Browsing the archives for the Uncategorized category.

Huawei hasn’t gone away


The US case against Huawei is as serious as ever. The tech company’s close ties to the Chinese government have created a national security threat. Andy Purdy, Huawei’s Chief Security Officer, is charged with defending the company’s integrity during the crisis. Earlier this year, Fox Business’ Maria Bartiromo picked him apart in a lengthy interview, the first part of which can be seen here:

Bartiromo interviewed him again on November 15. Like before, she was fair but direct. The results were no different. Purdy deflected the charges as best he could, but the facts are stacked against his company. Here are highlights from the most recent interview:

The Democrats’ impeachment fervor is damaging the country in many ways. By dominating the news cycle, it deflects attention from important issues like Huawei and China. But the dispute with China is about more than economics. The Huawei case illustrates many of the challenges, including Beijing’s control over Chinese and non-Chinese firms, issues with intellectual property, and data security.

Washington ignored Beijing’s economic and national security double standards for decades. The Chinese have become accustomed to two sets of rules about currency controls, intellectual property, state ownership of businesses, foreign ownership of business, and the like. I’m not unrealistic. These problems won’t be fixed overnight, but any “deal” with China must represent a substantial move in the right direction.

President Xi probably thinks most Americans don’t have the interest span or fortitude to understand and deal with issues like Huawei. He probably thinks the current tough stance with China will blow over when President Trump leaves office. If the media’s preoccupation with impeachment is any evidence, he might be right.


The NBA’s China Debacle


In early June 2019, 240,000 Hong Kong residents took to the streets to peacefully protest proposed legislation that would permit its citizens to be extradited to mainland China for trial. The bill in question was later withdrawn, but the demonstrations expanded into a protest against police brutality and oppression from Beijing. On October 4, Daryl Morey, General Manager of the NBA’s Houston Rockets, issued a tweet in support of the Hong Kong protestors: “Fight for freedom. Stand with Hong Kong.” Morey’s tweet sparked a firestorm from the government in China and an uproar on social media in the US. He deleted the tweet shortly after that.

The response to Morey’s tweet has exposed some hypocrisy among NBA players and management. Rockets owner Tilman Fertitta attempted to distance the team from Morey’s statement, tweeting “we are NOT a political organization.” The NBA did not issue an official apology but referred to Morey’s comments as “inappropriate” and noted that they “have deeply offended many of our friends and fans in China, which is regrettable.”

China’s response was swift. Basketball is big business there, with over 600 million Chinese watching games on TV each season. Ironically, China’s most famous NBA player, Yao Ming, played for the Rockets. China Central Television (CCTV) announced that it would no longer broadcast Rockets games, negating a deal purported to be worth $1.5 billion. The Chinese government can enforce such a decision because it controls the media. But the response from China was not limited to the Chinese. Nike—a US-based company—removed Rockets gear from its stores in China.

The NBA’s hypocrisy has been called out by Republicans and Democrats alike. Texas Republican Senator Ted Cruz called out China and the NBA’s lack of defense of Morey, tweeting, “Now in pursuit of $$, the @NBA is shamefully retreating.” New Jersey Democratic Representative Tom Malinowski tweeted, “the #NBA, which (correctly) has no problem with players/employees criticizing our [government], is now apologizing for criticizing the Chinese [government]. This is shameful and cannot stand.”

On October 8, NBA Commissioner Adam Silver issued a statement that provided a qualified defense of Morey, but his waffling has satisfied neither the Chinese nor many fans in the US. “The NBA will not put itself in a position of regulating what players, employees and team owners say or will not say. We simply could not operate that way…there are consequences from freedom of speech; we will have to live with those consequences…For those who question our motivation, this is about far more than growing our business.”

NBA star LeBron James only made things worse when he referred to Morey as “misinformed and not really educated on the situation.” James, who has logged dozens of poignant tweets in the last few years addressing social issues in the United States and criticizing President Trump, has remained silent on the events in Hong Kong and suggested that others should do likewise. Like many all-stars, James makes more from endorsements than he does from his $35 million annual salary with the Los Angeles Lakers. He has profited from the NBA’s expansion into China and stands to lose a lot if this rift continues.

The situation continued to deteriorate after James’ comments. After a trip to Asia, Adam Silver said that Chinese authorities asked him to fire Daryl Morey, but he refused. “We said there’s no chance that’s happening…There’s no chance we’ll even discipline him,” Silver responded. But a Chinese government spokesman immediately insisted that no demands were made.

The NBA is desperately looking for a solution that satisfies both the Chinese and US fans. Perhaps a soft apology to China—one that’s not called an apology—coupled with the passage of time will improve things on the surface. But at the core of this issue, there is no middle ground. As a China Central TV statement put it, “We believe any remarks that challenge national sovereignty and social stability do not belong to the category of free speech.” But speech is either free or it’s not.

Like Morey, I sympathize with the Hong Kong protestors, and I cherish the right to say so. The NBA has encouraged a wide range of social and political activity in the past. Spurs coach Greg Popovich and Warriors coach Steve Kerr have been harsh critics of President Trump, and many of the players actively support Black Lives Matter and other movements. Now that one general manager has opined about Hong Kong, Popovich, Kerr, James, and others have decided that basketball doesn’t mix with politics. You can’t have it both ways.


More on Student Debt


In my last post, I criticized student debt forgiveness proposals from Democrats seeking their party’s nomination for president. Even if you argue that government should subsidize the cost of college, repaying debt incurred by students in the past is a totally different issue. There are obvious problems with debt forgiveness schemes, but I will list a few:

  • Should students who incurred more debt by attending a more expensive college or university receive more government funds? If so, wouldn’t this be unfair to those who chose less expensive colleges because they never anticipated a bailout?
  • Should parents be repaid if they paid the tuition for their children? If so, how would you determine how much parents actually paid or should have been able to afford retroactively?
  • Should the debts of students who did not graduate be repaid? If not, should they be repaid if they decide to return to college and complete a degree?
  • Should Washington limit tuition in the same way that it caps medical reimbursements through Medicaid and Medicare? If so, which bureaucracy is equipped to do this?

Hopefully you are convinced by now that any debt forgiveness plan would be arbitrary and unworkable. If not, I will address the two primary arguments for college debt forgiveness:

First, we are told that college tuition is too expensive, but why is it so costly in the first place? There are a lot of contributing factors, but a major driver is government subsidies. Politicians constantly attempt to appease voters who think that anything is too expensive by proposing to use taxpayer funds to pay for part or all the cost. Many voters are fooled into thinking that subsidies make ____ more affordable. You can fill in the blank with healthcare, housing costs, higher education, or anything else with a substantial political constituency. However, subsidies increase prices because they remove the incentive for organizations to innovate and reduce costs. Why struggle to find new ways to deliver education at a lower cost if the federal government is going to reimburse your college anyway?

Second, we are told that college must be accessible because education is the ultimate equalizer by helping poor kids get good jobs. I certainly endorse the value of a college education, but not everyone has to earn a degree to be successful. Besides, if you are really interested in accessibility, refer to the first argument, as government subsidies exacerbate the problem. Like healthcare and housing, higher education already receives lots of government “assistance,” but is still not “affordable.”

It’s ironic that the same politicians pushing to impeach President Trump to “curb corruption” are engaged in blatant vote-buying schemes like college debt forgiveness.


Sanders and Warren on Student Debt


About 44 million Americans owe a collective $1.5 trillion in college debt. If elected, Elizabeth Warren and Bernie Sanders propose to end it. Other Democrats have made similar claims.

To be fair, I sympathize with students who overextended themselves with debt, expected a job they didn’t get, and are now obligated to pay it back. Many of them bought into the lie of easy money or were told they “had to go to college.” I’m a firm believer in higher education, but not everyone has to or should go to college. I’ll address this in detail at another time.

While the proposals from Sanders, Warren and other Democrats have a lot of emotional appeal, they are economically irrational. For starters, the decision to advance your education should be evaluated like all others—on a cost-benefit basis. You should accept the cost only if you are motivated to leverage the college experience enough to make it worthwhile. It’s just not right to ask someone else who chose a different path to cover the debt you incurred. Should your neighbor help pay for your car as well if you bought one you couldn’t afford? Knowing that we will be held financially accountable helps us think twice before we spend money we might not be able to repay.

But there’s also an interesting twist to the notion of college debt forgiveness. Tuition is the highest at elite, private schools, so any proposal to cancel college debt not only creates an unnecessary subsidy, but also gives the greatest benefits those who chose the most expensive colleges. It’s also not a coincidence that most professors—particularly those at elite schools—are on the political left.

I’m sorry to see so many Americans saddled with college debt. I’ll disappointed to see so many young Americans juggling a lot of credit card debe as well. Nonetheless, all of us should be responsible for our own decisions and obligations. Pandering to current and recent college students with a massive debt forgiveness plan will produce some votes. Hopefully, the rest of us will see the folly and reject candidates who make such proposals.


Update on the US-China Trade War


The trade war with China is escalating. The most recent concern is what the Trump administration accurately calls “currency manipulation.”

Major world currencies like the US dollar, the euro, the Japanese yen, and the British pound are actively traded; the rates of exchange among these currencies are determined predominantly by market forces (traders). But the Chinese government actively manages the exchange rate between its currency (the “yuan” or RMB) and the US dollar. As of 8/8/19, the rate is 7.05 RMB per dollar, up from 6.69 earlier this year.

Some argue that weakening the RMB isn’t a problem because it helps US consumers. A stronger dollar is bad for US companies but good for US consumers, because it raises the price of American products abroad and reduces the price of Chinese products in the US.

But currency manipulation is a serious problem. Global companies must constantly forecast and prepare for changes in market-based exchange rates, but they should not have to contend with Chinese government intervention that benefits Chinese firms. Moreover, currency manipulation permits Beijing to weaken the value of its currency and counter US tariffs. For this reason, the Trump administration has no choice but to respond.

I don’t expect this issue to be resolved anytime soon, but a shift to a market-based exchange rate for the RMB is long overdue.


Equal Pay for Women’s Soccer


As we celebrate the success of the US women’s soccer team, attention has turned to the lawsuit demanding equal compensation for male and female players. Winning the World Cup seems to bolster the claim, but there’s more to the issue than just “equal pay.”

Compensation in any job is based primarily on someone else’s willingness to pay for the products or services provided by the workers. The US Soccer Federation (USSF) employs both female and male athletes and negotiates the contracts for both teams. The men’s team has generated much more revenue over the years. Because of this, women have been paid a higher percentage of revenues than have men. From this perspective, men could demand a pay raise.

But there are several misunderstandings about the pay issue. Some—including several Democrats running for president—claim that the women should receive “equal pay” because of their success on the field. Are they suggesting that compensation should be tied to the number of wins and championships earned by the team? Perhaps so, but you can’t apply this type of model after the fact. If pay is to be based on performance, then all parties should agree on the measures in advance and be willing to accept the outcomes. I don’t think anyone would be demanding less pay for the women if they didn’t make it to the medal round.

Others argue that female athletes should make as much as their male counterparts simply because it’s fair. I agree with the principle, but this is more complicated in practice. Consider an example with a simpler revenue model—men’s and women’s professional basketball—the NBA and the WNBA. On average, male basketball players are paid more than $6 million, while their female counterparts earn less than $100,000. This happens not because their labor running down the court does more for humanity, but because they generate a lot more revenue for their teams. In other words, LeBron James and other male basketball players enjoy a higher market value. American consumers are willing to spend much more to go to NBA games, watch them online or on TV, and support NBA sponsors. If “equal pay” for female basketball players was mandated, the WNBA would not exist because teams could not afford to pay the players. This logic also explains why there are not professional baseball and football teams for female athletes.

In a market economy, compensation is based on market factors. When consumers demand more healthcare or entertainment, the market value of doctors, professional athletes, and others who provide these specialized services increases as well. This is an excellent system because the higher compensation lures workers into high-demand jobs. If you pay doctors the same as teachers, then few people would be willing to pay the high price of medical school. If female soccer players had to be paid as much as male soccer players in previous years, then it would not have been financially feasible to have a women’s team in the first place. In this respect, a market economy allows for innovation. When the demand for a new product or service grows, those who provide it will be paid more.

The USSF example is unusual because of complex revenue sources and different demand patterns for male and female athletes. For most jobs, gender does not (and should not) play a role in the business model. If USSF revenues for women’s soccer is equal to or higher than revenues for men’s soccer, then female athletes should earn as much or even more than their male counterparts. But ignoring the revenue side of the equation means ignoring the market, and doing so will have unintended consequences for all of us.


The rise of cryptocurrency


The value of a bitcoin peaked at $20,000 in 2018, dropped below $5,000 earlier this year, and just rose above $10,000 again. Amateur and professional speculators have attempted to profit from its volatility. If you are interested in technical explanations or “investing” in bitcoin, there is a lot of information available online. I am not providing any financial advice.

What is a bitcoin and why are so many people interested? Bitcoin is a decentralized digital currency not connected to a central bank or government administrator. It’s not the only cryptocurrency available today, but it’s getting the most attention. Some online businesses accept bitcoin as payment in lieu of US dollars or other national currencies.

Bitcoin has experienced growth pains, but interest in the cryptocurrency tell us a lot about economics and government intervention. Unlike fiat currencies like dollars or euros, cryptocurrencies cannot be printed or devalued by government decree. If you withdraw $10,000 from a bank in the US, the transaction will be reported to the feds. Bitcoins are not subject to the same reporting requirements.

As you might imagine, governments are getting nervous about cryptocurrencies because they permit financial activity without government oversight or taxation. Some argue that such control permits governments to track drug purchases and other nefarious activity. That’s not a good excuse and I don’t buy the argument that you shouldn’t be concerned about government monitoring “if you don’t have anything to hide.”

I’m not the only person who wants to live free of government intervention, which is why cryptocurrencies are here to stay. Bitcoin might not solve the problem over the long term, but its technical mechanisms and growing acceptance are paving the way for individuals and businesses to exchange value for value without answering to big brother. Cryptocurrencies challenge governmental monopolies on money creation and permit financial privacy. Bitcoin’s volatility is interesting, but you should keep an eye on the coming restrictions on crypto transactions. Your decision to use (or not use) bitcoin should be your own.


The Argument for Tariffs on Mexico


President Trump surprised just about everyone when he threatened to tariff Mexican imports at a rate reaching 25% by October unless they do more to halt the flow of illegal immigrants. The President was criticized harshly and immediately by leaders of both parties. The US Chamber of Commerce even threatened legal action to block the tariffs.

Trump’s critics are correct on economic grounds. Tariffs are simply taxes that increase prices and limit consumer choices. A 25% tariff would be crippling to firms in auto and other industries with strong ties to Mexico. Moreover, strengthening economic ties with our Mexican neighbors could add leverage to negotiations with the Chinese. There are lots of good reasons to avoid the tariffs. The President clearly understands the importance of North American trade or he would not have negotiated the USMCA.

But there’s more to the story than economics. Resolving the illegal immigration crisis requires common sense legislative reform, stronger enforcement and immigration processing, and genuine border security. But Mexico is the linchpin in the effort and needs to do more. Tariffs would hurt US consumers but could devastate the Mexican economy. President Lopez Obrador has threatened to retaliate if tariffs are enacted, but it’s obvious that Mexico has much more to lose. The tariff threat is a way to get their attention.

Strong North American economic interdependence is certainly in the US interest and I hope that tariffs can be avoided. Nonetheless, I support President Trump’s effort to engage the Mexican government in resolving the illegal immigration problem. He has signaled that he is willing to work with Mexico, but they must do more.


What many commentators don’t understand about US-China trade negotiations


Many of the commentators analyzing the US-China trade negotiations are making assumptions that are not entirely accurate. I will address 3 of them here.

First, Chinese leaders recognize that free markets drive economic growth. As a rule, Chinese leaders seek to shape markets, not follow them. They talk a lot about “free markets” and “free trade,” but Beijing controls much of production and consumption. Foreign markets (including the US) influence Chinese producers, but state control of the banking and other industries effectively prohibits Chinese firms from competing as they wish. Many Chinese companies benefit from government subsidies, but there are always strings attached.

Second, Chinese leaders are willing to adapt to the established Western understanding of global trade. This is only partially true today. Chinese goods are embedded in the global marketplace, and adding tariffs or removing these good altogether will hurt US firms and consumers. Chinese leaders accept the inevitability of negotiations, but they like their approach to managed trade. It’s benefitted them in the past, and they are not ready to abandon it.

Finally, China must agree to a free-market arrangement to get a deal. All nations would eliminate trade barriers in a perfect world, but a package that includes bona fide progress on issues like intellectual property and state subsidies can and should be acceptable even if these issues are not totally resolved. The global trajectory over the last several decades has favored free markets and will likely continue but change rarely occurs overnight.

I continue to believe that the greatest impediment to a trade deal is the 2020 elections. If President Trump is not reelected and the new administration is willing to soften the US stance, then holding out will prove to be an effective strategy for the Chinese. If only the Democrat contenders could stand with the President on this issue, the incentive to wait would be removed.


Getting a Trade Deal with China


Prospects of a trade deal with China are unclear. I’ve always believed there will be an agreement—and I still do—but it will require a lot of compromise. If you think about the ongoing negotiations as a poker game, both sides still hold valuable cards. Here’s how I see it.

The U.S. is in an overall position of strength. A reduction in free trade between China and the U.S. inevitably hurts both nations, but Chinese dependence on exports to the U.S. is greater than U.S. dependence on Chinese imports. The U.S. economy is growing rapidly and is better situated to absorb the negative effects of tariffs.

But the U.S. has some vulnerabilities as well. President Xi and other Chinese leaders typically stay for the long haul. President Trump is subject to a 50/50 election in 2020, and if he doesn’t win, a Democratic president could be willing to cut a better deal for Beijing. Stalling might be more costly for China in the short term, but not necessarily over the long haul.

China also wields a lot of influence over North Korea and can exercise this leverage positively or negatively to get a favorable deal. If China can help denuclearize the Korean peninsula, President Trump is likely to give more on the trade issues even if this is not an explicit part of a trade agreement. And he probably should.

There is one thing the U.S. could do to strengthen its position immensely. If leading Democrats like Biden and Sanders demonstrate unity with the President on this issue, it will send a strong message that the deal will not get better for China in 2020 regardless of who wins the White House. Of course, this issue creates a quandary for the Democrats. If supporting the President leads to a pre-election deal, then Trump gets a substantial political win on an issue pivotal to crossover Democrats and moderates. Standing with Trump on China will help his reelection effort.

I rarely agree with Chuck Schumer, but his recent support for tough negotiations with China is welcome. Wouldn’t it be great if the Democrats seeking the oval office could do the same? I’m not counting on it.

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