AEIdeas The public policy blog of the American Enterprise Institute Fri, 24 Oct 2014 02:50:05 +0000 en-US hourly 1 Markets in everything Fri, 24 Oct 2014 02:22:19 +0000 read more >]]> 1. Bringing House Calls Back with UberHEALTH — Now there’s an Uber for flu shots. Today the ride-sharing service announced a one-day UberHEALTH pilot program in partnership with Harvard Medical School to deliver free flu shots on-demand. From 10 a.m.- 3 p.m. today Uber drivers delivered a registered nurse to customers anywhere within the three test cities of New York, Boston, and Washington. Source.

This is one more reason Big Taxi is doomed — Uber is running circles around them with cutting-edge innovation and the constant introduction of new services – services that Big Taxi, which has been around for more than half a century, would never in a million years think of offering!

2. Online “competency-based education” (CBE) is a faster, cheaper, more flexible way for adults to earn college credentials valued by employers and it’s coming on strong.

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Good economic news this week Thu, 23 Oct 2014 22:03:52 +0000 read more >]]> There’s been a lot of good economic news recently, here’s a sample below of 8 pretty positive economic reports that were (mostly) released this week.

busloans1. Business Lending. The total volume of commercial and industrial loans at all US commercial banks reached an all-time high of $1.732 trillion in September (see chart above). That’s $147 billion and 9.3% above the previous peak of $1.585 trillion in October 2008, and 46% and $548 billion above the October 2010 trough of $1.18 trillion.

LEI2. Leading Indicators. The Conference Board’s Leading Economic Index rose to a 7-year high in September, its highest level since August of 2007. According to the Conference Board, “The outlook for improving employment and further income growth are expected to support the moderate expansion in the U.S economy for the remainder of the year.”

gasprices3. Gas prices. The average nationwide retail price of gas fell this week to $3.08 per gallon, the lowest level since December 2010, almost four years ago. Fifteen US states now have average gas prices below $3.00 per gallon. The 62 cent per gallon drop in gas prices over the last six months will save consumers almost $85 billion over the next year collectively, and about $718 per US household.

4. National Activity Index. The Chicago Fed reported today that its 85-variable index of national economic activity (CFNAI) increased in September, led by improvements in production-related indicators. The index’s three-month moving average (CFNAI-MA3), increased to +0.25 in September, marking its seventh consecutive reading above zero. The last time that happened was mid-2006, more than eight years ago.

abi5. Future Construction Activity. The American Institute of Architects Billings Indexes indicate “robust conditions ahead for the construction industry.” As a leading economic indicator of construction activity, the organization’s billings index (ABI) reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The September ABI index was 55.2, up from a mark of 53.0 in August (scores above 50 indicate an increase in billings). The new projects inquiry index in September was 64.8, following a reading of 62.6 the previous month.

rail6. US Rail Traffic. The volume of raw materials, supplies, grains, lumber, cars, and petroleum moving across the country by rail continues to increase, and is now back to the pre-recessionary level of rail traffic in November 2007.

staffing7. Temporary and Contract Employment. The American Staffing Association’s Staffing Index tracks the weekly changes in temporary and contract employment across the country at small, medium, and large staffing companies that provide services in virtually all sectors of the economy, and it recently reached the highest level since early December of 2007 when the Great Recession was just starting.

8. Jobless Claims Are Collapsing. Based on today’s report from the Department of Labor, jobless claims (4-Week Avg.) at 281,000 were the lowest since May 2000, and continued claims at 2.351 million were the lowest since December 2000. Adjusted for the size of the US nonfarm payrolls, jobless claims are the lowest ever in US history, see Scott Grannis for more details and commentary.

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The eurozone, slow growth, and debt Thu, 23 Oct 2014 19:45:09 +0000 read more >]]> Standard & Poor’s has some triple-dip recession concerns for the eurozone, arguing in a new report that the region’s “tentative recovery has lost momentum this year.” That is certainly true. The EZ is a mess. But I partially disagree with this analysis:

As we have said before, we believe that one of the main impediments to a more robust recovery is the large overhang of debt. The recent slowdown should therefore not come unexpectedly. Government debt burdens make headlines and are much discussed in policy circles, but the private indebtedness of corporations and households is just as important.

Leaving Greece to one side, we repeat our view that the origins of the eurozone crisis were not public profligacy and burgeoning budget deficits. Its root cause was excessive private-sector borrowing from external sources. The continued refinancing of those external debts at affordable rates had in many instances become impossible following the collapse of Lehman Brothers and the sudden halt to cross-border capital flows to the so-called periphery eurozone countries. Some of this leverage has been unwound, but many countries’ economies still have a long way to go.

Only after public and private debt levels are back to their appropriate levels will, we believe, national savings rates moderate and demand and growth return. Until then, deleveraging has stunted growth and we expect it will continue to do so–despite ultra-low interest rates and official efforts to reverse contracting credit. Debt reduction detracts from domestic demand–and therefore economic growth–because it reflects essentially an increase in the savings rate, which means less consumption, less investment, less government spending, and perhaps higher taxes. Much of these deleveraging-induced consequences are unavoidable in a balance sheet recession–unless liabilities are restructured.

Too much debt, sure. And the region is structurally uncompetitive.  But the EZ has a core NGDP problem, meaning debt levels become unsustainable even at moderate interest rate levels given such persistently anemic growth. This from Scott Sumner back in 2012 still seems applicable:

Ultimately the eurozone crisis is a massive failure of imagination among the Very Serious People than run Europe.  We have a huge demand shock creating a depression with year after year of high (and still rising) unemployment, just as all the textbooks say it should.  You have a severe NGDP growth plunge producing a debt crisis, just as the textbooks say it should.  We have low interest rates being a very poor indicator of the stance of monetary policy, just as the textbooks say it is.  And even with this massive demand shock occurring right in front of their eyes, they can’t see it.  All they can see are the symptoms, and they assume those symptoms are the causes.

And this from David Glasner:

It has been fashionable to blame the crisis on the fecklessness of the politicians in these countries, the greediness of their public employee unions and the overly generous pensions that they have extracted from taxpayers, overly generous welfare benefits, and an unwillingness to work hard and save like the good old solid Northern Europeans.  There probably is some truth in that assessment, though there is probably some exaggeration as well.

However, assigning blame in this way is really a distraction from the true cause of the crisis, which is a stagnation of income growth, making it impossible to pay off debts that were undertaken when it was expected that incomes would be rising.  Since the debts are fixed in nominal terms, the condition for being able to pay off the debts is that nominal income (NGDP) rise fast enough to provide enough free cash flows to service the debts.  That hasn’t happened in the five countries now unable to borrow at manageable rates.

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Can Human Rights Watch be salvaged? Thu, 23 Oct 2014 19:18:26 +0000 read more >]]> Over at Commentary, I look at the reign of Ken Roth, executive director at Human Rights Watch (HRW), and argue that if HRW is going to retain any credibility as a serious investigator and judge of human rights abuses, it is long past time that Roth step down.

The problem is this: Roth has been unable to separate political advocacy from human rights research. When the two come into conflict, he favors the former. The reason for writing the piece at Commentary was yesterday’s terrorist attack in Jerusalem in which a Palestinian Hamas activist drove at high speed into a crowd at a Jerusalem train station, injuring both Israelis and Americans, and killing a three-month-old girl. Even though Hamas claimed responsibility for the attack, Roth was unwilling to call it a terrorist attack, and instead implied it was an unfortunate accident.

That’s just the tip of the iceberg. In early September, I showed that Roth basically made up numbers when he tweeted with regard to a massacre last year in Egypt, arbitrarily upping the figures he used when he felt insulted by the Egyptian government.

Then, of course, there has been HRW’s partnership with Al-Karama, an organization whose head ended up being designated an Al Qaeda financier by the US Treasury Department. That should have cast doubt immediately upon the information HRW accepted from Al-Karama to incorporate into HRW reports. Perhaps HRW might not have known that its partner was, in effect, propagandizing for the Muslim Brotherhood and Al Qaeda against states like the United Arab Emirates against whom Al-Karama had a beef. But at the very least, this should have been cause to rescind and reinvestigate absent the corrupted information. Roth, however, chose to do nothing, in effect endorsing Al-Karama’s shoddy scholarship.

A colleague points out that I missed one of Roth’s most egregious statements. Here’s Ken Roth carrying water for the Islamic State and that group’s ‘respect’ for human rights: “ISIS in #Iraq reportedly tried not to alienate local population, unlike PM Maliki & his violent, sectarian repression.

We shouldn’t have to say this but a group too radical for Al Qaeda, a group which has murdered thousands of Yezidi men and boys; enslaved, raped, and trafficked thousands of Yezidi women and girls; a group which has murdered Christians, Alawis, and Shi‘ites simply because it doesn’t like the way they pray; and a group which has taken hostage and cruelly executed aid workers and journalists does not uphold human rights. Such action very much alienates the local population. Roth might not realize this but people don’t like being raped, tortured, and executed. Perhaps for Roth the issue was the sect of the victims; after all, HRW has actively sought to fundraise in Saudi Arabia, and so bashing Shi‘ites might simply have been a cynical strategy to fill HRW coffers. As for Iraq’s former Prime Minister Nouri al-Maliki? He was far from perfect but the moral equivalence Roth draws is inane and inaccurate.

Was Roth simply calling attention to an interesting news story for his 82,000 plus followers? Not quite: he tweets in his capacity with HRW and HRW once prided itself on being more than the Drudge Report or Huffington Post.

There is so much need today for independent, apolitical monitors of human rights. In every region of the globe, abuses seem to be mounting and dictators appear to be acting with impunity. Alas, Human Rights Watch’s executive director appears increasingly intent to subordinate the organization he leads to a much more limited and subjective political agenda. That is a tragedy not only for what HRW once was and what it could have been, but also for the victims of human rights abuses yet to come.

Follow AEIdeas on Twitter at @AEIdeas.

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In the battle between sharing economy entrepreneurs and regulators, I’ll bet on the entrepreneurs like Uber and Airbnb Thu, 23 Oct 2014 19:13:15 +0000 read more >]]> Dan Rothschild wrote in April (“How Uber and Airbnb Resurrect ‘Dead Capital’“) that the two biggest economic stories of the last decade are: a) the Great Recession and b) the rise of the entrepreneurial sharing economy, or as he describes it, “a category of new businesses that turn noncommercial capital and individuals’ spare time into valuable commercial assets.” Which of these two big economic stories will have the greatest lasting impact over the next several decades? Dan argues that there’s a strong case to be made that the entrepreneurial sharing economy will have the greatest and enduring impact on the US economy. Not surprisingly, the biggest challenge to the new rising class of peer-to-peer entrepreneurs and the flourishing sharing economy is coming from local, state and federal regulators – the enablers and protectors of the status quo.

The new sharing economy upstarts like the ride-sharing services Uber and Lyft are disrupting the existing, and sometimes outdated, business models like traditional taxi cartels, which haven’t changed the way they do business in more than half a century. And those existing businesses (e.g. taxi cartels and traditional hotels) are increasingly seeking the help of powerful, heavy-handed government regulators for government protection against the upstart entrepreneurs and the Schumpeterian gales of “creative destruction” that are disrupting their traditional business models.

It’s maybe best described as a battle between the new economic entrepreneurs like Uber and Airbnb and a new class of “political entrepreneurs” – taxi cartels and hotel chains that are increasingly turning to government regulators to quash competition. Here is some recent commentary about that battle:

1. From Arthur Brooks in his October 17 New York Times op-ed “Start Helping the Helpers”:

Technically, Airbnb — like Uber, Lyft and other innovative companies — is helping people tackle the problem of “dead capital.” This term, coined by the Peruvian economist Hernando de Soto, refers to potentially productive assets owned by ordinary people who could use them if they could only find a way. As Daniel M. Rothschild of the Mercatus Center points out, there are 1.5 bedrooms for every man, woman and child in the United States. The owners or renters of many of these dormant bedrooms could use extra money in a lousy economy.

Ordinary people, especially vulnerable people without power and privilege, find Airbnb empowering and useful. It lifts Americans up with zero cost to the taxpayer. And people like it. Shouldn’t we encourage this? Instead, state and local governments have met the service with antagonism, seeking to limit Airbnb’s operations or shut it down. Just this week, the attorney general of New York issued a new report insisting that a majority of Airbnb’s operations in New York City are illegal, and says it is planning a major regulatory crackdown. Uber, Lyft and similar services that enliven dead capital have met with similar treatment from government officials.

Nobody wants zero regulation, and every company should follow the law. But policy should begin with admiration for new ways that citizens can build their lives, not with hostility to profits or the impulse to protect entrenched industries. Governments have their own golden opportunity to exercise creativity in service of the common good, whether that entails rethinking anachronistic zoning laws or adjusting tax policies that treat someone’s spare bedroom the same as a Marriott suite.

2. From an interview with Marc Andreesen in New York Magazine:

Q: Politicians like Rand Paul are seizing on young people’s embrace of companies like Uber and Lyft and Airbnb that are disrupting heavily regulated industries and saying, “You know, if you’re frustrated about Uber, let me tell you about these other regulations that are terrible.” Are these companies breeding a new generation of libertarians?

A: I guess I would say the following: If you have been in an Uber car and gotten pulled over and had the car seized out from under the driver when you were like in the middle of a trip that you were otherwise having a good time on, you might be a little bit radicalized. You might all of a sudden think, Wait a minute, what just happened, and why did it happen? And then you might discover what the taxi companies did over the last 50 years to wire up city governments and all the corruption that’s taken place. And you might say, “Wait a minute.” There’s this myth that government regulation is well-intentioned and benign, and implemented properly. That’s the myth. And then when people actually run into this in the real world, they’re, “Oh, f***, I didn’t realize.”

3. From Wayne Brough’s op-ed today in Real Clear Markets, “Political Entrepreneurs Are Crowding Out the Entrepreneurs”:

Entrepreneurs launching “disruptive technologies” are reshaping markets across the U.S. economy, often by disintermediation and innovation. While these new products and services provide consumers more choices and better value, regulators have place increased attention on these activities, from car services such as Uber and Lyft, to those offering accommodations like Airbnb, to pop up restaurants running afoul of local health codes. In many instances, these new products emerged because innovators were one step ahead of the regulators. But as the regulatory state grows, these innovators will face new challenges from regulators.

Entrepreneurs and regulators work in different spaces, with completely different views of the world. For the entrepreneur, the world is fast-paced and dynamic. The goal of the entrepreneur is to identify unmet demands in the marketplace and develop the products to meet these demands. This requires innovation, adaptability, and the willingness to take risks. Regulators, on the other hand, live in a static world. By definition, regulation is backward-looking, designed to address purported market failures that have already emerged, focusing on data about past market behavior.

As political entrepreneurs crowd out economic entrepreneurs, society shifts from the positive-sum game of wealth creation to the zero-sum game of wealth transfers. This demonstrates the importance of institutions. As the rule of law is overwhelmed by the administrative state, it becomes more difficult to harness the beneficent power of the market. The administrative burden of tax and regulatory structures distorts incentives and diverts resources from productive entrepreneurship to more destructive rent-seeking opportunities. Entrepreneurs play a vital role in any economy but only well-defined market institutions can harness their creative powers in a way that promotes economic growth, innovation, and consumer welfare.

MP: As I’ve noted before, it’s important to remember that Uber drivers and Airbnb hosts are already very heavily regulated, and in some ways they are regulated even more intensely than traditional taxis or hotels by a very ruthless group of regulators – the consumers who use their services and can rate each driver after every Uber ride and rate each host after every Airbnb stay. And the regulation goes both ways – the Uber drivers rate their passengers and the Airbnb hosts rate their guests. So the issue really isn’t a choice between government regulation and a completely unregulated sharing economy; the issue really is who is the primary regulator: a) government bureaucrats and legislators who are often captured by regulated industries like taxi cartels (Big Taxi), or b) the consumers. And there’s no question that captured regulators almost always put the special interests of the well-organized, concentrated groups of regulated producers like the taxi cartel over the public interest of the dis-organized, dispersed thousands/millions of consumers.

In the battle between the new, innovative economic entrepreneurs like Uber and Airbnb and the traditional businesses like Big Taxi and Big Hotel, I predict that innovation will be victorious. When it comes to the “power of the people” versus the “power of regulators,” I’ll put my money on the power of consumers to empower the new entrepreneurs and overcome the regulatory roadblocks.

Here’s my economic forecast: Expect continued and very strong hurricane-strength Schumpeterian gales of innovation, with a high likelihood of market disruption and creative destruction for Big Taxi and Big Hotel, accompanied by huge tsunami-level tidal waves of increased consumer surplus. The sharing economy is the biggest economic story in a generation, and the regulators won’t be able to stop it. Consumers have already gotten a taste of the significant benefits of the sharing economy, and they won’t go back to “business as usual.”

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The 1950s and high tax rates, again Thu, 23 Oct 2014 19:12:48 +0000 read more >]]> It’s becoming something close to consensus on the left that very high tax rates won’t hurt economic growth. After all, the US did just fine in the 1950s with a 91% top rate, right? Here is a bit of my thinking on that, from a post over at NRO’s The Corner:

More importantly, the U.S. economy benefited from a set of one-factors that offset the high tax rates. A National Bureau of Economic Research study described the situation this way: “At the end of World War II, the United States was the dominant industrial producer in the world. With industrial capacity destroyed in Europe—except for Scandinavia—and in Japan and crippled in the United Kingdom, the United States produced approximately 60 percent of the world output of manufactures in 1950, and its GNP was 61 percent of the total of the present (1979) OECD countries. This was obviously a transitory situation.”

What’s more, as American Enterprise Institute scholar Ed Conard has explained about the 1950s, “The United States was prosperous for a unique set of reasons that are impossible to duplicate today, including a decade-long depression, the destruction of the rest of the world’s infrastructure, a failure of potential foreign competitors to educate their people, and a highly restricted supply of labor.”

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Robots vs. restaurant servers — check, please! Thu, 23 Oct 2014 18:57:36 +0000 read more >]]> I wrote yesterday about the possibility of McDonald’s possible automating away its cashiers. Now Mickey Ds denies that’s the intention of their plan to, as the Wall Street Journal puts it, “roll out new technology in some markets to make it easier for customers to order and pay digitally and to give people the ability to customize their orders, part of what the company terms the ‘McDonald’s Experience of the Future’ initiative.”

Indeed, economist Adam Ozimek argues that machines in place of cashiers wouldn’t really save much time or lead to increased sales, but adds that “in the event of a $15 minimum wage, I think the calculus here would change, but right now machines don’t have a huge operating advantage in these environments.”

Sit-down restaurant servers, however, might be a different matter:

Right now you wait for a server to come to your table, you order you drinks and wait again, then you wait for them to come back so you can order your meal, and there is still more waiting at the end of the meal. If you need anything else along the way you are waiting until they check in again. It’s true that in a restaurant we are often not in a hurry, but even assuming we don’t always want to order immediately, the server does not materialize after an exactly optimal wait time, but instead appears with some random noise that’s unlikely to match our preferences. Some would rather order in 30 seconds after the server arrived, some would rather order 30 seconds before they arrived. Optimal doesn’t mean rushed, but it allows rushed, and it means you choose your pace.

And it’s not just impatient customers who wish to speed thing up. For restaurants, every minute extra you are at a table beyond when you want to be is time that another customer ordering food could be there. In other words, it’s in their interest to speed things up and get more sales per table per day.

Although I have never seen one myself, this table top ordering system is exactly what the company Ziosk has been providing at places like Chilis and Red Robin. If I understand correctly -and correct me if I’m wrong, Chilis fans- you only use these things to order appetizers, drinks, and deserts, and then to pay the bill. The actual meal order is taken by waitstaff. This makes some sense, since the beginning and end of the meal are the biggest periods of “wasted” time, so the system is getting rid of the lowest hanging fruit first. So maybe this is where it will end. But this also could easily represent a toe in the water for the industry. It allows customers and employees to get familiar with the system, and has a built in human on hand in case computer ordering not working for someone. You can imagine the machines gradually taking over all ordering eventually.

Of course, high-end restaurants might continue to use human servers as a novelty or special attraction for their upscale clientele. Something a bit more artisinal. Indeed, people may be willing to pay extra for human messiness and irregularity for all sorts of goods and services as they value the human and hand-crafted  and hand-delivered over robotic perfection and efficiency. At least, if money or time isn’t an issue.

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Thing 1 and Thing 2: An economic mess in China Thu, 23 Oct 2014 18:42:34 +0000 read more >]]> There’s an overdue debate going on over the extent of China’s economic troubles. There are many angles but two indicators don’t get enough attention because they’re down in the weeds. Chinese monetary aggregates say the country is in serious trouble.

M1 is called narrow money, in China defined as currency in circulation and “demand” deposits – deposits you can empty out immediately. M2 is broad money, M1 plus “time” deposits, which are not fully liquid. Roughly speaking, M2 is the money everyone has, M1 is the money everyone is actually using at the moment.

Here is growth in M1 and M2China money supply

The single biggest challenge facing Beijing may be captured by the fact that M1 growth has fallen well below M2 growth for a sustained period. In addition, the stock of M2 is gigantic, $8 trillion larger than in the US. In other words, China is drowning in money, but few people are using it.

The gap between M1 and M2 growth is larger and has lasted longer than at any period in the past 15 years, in fact since the reform restart after Tiananmen. There is also an unparalleled plunge in M1 growth over the past four years.

This should, and does, correspond with a drop in economic activity, even if officially reported GDP has held up suspiciously well. The much bigger dilemma, however, is what China should do about it going forward. Japan has faced this problem for almost two decades and not solved it. The US may yet face it.

The hidden force here is debt. On some measures, China now has the world’s largest debt, an outgrowth in large part of the jump in M2 in 2009. Individuals and firms facing heavy debts tend to avoid new economic activity, protecting any additional funds. M1 growth thus slides (as does GDP).

Further stimulus as some advocate, won’t work for any extended period. With M2 still expanding at double-digit rates despite its overwhelming size, there is an argument to be made that Chinese monetary conditions are actually as loose as any country’s has ever been. Yet, M1 flags. More money is just more money most people won’t use.

It’s even possible that sweeping economic reform may not be enough. Reform, if wisely constructed and implemented, will improve efficiency, among other things steadily eliminating excess debt accumulation. This is necessary and would be a superb achievement. But it will not start to reduce the now huge mound of existing debt for quite some time.

With its labor force perhaps shrinking, China does not have quite some time – the opportunity for rapid gains in total wealth is slowly slipping away. To convince firms and individuals the debt problem is being addressed relatively quickly, Beijing might need a period of genuine and painful monetary austerity, which no one is talking about and which seems highly unlikely.

The world, not just China, remains obsessed with stimulus. The gap between M1 and M2 says it won’t work. More important, the debt behind that gap says China needs radical solutions, certainly including but perhaps not limited to fundamental reform.

Follow AEIdeas on Twitter at @AEIdeas.

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Goldman Sachs: The US middle class is finally seeing a recovery Thu, 23 Oct 2014 15:37:27 +0000 read more >]]> While Washington keeps talking about income stagnation for the 99%, seem incomes have stopped stagnating — at least for the 80%. From a new Goldman Sachs note:

Perhaps more importantly from the perspective of overall consumption growth, lower- and middle-income wage earners … are sharing fully in the recovery. This is shown in the growth rate of real pre-tax labor income of production and nonsupervisory workers, a group that accounts for roughly the bottom 80% of the private-sector wage distribution. … This measure is already up 3.5% year-on-year as of August 2014, and a further acceleration to around 4% is likely over the next six months as headline inflation declines. Except for a period of about one year at the end of the 2001-2007 expansion, this would be the fastest growth pace since the 1995-2000 boom.

Claims that lower and middle-income wage earners are seeing strong income gains will seem surprising to many readers, given the well-documented weakness in hourly wage growth and the well-documented increase in US income inequality. But it is important to keep two points in mind.

First, hourly wage growth is only one component of overall real labor income growth, and the other components–employment, the workweek, and headline inflation–are all quite helpful at the moment. Second, while inequality has increased significantly over the longer term, the information in Exhibit 2 is consistent with other indications showing a relative improvement at the bottom end of the income distribution over the past year or two.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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The Rada election: Good or bad for Ukraine? Thu, 23 Oct 2014 14:36:49 +0000 read more >]]> The October 26 elections to the Ukrainian parliament, the Verkhovna Rada, are likely to result in a vote of confidence for the pro-European government in power today. They will not, however, be a ringing endorsement of President Petro Poroshenko’s policies: while his bloc is almost certain to form the single largest faction, it may not be able to garner more than one-third of the vote and may get as little as 20%.

The reason, in addition to the crumbling economy and the prospect of a very cold winter without Russian gas for heat and electricity, is a de facto surrender of Ukrainian sovereignty over the southeastern regions of Luhansk and Donetsk. The Minsk Accords, which established the “truce” designed by President Putin and persistently violated by Russian proxies, also gave Luhansk and Donetsk the “special status” of de facto Russian protectorates inside Ukraine, complete with their own police and judiciary, and their own “election” on December 7. The self-proclaimed Donetsk and Luhansk People’s Republics have insisted on holding elections for their “heads” and parliamentarians on November 2, in violation of the December 7 date set by the Ukrainian legislation.

Yet this is hardly a reason for celebration in Moscow. With the price of oil dropping fast and bills from Crimean annexation coming due, the proxy war in Ukraine, Western sanctions and the borrowing sprees of state-controlled companies (Rosneft, for example, is $60.2 billion in debt, mostly issued by Western banks) the last thing Putin wants is to annex the Soviet-vintage industrial area of over 20,000 square miles and about 6.5 million people, many of whom are families of unemployed or part-time employed miners working the increasingly unprofitable coal mines. The Donetsk and Luhansk People’s Republics were a means to an end: to punish, humiliate, dismember, demoralize, and in the end, destabilize and derail a Europe-bound Ukraine.

Not only is that not likely to happen in the aftermath of the election but at least some of the Ukrainians who used to support Petro Poroshenko’s bloc appear to have switched their allegiances to parties that take a harder line vis-à-vis Russia, such as prime minister Arseniy Yatsenyuk’s People’s Front, the Fatherland Party of the former prime minister Yulia Timoshenko and the Radical Party, led by Oleh Lyashko. As to pro-Russian Deputies in the Duma, there may be literally none, especially given the newly signed “lustration bill” designed to purge the government and bureaucracy of Yanukovich supporters and Soviet-era officials.

Will Moscow accede to a de facto anti-Russian national consolidation in Ukraine? Not likely. So the bad news for Ukraine is that the election results might provoke in Moscow an all too familiar pattern: denunciations of the “Kiev fascists”, then concern about the life and dignity of ethnic Russians, followed by widened attacks against government troops and strategic targets (such as the Donetsk airport), or an increase in the flow of arms and “volunteers” across the Russian border. Russia might even go so far as to attempt to seize enough territory on Ukraine’s southeast coast to create a land-bridge to Crimea, currently accessible only by sea. As to Western sanctions, Putin may, quite correctly, presume that with winter coming, Europe is not going to risk its Russian gas deliveries for Ukraine.

The Ukrainian election, which is very likely to be found free and fair by international observers, ought to be a cause for celebration. But the northern neighbor’s shadow makes it an occasion for concern.

Follow AEIdeas on Twitter at @AEIdeas.

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