Mexico’s Oiling Days Are Numbered

Energy: Even without a terror attack on its oil facilities, Mexico’s output is falling sharply and could end as soon as 10 years. Its president is setting an example by fighting a difficult Congress and culture to reverse that.

If we Americans think persuading our Congress to get serious about drilling for oil is tough, consider what the president of Mexico is going through.

Put simply, Mexico’s state oil company, Pemex, is running out of oil. Its output has plunged 20% in the last three years, an unsustainable drop that could lead to a collapse of the country’s oil industry in a decade, according to Mexico’s oil minister.

Exports could halt in as little as five years. This would be a fiscal disaster, given Mexico’s reliance on oil earnings for 40% of its budget.

Nationalized since 1938, Pemex has muddled through for years on the nation’s easily recoverable oil. But that’s now running out. And without massive new investment to boost output, Mexico’s oil experts warn, Mexican citizens will have to pay much-higher taxes or shut down nearly half of the federal government.

That’s why President Felipe Calderon is taking the lead on a farsighted third option: using his political capital to reform the nation’s oil sector and boost output — as America should be doing.

Mexico has other offshore fields that can replace its giant Cantarell field, but they’re too far out and too deep in the Gulf of Mexico for Pemex to extract. It makes sense to invite in foreign partners from the private sector who can provide the technology. But under the 1938 oil nationalization, foreign investment isn’t allowed.

For Calderon, that’s a huge obstacle. The Mexican Congress he’s up against is an incorrigible version of House Speaker Nancy Pelosi’s Democratic Congress, dead set against bringing in critical foreign investment to help develop Mexico’s oil. Like congressional Democrats in the U.S., they’re just putting their heads in the sand.

Like Pelosi, Mexico’s left-wing Congress likes to change rules and block votes from ever happening to ensure that things go their way.

Last April 8, President Calderon submitted a bill to Congress to begin a small modernization of Mexico’s energy industry, by permitting private refineries and transport. Rather than vote, Mexico’s left-leaning legislators shut their own Congress down for two weeks. Calderon gave them the 71 days of debate they wanted for the bill. Rather than debate, they rallied big crowds against it.

This works only because public sentiment on oil is potent.

Oil nationalization is connected in the Mexican public’s mind with the forging of Mexico into a viable nation. Before 1938, Mexico had been weak and mired in civil wars. Many thought it wouldn’t survive. Beloved President Lazaro Cardenas’ oil nationalization coincided with a period of peace and a stronger central state.

So Calderon’s bid to revive Mexico’s oil industry through foreign investment is seen by many Mexicans as risky at best, and unpatriotic at worst. It’s ironic, of course, because if the oil runs out, there won’t be much of a state at all — and Mexicans will stream across U.S. borders looking for economic relief.

Yet Calderon’s taking this risk against all political odds to save his country’s energy industry and perhaps convert Pemex into a viable state company like Brazil’s Petrobras. He’s also doing us a favor by fighting to modernize, because Mexico’s oil accounts for about 12% of America’s imports.

What kind of courage, by contrast, does it take in the U.S. Congress and the presidency to fight for drilling in America’s oil-heavy wildernesses? President Calderon shows a leadership that our own leaders should imitate. Because like Mexico, if we don’t start producing, we’ll lose much in five years, too.

Is Larry Summers The Canary in the Mine?

Larry Summers, Protectionist?, Devesh Kapur et al

Is a liberal international economic order losing intellectual support? Should developing economies be worried? If Larry Summers is the canary in the intellectual mine, his two columns in the Financial Times (April 28 and May 5) suggest that the answers to both questions are yes.

The liberal economic order of the last several decades was premised on two assumptions. First, that the proliferation of prosperity across countries was a good thing. Second, there would be winners and losers but, on balance, a majority of people in both developing and developed countries would benefit. Mr Summers now appears to be questioning both assumptions. He has not stated outright that the proliferation of prosperity is undesirable but his -columns do suggest that globalisation creates competition for America.


I Beg To Differ, Larry Summers

I am sorry but not terribly surprised to have provoked Devesh Kapur, Pradap Mehta and Arvind Subramanian (henceforth KMS) with my recent columns on globalization and appropriate American policy responses. Their recent response distorts what I wrote in important respects and much more importantly adopts a posture towards globalization that is analytically dubious and politically untenable.

My columns included the assertions that “the policy of withdrawing from the global economy or reducing pace of integration is untenable” and that after stating a number of standard economic arguments for free trade “all of these arguments have the very considerable virtue of being correct arguments…the United States will be better off with than without trade agreements and the world will be a richer and safer place with increasing economic integration”.


Is Robert Shiller Now a Psychologist?

The Scars of Losing a Home, Robert Shiller

ACROSS the United States, there were 243,353 foreclosure filings in April alone, nearly three times the total in the same month just two years ago, according to RealtyTrac, a company that follows the numbers. The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long.

What would this mean in human terms? Picture a line of moving trucks extending for hundreds of miles: they are taking the furniture of countless families to storage lockers. Picture schoolchildren saying goodbye to their classmates. They aren’t going on vacation: they are being abruptly moved to the other side of town.

It’s easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned from such a life experience. After all, we live in a capitalist economy that thrives on the sanctity of contracts. The founders of our nation put the contract clause into the Constitution to make it clear that people need to live up to the documents they sign.

This stern view may, in fact, be winning the battle of public opinion. On May 9, the House approved legislation aimed at helping some of the people facing foreclosure, but the president has said he would veto it.


Bail Out Housing To Salve Damaged Psyches, Yves Smith

I kid you not, the headline above is a faithful representation of the thrust of an article today in the New York Times, “The Scars of Losing a Home,” by Yale economist Robert Shiller.

With friends like this, liberals have no need of enemies.

Shiller’s argument is ludicrous: implement the legislation before Congress, which guarantes up to $300 billion in mortgages for stressed borrowers, to prevent psychological damage to them. Wouldn’t it be cheaper just to hand out Prozac? Or copy New York’s Red Cross 9/11 mental health program?

This piece illustrates much of what is wrong-headed about the “rescue the homeowner” concept. First, attempting to prop up assets at levels not supported by the underlying economics (in this case, incomes) does not work (see here for an illustration). The prices will in the end revert to a sustainable level, if not trade below them for a while in some (perhaps even many) markets. Japan is an extreme example of the consequences: low growth due to good capital being thrown after bad and delays in clearing out bad loans and recapitalizing the financial system so it could get back to its job of funding productive enterprise.


Calcuated Risk Is Similarly Befuddled

May 16, 2008

Reaganomics: Friend or Foe?

America Beset By Reaganism, W. Williams & B. Jones

When it comes to fiscal policy, bad ideas are dangerous, observed the great British economist John Maynard Keynes. “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood,” he wrote. “Indeed, the world is ruled by little else.”

America is now beset by a bad idea called Reaganism, which holds that government is the problem and must be constrained if the powerful American economy is to flourish. Deep tax cuts for the rich and massive deregulation will do the trick.

Ronald Reagan was able to turn this philosophy into the nation’s dominant economic concept. But in the hands of Reagan’s disciple–George W. Bush–it has yielded devastating results.


Reaganomics in Retreat, Donald Luskin

IT SEEMS THAT the world is beginning to come around to my point of view, that the credit crisis has been averted and the economy is not going to weaken enough to deserve to be called a “recession.”

Several speeches this week by Federal Reserve officials have talked about the credit crisis very much in the past tense. The Fed finally came up with new liquidity facilities that were effective at easing the crisis — after nine months of flailing, doing everything wrong and nothing right. This after years of keeping interest rates too low, and triggering the cycle of speculation that led to the credit crisis in the first place. So now the Fed speechifiers can pontificate about the mistakes that bank lending officers and brokerage firm risk control experts made.

Even my longtime ideological nemesis Paul Krugman, the economist who writes a column for the New York Times in which, for years, he has forecasted every possible horrific outcome for the economy, admitted last week that “the worst of the financial crisis is over.”


May 15, 2008

Globalization: A “Man-Made Catastrophe”?

Our Great Economic U-Turn, Thomas Frank

Twenty years ago, when I started out as a writer, the problems of mass prosperity were the ones that intrigued me most. America was then, as I thought it would always remain, the great middle-class nation. And in the permanent affluent society, questions of taste and waste and marketing and alienation were what really mattered, now and forever. When moved to consider workplace issues in those days, I instinctively placed them in the category of brutal-things-settled-long-ago: Without even thinking about it, I connected the word “labor” to the word “history.”

It’s not a mistake anyone can make any longer, whether they are pondering the voting patterns of working-class Hoosiers or the driest statistics in the record book. Median “nonelderly” household income, we find, fell consistently through the first half of this decade, despite the solid economic growth enjoyed by the country as a whole.


The Dumbest WSJ Story Ever. Really, James Pethokoukis

What the heck is the matter with Thomas Frank? The new columnist at the Wall Street Journal—and author of the book What’s the Matter With Kansas?—wrote a commentary earlier this week, “Our Great Economic U-Turn,” that basically said the economic boom of the past quarter century was a “man-made catastrophe.” (It’s an opinion seemingly shared by Barack Obama if you listen to his speeches.) This chunk pretty well sums up Frank’s thesis:

Where, oh where, to begin? OK, a few quick observations:

1) It was the 1970s, a decade Frank praises because of its strong unions and low income inequality, that was the economic disaster. High inflation, high oil prices, high taxes, a terrible stock market and three (!) nasty recessions averaging 11 months apiece. Ugh. The 1973-75 downturn was the worst since the Great Depression. Even most liberal economists would say taxes were probably too high and regulation too heavy.


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