China v America; A new kind of cold war

 

 

 

 

Source: The Economist magazine.

FIGHTING OVER trade is not the half of it. The United States and China are contesting every domain, from semiconductors to submarines and from blockbuster films to lunar exploration. The two superpowers used to seek a win-win world. Today winning seems to involve the other lot’s defeat—a collapse that permanently subordinates China to the American order; or a humbled America that retreats from the western Pacific. It is a new kind of cold war that could leave no winners at all.

As our special report in this week’s issue explains, superpower relations have soured. America complains that China is cheating its way to the top by stealing technology, and that by muscling into the South China Sea and bullying democracies like Canada and Sweden it is becoming a threat to global peace. China is caught between the dream of regaining its rightful place in Asia and the fear that tired, jealous America will block its rise because it cannot accept its own decline.

The temptation is to shut China out, as America successfully shut out the Soviet Union—not just Huawei, which supplies 5G telecoms kit and was this week blocked by a pair of orders, but almost all Chinese technology. Yet, with China, that risks bringing about the very ruin policymakers are seeking to avoid. Global supply chains can be made to bypass China, but only at huge cost. In nominal terms Soviet-American trade in the late 1980s was $2bn a year; trade between America and China is now $2bn a day. In crucial technologies such as chipmaking and 5G, it is hard to say where commerce ends and national security begins. The economies of America’s allies in Asia and Europe depend on trade with China. Only an unambiguous threat could persuade them to cut their links with it.

It would be just as unwise for America to sit back. No law of physics says that quantum computing, artificial intelligence and other technologies must be cracked by scientists who are free to vote. Even if dictatorships tend to be more brittle than democracies, President Xi Jinping has reasserted party control and begun to project Chinese power around the world. Partly because of this, one of the very few beliefs which unite Republicans and Democrats is that America must act against China. But how?

For a start America needs to stop undermining its own strengths and build on them instead. Given that migrants are vital to innovation, the Trump administration’s hurdles to legal immigration are self-defeating. So are its frequent denigration of any science that does not suit its agenda and its attempts to cut science funding (reversed by Congress, fortunately).

Another of those strengths lies in America’s alliances and the institutions and norms it set up after the second world war. Team Trump has rubbished norms instead of buttressing institutions and attacked the European Union and Japan over trade rather than working with them to press China to change. American hard power in Asia reassures its allies, but President Donald Trump tends to ignore how soft power cements alliances, too. Rather than cast doubt on the rule of law at home and bargain over the extradition of a Huawei executive from Canada, he should be pointing to the surveillance state China has erected against the Uighur minority in the western province of Xinjiang.

Read the complete article on The Economist magazine site here.

How to tax the rich

The Economist Magazine published this article on how to tax the rich. Good reading.

How to tax the rich. The Economist magazine

 

 

 

 

 

 

 

 

 

DURING HIS lesser-known run for president, which began in 1999, Donald Trump proposed levying a wealth tax on Americans with more than $10m. He may soon find himself campaigning on the other side of the issue. That is because Democrats are lining up to find ways to tax the rich. Senator Elizabeth Warren, who wants Mr Trump’s job, has called for an annual levy of 2% on wealth above $50m and of 3% on wealth above $1bn. Alexandria Ocasio-Cortez, a prominent new left-wing congresswoman, has floated a top tax rate of 70% on the highest incomes.

In one way these proposals are a relief. Left-wing Democrats have plenty of ideas for new spending—Medicare for all, free college tuition, the “Green New Deal”—that would need funding. Mainly because America is ageing, but also boosted by Mr Trump’s unfunded tax cuts, the debt-to-GDP ratio is already expected to nearly double over the next 30 years. If a future Democratic administration creates new spending programmes while maintaining existing ones, higher taxes will be necessary.

If revenues are to rise, there are good grounds to look first to the rich. Mr Trump’s tax cuts are just the latest change to have made life at the top more splendorous. Between 1990 and 2015 the real income of the top 1% of households, after taxes and transfers, nearly doubled. Over the same period middle incomes grew by only about a third—and most of that was thanks to government intervention. Globalisation, technological change and ebbing competition have all helped the rich prosper in recent decades. Techno-prophets fear that inequality could soon worsen further, as algorithms replace workers en masse. Whether or not they are right, the disproportionate gains the rich have already enjoyed could justify raising new revenues from them.

Unfortunately, the proposed new schemes are poorly designed. Ms Warren’s takes aim at wealth inequality, which has also risen dramatically. It is legitimate to tax wealth. But Ms Warren’s levy would be crude, distorting and hard to enforce. A business owner making nominal annual returns of around 5% would see much of that wiped out, before accounting for existing taxes on capital. That prospect would squash investment and enterprise. Meanwhile, bureaucrats would repeatedly find themselves having to value billionaires’ art collections and other illiquid assets. Eight rich countries have scrapped their wealth taxes since 1990, often amid concerns about their economic and administrative costs. In 2017 only four levied them.

There are better ways to raise taxes on capital. One is to increase inheritance tax, an inequality-buster that, though also too easily avoided, is relatively gentle on investment and work incentives when levied at modest rates. Another is to target economic rents and windfalls that inflate investment returns. Higher property taxes can efficiently capture some of the astronomical gains that landowners near successful cities have enjoyed. It is also possible to raise taxes on corporations that enjoy abnormally high profits without severely inhibiting growth. The trick is to shield investment spending by letting companies deduct it from their taxable profit immediately, rather than as their assets depreciate. (Mr Trump’s reform accomplished this, but only partially and temporarily.)

What about income tax? Ms Ocasio-Cortez’s boosters point out that a 70% levy is close to the rate that is said to maximise revenue in one notable economic study. In truth the study is notable because it is an outlier—one that ignores the benefits of entrepreneurial innovation or of workers improving their skills. France’s short-lived 75% top tax rate, which was scrapped at the end of 2014, raised less money than was hoped. America’s top rate of federal income tax is 37%; higher is clearly feasible, but it would be wise to keep change incremental.

Although there is scope to raise taxes on the rich, they cannot pay for everything, if only because the rich are relatively scarce. One estimate puts extra annual revenue from Ms Ocasio-Cortez’s idea, which applies only to incomes above $10m, at perhaps $12bn, or 0.3% of the tax take. Ms Warren’s proposal would raise $210bn a year, her backers say—but they assume, implausibly, limited avoidance and no economic damage. Ultimately, the price of ambitious spending programmes will be tax increases that are also far-reaching. The crucial point about a strategy for taxing the rich is to realise that it has limits.

I urge every reader interested in economics and world affairs to subscribe to The Economist magazine to access professional and thorough news reporting.

Why house prices in global cities are falling

CENTRE POINT, a tower that looms over central London, was empty for so long in the 1970s that it lent its name to a homelessness charity. Recently it was converted from offices to flats. Half are yet to find buyers. So the developer has taken them off the market pending a clearing of the political fog over Britain. Its boss complained to Estates Gazette, a trade paper, of bids that were “detached from reality”. One-bedroom flats were on sale for £1.8m ($2.4m).

Property used to be thought of as an inflation hedge. But in recent years it has become a substitute for low-yielding Treasury bonds—a safe asset in which the globally mobile can store their wealth. After years of rapid price rises, houses in the most favoured markets are overvalued. Rising bond yields, tighter mortgage credit and shifting politics are now combining to push prices down.

Demand from emerging markets such as China and Russia has been growing. Buyers are willing to pay steeply to secure a safe place for their savings—or a bolthole for themselves. Cristian Badarinza of the National University of Singapore and Tarun Ramadorai of Imperial College London have shown that political trouble in Russia, parts of Africa and the Middle East predicts a rise in the price of prime London property.

Foreign demand has spillovers. If an oligarch buys a house, it drives up the prices of smaller properties nearby. A paper by Dragana Cvijanovic of the University of North Carolina and Christophe Spaenjers of HEC Paris finds similar effects in Paris’s property market. Foreign buyers, mostly from China, have been a force behind booms in the big cities of Australia and Canada.

The yield on Treasury bonds, the world’s benchmark safe asset, is rising. A tightening of credit standards on mortgages in Australia and Canada has squeezed housing in cities there. Uncertainty about Brexit has made London a place of political risk rather than a refuge from it. Meanwhile, capital is moving less freely. Governments are charier of Russian money. China is shaking down its super-rich for taxes and is zealous in its policing of capital outflows.

A corollary of stronger links between global cities is a kind of “waterbed” effect. For instance, when taxes were levied on foreign homebuyers in Vancouver in 2016, the market cooled, but Toronto took off. There are buyers who will compare prices in, say, Mayfair in London and Park Avenue, New York. They look for value. But it is vanishingly scarce. The market is turning. Those who bought at the peak, or are hoping to sell, will slowly adjust to a new reality.

Read the complete article on the Economist web site here.

Quantum computers will break the encryption that protects the internet

Quantum computers rely on the famous weirdness of quantum mechanics to perform certain sorts of calculation far faster than any conceivable classical machine. Their fundamental unit is the “qubit”, a quantum analogue of the ones and zeros that classical machines manipulate. By exploiting the quantum-mechanical phenomena of superposition and entanglement, quantum computers can perform some forms of mathematics—though only some—far faster than any conceivable classical machine, no matter how beefy.

In 1994 Peter Shor, a mathematician then working at Bell Laboratories, in America, came up with a quick and efficient way to find a number’s prime factors. The only catch was that for large numbers his method—dubbed Shor’s algorithm—needs a quantum computer to work.

Big quantum computers will have applications in fields such as artificial intelligence and chemistry. But it is the threat posed by Shor’s algorithm that draws most public attention. Large organisations may be able to get around the problem using so-called quantum cryptography. This detects eavesdroppers in a way that cannot be countered. But it is expensive, experimental and unsuitable for the internet because it must run on a special, dedicated network. For most people, therefore, the best hope of circumventing Shor’s algorithm is to find a bit of one-way maths that does not give quantum computers an advantage.

But translating a piece of maths into usable computer code and then delivering it to the zillions of machines that will need updating will not be easy.

Despite—or perhaps because of—the information-technology industry’s obsession with novelty, the internet resembles ancient cities like Rome and Istanbul, with modern structures built atop forgotten layers of old, unmaintained code.

Read the complete article in The Economist here.

 

After a year of #MeToo, American opinion has shifted against victims

Oct 15th 2018 by THE DATA TEAM

ONE year ago Alyssa Milano, an American actress, posted on Twitter: “If you’ve been sexually harassed or assaulted write ‘me too’ as a reply to this tweet.” Within 24 hours she had received more than 500,000 responses using the hashtag “#MeToo”. Ms Milano’s tweet came days after the New York Times and New Yorker had published detailed allegations of sexual harassment by Harvey Weinstein, a Hollywood producer. Mr Weinstein was the first in a long line of prominent entertainers and executives to be toppled by such investigations, which dominated the headlines throughout late 2017.

Even as these stories broke, it was #MeToo that resonated most on social media, as millions of women shared their experiences of abuse, intimidation and discrimination. In the past 12 months, the hashtag has been tweeted 18m times according to Keyhole, a social-media analytics company. The phrase has come to encapsulate the idea of sexual misconduct and assault. In recent months American journalists have used the hashtag in their articles more frequently than they have mentioned “sexual harassment”, according to Meltwater, a media analytics company.

Yet surveys suggest that this year-long storm of allegations, confessions and firings has actually made Americans more sceptical about sexual harassment. In the first week of November 2017, YouGov polled 1,500 Americans about their attitudes on the matter, on behalf of The Economist. In the final week of September 2018, it conducted a similar poll again. When it came to questions about the consequences of sexual assault and misconduct, there was a small but clear shift against victims.

Read the complete article on The Economist here.

Big Mac Index 2018

The Economist’s Big Mac index gives a flavour of how far currency values are out of whack. It is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same everywhere. Our basket contains only one item, but it is found in around 120 countries: a Big Mac hamburger.

If the local cost of a Big Mac converted into dollars is above $5.28, the price in America , a currency is dear; if it is below the benchmark, it is cheap. The average cost of a Big Mac in the euro area is €3.95, or $4.84 at the current exchange rate. That implies the euro is undervalued by 8.4% against the dollar.

THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in January 2018 was $5.28; in China it was only $3.17 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 40% at that time.

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index.

This adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labour costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today’s equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation.

Link to the Interactive Currency-Comparison.

What to do about China’s “sharp power”

China is manipulating decision-makers in Western democracies. The best defence is transparency

WHEN a rising power challenges an incumbent one, war often follows. That prospect, known as the Thucydides trap after the Greek historian who first described it, looms over relations between China and the West, particularly America. So, increasingly, does a more insidious confrontation. Even if China does not seek to conquer foreign lands, many people fear that it seeks to conquer foreign minds.

Australia was the first to raise a red flag about China’s tactics. On December 5th allegations that China has been interfering in Australian politics, universities and publishing led the government to propose new laws to tackle “unprecedented and increasingly sophisticated” foreign efforts to influence lawmakers (see article). This week an Australian senator resigned over accusations that, as an opposition spokesman, he took money from China and argued its corner. Britain, Canada and New Zealand are also beginning to raise the alarm. On December 10th Germany accused China of trying to groom politicians and bureaucrats. And on December 13th Congress held hearings on China’s growing influence.

This behaviour has a name—“sharp power”, coined by the National Endowment for Democracy, a Washington-based think-tank. “Soft power” harnesses the allure of culture and values to add to a country’s strength; sharp power helps authoritarian regimes coerce and manipulate opinion abroad.

The West needs to respond to China’s behaviour, but it cannot simply throw up the barricades. Unlike the old Soviet Union, China is part of the world economy. Instead, in an era when statesmanship is in short supply, the West needs to find a statesmanlike middle ground. That starts with an understanding of sharp power and how it works.

China has a history of spying on its diaspora, but the subversion has spread. In Australia and New Zealand Chinese money is alleged to have bought influence in politics, with party donations or payments to individual politicians. This week’s complaint from German intelligence said that China was using the LinkedIn business network to ensnare politicians and government officials, by having people posing as recruiters and think-tankers and offering free trips.

Bullying has also taken on a new menace. Sometimes the message is blatant, as when China punished Norway economically for awarding a Nobel peace prize to a Chinese pro-democracy activist. More often, as when critics of China are not included in speaker line-ups at conferences, or academics avoid study of topics that China deems sensitive, individual cases seem small and the role of officials is hard to prove. But the effect can be grave. Western professors have been pressed to recant. Foreign researchers may lose access to Chinese archives. Policymakers may find that China experts in their own countries are too ill-informed to help them.

To ensure China’s rise is peaceful, the West needs to make room for China’s ambition. But that does not mean anything goes. Open societies ignore China’s sharp power at their peril.

Part of their defence should be practical. Counter-intelligence, the law and an independent media are the best protection against subversion. All three need Chinese speakers who grasp the connection between politics and commerce in China. The Chinese Communist Party suppresses free expression, open debate and independent thought to cement its control. Merely shedding light on its sharp tactics—and shaming kowtowers—would go a long way towards blunting them.

Read the complete article on The Economist magazine web site.

A prosecutor of Klansmen captures Jeff Sessions’s old seat, as the Republicans’ Senate majority shrinks

Roy Moore watching results

INITIALLY the mood at Doug Jones’s election-night party was genial but uneasy. Guests knew Mr Jones was closer to winning one of Alabama’s Senate seats than any Democrat in a quarter-century; they also knew that Mr Trump won the state by 28 points, and the last two Republican Senate candidates won 63.9% and 97.3% of the vote. So they smiled, and made all the right hopeful noises, but around the corners of their eyes you could see them bracing for disappointment.

Mr Jones’s victory was narrow—he took 49.9% of the vote to Mr Moore’s 48.4%, with the remaining 1.7% going to write-in votes—but decisive. He flipped every one of the counties that Mr Trump won by 10 points or less last year, banking large numbers of votes in the counties housing Alabama’s five biggest cities, and running up sizable margins in Alabama’s majority African-American “black belt”.  Mr Moore, meanwhile, underperformed Mr Trump’s results from November 2016 in every one of Alabama’s 67 counties, faring especially poorly in those with large numbers of educated voters.

At a rally in south-eastern Alabama the night before the election, Steve Bannon, Mr Trump’s former chief strategist and the architect of his presidential campaign, headlined a motley crew of far-right Republicans who offered a cavalcade of bilious, resentment-filled speeches promoting Mr Moore while pandering to Alabamians’ prickliness. “Nobody comes down here and tells Alabamians what to do,” said Mr Bannon, a Virginian, speaking after a Texan and several Midwesterners. Other speakers attacked George Soros, Islam and “the lynch-mob media”. No name got longer and more sustained boos than Mr Shelby’s. Two days before the election he went on a prominent talk show just to say, “I wouldn’t vote for Roy Moore…The state of Alabama deserves better.” Mr Moore’s wife defended her husband against charges of bigotry by revealing that “one of our attorneys is a Jew.”

White evangelicals—Mr Moore’s core supporters—comprised a smaller share of the electorate this year than in past elections. Some of them stayed home, or even voted for Mr Jones, despite vehemently disagreeing with his pro-choice position on abortion. Rushton Mellen Waltchack, a Christian and lifelong Republican from Birmingham, compared Mr Moore to “a televangelist who falls from grace,” and said she could not bring herself to vote for him. “He makes statements that to me don’t represent Jesus in the Bible…What does it say about us as a party if we continue to choose policy over character?”

Read the complete article on The Economist magazine web site.

Donald Trump’s big test in 2018 – The Economist video

The ninth in The Economist series of films previewing some of the big themes of 2018 considers America’s mid-term elections. A bad result for Donald Trump could lead to his impeachment. Can he unite and rally Republican voters?

How bookmakers deal with winning customers

888, an online betting firm, was fined a record £7.8m ($10.3m) in August after more than 7,000 customers who had chosen to ban themselves from their betting accounts were allowed to retain access. Yet away from the regulator’s gaze, bookies often stand accused of the opposite excess: being too prompt to shun winning customers. Successful bettors complain that their accounts get closed down for what are sometimes described as business decisions. Others say their wagers get capped overnight to minuscule amounts. The move may be unpopular with punters, but in most parts of the world it is legal.

Operators say scrutinising winners is necessary to help prevent fraud. Competition in the gambling industry increased with the arrival of online betting, prompting bookmakers to offer odds on markets they did not previously cover. In some, such as Eastern European football leagues, low wages and late payments make fertile ground for match-fixing. A winning streak at the windows can signal foul play. Most often, however, efforts to spot savvy customers are not rooted in a desire to thwart dodgy schemes. Rather, they are part of what industry insiders call “risk management”: to remain profitable, bookies seek to cap potential losses. As one betting consultant puts it, “Bookmakers close unprofitable accounts, just as insurance companies will not cover houses that are prone to flooding.” Betting outlets get to know their customers by gleaning information online, tracking web habits and checking whether punters visit odds-comparison sites. Profiling has also been made easier by the tightening of anti-money laundering regulations, which require online punters to provide detailed information when opening accounts.

Professional gamblers rarely do business with high-street bookmakers. They often place their trades on betting exchanges like Betfair or Smarkets, which do not restrict winning customers (though Betfair charges a premium to some of its most successful users). Alternatively they work with those bookmakers who use successful gamblers to improve the efficiency of their betting markets, and make most of their money on commission. These profess not to limit winning accounts and accept much bigger bets (Pinnacle, an influential bookie, often has a $1m limit for major events). Betting professionals also sneak in big trades via brokers, like Gambit Research, a British operation that uses technology to place multiple smaller bets with a range of bookmakers. Asian agents, in particular, have made their names in that trade: many are able to channel sizeable bets to local bookies anonymously. Unlike the sports they love, the games played by professional gamblers and bookmakers are kept out of the spotlight.

Sources: The Economist magazine web site.

 

Active fund managers have had a good 12 months, but a terrible ten years

coin flip

When it comes to choosing an index-tracking, or passive fund management, investment a lot of people choose a manager who tries to beat the market by picking the best stocks, because that sounds like a great idea.

The tricky bit is finding the right manager. The temptation is to look at past performance but fund managers rarely beat the market for long.

The average fund manager is always going to struggle to beat the market (this is a separate argument from whether markets are “efficient”). That is because the index reflects the performance of the average investor before costs. In a world dominated by professional fund managers, there aren’t enough amateurs for the professionals to beat. Even the hedge funds, those supposed “masters of the universe”, haven’t been able to do it; Warren Buffett looks set to win a $1m bet on the issue.

The table, from Standard & Poor’s, shows how many European-domiciled funds (investing in a wide range of markets) have managed to beat the market over one, three, five and 10 years. Eight out of 19 categories managed the feat over one year, but that drops to four categories over three years, three over five years and none over 10 years. In most categories over 10 years, you had a less than one-in-five chance of finding a fund that beat the market.

The Economist fund table

So why do so many people think they can pick a winner? The answer may be found in a new paper from James White, Jeff Rosenbluth and Victor Haghani of Elm Partners that shows people find it very difficult to tell skill from luck. Suppose you have two coins, one fair and the other biased 60% in favour of heads. How many parallel tosses would you need to be 95% certain (statistically speaking) of identifying the rigged coin? They asked 700 financial professionals the question and their median guess was 40. The actual answer is 143.  If you widen the experiment to three coins, the number rises to 220.

The authors then use a thought experiment, which assumes that 15% of fund managers can generate a post-fee return of 1% a year relative to the market while the other 85% lose 1%. They put 1% of the portfolio a year into each fund and then shift more to the winners each year, based on the probability that they can continue to outperform. Even after 10 years, the expected return on this portfolio is -0.6% a year, relative to the index.

Read the complete article on The Economist web site.

What machines can tell from your face

machine facial recognition on punzhu puzzles

We are now living our lives in the age of facial recognition, and each new technology comes with its own pro’s and con’s.

THE human face is a remarkable piece of work. The astonishing variety of facial features helps people recognise each other and is crucial to the formation of complex societies. So is the face’s ability to send emotional signals, whether through an involuntary blush or the artifice of a false smile. People spend much of their waking lives, in the office and the courtroom as well as the bar and the bedroom, reading faces, for signs of attraction, hostility, trust and deceit. They also spend plenty of time trying to dissimulate.

Technology is rapidly catching up with the human ability to read faces. In America facial recognition is used by churches to track worshippers’ attendance; in Britain, by retailers to spot past shoplifters. This year Welsh police used it to arrest a suspect outside a football game. In China it verifies the identities of ride-hailing drivers, permits tourists to enter attractions and lets people pay for things with a smile. Apple’s new iPhone is expected to use it to unlock the homescreen (see article).

Set against human skills, such applications might seem incremental. Some breakthroughs, such as flight or the internet, obviously transform human abilities; facial recognition seems merely to encode them. Although faces are peculiar to individuals, they are also public, so technology does not, at first sight, intrude on something that is private. And yet the ability to record, store and analyse images of faces cheaply, quickly and on a vast scale promises one day to bring about fundamental changes to notions of privacy, fairness and trust.

The final frontier

Start with privacy. One big difference between faces and other biometric data, such as fingerprints, is that they work at a distance. Anyone with a phone can take a picture for facial-recognition programs to use. FindFace, an app in Russia, compares snaps of strangers with pictures on VKontakte, a social network, and can identify people with a 70% accuracy rate. Facebook’s bank of facial images cannot be scraped by others, but the Silicon Valley giant could obtain pictures of visitors to a car showroom, say, and later use facial recognition to serve them ads for cars. Even if private firms are unable to join the dots between images and identity, the state often can. China’s government keeps a record of its citizens’ faces; photographs of half of America’s adult population are stored in databases that can be used by the FBI. Law-enforcement agencies now have a powerful weapon in their ability to track criminals, but at enormous potential cost to citizens’ privacy.

The face is not just a name-tag. It displays a lot of other information—and machines can read that, too. Again, that promises benefits. Some firms are analysing faces to provide automated diagnoses of rare genetic conditions, such as Hajdu-Cheney syndrome, far earlier than would otherwise be possible. Systems that measure emotion may give autistic people a grasp of social signals they find elusive. But the technology also threatens. Researchers at Stanford University have demonstrated that, when shown pictures of one gay man, and one straight man, the algorithm could attribute their sexuality correctly 81% of the time. Humans managed only 61% (see article). In countries where homosexuality is a crime, software which promises to infer sexuality from a face is an alarming prospect.

Keys, wallet, balaclava

Less violent forms of discrimination could also become common. Employers can already act on their prejudices to deny people a job. But facial recognition could make such bias routine, enabling firms to filter all job applications for ethnicity and signs of intelligence and sexuality. Nightclubs and sports grounds may face pressure to protect people by scanning entrants’ faces for the threat of violence—even though, owing to the nature of machine-learning, all facial-recognition systems inevitably deal in probabilities. Moreover, such systems may be biased against those who do not have white skin, since algorithms trained on data sets of mostly white faces do not work well with different ethnicities. Such biases have cropped up in automated assessments used to inform courts’ decisions about bail and sentencing.

Eventually, continuous facial recording and gadgets that paint computerised data onto the real world might change the texture of social interactions. Dissembling helps grease the wheels of daily life. If your partner can spot every suppressed yawn, and your boss every grimace of irritation, marriages and working relationships will be more truthful, but less harmonious. The basis of social interactions might change, too, from a set of commitments founded on trust to calculations of risk and reward derived from the information a computer attaches to someone’s face. Relationships might become more rational, but also more transactional.

In democracies, at least, legislation can help alter the balance of good and bad outcomes. European regulators have embedded a set of principles in forthcoming data-protection regulation, decreeing that biometric information, which would include “faceprints”, belongs to its owner and that its use requires consent—so that, in Europe, unlike America, Facebook could not just sell ads to those car-showroom visitors. Laws against discrimination can be applied to an employer screening candidates’ images. Suppliers of commercial face-recognition systems might submit to audits, to demonstrate that their systems are not propagating bias unintentionally. Firms that use such technologies should be held accountable.

Read the complete article on The Economist magazine web site.

 

Donald Trump has no grasp of what it means to be president

DEFENDERS of President Donald Trump offer two arguments in his favour—that he is a businessman who will curb the excesses of the state; and that he will help America stand tall again by demolishing the politically correct taboos of left-leaning, establishment elites. From the start, these arguments looked like wishful thinking. After Mr Trump’s press conference in New York on August 15th they lie in ruins.

The unscripted remarks were his third attempt to deal with violent clashes in Charlottesville, Virginia, over the weekend (see article). In them the president stepped back from Monday’s—scripted—condemnation of the white supremacists who had marched to protest against the removal of a statue of Robert E. Lee, a Confederate general, and fought with counter-demonstrators, including some from the left. In New York, as his new chief of staff looked on dejected, Mr Trump let rip, stressing once again that there was blame “on both sides”. He left no doubt which of those sides lies closer to his heart.

Far from being the saviour of the Republic, their president is politically inept, morally barren and temperamentally unfit for office.

Self-harm

Start with the ineptness. In last year’s presidential election Mr Trump campaigned against the political class to devastating effect. Yet this week he has bungled the simplest of political tests: finding a way to condemn Nazis. Having equivocated at his first press conference on Saturday, Mr Trump said what was needed on Monday and then undid all his good work on Tuesday—briefly uniting Fox News and Mother Jones in their criticism, surely a first. As business leaders started to resign enmasse from his advisory panels, the White House disbanded them. Mr Trump did, however, earn the endorsement of David Duke, a former Imperial Wizard of the Ku Klux Klan.

Mr Trump’s inept politics stem from a moral failure. Some counter-demonstrators were indeed violent, and Mr Trump could have included harsh words against them somewhere in his remarks. But to equate the protest and the counter-protest reveals his shallowness. Video footage shows marchers carrying fascist banners, waving torches, brandishing sticks and shields, chanting “Jews will not replace us”. Footage of the counter-demonstration mostly shows average citizens shouting down their opponents. And they were right to do so: white supremacists and neo-Nazis yearn for a society based on race, which America fought a world war to prevent. Mr Trump’s seemingly heartfelt defence of those marching to defend Confederate statues spoke to the degree to which white grievance and angry, sour nostalgia is part of his world view.

At the root of it all is Mr Trump’s temperament. In difficult times a president has a duty to unite the nation. Mr Trump tried in Monday’s press conference, but could not sustain the effort for even 24 hours because he cannot get beyond himself. A president needs to rise above the point-scoring and to act in the national interest. Mr Trump cannot see beyond the latest slight.

An Oval Office-shaped hole

For Republicans in Congress the choice should be clearer. Many held their noses and backed Mr Trump because they thought he would advance their agenda. That deal has not paid off. Mr Trump is not a Republican, but the solo star of his own drama. By tying their fate to his, they are harming their country and their party. His boorish attempts at plain speaking serve only to poison national life. Any gains from economic reform—and the booming stockmarket and low unemployment owe more to the global economy, tech firms and dollar weakness than to him—will come at an unacceptable price.

Read the complete article on The Economist magazine web site.

The attorney-general’s amnesia

The Economist magazine writes “Millions of Americans who watched or listened to Mr Sessions’s testimony, which was broadcast live on National Public Radio and all major cable-news channels, heard his version of the truth. But he did not provide much enlightenment for those who followed the saga of Russia’s alleged meddling in the election in 2016 closely. In response to numerous questions, the attorney-general said that he could not remember or was unable to reply. He insisted he would not discuss his conversations with Mr Trump even though the president had not invoked his executive privilege to prevent such testimony. “Consistent with longstanding Department of Justice practice, I cannot and will not violate my duty to protect confidential communications with the president,” he said.

Mr Sessions then specifically addressed an allegation that he had met with Sergey Kislyak, the Russian ambassador, at an event at the Mayflower hotel in Washington in April 2016:

I did not have any private meetings nor do I recall any conversations with any Russian officials at the Mayflower Hotel. I did not attend any meetings at that event. Prior to the speech, I attended a reception with my staff that included at least two dozen people and President Trump. Though I do recall several conversations I had during that pre-speech reception, I do not have any recollection of meeting or talking to the Russian ambassador or any other Russian officials.

The attorney-general’s denial of a meeting with the Russian envoy matters because, during his confirmation hearing, Mr Sessions had testified under oath that he did not communicate with the Russians in 2016. It later emerged that he had had at least two encounters with Mr Kislyak. This created many negative headlines, which is why many assumed that Mr Sessions swiftly recused himself from the probe into Russia’s interference in the election. But in his testimony Mr Sessions claimed that he stepped aside not because of any wrongdoing on his part, but because a regulation of the Department of Justice mandated it. The regulation, 28 CFR 45.2, notes that an employee of the Department of Justice shall not participate in a criminal investigation or prosecution if he has a personal or political relationship with an elected official.

Mr Sessions’s refusal to talk about his discussions with Mr Trump meant that he was unable to answer some of the hearing’s most salient questions. He would not say whether he ever talked with the president about the FBI’s probe of Russian interference into the election. And he told Marco Rubio, the Republican senator from Florida who ran for president last year, that he could not comment on Mr Comey’s account that Mr Trump asked everyone to leave the Oval Office after a meeting on February 14th so he could lean on the former FBI director who was then in charge of the Russia probe.

Read the complete article on The Economist web site.

Why Trumponomics won’t make America great again

The impulsiveness and shallowness of America’s president threaten the economy as well as the rule of law. Graphic: The Economist

Accordng to this article in The Economist: DONALD TRUMP rules over Washington as if he were a king and the White House his court. His displays of dominance, his need to be the centre of attention and his impetuousness have a whiff of Henry VIII about them. Fortified by his belief that his extraordinary route to power is proof of the collective mediocrity of Congress, the bureaucracy and the media, he attacks any person and any idea standing in his way.

Just how much trouble that can cause was on sensational display this week, with his sacking of James Comey—only the second director of the FBI to have been kicked out. Mr Comey has made mistakes and Mr Trump was within his rights. But the president has succeeded only in drawing attention to questions about his links to Russia and his contempt for the norms designed to hold would-be kings in check.

Just as dangerous, and no less important to ordinary Americans, however, is Mr Trump’s plan for the economy. It treats orthodoxy, accuracy and consistency as if they were simply to be negotiated away in a series of earth-shattering deals. Although Trumponomics could stoke a mini-boom, it, too, poses dangers to America and the world.

Trumponomics 101

In an interview with this newspaper, the president gave his most extensive description yet of what he wants for the economy (see article). His target is to ensure that more Americans have well-paid jobs by raising the growth rate. His advisers talk of 3% GDP growth—a full percentage point higher than what most economists believe is today’s sustainable pace.

In Mr Trump’s mind the most important path to better jobs and faster growth is through fairer trade deals. Though he claims he is a free-trader, provided the rules are fair, his outlook is squarely that of an economic nationalist. Trade is fair when trade flows are balanced. Firms should be rewarded for investing at home and punished for investing abroad.

The second and third strands of Trumponomics, tax cuts and deregulation, will encourage that domestic investment. Lower taxes and fewer rules will fire up entrepreneurs, leading to faster growth and better jobs. This is standard supply-side economics, but to see Trumponomics as a rehash of Republican orthodoxy is a mistake—and not only because its economic nationalism is a departure for a party that has championed free trade.

The real difference is that Trumponomics (unlike, say, Reaganomics) is not an economic doctrine at all. It is best seen as a set of proposals put together by businessmen courtiers for their king. Mr Trump has listened to scores of executives, but there are barely any economists in the White House. His approach to the economy is born of a mindset where deals have winners and losers and where canny negotiators confound abstract principles. Call it boardroom capitalism.

That Trumponomics is a business wishlist helps explain why critics on the left have laid into its poor distributional consequences, fiscal indiscipline and potential cronyism. And it makes clear why businessmen and investors have been enthusiastic, seeing it as a shot in the arm for those who take risks and seek profits. Stockmarkets are close to record highs and indices of business confidence have soared.

In the short term that confidence could prove self-fulfilling. America can bully Canada and Mexico into renegotiating NAFTA. For all their sermons about fiscal prudence, Republicans in Congress are unlikely to deny Mr Trump a tax cut. Stimulus and rule-slashing may lead to faster growth. And with inflation still quiescent, the Federal Reserve might not choke that growth with sharply higher interest rates.

Unleashing pent-up energy would be welcome, but Mr Trump’s agenda comes with two dangers. The economic assumptions implicit in it are internally inconsistent. And they are based on a picture of America’s economy that is decades out of date.

Contrary to the Trump team’s assertions, there is little evidence that either the global trading system or individual trade deals have been systematically biased against America (see article). Instead, America’s trade deficit—Mr Trump’s main gauge of the unfairness of trade deals—is better understood as the gap between how much Americans save and how much they invest (see article). The fine print of trade deals is all but irrelevant. Textbooks predict that Mr Trump’s plans to boost domestic investment will probably lead to larger trade deficits, as it did in the Reagan boom of the 1980s. If so, Mr Trump will either need to abandon his measure of fair trade or, more damagingly, try to curb deficits by using protectionist tariffs that will hurt growth and sow mistrust around the world.

A deeper problem is that Trumponomics draws on a blinkered view of America’s economy. Mr Trump and his advisers are obsessed with the effect of trade on manufacturing jobs, even though manufacturing employs only 8.5% of America’s workers and accounts for only 12% of GDP. Service industries barely seem to register. This blinds Trumponomics to today’s biggest economic worry: the turbulence being created by new technologies. Yet technology, not trade, is ravaging American retailing, an industry that employs more people than manufacturing (see article). And economic nationalism will speed automation: firms unable to outsource jobs to Mexico will stay competitive by investing in machines at home. Productivity and profits may rise, but this may not help the less-skilled factory workers who Mr Trump claims are his priority.

The bite behind the bark

Trumponomics is a poor recipe for long-term prosperity. America will end up more indebted and more unequal. It will neglect the real issues, such as how to retrain hardworking people whose skills are becoming redundant. Worse, when the contradictions become apparent, Mr Trump’s economic nationalism may become fiercer, leading to backlashes in other countries—further stoking anger in America. Even if it produces a short-lived burst of growth, Trumponomics offers no lasting remedy for America’s economic ills. It may yet pave the way for something worse.

A complete transcript of The Economist’s interview with Mr Trump is available here.

Palace whispers in the court of King Donald

Image from The Economist magazine article.

IT IS too soon to know whether Donald Trump’s sudden, regal dismissal of the FBI director—“Off with his head!”—will trigger a constitutional crisis. Much depends on who is appointed to succeed James Comey, and on the fate of FBI probes into Russian meddling in the election of 2016.

It is not too soon to make a more general observation. Less than four months into the reign of King Donald, his impetuous ways are making it more likely that his presidency will be a failure, with few large achievements to its name. That is not journalistic snark but a statement of fact, based on warnings from prominent Republicans and Democrats, notably in the Senate.

The 100 members of the Senate have a touchy relationship with every president. They are grandees, with a keen sense of superiority over the toiling hacks who serve in the House of Representatives and the here-today-gone-tomorrow political appointees who run the executive branch. Senators are treated as princes when they travel overseas, briefed by grizzled American generals and treated to tea by local potentates. In their dreams, election campaigns might still involve addressing crowds from the flag-draped caboose of a private train. Small wonder, then, that senators often resent the still-grander life of a president. Yet their dismay over Mr Trump sounds different.

As the Trump era began, Democratic senators recalled how this populist president had scorned both parties on the campaign trail, and wondered whether he might seek new, bipartisan coalitions to help hard-pressed working Americans. Democrats would muse, off the record, about the terms they would demand for supporting policies like a vast infrastructure programme. Perhaps, for example, they might seek union wage rates for workers building Mr Trump’s new airports and bridges. Republican senators worried, privately, about the same thing from the other side. They fretted that their new president would strike bargains with the new Democratic leader in the Senate, the canny, deal-cutting Charles Schumer of New York. To comfort themselves, Republicans imagined Mr Trump as a sort of salesman-CEO, selling comprehensive tax reform and deregulation to the masses while delegating day-to-day government to conventional conservatives such as his vice-president, Mike Pence.

Not any more. Increasingly the mood among Senate Republicans is a mixture of incredulity and gloom, as each political success (the confirmation of Neil Gorsuch as a Supreme Court justice, deftly handled cruise-missile strikes on Syria) is followed by a momentum-killing outburst from the president.

Some cast Mr Trump’s woes as a crisis of messaging and of White House staff discipline. At a recent lunch for Senate Republicans , Senator Mitch McConnell of Kentucky, the owl-like majority leader, scolded Mr Pence over a Trump tweet that suggested a government shutdown might be a nifty idea. You don’t believe that, we don’t believe that, and that sort of tweet only makes our lives harder, Mr McConnell reportedly told the vice-president. Prominent Republicans and Democrats have offered Mr Trump the same advice: find a chief of staff in the ferocious mould of James Baker, chief enforcer in the White Houses of Ronald Reagan and George H.W. Bush. Some senators have still more specific counsel to offer. They urge Mr Trump to create a domestic policy team that apes the professionalism of his national security team. They praise his second national security adviser, Lieutenant-General H.R. McMaster, for turning around a group left in chaos by his ill-starred predecessor, Mike Flynn, and hail the way that his defence secretary, James Mattis, works with the secretary of state, Rex Tillerson. Not only do the chieftains of the Pentagon and State Department meet on their own at least once a week for breakfast to share their thinking, when recommending policies they try to present the president with a single option.

At the root of each fresh crisis lies Mr Trump’s character. If he were a king in velvet and ermine that would matter less. But he is an American president. Party loyalty may save him from a revolution. But, startlingly early on, his own colleagues are starting to wonder what King Donald is for.

Read the complete article on The Economist magazine web site.

Trump presidency is in a hole

After 70 days in office Mr Trump is stuck in the sand.

DONALD TRUMP won the White House on the promise that government is easy. Unlike his Democratic opponent, whose career had been devoted to politics, Mr Trump stood as a businessman who could Get Things Done. Enough voters decided that boasting, mocking, lying and grabbing women were secondary. Some Trump fans even saw them as the credentials of an authentic, swamp-draining saviour.

After 70 days in office, however, Mr Trump is stuck in the sand. A health-care bill promised as one of his “first acts” suffered a humiliating collapse in the—Republican-controlled—Congress. His repeated attempts to draft curbs on travel to America from some Muslim countries are being blocked by the courts. And suspicions that his campaign collaborated with Russia have cost him his national security adviser and look likely to dog his administration (see article). Voters are not impressed. No other president so early in his first term has suffered such low approval ratings.

The business of government

Mr Trump is hardly the first tycoon to discover that business and politics work by different rules. If you fall out over a property deal, you can always find another sucker. In politics you cannot walk away so easily. Even if Mr Trump now despises the Republican factions that dared defy him over health care, Congress is the only place he can go to pass legislation.

The nature of political power is different, too. As owner and CEO of his business, Mr Trump had absolute control. The constitution sets out to block would-be autocrats. Where Mr Trump has acted appropriately—as with his nomination of a principled, conservative jurist to fill a Supreme Court vacancy—he deserves to prevail. But when the courts question the legality of his travel order they are only doing their job. Likewise, the Republican failure to muster a majority over health-care reflects not just divisions between the party’s moderates and hardliners, but also the defects of a bill that, by the end, would have led to worse protection, or none, for tens of millions of Americans without saving taxpayers much money.

Far from taking Washington by storm, America’s CEO is out of his depth. The art of political compromise is new to him. He blurs his own interests and the interests of the nation. The scrutiny of office grates. He chafes under the limitations of being the most powerful man in the world. You have only to follow his incontinent stream of tweets to grasp Mr Trump’s paranoia and vanity: the press lies about him; the election result fraudulently omitted millions of votes for him; the intelligence services are disloyal; his predecessor tapped his phones. It’s neither pretty nor presidential.

That the main victim of these slurs has so far been the tweeter-in-chief himself is testament to the strength of American democracy. But institutions can erode, and the country is wretchedly divided (see article). Unless Mr Trump changes course, the harm risks spreading. The next test will be the budget. If the Republican Party cannot pass a stop-gap measure, the government will start to shut down on April 29th. Recent jitters in the markets are a sign that investors are counting on Mr Trump and his party to pass legislation.

More than anything, they are looking for tax reform and an infrastructure plan. There is vast scope to make fiscal policy more efficient and fairer (see article). American firms face high tax rates and have a disincentive to repatriate profits. Personal taxes are a labyrinth of privileges and loopholes, most of which benefit the well-off. Likewise, the country’s cramped airports and potholed highways are a drain on productivity. Sure enough, Mr Trump has let it be known that he now wants to tackle tax. And, in a bid to win support from Democrats, he may deal with infrastructure at the same time.

Yet the politics of tax reform are as treacherous as the politics of health care, and not only because they will generate ferocious lobbying. Most Republican plans are shockingly regressive, despite Mr Trump’s blue-collar base. To win even a modest reform, Mr Trump and his team will have to show a mastery of detail and coalition-building that has so far eluded them. If Mr Trump’s popularity falls further, the job of winning over fractious Republicans will only become harder.

The character question

The Americans who voted for Mr Trump either overlooked his bombast, or they saw in him a tycoon with the self-belief to transform Washington. Although this presidency is still young, that already seems an error of judgment. His policies, from health-care reform to immigration, have been poor—they do not even pass the narrow test that they benefit Trump voters. Most worrying for America and the world is how fast the businessman in the Oval Office is proving unfit for the job.

Read the complete article on The Economist magazine web site.

A Peronist on the Potomac

trumpperon

A PRESIDENT is swept into office after whipping up a wave of grievance and resentment. He claims to represent “the people” against internal exploiters and external threats. He purports to “refound” the nation, and damns those who preceded him. He governs though confrontation and polarisation. His language is aggressive—opponents are branded as enemies or traitors. He uses the media to cement his connection with the masses, while bridling at critical journalism and at rebuffs to executive power. His policies focus on bringing short-term benefits to his political base—hang the long-term cost to the country’s economic stability.

Donald Trump? Yes, but these traits come straight from the manual of Latin American populist nationalism, a tradition that stretches from Argentina’s Juan Perón to Venezuela’s Hugo Chávez and beyond. Yes, Mr Trump is a billionaire capitalist whereas Chávez was an anti-capitalist army officer. But populism is not synonymous with the left: conservatives such as Peru’s Alberto Fujimori used its techniques, too. “Post-truth” politics and “alternative facts” have long been deployed in Latin America, from Mr Fujimori’s use of tabloid newspapers to smear opponents, to Chávez’s imaginary coups and Cristina Fernández de Kirchner’s fake inflation statistics in Argentina.

Latin American experience teaches that populists are easily underestimated and can stay in power for a long time. But not forever. Populist regimes are often corrupt and spendthrift, and usually fail to make people better off. Whatever the example from the White House, Latin American history shows that populist nationalism is a recipe for national decline. That is the message liberals need to hammer home.

Read the complete article in The Economist magazine.

What is the scope of a president’s executive orders?

trumpexecutiveorder

In just his first week as America’s 45th president, Mr Trump signed executive orders and memoranda freezing federal hiring, backing out of the Trans-Pacific Partnership, defunding “sanctuary cities” that protect unauthorised immigrants, undermining Obamacare, restoring the “global gag rule” on abortion counselling, restarting the construction of two controversial oil pipelines through Native American lands, building a wall on the nation’s southern border, blocking Syrian refugees and residents of several majority-Muslim countries from immigrating to the United States and slashing regulations on businesses. These moves have provoked fierce criticism from Democrats and studied silence from most Republicans. What are executive orders, and what limits a president’s authority to issue them?

Only Congress can make laws; it is the executive branch’s duty to enforce them. Article II of the constitution specifies that presidents “shall take care that the laws be faithfully executed”, and they take an oath to do just that on inauguration day. But as John Locke pointed out in his “Second Treatise of Government,” gaps and ambiguities are hallmarks of written law. “[A] latitude”, Locke wrote, must be “left to the executive power, to do many things of choice which the laws do not prescribe”. When on January 25th he ordered the erection of a wall on the Mexican border, for example, Mr Trump claimed to be acting under the Immigration and Nationality Act and two other statutes. This move, he wrote, was designed to protect America’s “safety and territorial integrity” and to “ensure that the nation’s immigration laws are faithfully executed”.

Few presidents hesitate to put their executive power to quick use. Mr Obama issued fewer orders than most, averaging 35 a year (compared to Franklin Delano Roosevelt’s 307, the peak, and 36 and 46 for George W. Bush and Bill Clinton, respectively). But Mr Obama came out swinging, too, putting his name to 17 orders during the first month of his presidency. Not every signature bears fruit: Barack Obama ordered the closure of the Guantanamo Bay detention centre on January 22nd, 2009, a facility that still housed 41 inmates when he left office. The boldness of Mr Trump’s volley of orders in the opening days of his presidency may be similarly tempered, and the entry ban has already met with judicial resistance. Further court challenges are likely: threatening sanctuary cities with a loss of federal funding may violate the Tenth Amendment and the abortion gag rule runs up against the First.

Read the complete article on The Economist web site here.

Why presidents take an oath of office

georgewashingtonswearingoath

AT NOON on January 20th, Donald Trump will take the presidential oath of office, administered by John Roberts, the chief justice. With his right hand raised and his left hand atop two bibles, Mr Trump will say “I do solemnly swear”, (though he also has the option to “affirm”, using a book of his choice), “that I will faithfully execute the office of president of the United States, and will to the best of my ability, preserve, protect and defend the constitution of the United States.”

There are signs that Mr Trump’s constitutional commitment may not match those of his predecessors in the White House. During the campaign and the post-election transition, Mr Trump made several statements that seem difficult to square with America’s founding document. In an apparent rejection of settled First-Amendment law—and of a ruling by the late Antonin Scalia, a justice he hails—Mr Trump said that people who burn the American flag should be jailed or lose their citizenship. He also called for looser libel laws to permit newspapers to be sued more easily and advocated the use of torture, long held to violate the Eighth Amendment. Some scholars say that the oath gives presidents a tool to protect the prerogatives of their office from the encroachment of Congress. But others argue the presidential oath was designed to serve as a check on chief executives’ power. David Strauss, a law professor at the University of Chicago, observes that oaths are inherently “limiting, not empowering”.

From The Economist magazine here.