Strategic Global Intelligence Brief for August 2, 2018

Short Items of Interest—U.S. Economy

Economic Game of Chicken
There have been many phases of the trade war between the U.S. and China. In the beginning, it was thought to be posturing by both sides in anticipation of some kind of mutually acceptable deal. Then, it started to get serious with the U.S. imposition of tariffs and the Chinese countering with tariffs of their own. The one side ratchets things up and the other side responds with ratcheting of their own. Now, it is becoming obvious which bystanders are going to get hurt; there will be casualties on both sides. It has now become a matter of which of these groups has the most leverage with their government. Will the farmers and those that export to China have the power to deter the U.S.? The critics now include some of the most powerful people in the GOP and among GOP contributors (Koch brothers). Chinese business is also exerting pressure on its government to capitulate.

Jobs Report Details to Watch For
The July jobs report is due tomorrow; no big surprises are expected. Most assert there will be around 200,000 jobs added, about on par with the numbers that have been seen all year. The rate of unemployment is likely to fall just slightly from 4% to 3.9%. None of this is earth shattering news. The thing to watch for is the change in the labor participation rate. Last month, it went up by 0.2%—unexpected given the rate of retirements. It seems that more people are finally getting off the sidelines and seeking work. This is good news, of course, but the vast majority of those who are back in the search will be seeking low-wage jobs. If they had qualified for better pay, they would have reentered the job markets before this.

Labor Shortage and Wages
The complaint has been voiced for several years now. There are not enough qualified people to take the jobs on offer. This has been chronic in everything from manufacturing to construction to health care. The glib response has always been that job shortages would go away if these people were paid more. The problem is that paying unskilled and unqualified people doesn't do much to advance the prospects for the hiring company. Of late, there has been a general hike in wages of around 2.9%. The most rapid growth has been in the very sectors that have expressed the most distress—manufacturing, transportation, health care and construction. All have seen movement of at least 1.5%. Construction has been at close to 3.7%, but the most rapid increase has been in financial services at 4.5%

Short Items of Interest—Global Economy

Nicaragua Falling Into Same Place as Venezuela
The Ortega government has been unable to quell the protests and demonstrations that have engulfed the country over the last several weeks. The protests have instead spread and gotten much larger with participation from all classes of society. The inflationary hikes have taken their toll and the government response has been found lacking. Now that the average Nicaraguan expects the worst, there has been enough of a run on the banking system to put it close to collapse. Tourism has all but vanished. Even the intrepid Europeans in search of cheap beach holidays are looking elsewhere.

Privatization in Pakistan
One of the first measures that new Prime Minister Imran Khan is going to push is the mass privatization of state-controlled enterprises that have been notorious for low quality and low levels of output. The list is not yet comprehensive, but is expected to include everything from banks to utilities to the airlines and some civic institutions in the health care field. Government control has also meant there has been little foreign investment. He wants to change that as well.

Escalating Fight Over Turkey
The government of Turkey has detained the U.S. evangelical preacher Andrew Brunson. He has been in Turkey for over 20 years, but fell out of favor with Erdogan by being connected to those who staged a military coup a couple of years ago. The U.S. wants him released while Turkey has indicated they have no desire to do so. The U.S. has countered with economic and travel sanctions against two senior Turkish politicians and members of Erdogan's Cabinet and inner circle.

How Is Russia Influencing U.S. Elections?
To begin with, there are some clarifications needed along with some historical context. The Russians have been accused of both direct and indirect attacks on the U.S. Dealing with these attacks will take very different strategies. The most direct is to hack into the voting systems so that votes can be changed. These may also be the easiest to defend against, although this is not to assert that anything about that kind of attack is simple. It is cyber warfare at the same level as trying to break into systems to steal credit card information. Russian hackers have also been caught getting access to control of utility grids and other services. The smallest town now has to be on guard against hackers that would try to alter the votes or the very essence of the service they provide the public. The other technique is far more insidious and more damaging in many ways. The irony is that it can be the easier to defend against if people would simply use their heads and avoid falling for these disinformation campaigns.

Analysis: Russia is not the only nation that has used this technique and the U.S. has not been the only target. It is not even a particularly new strategy as countries have been employing these attempts to influence the nature of their enemies for a long time. It used to be called the propaganda war. Posters, radio shows, speeches and later TV shows and movies that depict the enemy in extremely negative terms. There was simultaneously an attempt to sow discontent within the enemy's own population. This has been part of warfare for as long as there has been conflict.

How does a nation protect itself from these attacks? The first step is to understand they can't be stopped. In the past, it would have meant massive efforts to engage in censorship and to destroy our basic rights of free speech and free press or free assembly. Today, there is the demand that Facebook do something. Why is a platform that allows us to share pictures of our food suddenly responsible for protecting our political freedom? The solution now is the same as it has always been—education and knowledge.

The Russian hackers (and those from other countries) attack by spreading lies to create discontent and foment division and anger. They spread false stories that encourage race hatred or make people feel persecuted. They spread rumors about people that are patently untrue so as destroy their reputations. Along the way, they inflate the reputations of those who are favored by the foreign powers. What do all of these reports, accusations and assertions have in common? They are all lies. How does one fight lies? There has always only been one way—with the truth. Fortunately, the same internet that bombards us with these lies and distortions can bring us the truth. There are a number of websites that expose these lies for what they are. One of the oldest is Snopes (www.snopes.com). There is also www.FactCheck.org, www.TruthOrFiction.com, www.hoax-slayer.com, www.PolitiFact.com, www.ThatsFake.com. There are others that you will run across that specialize in uncovering these attempts at deception in specific areas. All that is required of us is healthy skepticism and the ability to use our heads.

When you encounter something that seems just a little too fantastic or strange or over the top in terms of partisan opinion—remember the famous watchwords of Ronald Reagan—"trust but verify." It is interesting to note that this phrase is an old Russian proverb and was deliberately used by Reagan to drive the point home that the U.S. would not be duped.

Mnangagwa Appears to Win in Zimbabwe
Analysts asserted there would be violence regardless of the outcome. The losing candidate would be hard pressed to control their supporter even assuming they wanted to. Throughout the campaign, there have been assertions that Emmerson Mnangagwa had been trying to rig the election with money and the influence of the military and police. The leaders of the old ruling party (Zanu-PF) have no desire to follow the discredited Robert Mugabe into exile. The vote has been more or less fair, but that influence from the ruling party has been substantial and has been the difference in rural areas. There may be a chance of voting anonymously in the cities, but not in the rural villages where intimidation is easy.

Analysis: There have been protests from the opposition already, but it doesn't appear that the leader—Nelson Chamisa—is urging this. Neither has he taken a strong stand against the riots. The current regime promises to investigate the response of the police and military, but few have much confidence in the effort. The real test comes in the next few weeks. Will Mnangagwa find a way to work with Chamisa and others to propel the country forward or will this be just an extension of Mugabe's thug nation.

Health Care Costs in U.S.
The debate over health care has faded a little as it doesn't seem to be the driver in this election that it was in previous years. This is certainly not because any of the problems have been solved. It seems more likely to be a matter of issue fatigue for now. From being at the top of the list of concerns for the majority of voters, the concern has fallen, but not very far. It still ranks in the top five. The issue will be back and likely with a vengeance after the elections as both parties want to get back in the game. The GOP still has designs on dismantling the Obamacare system and Democrats are just as determined to defend and expand the system. There has even been a good deal of conversation from the more liberal elements of the Democratic Party regarding the expansion of Medicare to cover everyone. The estimates have ranged considerably, but none have been cheap—anywhere from an additional $32 trillion over 10 years to just south of $20 trillion. Given the fact the U.S. has a total GDP of just under $20 trillion a year, this is a significant commitment.

Analysis: Part of the problem is that health care in the U.S. is considerably more expensive than in comparable developed nations. The U.S. spends around 20% of its GDP on health care. No other nation comes even close to that percentage. This means that many modern and developed nations with very comprehensive health care plans are dealing with far lower costs. What accounts for this enormous disparity?

As recently as the late 1970s, the U.S. was about the same as the average Organization for Economic Cooperation and Development (OECD) nation as far as costs were concerned—6% of GDP as compared to around 5% for the OECD as a whole. With every passing year, the U.S. system got more and more expensive and gobbled up more and more of the GDP. By the early 80s, the percentage was nearly 10% while the OECD was close to 7%. By the 1990s, there were several factors that led to higher prices—hospital consolidation gave them more power over insurance companies, drug companies aggressively hiked prices as soon as the new drug plans were introduced by Medicare and some of the techniques that had been used to control prices vanished. Now, the U.S. spends 20% of GDP on health care while the average of the OECD states is less than 9%. Perhaps the extra expenditure would be worth it if the U.S. had better outcomes than the OECD norm, but the U.S. lags behind in almost every significant category—infant mortality, life expectancy as well as deaths from cancer, heart disease, diabetes and respiratory disease. In fact, the U.S. numbers match up with emerging economies such as Brazil and China.

There is more than enough blame to go around as far as health care costs are concerned. The plain fact is that every player in the system has been seeking market advantage that allows them to hike prices. There has been a substantial reduction in terms of competition, which always leads to price hikes. Hospitals have merged aggressively and, in many cities, this has reduced the number of hospitals to just one or two. As soon as that position has been reached, the prices charged go up. Those cities with multiple choices have the lowest costs. Drug companies have steadily hiked the price of drugs for both justifiable and not-so-justifiable reasons. The new drugs are expensive to develop. Many take years to reach the market. If the drug is not going to be widely used, there is an incentive to make as much as can be made quickly. The development of generic drugs has been a double-edged sword as drug companies know they have a limited time to make money before generics replace their product, so they maximize profit while they can. There is also the old-fashioned notion of greed when a drug is vital to millions.

Since the 1960s, there has been a general increase in inflation of about 600%. It should be noted, however, that these numbers have been volatile with periods of very high prices and periods when the prices fell back. Much of this 600% increase has been attributed to the price of energy, but housing and education have played major roles as well. These pale in comparison to the 2,000% increase in the costs of health care. Since 2000, the hike in drug costs has been 69%, hospital care in general has been up by 60% and physician services have risen by 23%. Health care has become a dominant part of the overall economy as it has been as major employer and contributor to the U.S. GDP. The number of people employed in manufacturing has fallen by half since 2000—from around 13% of jobs to less than 7%. Meanwhile, the health care sector has been adding people at a rapid rate—from 8% of the workforce in 2000 to around 11% today. This growth would be even faster if there were more qualified people available.

There are all manner of other issues that affect health care costs; these add up as well. The legal system has made malpractice insurance prohibitively expensive. The average American does little to protect their health and ends up in dire straits by the time they arrive for medical care. Then there is the simple fact that Americans are aging and the Boomer is more likely to need medical attention more often.

When Will Medical Costs Come Down?
There are those skeptics who assert that such a thing will never happen. They may be correct, but unless the health care system is able to dodge some of the basic precepts of market economics, there will be downward pressure at some point. It will all lie in demographics. The Boomer who is helping drive medical activity and costs will at some point die. When the number of Boomers dying exceeds the numbers coming into the system, there will be a reduced market for everything in health care and prices will fall.

Analysis: The bad news is that this eventuality is at least 20 to 30 years away given that the last of the Boomer generation will be hitting retirement age in the next few years. We will need to give today's 60-year-old about 30 years to move on and reduce the burden on health care.

Hoax World
Earlier in this issue, I wrote about the Russian hacking and the attempts at "disinformatzia." In fact, there are hoax attempts in play constantly. I find myself responding as a hectoring critic on my friend's Facebook posts. One that has been cracking me up of late and seems to encapsulate how naïve and credulous we have become is the assertion that Facebook has decided that you can only have 25 friends and will see only their posts. This explains why you see posts from only a few of those you have "friended." This is a hoax that has been debunked by all the hoax sites. But what is amazing to me is that anybody would believe this for a second. It makes utterly no sense for Facebook to do this.

They are trying to make money from advertising, which has been a long upward slog. The fact that this revenue growth has been slower than expected just cost its founder millions of dollars in lost stock value. Naturally, the solution is to restrict what people can see and communicate. This is why TV broadcasters have been trying to ensure that TV ads only appear on 25 TV sets. The very notion that an advertising medium would restrict access should have evoked peels of derisive laughter. Facebook does indeed put a limit of number of friends one can have to reduce the number of spammers—it is 5,000, not 25. If you are getting messages from 25 people over and over again consider the possibility that these are your posting addicted friends. The others on your list have gone out and developed an actual life that leaves them less time to post.

I have long tried to live my life as a skeptic—it is what comes from having an engineer father that rarely offered even the smallest opinion without extensive research in an age before Google. I remember asking a question about President Calvin Coolidge for an eighth-grade essay. This provoked a trip to the library so that he could look up Coolidge—we read over books and articles for over four hours because he kept muttering "I just don't know enough about Coolidge to have an opinion." This is still my mantra.