Menckens Ghost

More About: Economy - Economics USA

Editorial from the weekend Wall Street Journal

Immediately below is an editorial from the weekend Wall Street Journal, and following that is an article also from the weekend Journal.  If anyone still believes that the USA has a free-market economy, both pieces should disabuse them of the notion. 

The editorial describes how export subsides from the federal Export-Import Bank help politically-connected industries while hurting other industries. 

The article is even more disturbing.  It describes how Russian President Putin wins the loyalty of oligarchs and workers in large industries and companies through subsidies and state-granted monopolies.  The parallels between Putin's Russia and Obama's USA (or a Republican president's USA) are striking.  The politics are more brazen in Russia, than in the USA, but the end result is the same here.  Think of GE, Warren Buffett, the bailed out banks, and scores of others who cozy up to government to benefit from government favors, subsidies and bailouts.  Yet millions of Americans have been led to believe that the problems with banking, medical care/insurance, and other goods and services are the result of free-market capitalism and not government distortions and control.  Sigh.

----Mencken's Ghost


The Export Subsidy Boomerang

The Wall Street Journal
March 3 - 4, 2012

If you thought Fannie Mae, Freddie Mac and Solyndra would teach Congress a lesson about politicized credit, think again. The federal Export-Import Bank is up for reauthorization, and the only question seems to be how much more taxpayer money Washington wants to put at risk. If the GOP wants to have a principled battle about fiscal waste and market distortions, this is a good one.

The ExIm Bank—founded in 1934 to support trade with the Soviet Union, but never mind—provides taxpayer-backed loan guarantees and other services to U.S. business, especially big exporters. The bank's renewable charter expired on September 30 and Congress has kept it alive through temporary spending bills.

Business lobbies claim the country can't afford to let the bank expire or—gasp—private banks like Citigroup and J.P. Morgan would have to do more trade financing. California Republican Gary Miller, supported by fellow Republican Spencer Bachus, Democrat Barney Frank and others, has a bill pending in the House to prolong the bank's life through 2015 and raise its lending cap to $160 billion from $100 billion. The House Financial Services Committee waved the bill through in a voice vote last year and it's likely to get a floor vote this month.

The issue deserves more public scrutiny, starting with the bank's mission. ExIm says it takes risks that private lenders are "unable or unwilling" to take. But in today's global capital markets, there are very few places (North Korea) where private banks are unable to function, which raises the question of why taxpayers should bear risks that private banks are unwilling to take. At the same time, ExIm also paints itself as a low-risk enterprise. It can't be both.

ExIm's defenders note it has returned money to the Treasury since 2008 and has a less than 2% historical default rate. But ExIm is essentially adopting the same strategy as the Federal Housing Administration: expanding its business, raking in more revenues and proclaiming that it's therefore lower-risk.

ExIm had a record year in 2011, doling out $32.7 billion in loans, guarantees and insurance. That's up from $24.5 billion in 2010 and $12.6 billion in 2007. Meanwhile, loss reserves have declined to $4.1 billion from $5.1 billion in 2010, or to 4.6% from 6.8% of total exposure.

The bigger issue is that the bank by its nature helps some companies at the expense of others. ExIm, for instance, helped its biggest client—Boeing—win airplane contracts in 2011 from Air China, Air India, Cathay Pacific and others. That's great for Boeing, which accounted for 45.6%, or $40.7 billion, of ExIm's total exposure in fiscal 2011.

But this subsidy means that foreign airlines can then buy newer aircraft more cheaply than their U.S. competitors. This gives them an advantage in the global air transportation market. In a letter to Congress last month, Delta estimated that ExIm cost the U.S. airline industry up to 7,500 jobs and $684 million a year.

ExIm Bank supporters play the patriotism card by suggesting that export subsidies help U.S. companies at the expense of foreigners, but in this case it helps foreign companies at the expense of American airlines.

ExIm distorts markets in other industries, too. The bank has an environmental export financing program that has backed the likes of Solyndra, First Solar and Abound Solar. Think about that: The Department of Energy's loan program provided the start-up capital for those companies, and ExIm Bank provided financing for their customers. Solyndra is now bankrupt, Abound Solar has halted production and First Solar is struggling.

ExIm also has initiatives for medical equipment manufacturers, exporters to sub-Saharan Africa and small to medium-sized business. These programs are designed to broaden ExIm's political support in Congress, so the bank doesn't appear to help only the likes of Boeing. But this is another problem with political financing—once someone has it, everyone wants in. Before you know it, taxpayers are financing everyone's exports.

ExIm tries to lash itself to improving export figures, but the bank doesn't move the needle much. U.S. goods and services exports last year totaled $2.1 trillion, of which ExIm's contribution is negligible.

The way to fight subsidies provided by other countries is through diplomacy and new trade deals, not by imitating their subsidies. The way to help U.S. exports is to reduce the tax, regulatory and lawsuit burden on business, negotiate new market opening abroad, and reduce American energy costs. That's what business should be lobbying for, not favors for some businesses over others.

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Printed in The Wall Street Journal, page 11

A version of this article appeared Mar. 3, 2012, on page A14 in some U.S. editions of The Wall Street Journal, with the headline: The Export Subsidy Boomerang.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

In Russian Steel Town, Putin Woos Voters With Jobs and an Iron Fist

By Alan Cullison
The Wall Street Journal
March 3 - 4, 2012

MAGNITOGORSK, Russia—Moscow has been swept by the biggest anti-Kremlin street protests since the fall of the Soviet Union two decades ago. But here in the Ural Mountains, Alexander Kovalyev edits his city's chief political opposition website on a laptop from the couch of his studio apartment.

Mr. Kovalyev was fired from his prior journalism job after drawing the wrath of the Magnitogorsk Iron and Metals Works, a massive plant that dominates work life and local politics. He has no doubt that Vladimir Putin will win the most votes here in Sunday's presidential election, with help from the metals plant.

"They control everything in this town," he said, "and now they will control the elections."

In similar fashion throughout the provinces, dissenters from Russia's rust belt to the Siberian swamps face the blunt force of alliances between the Kremlin and industrial giants that were once the pride of Communist planners.

This city of 400,000 boasts a steel-and-glass mall, a new hockey stadium and two McDonald's restaurants but one link to its Stalinist past is unbroken: the powerful tug of the giant metals plant—built with socialist fervor and slave labor in the 1930s around a mountain so rich in iron ore that compasses go haywire. With 20,000 employees, it is by far the region's largest employer, with its continued success dependent on political ties to the Kremlin.

While hopes still burn for change, bedraggled organizers say society here is hard-wired against a revolution or Arab-spring-style upheaval.

"Maybe someone in Moscow would think of the situation a little differently, but here we have a rather pragmatic view of the matter," said Vladimir Dryomov, the plant spokesman. "Here we value the reliability of a man, and it seems to us Putin is the most reliable of them all."

Across Russia, the powerful and the meek anticipate Mr. Putin will easily win election Sunday against a field of handpicked opponents with little popular appeal. The larger question is how he will rule a country increasingly divided between a majority dependent on government largess and a growing urban middle class seeking new leadership.

Mr. Putin said in comments released Friday he may run for president for a fourth time in 2018, which would lengthen his term to 24 years. "It would be normal, if things are going well, and people want it," he said. "But I don't know if I want to do this for more than 20 years. I haven't decided yet."

The brittle top-down political system assembled by Mr. Putin since he rose to power 12 years ago presents a muddle for the U.S., which has struggled for a so-called reset with Russia to modernize relations. The outgoing president, Dmitry Medvedev, was seen as a seat warmer for Mr. Putin over the past four years, and the tactics used by Mr. Putin to return to power look a lot like they did in the past.

In Magnitogorsk, Mr. Dryomov is the de facto manager of Mr. Putin's local election campaign, overseeing the plant's newspaper, TV channel, two radio stations and website, all of which flatter Mr. Putin and hound his critics.

Hundreds of people here protested the results of local parliamentary elections in December. On election night, local officials said early results showed the pro-Kremlin party, United Russia, received about 37% of the vote with 90% of the ballots counted. Days later, the final results put United Russia at 57%.

Local officials have largely ignored allegations of vote fraud and deny any wrongdoing. 

Protesters, who have dwindled to a few dozen, are lampooned on the plant-owned TV station. The plant-owned newspaper, Magnitogorsk Metal, described them as a strange fringe who shiver in the winter cold at poorly attended rallies.

A website funded by the metals plant said recently that protests around the country were being triggered by a top-secret U.S. military base in Alaska beaming high-frequency signals into the brains of Russians.

Until December's parliamentary elections, the metals plant never worried much about political opposition because it had always been easy to persuade voters that Mr. Putin was the guarantor of stability and jobs.

Under Mr. Putin, the Kremlin has required domestic auto makers to buy 75% of their steel from Russian mills. When car sales collapsed in the 2008 financial crisis, Mr. Putin ordered subsidies for buyers and hiked tariffs to block imports.

The plant is controlled by majority shareholder Viktor Rashnikov, whose wealth is estimated at $11 billion. Like nearly all tycoons in Russia, Mr. Rashnikov has a close relationship with Mr. Putin, who has visited the Magnitogorsk plant seven times since he came to power in 1999. That alliance has helped to modernize and invest in new production, said Mr. Dryomov.

Mr. Rashnikov invested $1.5 billion to make the plant the largest metals supplier to auto makers in Russia, contracting with Germany's SMS Demag to deliver a cold-rolling complex. He spent another $1.3 billion to build a massive Demag production line that in 2009 made Magnitogorsk one of the world's premier makers of gas and oil-pipeline material.

The plant also spent millions on distractions in a town where a favorite winter pastime remains racing Soviet-era cars on the frozen Ural River. The plant owns an aqua-park and hotel, two ski resorts and a hockey stadium with a popular team that Mr. Rashnikov cheers at games.

The rumblings of discontent began with the 2008 crisis, when cuts to salaries and working hours put a dent in the image of Mr. Putin as a guardian of jobs.
 
That year, Pavel Verstov set up a for-profit news portal, Verstov.info. The website's soaring popularity and eventual collision with the plant trace Magnitogorsk's political opposition.

When ripples from the world's economic crisis reached Magnitogorsk, Mr. Verstov lost his freelance newspaper job so he began posting articles on the website. High-speed Internet connections had arrived in the city a year earlier.

Readership grew from a group of friends to hundreds of Internet fans who were bored with the plant-operated newspaper, he said. Mr. Verstov hired two journalists and fashioned a newsroom in his two-room apartment with a view of the steel plant on the opposite bank of the Ural River.

Mr. Verstov clashed with plant management from the beginning. When managers cut worker hours, Mr. Verstov wrote about a rash of suicides that followed. His site soon crumpled under a denial-of-service hacking attack, with visitors receiving a "page cannot be found" message in their browsers.

Mr. Verstov never learned who was behind the attacks but said they stopped after he promised plant managers he would stop writing about the suicides. "Maybe you in the West are not accustomed to come to these kinds of agreements, but they're common in Russia," he said.

The hacking of his site boosted traffic, as thousands of new readers logged on to see who had roused the plant's animosity. Mr. Verstov hired more journalists. Last year, he poached Mr. Kovalyov from the mill's newspaper and named him chief editor.

Voter discontent reached a peak in December. Turnout for the parliamentary elections was heavier than expected for the Kremlin's rival parties. Mr. Verstov, who ran for the city council, watched returns roll in at a local polling station. He later ran an article on his website headlined "We Are in Shock" and in blog posts denounced the election as a fake.

After phone calls from Mr. Dryomov, the plant spokesman, and Russian security services, he removed the article and blog posts. "Yes, I bowed to their pressure," he said, "but I have to worry about my employees."

Vladimir Polyev, who worked at a local polling station, said he saw the Kremlin party's vote return boosted to 90 percent from 30 percent. He filed a complaint with the local prosecutor, he said, and was told to take his allegation to the federal court in Moscow. The court directed him to Russia's top investigative body, the Investigative Committee in Moscow.

Last week, Mr. Polyev, who teaches history at a local university, got a letter from the Investigative Committee telling him to take his complaint to the local election committee that he alleged performed the vote fraud.

"They took me on a wide circle and that circle is finished," said Mr. Polyev, who has dropped the matter.

The first protest rally in Magnitogorsk, organized in the wake of the parliamentary vote, drew about 300 people. On Tuesday, a protest staged in front of a local discothèque attracted about 50 people. The organizer, Dmitri Teplyh, said he wasn't disappointed at the turnout. His activist group, Citizen Defense, has signed up hundreds of vote monitors for Sunday's election.

"We must try to be optimistic," said Mr. Teplyh, whose efforts have drawn unwanted attention. He lost his job teaching philosophy at a local university last year after organizing teachers to demand higher wages. He has been trying in court to get his job back.

In January, he said, Mr. Dryomov invited him to his office. "He told me if I stopped organizing all these protests, I could get my job back," he said. Mr. Teplyh said he refused. Mr. Dryomov denied making any such offer. Earlier this week, Mr. Teplyh lost his case in court.

Tuesday's rally was described on the plant's TV station as representing "one ten-thousandth of the Magnitogorsk's population." A pro-Putin rally that showed participants driving through the city with banners flying got favorable coverage.

Mr. Kovalyev denounced the plant-sponsored campaign coverage as an insult to Russians' intelligence but admitted the quixotic nature of his fight. He wrote an article last month critical of Mr. Dryomov and other plant officials for using a conference of doctors as an opportunity to stump for Mr. Putin. Afterward, Mr. Dryomov called his boss, Mr. Verstov, who said he fired him.

Mr. Kovalyev has since decamped to his couch, where he writes for his website. His first article denounced Mr. Dryomov, who acknowledged calling Mr. Kovalyov's boss to complain about what he called subjective reporting.

"He made me look like some kind of monster, a gray cardinal who controls everything in Magnitogorsk," Mr. Dryomov said. "Of course, I do control some things. But that is my job."

______________

 

A version of this article appeared Mar. 3, 2012, on page A1 in some U.S. editions of The Wall Street Journal, with the headline: In Russian Steel Town, Putin Woos Voters With Jobs and an Iron Fist.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

 

 

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