon, who might already be using it?
  • Qualcomm mobile chip flaw leaves 60% of Android devices exposed (Threatpost) — Not good, especially since this boo-boo may affect both oldest and newest Android versions. But a malicious app is required to take advantage of this flaw, unlike the Stagefright exploit. Android has already issued a patch; the problem is getting it to all affected devices.
  • LinkedIn’s 2012 breach yielded info on more than 100 million accounts (Motherboard) — Only 6.5 million accounts were initially breached — but that’s only the first batch published online. The actual haul from 2012 was at least 117 million accounts, now for sale for a mere five bitcoins or $2200. Are you a LinkedIn user? Time to check Have I Been Pwned? to see if your account is among those in the breach.

Climate Crises

  • Record high temp of 51C (124F) recorded in India (The Register) — Drought continues as well; article notes, “Back in India, relief from the heat is expected when the annual monsoon hits. The cooling rains generally arrive in mid-June.” Except that with a monster El Nino underway, the amount of rain and cooling will depart from average.
  • Polymath Eleanor Saitta considers climate change and comes to some grim, mortal conclusions (Storify by @AnthonyBriggs) — If you’re a policymaker, you’d better worry about dealing effectively with climate refugees and deaths in the millions. Maybe billions. Refugees from Syria will look like a minuscule blip. If you’re not terrified, you should be.

Looks like it’s going to be a lovely late spring weekend here — hope you’re going to have a nice one, too. See you Monday!

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Thursday Morning, Late: Like a Sucker Punch

It’s true
That it kicks you in the teeth when you are least expecting
Bad news
Oh it beats you black and blue before you see it coming

— excerpt, Bad News by Bastille

This little ditty seemed appropos for today. I’m surprised it was just a B-side.

Spin Factory
BAD DOG, REUTERS — When a big event happens, news media jump all over it and churn out reporting. But in the age of social media and the failure of traditional business models, crap is published and too often blown off. Like this tweet:Reuters_tweet_813am_19MAY2016
Looks innocuous, right? But it’s not — this is the replacement for a tweet that preceded it. Same story, but with a frigging picture of Donald Trump attached. I’d post that original tweet here but they deleted it before I could snag it.

Initial reaction too often is “It’s just a tweet, it’s just Twitter.” No. Hell, no. If Reuters can’t get something as simple as a photo on a tweet correct, what else are they getting wrong with slap dash coverage?

Reuters isn’t just any news outlet; businesses pay its parent corporation, Thompson Reuters for their information products. What are businesses getting in purchased real-time feeds? Some of these businesses are broadcasters. Are erroneous feeds shaping broadcasters’ perceptions before they even reproduce news content? It’s rather important today when some news outlets sought whacko tweets and quotes from Trump before attempting to get a reaction from the White House.

Reuters’ alleged bias has already been controversial; a contributor left in 2013 claiming editorial bias for climate skepticism demanding false balance made reporting on climate change difficult. Reuters denied the claim.

ON THE MEDIA — Rather than allow media churn to burn us with bad (as in poorly executed and unethical) news, best to consult On The Media‘s Breaking News Consumer’s Guide — Airplane Edition.
OnTheMedia_BreakingNewsConsumersGuideAirplaneEd_19MAY2016

FIFTY CENT PARTY — You’ve probably seen a news story about this research. Cut out the middlemen and read it at this link:

King, Gary, Jennifer Pan, and Margaret E. Roberts. How the Chinese Government Fabricates Social Media Posts for Strategic Distraction, Not Engaged Argument. 2016. http://gking.harvard.edu/50c.

RIP MORLEY SAFER — And more bad (as in sad) news: former CBS reporter and correspondent Morley Safer has died at age 84. The three-time Peabody Award winner retired from CBS only last week. We need more journalists like Safer, who began his career with reporting from the Vietnam War that galled then-President Lyndon Johnson for its honesty.

Busy day here, can’t spend any more time at the keyboard. See you here tomorrow morning!

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Imperialist Robert Kagan Disavows the Bureaucracy of Immense American Presidency He Championed

The chattering class is in love with this Robert Kagan op-ed warning of Donald Trump bringing fascism,

not with jackboots and salutes (although there have been salutes, and a whiff of violence) but with a television huckster, a phony billionaire, a textbook egomaniac “tapping into” popular resentments and insecurities, and with an entire national political party — out of ambition or blind party loyalty, or simply out of fear — falling into line behind him.

I suppose I’m unsurprised that Beltway insiders are so gleeful that this Hillary-endorsing Neocon has turned on Republicans in such a fashion. Or, perhaps more importantly, that they’re so thrilled someone with such a soapbox has written a warning of impending fascism that so neatly disavows any responsibility — for Kagan himself, and by association, for other insiders.

But there are a couple of real problems with Kagan’s screed.

First, Kagan would like you to believe that Trump’s success has nothing to do with policy or ideology or the Republican party except insofar as the party “incubated” Trump.

But of course the entire Trump phenomenon has nothing to do with policy or ideology. It has nothing to do with the Republican Party, either, except in its historic role as incubator of this singular threat to our democracy. Trump has transcended the party that produced him.

Kagan gets Trump’s relationship with the Republican party exactly reversed. The party did not in any way incubate Trump. 80’s style greed and cable TV incubated Trump, if anything. What the Republican party has long incubated is racism. Trump just capitalized on that and pushed it just … a … bit … further than Republican dogwhistles traditionally go, in a year in which the GOP had lost a great deal of its credibility.

Which is why Kagan is also wrong in claiming that Trump isn’t about policy or ideology. I admit that Trump has always shown great deal of ideological flexibility, both before and during this run. But he has been consistent on two points: that racism, but also protectionism. There are a lot of reasons those two ideological keystones have appealed this year, but one has to do with the failures of globalization and the related American hegemonic project it assumes. That’s ideology and policy, both Trump’s, but also DC’s, including Kagan’s.

Kagan goes on to deal with these two issues.

We’re supposed to believe that Trump’s support stems from economic stagnation or dislocation. Maybe some of it does. But what Trump offers his followers are not economic remedies — his proposals change daily. What he offers is an attitude, an aura of crude strength and machismo, a boasting disrespect for the niceties of the democratic culture that he claims, and his followers believe, has produced national weakness and incompetence. His incoherent and contradictory utterances have one thing in common: They provoke and play on feelings of resentment and disdain, intermingled with bits of fear, hatred and anger. His public discourse consists of attacking or ridiculing a wide range of “others” — Muslims, Hispanics, women, Chinese, Mexicans, Europeans, Arabs, immigrants, refugees — whom he depicts either as threats or as objects of derision. His program, such as it is, consists chiefly of promises to get tough with foreigners and people of nonwhite complexion. He will deport them, bar them, get them to knuckle under, make them pay up or make them shut up.

Note the assumption that Trump’s protectionism is not an economic remedy but some unstated alternative is? Note Kagan’s treatment of racism, an ideology, as fear divorced from that ideology of white American exceptionalism?

Fear!! Kagan wants to boil Trump’s popularity down to fear! A guy who has had a central role in ginning up serial American aggressive wars is offended that someone wields fear to achieve political power!!! And having done that, this warmonger says the ability to gin up fear is precisely what our Founders — the men who set up three competing branches of government, each jealously guarding its power — were concerned about.

Which brings me to the Kagan argument that most baffles me. After bewailing Republican politicians’ refusal to stand up to Trump’s demagoguery, Kagan then argues (though I’m not sure he even realizes he’s making this argument) that Article I and Article III (the latter of which goes entirely unmentioned in this op-ed) will be powerless to stop Trump and his “legions” once he becomes president.

What these people do not or will not see is that, once in power, Trump will owe them and their party nothing. He will have ridden to power despite the party, catapulted into the White House by a mass following devoted only to him. By then that following will have grown dramatically. Today, less than 5 percent of eligible voters have voted for Trump. But if he wins the election, his legions will comprise a majority of the nation. Imagine the power he would wield then. In addition to all that comes from being the leader of a mass following, he would also have the immense powers of the American presidency at his command: the Justice Department, the FBI, the intelligence services, the military. Who would dare to oppose him then? Certainly not a Republican Party that laid down before him even when he was comparatively weak. And is a man like Trump, with infinitely greater power in his hands, likely to become more humble, more judicious, more generous, less vengeful than he is today, than he has been his whole life? Does vast power un-corrupt?

Never mind that Kagan describes general election numbers that simply don’t exist in our democracy. What he’s really complaining about is that a President — one he happens to distrust and dislike — would have “the immense powers of the American presidency at his command: the Justice Department, the FBI, the intelligence services, the military.”  Of course, Kagan focuses not on the government as a whole, but on the Deep State and the Justice Department that has increasingly become an integral part of it.

The guy who, for years, championed the unfettered exercise of the Deep State in the hands of people like Dick Cheney is now troubled about what would happen if Donald Trump got the same powers Dick Cheney had. And for what it’s worth, while I don’t buy Michael Hayden’s claim the CIA would resist a President Trump’s order to torture (Hayden’s successors at NSA and CIA will likely do just what Hayden himself did, capitulate to unconstitutional demands), I also know that neither Trump nor anyone in his immediate orbit has the kind of bureaucratic mastery of the Deep State that Dick Cheney had.

One more really important point: the Deep State — those tools Kagan is horrified Trump might soon wield — got so powerful, creating the danger that a demagogue like Trump might tap into them fully formed, largely in the service of an imperial project significantly sold by Robert Kagan. Kagan has claimed to be selling “Democracy™” around the world, but all along that project has rotted our own democracy here at home.

Kagan (and his fellow imperialists) did that. Not Trump. Trump would just take advantage of the bureaucratic tools Kagan’s propaganda has served to justify.

I’m not denying Donald Trump is a huge threat to American democracy (though I happen to think Hillary’s foreign policy will come with great risks and costs as well). I’m saying that Robert Kagan is not the one to make this argument — at least not without a whole lot of soul searching and commitment to change the underlying empowerment of “the immense powers of the American presidency.”

But Kagan doesn’t want that. Rather, he just wants to hand those powers, still unchecked, to Hillary Clinton.

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The Theory of Business Enterprises Part 3: Capital and Credit

In Chapter 5 Veblen takes up the use of credit. He defines credit as any money obtained from third parties to run a business, including the owner’s capital, but excluding profits. He disregards the form in which the capital is contributed: equity, preferred stock, debt whether collateralized or not, all are credit. That’s because the business has to pay for the use of the money one way or another. Of course, structure matters in bankruptcy, because debt gets a preference over equity, and the order of payment is set by the documents of the capital structure. Veblen says that in economic downturns, bankruptcy takes hold, and the creditors determine the ownership of the material means of production and redistribute them in their best interests.

Veblen distinguishes the newer credit economy from the money economy described by the earlier economic thinkers, including Adam Smith.

It has been the habit of economists and others to speak of “capital” as a stock of the material means by which industry is carried on, – industrial equipment, raw materials, and means of subsistence. This view is carried over from the situation in which business and industry stood at the time of Adam Smith and of the generation before Adam Smith, from whose scheme of life and of thought he drew the commonplace materials and conceptions with which his speculations were occupied. It further carries over the point of view occupied by Adam Smith and the generation to whom he addressed his speculations. That is to say, the received theoretical formulations regarding business capital and its relations to industry proceed on the circumstances that prevailed in the days of the “money economy,” before credit and the modern corporation methods became of first-class consequence in economic affairs. They canvass these matters from the point of view of the material welfare of the community at large, as seen from the standpoint of the utilitarian philosophy. In this system of social philosophy the welfare of the community at large is accepted as the central and tone-giving interest, about which a comprehensive, harmonious order of nature circles and gravitates. These early speculations on business traffic turn about the bearing of this traffic upon the wealth of nations, particularly as the wealth of nations would stand in a “natural” scheme of things, in which all things should work together for the welfare of mankind. Chapter 6.

In Adam Smith’s time, and the generation after him, production occurred in a “money economy”. The earlier economists examined this from the standpoint of natural law and later utilitarianism. I understand the first part, about natural law. That appears in a number of French thinkers and British as well, and perhaps is part of the thinking of Smith, as Veblen asserts. The idea is roughly that factory owners would benefit from an engaged working class, and all would want to improve things in their communities because that would benefit them and because it was the natural order of things. Veblen adds the notion of the utilitarian philosophy which I assume is a reference to Jeremy Bentham, although that name does not appear in the book. The connection isn’t obvious to me.

By the early 1900s the money economy was replaced by a “credit economy”. Veblen seems to be saying that the ideas of the money economy were imported into the credit economy, including the ideas of natural law and utilitarianism. He does not elaborate on this idea at this point, turning to a discussion of the general forms of business organization.

Chapter 7, The Theory of Modern Welfare, is primarily a discussion of the business cycle. Financing costs, including interest on debt, preferred stock dividends, and a normal rate of profit, are more or less fixed. Prices decline because of competition as new entrants use more efficient machines and processes, while facing the same or lower financing costs. When prices decline, the more heavily burdened businesses fail, causing a downward spiral in prices for suppliers and their suppliers. It takes an external shock such as a war to restore the previous price levels. And, as noted, the creditors get to decide how to redistribute the capital equipment and factories of the bankrupt companies. From this he concludes that the natural condition of the capitalist economy is chronic depression.

He concludes his discussion of the business cycle by arguing that the economy will sink unless prices can be maintained by oligopolies and monopolies operated through trusts. That’s not a complete solution, though, unless almost all competition can be eliminated.

The great coalitions and the business manoeuvres connected with them have the effect of adding to the large fortunes of the greater business men; which adds to the large incomes that cannot be spent in consumptive expenditures; which accelerates the increase of investments; which brings competition if there is a chance for it; which tends to bring on depression, in the manner already indicated.

That doesn’t include workers, though. They are hung out to dry in this setting. Or as Veblen puts it: “there remains the competitive friction between the combined business capital and the combined workmen.”

Veblen begins Chapter 7 with this interesting observation. In a money economy, the welfare of the community, apart from issues of war and peace, “turned on the ease and certainty with which enough of the means of life could be supplied.”

Under the old regime the question was whether the community’s work was adequate to supply the community’s needs; under the new regime that question is not seriously entertained.

This fleshes out the section quoted above about natural law. With this measuring principle, under the natural law, “…all things should work together for the welfare of mankind”. It makes a nice contrast with the credit economy which disregards the welfare of the community and concentrates all its efforts on the frantic search for profits.

It seems to me that the structures and theories Veblen identifies have grown into the structures of business today, but observing them in their earliest stages is helpful in thinking about alternatives. Veblen’s point that the costs of financing are included in the price reminds us of something we rarely think about. The price we pay for goods in a credit economy includes the amount necessary to pay off banks, bondholders, preferred stockholders and so on, and to produce profits to pay off shareholders and managers. The profits have to be great enough to persuade the businessman to stay in the business. At each step in the process, the ultimate consumer pays for capital.

At the same time, Veblen points out that competition will force profits to zero over time through efficiency gains, mismanagement, or other mechanisms, usually with disastrous consequences. Theoretically the US has an antitrust policy which pushes back against monopoly, but that has mostly fallen into oblivion. As a result, we preach competition but operate in an oligopoly at best, and in many areas, in an effective monopoly. That means that capital is being paid more than necessary to produce sufficient goods and services for the community.

There is effectively no limit on the amounts that the monopolist can collect. We see this in operation in the pharmaceutical industry. Pfizer, for example, raises the prices regularly on drugs in which it has a monopoly or an oligopoly. See also this discussion of an interview Pfizer CEO Ian Read did with Forbes. The pricing strategy for new drugs is to maximize profits, not to provide for the needs of the community. The explanation is that a business valued by capitalization of future earnings, like Pfizer, must show increases in earnings every year, or the stock price will stabilize or perhaps fall, and perhaps even the interest rates charged by lenders will rise. That should make us ask why we think this is a good plan for something as important as medicine. But we don’t ask that question. Instead, our politicians protect businesses with favorable trade treaties and other accommodations, and raise prices to consumers for drugs.

Suppose the goal of manufacturing drugs is to produce sufficient quantities to meet the needs of the community, and to pay the owner of a plant a reasonable living wage, as Veblen says was the case in Adam Smith’s time. This business model was used by actual non-profit hospitals like the one my Dad worked at, a Catholic hospital built and operated with cash raised from the community. In that setting, there is no need to raise prices beyond inflation and depreciation (shorthand for new and replacement equipment and plant, training and so on). Any new entrant would face the same situation, so there is no advantage to be obtained in the near term from introduction of new capital. The business of creating new drugs can be pushed off to venture capital, as is mostly the case already, so there is no need to provide for R&D. There would be no need in this setting to pay dividends, and the need for interest payments would also be reduced. There would be other savings as well.

I leave as an exercise for the reader working out methods for forcing this outcome. I assume there must be some problem with this analysis, and leave that open as well.

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Wednesday Morning: Meet Me on the Floor

I admit it, I’ve betrayed my kind. I’ve been remiss in my responsibilities, haven’t been equitable.

To fix that, you need a dose of estrogen, stat. This morning’s medication is Veruca Salt’s Volcano Girls.

Feel better soon, eh?

Wheels
Mitsubishi’s Tetsuro Aikawa to leave, asks Nissan to name replacement (Bloomberg) — Announcement comes six days after Nissan announced it would buy a controlling interest in Mitsubishi. Nissan’s CEO Carlos Ghosn indicated he does not intend to subsume and phase out the Mitsubishi brand; this may have encouraged Aikawa he was leaving the company in good hands. I wouldn’t bet on some overlap between Nissan/Mitsubishi being eliminated.

Suzuki apologized for using the wrong fuel economy tests (Reuters) — Suzuki says it didn’t need to change its declared mileage data based on correct testing. I sure hope independent testing confirms this, though I suspect the same study which revealed Volkswagen’s cheat would have indicated additional validation needed.

Volkswagen says it will focus on profitability, pronto (Bloomberg) — Investors are restless and complaining about VW’s recalcitrance toward cost cutting in light of 16 billion euros it set aside for fixes and claims due to Dieselgate. Executives’ pay is on the butcher’s block. More than a little overdue as VW execs knew about the emissions controls defeat’s detection two years ago.

Forensic scientist reports to NHTSA Chevrolet’s dangerous cruise control problem (Zdziarski’s blog) — PAY ATTENTION TO THIS IF YOU’RE A LATE MODEL CHEVROLET OWNER. Read the linked post; Chevrolet’s response is deplorable, asking drivers to modify behavior rather than supply/fix product to work as documented and sold.

The (Fossil Fuel) Business
Goldman Sachs downgrades stocks to neutral while going bullish on oil (Bloomberg) — I like the subhead on this article: “Too many things to worry about.” ~LOL~ Excess valuation, lower growth, “a wall of stock market worries” encouraged the bear move. Things not explicitly mentioned: the U.S. and Australian elections and Brexit referendum outcome.

But…bullishness on oil out of whack (MarketWatch) — Another LOL-ish subhead today: “The fine print shows Goldman analysts believe oil will struggle to easily top $50.” So GS is telling its clients to reduce excess oil holdings while conditioning overall market to firm up what’s in their clients’ portfolios? ~smh~ Just as above, not mentioned in this take are any elections/referendums.

Note, too, that neither of these reports mentions Iran.

Anadarko Petroleum downgraded to neutral by Credit Suisse (Trade Calls) — You want another confusing take on fossil fuels? Read this article. Supports MarketWatch’s calling out GS on oil, though Anadarko also includes natural gas.

Total SA’s CEO Pouyanne pooh-poohs France’s ban on shale gas (Bloomberg) — Man, this dude is as arrogant as his predecessor. France could simply outlaw any imports without a certificate of origin, and force the industry to figure it out. Yet another article that doesn’t mention Iran, which sits on one of the largest natural gas reserves in the world. Pouyanne’s predecessor was cozy with Iran, too. So why all the attitude about North American shale gas imports?

Artificial Intelligence
Hedge fund used AI to pick through Fed Reserve’s minutes (Business Insider) — Using AI gleaned from a competition it hosted, Two Sigma fund analyzed the Fed Reserve. The app used Natural Language Processing and found some interesting trends. Wonder if the results would be different using Google’s SyntaxText open sourced this past week?

NSFWhut?
Cynically opportunistic marketing push promotes so-called ‘anti-Zika’ condoms (IBTImes-AU) — Pharmaco Starpharma Holdings and condom-maker Ansell will give Australia’s Olympians “Dual Protect” condoms lubricated with VivaGel for “almost 100-percent anti-viral protection” against Zika. Never let a perfectly good health crisis go to waste, right?

CDC says any condom will work against Zika (MarketWatch) — Yeah. That. I said this already: condoms are recommended for other viral STIs like herpes and HIV, will work fine for Zika, no special anti-Zika condom required. But you have to use the consistently and for at least six months after exposure to Zika since the virus can remain in men’s reproductive system for at least that long after infection.

ONE company will release condoms in 56 different sizes (Glamour) — Holy schnikes. This is a broader range of sizes than men’s off-the-rack suits. No excuses about not wearing condoms, there will be one bound to fit gents. Would be nice if ONE could hit the market with these in Brazil before the Olympics. (And don’t turn your nose up at Glamour. It’s one of the better articles I read today, includes some good links.)

There’s enough material to get you over the hump. Catch you in the morning tomorrow!

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SEC Says Hackers Like NSA Are Biggest Threat to Global Financial System

Reuters reports that, in the wake of criminals hacking the global financial messaging system SWIFT both via the Bangladesh central and an as-yet unnamed second central bank, SEC Commissioner Mary Jo White identified vulnerability to hackers as the top threat to the global financial system.

Cyber security is the biggest risk facing the financial system, the chair of the U.S. Securities and Exchange Commission (SEC) said on Tuesday, in one of the frankest assessments yet of the threat to Wall Street from digital attacks.

Banks around the world have been rattled by a $81 million cyber theft from the Bangladesh central bank that was funneled through SWIFT, a member-owned industry cooperative that handles the bulk of cross-border payment instructions between banks.

The SEC, which regulates securities markets, has found some major exchanges, dark pools and clearing houses did not have cyber policies in place that matched the sort of risks they faced, SEC Chair Mary Jo White told the Reuters Financial Regulation Summit in Washington D.C.

“What we found, as a general matter so far, is a lot of preparedness, a lot of awareness but also their policies and procedures are not tailored to their particular risks,” she said.

“As we go out there now, we are pointing that out.”

Of course, the criminals in Bangladesh were not the first known hackers of SWIFT. The documents leaked by Snowden revealed NSA’s elite hacking group, TAO, had targeted SWIFT as well. Given the timing, it appears they did so to prove to the Europeans and SWIFT that the fairly moderate limitations being demanded by the Europeans should not limit their “front door” access.

Targeting SWIFT (and credit card companies) is probably not the only financial hacking NSA has done. One of the most curious recommendations in the President’s Review Group, after all, was that “governments” (including the one its report addressed, the US?) might hack financial institutions to change the balances in financial accounts.

(2) Governments should not use their offensive cyber capabilities to change the amounts held in financial accounts or otherwise  manipulate the financial systems;

Second, governments should abstain from penetrating the systems of financial institutions and changing the amounts held in accounts there. The policy of avoiding tampering with account balances in financial institutions is part of a broader US policy of abstaining from manipulation of the financial system. These policies support economic growth by allowing all actors to rely on the accuracy of financial statements without the need for costly re-verification of account balances. This sort of attack could cause damaging uncertainty in financial markets, as well as create a risk of escalating counter-attacks against a nation that began such an effort. The US Government should affirm this policy as an international norm, and incorporate the policy into free trade or other international agreements.

After which point, James Clapper started pointing to similar attacks as a major global threat.

I don’t mean to diminish the seriousness of the threat (though I still believe banksters’ own recklessness is a bigger threat to the world financial system). But the NSA should have thought about the norms they were setting and the impact similar attacks done by other actors would have, before they pioneered such hacks in the first place.

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For Second Year in a Row, HPSCI Tries to Gut PCLOB

As I reported, during the passage of Intelligence Authorization last year (which ultimately got put through on the Omnibus bill, making it impossible for people to vote against), Congress implemented Intelligence Community wishes by undercutting PCLOB authority in two ways: prohibiting PCLOB from reviewing covert activities, and stripping an oversight role for PCLOB that had been passed in all versions of CISA.

In the 2017 Intelligence Authorization HPSCI passed on April 29, it continued more of the same. It does so in two ways:

Requires it to get its appropriations approved by Congress

Section 303 changes the authorizing language for PCLOB to state that it can only spend money on things if Congress specifically authorized it.

SEC. 303. AUTHORIZATION OF APPROPRIATIONS FOR PRIVACY AND CIVIL LIBERTIES OVERSIGHT BOARD.

(a) REQUIREMENT FOR AUTHORIZATIONS.—Sub-section (m) of section 1061 of the Intelligence Reform and Terrorism Prevention Act of 2004 (42 U.S.C. 2000ee(m)) is amended to read as follows:

(m) FUNDING.—

(1) SPECIFIC AUTHORIZATION REQUIRED.— Appropriated funds available to the Board may be obligated or expended to carry out activities under this section only if such funds were specifically authorized by Congress for use for such activities for such fiscal year.

(2) DEFINITION.—In this subsection, the term ‘specifically authorized by Congress’ has the meaning given that term in section 504(e) of the National Security Act of 1947 (50 U.S.C. 3094(e)).’

(b) AUTHORIZATION OF APPROPRIATIONS.—There is authorized to be appropriated to the Privacy and Civil Liberties Oversight Board for fiscal year 2017 the sum of $10,081,000 to carry out the activities of the Board under section 1061 of the Intelligence Reform and Terrorism Prevention Act of 2004 (42 U.S.C. 2000ee(m)).

At one level, this looks like nothing more than bureaucratic dick-waving, a reminder to PCLOB that Congress can cut off funding if it does things like deign to comment on covert spying activities.

But — particularly given the way the Intelligence Communities stripped PCLOB’s involvement in CISA oversight at the last minute — I wonder whether this will restrict what PCLOB can do under presidential orders. Congress set up PCLOB such that its mandate covers only counterterrorism programs. But with EO 13636 (the EO that set up the information sharing system that, with significant changes, became CISA) and PPD 28, President Obama gave PCLOB a cybersecurity role beyond that defined in statute. So I wonder whether this is a way to further PCLOB remove from cybersecurity oversight than those last minute changes already did.

The authorization still granted PCLOB its requested funding (and that request did lay out those cybersecurity activities), so this may just be, for the moment, a shot across the bow.

Requires the Committee to warn the Intelligence Committees and Intelligence Agency heads before they conduct any oversight

The bill also adds new reporting requires on PCLOB, beyond the biennial reports that go to a number of congressional committees. In short, the new language requires PCLOB to warn the Intelligence Committees and the heads of an intelligence agency before they start doing any oversight.

SEC. 307. INFORMATION ON ACTIVITIES OF PRIVACY AND CIVIL LIBERTIES OVERSIGHT BOARD

Section 1061(d) of the Intelligence Reform and Terrorism Prevention Act of 2004 (42 U.S.C. 2000ee(d)) is further amended by adding at the end the following new paragraph:

(5) INFORMATION.—

(A) ACTIVITIES.—In addition to the reports submitted to Congress under subsection (e)(1)(B), the Board shall ensure that each official and congressional committee specified in subparagraph (B) is kept fully and currently informed of the activities of the Board, including any significant anticipated activities.

(B) OFFICIALS AND CONGRESSIONAL COMMITTEES SPECIFIED.—The officials and congressional committees specified in this subparagraph are the following:

(i) The Director of National Intelligence.

(ii) The head of any element of the intelligence community (as defined in section 3(4) of the National Security Act of 1947 (50 U.S.C. 3003(4)) the activities of which are, or are anticipated to be, the subject of the review or advice of the Board.

(iii) The Permanent Select Committee on Intelligence of the House of Representatives and the Select Committee on Intelligence of the Senate.

Of particular note: if PCLOB warned the spooks, and the spooks prohibited PCLOB oversight (again), it’s not clear how the other committees of jurisdiction — which include the Judiciary, Homeland Security and House Oversight Committee, in addition to the Intelligence Committees — would get notice.

These changes are being made based on an Intelligence Committee claim that they give PCLOB — one of the very few entities that has proven to effectively oversee the Intelligence Community — more “oversight.” But it’s hard to understand how they’ll do anything more than ensure that the Intelligence Committees return to the status quo position where they’re the only entities permitted to (not) oversee the IC.

In other words, HPSCI — of all entities !!! — claims that that committee, which has serially failed at overseeing just about anything, must give the overseers greater oversight.

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Tuesday Morning: Speed of Love

This video fascinates me. I’ve watched it a number of times since Nerdist shared it last month; it’s the 24-minute long set by Freddie Mercury and Queen at the 1985 Live Aid concert held in Wembley Stadium.

Nerdist noted the audience’s response reflects the speed of sound — the visible ripple of fans’ hands speeds across the crowd in response to the sound as it leaves the stage area and travels across the venue. The gif they shared was taken about 16:37 into this set, just as the band begins We Will Rock You.

I think there was more at work here because earlier snaps of the audience reaction during Radio Gaga (roughly 4:25 onward) don’t show the same marked wave across the crowd. But several points in the set Mercury interacts with the audience, coaxing them to sing and shout along with him.

And then at 16:35 when he begins We Will Rock You, the crowd is completely in sync with him. They adore him and are utterly engaged. The wave is not just sound but their feeling for Mercury and his performance.

Can you imagine a politician who could induce such a response?

Cybersecurity
Adobe Flash must die, and Google’s slowly exterminating it in Chrome (Ars Technica) — By year’s end, Flash will be disabled by default in Google’s Chrome browser. It will only play when manually enabled. All part of the slow migration to HTML5 away from risky Flash.

Antivirus app halts heart surgery (Ars Technica-UK) — Holy crap. Why does medical equipment need antivirus software to begin with, let alone how does an A/V app launch and run during surgery?

Artificial Intelligence
Dude, that female TA you hit on? An AI bot (Sydney Melbourne Herald) — Wow. Future’s already here and you can’t tell you’ve been dissed by both your prof and the chick-bot-TA.

A series of tubes
Remote healthcare not ready for prime time (ScienceDaily) — Study using fake patients to test direct-to-consumer teledermatology remote health care systems found security problems with IDs, poor-to-bad assignment of clinicians, many errors made in major diagnoses, insufficient warning to pregnant patients when meds prescribed, just for starters. Think of this as Healthcare Internet of Things Fail.

Super. Fast. Wireless. Internet. Coming. To. YOU! Really? (MIT Technology Review) — Ugh, so breathless with excitement they are about this startup called Starry. I was, too, initially, but we’ve been told this crap for more than a decade. Since this requires the cooperation of Verizon, AT&T, Facebook, and Google to standardize on this platform AND reception relies on line-of-sight, I’m not holding my breath.

The Business
New business for Amazon to tackle: its own private label groceries (Techcrunch) — Amazon doesn’t want to leave a penny on the table. If customers are too price sensitive to click their Dash button for a big name brand consumer good, they’ll offer their own instead. Prime accounts only, though; first goods will be heavy on baby needs, which makes sense given parents are often a captive audience.

Norway’s sovereign (oil) wealth fund to sue Volkswagen (AP) — Fossil fuel-created fund owns 1.64% stake in Volkswagen. It’s suing to protect its assets exposed by VW’s emissions controls cheat. Imagine me laughing at oil suing a car company for the manner in which it promulgated oil consumption.

Norway’s Statoil to launch first floating wind farm (Bloomberg) — This company is well ahead of Shell when it comes to diversifying energy production.

Flint Water Crisis
Michigan’s top law enforcement agent unaware of Michigan State Police “quiet investigation” (WZZM) — Still scratching my head over this one. Why did the governor ask MSP to conduct an administrative — not criminal — investigation, omitting the state attorney general? And who’s conducting a genuine criminal investigation, including the governor’s role?

Gender Equity
Toy maker(s) insisted Iron Man 3 movie must have male, not female villain (The Mary Sue) — In other words, Marvel’s big sweeping superhero movies are really just very long trailers to sell boys’ toys. Girls and women need not apply. I have no idea how they can make a decision based on any realistic data given the dearth of female villains on screen and in toys. Is this just some lame argument for inequity in front and behind the camera?

Running behind, probably read too much today and swamped my processing circuits. Hope mid-week becomes a little more focused — catch you tomorrow!

 

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Minh Quang Pham: FBI Continues Creating Terror Stories Assisted by Unrecorded Interviews

Minh Quang Pham, whom I dubbed AQAP’s “graphic artist of mass destruction” because he was busted for providing graphic design skills to AQAP, got sentenced today; neither FBI nor SDNY have announced his sentence but it will be between 30 and 50 years in prison.

The government, as it tends to do, has submitted a bunch of documents as part of the sentencing process to inflate the magnitude of Pham’s acts, which largely consist of carrying a Kalashnikov he wasn’t really trained to use and helping Samir Khan make Inspire look prettier. With the documents, DOJ suggests Pham might have attacked Heathrow if he hadn’t been stopped when he was. Materials submitted as part of the sentencing process include:

The FBI 302s have the most detail, including that Awlaki gave Pham a “clean” computer that, as described, was not clean at all (a forensics report that is sealed in the docket reportedly found it had shared data with a computer that Warsame had been caught with) and the claim that Awlaki gave Pham a phone and an email account to contact him with — or to provide to new AQAP recruits (the story varies) — in the future. One 302 provides the rather incredible detail that “the email account AULAQI provided might have been a Hotmail account.”

We’re to believe that Awlaki, a guy who learned he was being wiretapped in November 2009, had been pursued using all resources of the US government for a year and a half, and who otherwise had a sophisticated understanding of US surveillance, was still using a Hotmail account in June 2011.

The final 302 (I don’t think the previous 3 include start and stop times, which is a telling omission) provides details of what Scott Shane has described as proof Anwar Awlaki was acting as a bomb making trainer close to the end of his life, based on the description of him teaching Pham, in a single day, “how to mix chemicals to make an explosive powder” that Pham used to detonate a tin can that “generated enough force to launch the tin can away from PHAM and into the air.” This was the training, the FBI implies, that AQAP gave Pham to prepare him to attack Heathrow Airport.

Here’s the thing, though: FBI didn’t record any of those interviews, in spite of an explicit policy presuming FBI will record custodial interviews that went into effect on July 11, 2014. There are exceptions FBI might, in a stretch, be claiming here (that because Pham was not yet in a formal detention center, he was not in custody, or that it was a national intelligence collecting interview that is nevertheless being used against him in sentencing; I’ve got an email in with the FBI to find out what their explanation is). But this seems like a clear-cut case, where, for their own credibility, FBI should have recorded the interviews.

Especially since Pham says they’re inaccurate.

For four days I have willfully sat with the agents to confess my association with AL-QAIDA + to make an appeal to the government for compassion. Brian said: “we are the best representatives to the government for you.”

[snip]

The agenst [sic] had the opportunity to take recording but for some reason they did not do so. I only receive the FBI statements around couple months after my interviews. I then realize that they have omitted possibly 30 – 40% of what I’ve said, misunderstood many points + added some information I did not say. Had there been a recording, it would have shown a different picture. Had they been sincere in what they said about being “the best representatives to the government,” they would have shown me the draft of the statement for any needed correction before publishing it or have the interview recorded which would have revealed all the questions + answers.

Initially I didn’t want to tell them about the airport plot because it was something occurred in YEMEN which I never intended to do. I only want to leave YEMEN + had to accept a foreign operation. I told them that Imam ANWAR AL-AWLAQI (who was killed in a drone strike in Sept 2011) wanted me to do. The reason why I told the agents is because I felt pressured due to MATT posing the same question for 4 days, + on the 4th day he said: “Is there something they told you to do but decided not to?”

[snip]

Later at the 5th interview, the prosecutor asks me if I intended to carry out the plot, Matt intervene + said “at that point did you accept it? I made it clear that I did not intended [sic] it but I only accept it + was willing to accept any plot to go home.

The expression I got from the was that, they were trying to paint a picture oof me of intending to return to carry out the plot + had I not been arrested, I would have carried out a suicide operation at Heathrow Airport.

Obviously Pham has good reason to want to insinuate he would never have conducted the plot (but then, he was free in the UK for 5 months and didn’t take any steps to do so, not even obtaining acetone from his sister’s nail salon). Then again, obviously the FBI has good reason to want to claim that Pham was more than the graphic artist who was never really trained in fighting that the other records show him to be.

The thing is, there’s no evidence in the record that makes this Heathrow attack look credible. There are some other really funny details about this story that I hope to return to. But I’m sure the story worked to ensure Pham would spend most of the rest of his life in a US SuperMax.

Update: I guess this is why they didn’t announce Pham’s sentence: Judge Alison Nathan delayed sentencing because of conflicting stories over whether Pham really intended to attack Heathrow, or whether he used that as a way to get out of Yemen (though she reportedly is inclined to side with the government). I think this is a sound result: the government actually hasn’t proven this attack was real (again, I have questions about whether even Awlaki designed it to be real). Moreover, Pham will get 30 years in any case.

The FBI might have a more (or less — who knows!!) credible case had they taped these interviews. Now they have to make their case in court.

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