Why We Need More Electoral Colleges

Many state division and secessionist movements are afoot, including one that I had previously not known about, "New Illinois," which would be Illinois minus Chicagoland. See the WSJ's coverage here: https://www.wsj.com/us-news/rural-counties-new-illinois-california-1e1badb5?mod=djem10point 

If you look at a map of any recent presidential election, you will see a sea of Republican red with splotches of Democrat blue. The Red areas also mostly rural areas and the blue ones mostly big cities and their burbs, with some Indian Reservations tossed into the mix.

The Founders and Framers devised the Electoral College (EC) to ensure that presidents would be chosen with input from states and not just majority rule because the president is supposed to represent the nation and not just densely populated areas. Democrats hate it for that reason and are actively trying to undermine it at the national level.

What true small-d democrats should be doing though, is replicating the EC at the state level so that big cities do not dominate rural areas, as they do in California, Illinois, New York, Massachusetts, and other states where blue metro areas control state government. They need to find some way for rural residents  to have more say in policy, at least enough to veto policies that actively hurt them for no good reason.

One problem with straight majority rule is that only one voting precinct needs to be corrupted to throw a close election to the wrong party. Another problem is that if even a real majority lives in a small space or is otherwise narrowly interested in a subject, it can impose its palpably poor policies at low or no cost to themselves on people living in places the majority knows nothing about. 

Consider, for example, the silly prohibition on trapping beavers in Massachusetts. People in Boston passed that because they think beavers are cute. They are, I guess, but they build dams that can damage people's property, not in "the Blue Blood streets of Boston" but in the Berkshires, hours away. The dumbest thing of all about the law is that people can still call exterminators to take out the beavers and hence have an incentive to ERADICATE the busy furry fellows so they do not have pay the exterminator fee again. If they could trap the beavers, they actually have an incentive to cull them rationally because beaver furs have some value. For more backup on this, see https://www.scirp.org/journal/papercitationdetails?paperid=124716&JournalID=192 (no paywall).

As our governments grow ever bigger and more powerful, incentives to break away from ones that do not represent all people will grow. If urban centers do not relinquish their death grip on rural areas by building something like state-level ECs, we may end up with 100 states, or maybe with two national governments, a democratic one that respects minority rights, and a Democratic one that does not.

For more on that, see another open source article I recently published here: https://link.springer.com/article/10.1007/s44282-024-00065-5

Unconstrained democracy has been compared to two wolves and a sheep voting on what is for dinner. The sheep needs a veto and so do our rural residents. 

Secondary Sanctions: Limited Effects and Potential Backfire

 No earthly power, short of nuclear annihilation, can stop Russia and China from trading. The countries share a 4.3 thousand kilometer long border over which bulk commodities like oil can be exchanged for precious commodities like gold. Physical currencies, including dollars, euro, renminbi (CN¥), and rubles (₽) can also flow across the border, by plane, train, automobile or, if necessary, camelback.

Physical means of payment need to be safeguarded from third-party bandits, which adds to expenses, but the counterparties need not fear expropriation so long as Putin and Xi remain allied, for each retains incentives to enforce the foreign contracts of the companies in their respective countries. Given the likely size and profitability of current and future trade, private contracts will largely be self-enforcing anyway because the costs of reneging on a deal, loss of future dealings, will exceed the expected benefits of future trade. That is why hundreds of billions of dollars can exchange hands in foreign exchange deals daily with nary a default.

For transactions requiring more speed, or some sort of collateral, Bitcoin or other cryptoassets could be used, and probably already are. 

The cheapest and fastest method to make payments, though, is simply bank to bank, CN¥ for ₽ deposits and vice versa. To thwart such transactions, U.S. officials have imposed secondary sanctions, i.e., sanctions on foreign banks and other financial intermediaries engaged in sanctioned transactions. 

The U.S. officials who imposed secondary sanctions are either daft or engaged in vote mongering. Hopefully, it is the latter because the former continues down a road more costly to the U.S. than to Russia.

Some segment of U.S. voters blames Russia for the invasion of Ukraine and wants the American government to do whatever it can to defeat Putin. Some would even support direct military intervention but most appear content with what is termed “virtue signaling.” In other words, they want to think that U.S. policymakers are actually inflicting harm on Russia’s military capabilities by thwarting its trade. Such voters do not understand even their own domestic finances much less international ones and are easily swayed by headlines and pundits telling them that sanctions have been “strengthened” or “tightened” or other impressive sounding words. Most such people will not vote for Trump but they might also abstain from voting at all unless they can be made more enthusiastic about Biden.

U.S. policymakers, though, might actually believe that their secondary sanctions will prove effective although they simply move the core issue to another level. Much like the internet itself, financial systems are networks and highly malleable ones at that. Information/cash flows that hit nodes (financial institutions) that are blocked due to sanctions or other causes simply reroute to active nodes. Moreover, new nodes can be created at any time to “launder” the money, or in other words to hide its “dirty” origins. Despite decades of effort, U.S. officials have been unable to stop the laundering of illicit drug money by domestic agents and hence stand no chance against foreign launderers, whose transaction data can be altered or hidden from prying eyes.

Policymakers could take more extreme measures but again they can only increase transaction costs, not interdict mutually beneficial trade. Moreover, at some point, they risk their actions hurting an already troubled domestic U.S. economy by making U.S. companies fearful of doing business abroad, which appears to be the main effect of the secondary sanctions so far. In the limit, their actions could be seen as an act of war, like a physical blockade of Russian ports certainly would be.

Extending sanctions to tertiary transactors and beyond threatens a return to a bipolar world, like that of the Cold War era, with two competing spheres or “worlds” that trade in limited quantities and only with government approval. Such an outcome would decrease world output by limiting the gains from trade to those available within the two blocs and also increase the probability of the outbreak of a major war by decreasing economic ties.

The “Free World,” led by the U.S., prevailed in the Cold War but the same outcome is not assured should global trade again be divided. America’s free enterprise system proved more productive relative to the command economies of the two major communist foes, the USSR and China. The economies of the EU and the U.S. today, however, are much more controlled than they were then and the economies of Russia and China are now more fascist, and hence flexible and productive, than the economies of their communist forebears.

Moreover, how the world would divide remains unclear. After decades of invasions and occupations of foreign countries, as well as numerous documented instances of interfering with foreign nations’ sovereignty, the U.S. has lost the moral high ground it possessed after World War II. The Anglosphere, the EU, and India would likely remain within the U.S. bloc but much of the rest of the world could fall into the Sinosphere, creating a rough economic parity that never really existed during the Cold War. Undoubtedly, some countries would play off the two blocs, much as India did for decades, for their own gains.

In sum, the latest round of U.S. sanctions against Russia and those doing open business with Russia might raise transaction costs but cannot stop trade between Russia and China. Hopefully, U.S. policymakers cynically attempt to increase votes to Biden knowing full well that their efforts are too miniscule to affect Russia’s war machine more than at the margin. If they actually believe that sanctions can work if only further tightened, their miscalculation may lead to much higher costs for Americans while actually bolstering China and Russia.

The Protectionism Gambit

 President Biden now tries to out-Trump former President Trump on protectionist trade policies. Not only did he leave most of Trump’s tariffs in place, he matched Trump’s call for 100 percent tariffs on Chinese EVs and supported a Section 301 petition that, when implemented, will impose still undetermined port duties on Chinese-built ships.

Bilateral trade restrictions like those reduce the economic output of both trading partners. Specifically, the tariffs and port duties hurt U.S. consumers by raising the price they pay for Chinese goods and hurt Chinese manufacturers by eliminating their cost advantages. U.S. manufacturers may benefit, but it is just as likely that untaxed foreign producers that are more efficient than U.S. ones, like Japanese shipbuilders or European EV makers, will gain instead.

By raising the price of all EVs sold in the U.S., tariffs on Chinese EVs will also discourage EV adoption, a purported goal of the Biden administration’s so-called Green New Deal.

Why, then, would Biden turn toward Trumpian protectionism? Because it will certainly generate votes in November. 

U.S. politicians routinely lie to the media and the public, so the only way to know what policymakers are truly thinking is to access their correspondence via a FOIA request. If that is unavailable, as it usually is because they routinely illegally destroy official correspondence, use unofficial back channels to communicate, or redact key information from the documents they are forced to disclose, analysts must follow the money or votes by analyzing who wins or loses, or who thinks they will win or lose, due to specific policy changes.

One possibility is that the Biden administration believes that high tariffs will somehow reduce Chinese military capacity. That seems unlikely, however, as the tie is tenuous. Moreover, the last time that the U.S. imposed heavy economic sanctions and other economic costs on an ambitious East Asian empire, war resulted.

More likely, Biden’s handlers believe that he can take voters from Trump, specifically some untold number of millions who like Trump’s trade policies but who dislike Trump himself, by implementing Trumpian tariffs. Moreover, because independent presidential candidate Robert F. Kennedy, Jr. has also come out in favor of tariffs against China (and any other nation that allows the “exploitation of workers”), Biden does not have to worry about losing any votes due to his trade policies.

Some subset of the anti-Trump the man, pro-Trump trade policy bloc might overlook Biden’s other policies, like the open southern border, just to avoid voting for Trump while still getting Trump-like tariffs. As it becomes clear to Biden’s advisors, however, that most swing voters (not dedicated to either major party) do not believe Biden’s claim that Republicans are to blame for the border crisis by blocking border reform legislation, look for Biden to make some grand gesture towards border security in the months before the November general election, as he tries to win over more of the swing bloc.

That Biden would sacrifice consumer interests to gain votes is unsurprising. Like other U.S. presidents dating back at least to Franklin D. Roosevelt (1933-1945), Biden openly buys votes with taxpayer money. He continues to insist on student debt relief, for example, even though the courts have rebuffed his previous plans. Here, the strategy seems to be to appear to put up a good fight, but if U.S. courts stymie his efforts he can credibly pledge to get a student debt relief bill through Congress during his second term.

High tariffs on Chinese ships and EVs hurt most Americans in their role as consumers. The costs per American per year are too modest to force them to take action, but for decades they understood that free trade promotes their interests and voted accordingly. How, then, can all three leading candidates for president in 2024 support tariffs?

The events of 2020-22 proved that many, if not most, Americans have been poorly educated in biology, economics, and civics. Most willingly followed obviously flawed pandemic policies, many of which were concocted out of thin air (social distancing and masking), and took untested, experimental vaccines simply because authority figures told them to. Government censorship of dissenting voices pointing to the misaligned incentives of vaccine manufacturers and the self-serving regulations and lockdowns imposed by politicians made it difficult to direct people toward unbiased sources and more logical analyses of data about Covid IFR, vaccine danger signals, and the like. Trillions of dollars and millions of lives were lost as a result.

When it comes to economic policies, government censorship is largely unnecessary because aside from those interested in investment decisions, most Americans do not seek out alternative economic policy viewpoints, or fully grasp any randomly encountered. Were a claim about the destructive nature of trade restrictions against China to become popular, however, the U.S. government now has all the tools necessary to squelch it and to discredit the author(s), just as it discredited and disqualified doctors pointing to the true nature of Covid-19 and the effective clinical treatments they developed during the pandemic.

In short, so long as the U.S. government can force traditional mass and social media to censor contrary viewpoints, its policies, including its economic policies, voters will not constrain policymakers. Higher prices will be put down to “corporate greed” and restricted supplies to “global supply conditions.” Budget deficits will continue to grow and military aid to flow. In short, expect more economically irrational policies from Washington.

Economic and Political Analysis of the Recent Section 301 Petition Re: the Chinese Ship Industry

 In a 137-page and 150-exhibit petition filed with the U.S. Trade Representative (USTR) in March, attorneys and consultants for five large U.S. labor unions allege that the “Government of China” engages in “unfair trade practices” that precipitated the relative demise of America’s shipbuilding industry since 2000 and prevent its recovery. It was filed under Sections 301 and 302 of the Trade Act of 1974, which empowers U.S. economic entities to petition USTR to investigate and rectify non competitive foreign business practices and policies.

Although its economic claims are nonsensical, the petition does have a valid legal basis. Most importantly, it will have strong political support, so its nostrums, including a port levy on Chinese-built ships, may prevail in a US election year. The short- and long-run economic effects of the port levy on China, however, can only be stated in general terms until the details are determined.

The petition does not claim that China has broken any international laws or treaties. Rather, it rests on a part of U.S. trade law that considers “unreasonable” the policy of any foreign government that is “unfair and inequitable.” Such policies include “export targeting,” which U.S. law defines as “any government plan or scheme consisting of a combination of coordinated actions (whether carried out severally or jointly) that are bestowed on a specific enterprise, industry, or group thereof, the effect of which is to assist the enterprise, industry, or group to become more competitive in the export of a class or kind of merchandise.”

Like the legal concept of “export targeting,” the petition contains little economic merit. The complaints amount to no more than admissions of Sino superiority in shipbuilding. They focus on Chinese government investment in the sector rather than U.S. disinvestment in maritime industries, due, in large part, to the actions of the complainants themselves, which raise U.S. labor costs above competitive levels. 

The petition complains of practices also employed by the US government. For example, it notes that “the China Export-Import Bank has provided tens of billions of dollars in loans to support the construction of thousands of vessels in China for export to foreign owners,” without also noting that the United States government has employed an Export-Import Bank since 1934. According to the U.S. House of Representatives, “The Export-Import Bank of the United States (Ex-Im) opens up international markets to U.S. businesses by financing and insuring the sale of U.S. exports when private sector financing is prohibitively expensive or simply not available.”

The petition also claims that “China has given its domestic shipbuilding unfair advantages by mandating the purchase and use of Chinese ships by Chinese state-owned shipping enterprises and state-owned oil companies.” Yet it calls for the strengthening of the Jones Act, also known as the Merchant Marine Act of 1920, which protects the domestic U.S. shipping industry from foreign competition. Almost 50 countries enforce similar “cabotage” laws.

The biggest flaw in the petition may be that it doesn’t recognize that the “Government of China” is merely the agent of the Chinese Communist Party (CCP), the largest and most powerful de facto corporate conglomerate the world has ever seen. The many Chinese state-owned enterprises (SEOs) are best understood not as corporations aided by the Chinese government but as de facto subsidiaries of the CCP’s conglomerate.

Unlike most conglomerates, the CCP is not publicly traded, but rather has taken the form of a private equity venture, with rents accruing to party members. It behaves, however, as many international corporate conglomerates, from the Dutch East Indies Company to 3M, have for centuries by strategically expanding the geographical and industrial scope of its business activities.

For example, the “CCP Inc.” shifts resources between its many units to leverage emerging international opportunities. Its Belt and Road and Maritime Silk Road initiatives differ from the activities of Western multinational corporations, many of which were government subsidized, only in scale. Like other conglomerates, the CCP favors trade between its subsidiaries, a conventional and rational business practice the petition derides as “discrimination against non-Chinese producers and operators.”

The petitioners also lament many discrete facts, like the production of 70 percent of the world’s cargo cranes by a Chinese SOE. Without evidence of coerced sales, all that means is that the Chinese must produce cargo cranes with the best combination of quality and price. It should be thanked for the same reasons that consumers thanked Standard Oil for supplying the world with inexpensive oil. The petition itself notes that China has decreased the global price of commercial vessels, which of course is a problem only for less efficient competitors, like U.S. shipbuilders. Its claim that “non-market acts and policies” allow China to underprice competitors remains completely unsupported.

British shipbuilders made similar complaints about the Japanese ship industry in the 1970s and 1980s. Then and now, such complaints display a profound ignorance of the workings of the free enterprise system, whereby any economic entity, including sovereign governments, remain free to invest in whatever industries they like, while also bearing the costs of overinvestment, as Japan did for several decades after its acclaimed “economic miracle” ended in the 1990s. 

The petition also raises the specter of compromised U.S. national security. It remains unclear, however, why peacetime ownership of ports and ships matter in wartime. In both world wars, for example, the U.S. government nationalized the physical and financial assets of enemy combatants in areas within its control, turned their administration over to the Alien Property Custodian, and utilized them in the war effort. Similarly, U.S. corporations could buy relatively inexpensive Chinese cargo ships in peacetime but deploy them on behalf of the U.S. military if called upon to do so. Steel, after all, owes allegiance to no country. (Computer chips might, but the petition makes no such claim.)

U.S. corporations buy so few Chinese ships that the petition does not call for higher tariffs on Chinese-built ships. Tariff revenues would simply accrue to the U.S. Treasury anyway. Instead, the petitioners want much more direct aid, in the form of the USTR charging Chinese-built ships (regardless of flag) a port fee dedicated to a U.S. Commercial Shipbuilding Revitalization Fund “to help the domestic industry and its workers compete.” Such protectionist measures, however, cannot increase competitiveness because they allow uncompetitive businesses and their unionized workers to continue to conduct business as usual rather than make the difficult choices necessary to increase productivity.

The next step in the process is for the USTR to consult with the Chinese government and to hold a public hearing on the petition. Written comments must be submitted by 22 May, a week before the scheduled start of the public hearing in Washington DC. A week after the hearing ends, post hearing rebuttal comments fall due. After that, USTR will likely make policy recommendations to POTUS. 

 Section 301 has long been a matter of controversy between the US and the World Trade Organization (WTO). In 2020, the US formally questioned the legality of the WTO’s dispute settlement system, particularly its Appellate Body. To move the dispute to the WTO likely would delay any policy implementation for years, so POTUS might act unilaterally in this matter.

As this is an election year, POTUS may use the USTR’s recommendations to try to garner votes. As discussed elsewhere, US politicians have increasingly jettisoned free trade for protectionist policies in the hopes of alleviating the nation’s looming fiscal crisis by taxing foreign firms, especially Chinese ones, to the limited extent possible. A secondary goal is to appear “tough on China,” even if the main effect of a policy is to tax U.S. consumers to subsidize special interests, like unions, sympathetic to the political party currently in power.

Judging the precise effects of the proposed port fee is impossible before USTR and POTUS agree on the specifics. The petitioners want the port fee to be a tonnage duty so that bigger Chinese-built ships pay more, but they do not specify if they want the per-ton fee to increase with ship size. If the last ton costs as much as the first, the port fee will not distort the size of Chinese-built ships docking in the US. If the per ton fee increases steeply, however, smaller ships will be favored.

The petitioners also want the fee to decrease with the age of the ship, which will encourage keeping older, less energy-efficient, and more accident-prone ships to remain in service. Environmental groups will likely oppose that part of the proposal and prevail.

The precise definition of Chinese-built will also be important. If ships built in a foreign country by a Chinese SOE will not be subject to the fee, it will encourage the globalization of Chinese-owned shipbuilders.

The petitioners also want the fee to increase regularly until China’s shipbuilding dominance ends, but they do not specify rates or intervals. They suggest $1 million per ship per clearance as a hypothetical but it is unclear if they see that as a starting or ending figure.

To the extent that the fee becomes high and is binding, the Chinese will have an incentive to hide their ownership of shipbuilders in other countries through complex and opaque chains of shell corporations, secret ownership stakes, or convertible debt financing. Such tactics can be difficult to detect or police.

If the regulations and their enforcement are tight enough, the biggest winners from the proposed port duty in the long term may well be Japanese and South Korean shipbuilders, not the much less competitive American ones. The petition suggests that those countries too might be guilty of “export targeting” but slapping duties on America’s most important allies in any future war ith China will be a much harder sell politically. 

Moreover, the more countries whose ships are subject to a port fee the more the fee will fall on U.S. consumers in the form of higher prices for imports. Ostensibly, the first reaction to a port fee on Chinese-built ships will be to not use those ships, however defined, in international trade to the U.S. That could reduce future demand for Chinese-built ships, lowering the quantity sold at any given price. 

If ships built in Japan, South Korea, and elsewhere were subject to the port levy, however, shippers would have no choice but to pay the port fee and there would be no reason to prefer non-Chinese-built ships. The port fee would then be similar to a tariff, but one based on the tonnage (and potentially age) of the ship rather than the value of the goods aboard. The cost, in other words, would be largely or wholly passed on to American consumers and become just another example of special interest legislation that aids the few by placing a small and difficult to detect tax on the many. The petition recognizes this, but trivializes it by estimating the cost at half a cent per pair of blue jeans. A fee of $1 million per vessel, however, would generate billions of dollars in revenue, which is billions of dollars per year diverted from the pockets of the Americans wearing those blue jeans to uncompetitive U.S. shipbuilders, employees, and unions.