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Where common sense meets economics
31 July 2002
Bush Straps On His Anti-Gravity Belt
America: abandoning civil aviation?
Puzzling over the president’s vow to “crush” the world’s “worst” leaders, we wondered if the following story about
Boeing’s research might explain it. He is just a little giddy, as are the idiots who put this out in this summer’s silly
season. This says a lot about Boeing, which is finding it increasingly difficult to compete in civil aerospace and is
becoming a defence contractor pure and simple. This may well be great news for the company and its stockholders, but it
is a real pity for the American economy. Boeing’s acquisition of McDonnell Douglas propelled them into the Pentagon’s
commercially unreal world of cost-plus contracting, where higher costs mean more profits. It is not hard to see the day
coming when the United States will no longer produce civil aircraft. They are going the way of shipping, computers,
machine tools, railways, and other useful things. Anyone wondering about a longer-term investment reason to own euros
instead of dollars might well ponder this.
Congress finds its voice
Senator Fritz Hollings did nothing more than call a spade a spade in calling government accounting practice fraud in the
pages of the Financial Times. Frankly, he didn’t go far enough, but the fact that the shock of last year’s anthrax
attacks on Congress is finally wearing off is encouraging. As we have reported on a variety of occasions, the anthrax
came from the US military and the most likely suspects are home grown. When you combine that with the fact that the most
prominent characters to receive it were senior Democrats, then you have an interesting chain of inference. What Hollings
doesn’t say is that the budget deficit’s size relates largely to increased benefits for American military personnel
legislated in 2000. On an accrual accounting basis, defence spending in FY2001 was some 7.5% of GDP. Why Congress should
be paying the military more is beyond us, when neither the military nor the intelligence community are capable of doing
their job properly. Witness 911.
Don’t pick a fight you can’t pay for
The economics of the War on Terror have gone largely unremarked, but that seems to be changing. The Gulf War in 1990 was
paid for by Kuwait, Saudi Arabia, Germany and Japan. Why any of those countries should be willing to pony up for round
two is a mystery. The Bush administration’s idea of finance is to monetise new debt issuance, which was an idea of
relevance when Keynes first proposed it as a means of financing Britain’s mobilisation for World War Two, but seems more
than a little anachronistic when applied to the US today.
The enemy of my oil company is my enemy?
One school of thought has it that the Saudi government’s program to open up gas exploration in the Kingdom is the real
reason behind recent American hostility. This is not completely implausible, as it represents the first time since the
forging of the Aramco concession fifty years ago that the oil and gas business in the Kingdom will be opened up to
outside competition. On the other hand, it is very hard to understand why the United States would assume a belligerent
posture over this. The American majors are well represented, and it is difficult to imagine that instability in the
Kingdom is preferable to just doing the deal. One wonders indeed who wins by the constant portrayal of the Kingdom as a
powder keg waiting to blow up. The country’s financial position is often cited as a reason for this, but at current
levels of crude production in excess of 8 million barrels a day and an oil price that has averaged (WTI) over $23 a
barrel, Saudi Arabia’s budget problems are manageable.
Making Clinton look good (moral: Never give up. Nothing is impossible)
Paul Krugman is easy to disagree with, so it is very interesting to see him picking up on the corruption them that we
have been writing about for the last five years. The mess that many of the US states are in now has to be seen to be
believed, but it is only a sideshow compared to what is happening in Washington. To hear Krugman tell it, Bush is the
Author of Evil, economic at least. The Democrats and their fellow travellers are smart to keep pounding on the theme of
the balanced (or unbalanced) budget. What is so interesting is that this should have been a Republican issue. Clinton
“balanced” the budget, all right, at the price of fuelling the biggest financial asset bubble in history. Only the
manifestly incompetent or corrupt could have failed to turn that into a political issue. If Bush is playing the role of
Herbert Hoover, then Clinton is the Calvin Coolidge of the piece. Truthfully, though, this is an insult to both Hoover
and Coolidge.
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