The Gap Again Widens

 The September trade numbers are out and America’s Trade deficit increased significantly since August. Not only did it increase, but it made the largest percentage increase since February of 1999. Of course, part of that dramatic note is due to the contraction that resulted as part of the economic down-turn.

An AP article (see: http://www.google.com/hostednews/ap/article/ALeqM5gNiyJ905Ho0Ur96V2TQhsBX19lGwD9BUNGF80) sites authorities who suggest that the increase in energy prices is outstripping the benefit gained in the export sector by a falling dollar.

As President Obama travels through Asia this will no doubt be a subject of discussion. A Chinese Yuan that is kept artificially low is credited with a not insignificant portion of the problem. The Chinese have indicated a willingness to let the Yuan adjust a little, but are, not unexpectedly, quite concerned about the state of the dollar (being holders of vast quantities of dollar assets.)

What explains the diametrically opposed positions on nuclear power witnessed between France and Germany? France is arguably the most pro-nuclear energy country in the world, and Germany, while it may be having second thoughts, has been retiring its aging nuclear plants so as to gradually phase out of the nuclear energy business.

These two countries have quite a bit in common in addition to being neighbors. They have similar sized populations and economies. While Germany is a little bigger in terms of both population and Gross Domestic Product (GDP), the two countries’ per capita GDP figures are quite close. On a broad continuum of political governance, they are quite close together as republics with parliaments and constitutions. There is a paper that suggests that Frances nuclear power optimism is a product of a system of governance that makes it hard for dissenting interest groups to make headway into impacting policy. (Delmas & Heiman, J of Policy Analysis and Management, 20 (3), pp. 433 – 456) They both built considerable nuclear capacity initially.

First, it may be interesting to consider those commonly hypothesized explanations that don’t do so well at clarifying this divide. One might find it reasonable to expect that public opinion about nuclear energy in the two countries would be radically different, and that this is the root of the divide. However, there is a survey conducted by GlobeScan on behalf of the International Atomic Energy Agency (IAEA) that shows that, while Germans do have a slightly higher proportion of their population with negative opinions on nuclear, the differences were not, in fact, massive.

In France there is not a majority of the population clamoring for more plants, and, on the other hand, the percentage of Germans that want to see more nuclear power is only a couple percentage points below what is seen in France. These results could be deceptive. “Use existing facilities, do not build more”, which is the largest response category for both countries, could mean different things to citizens of the two countries. France might be considered to be at its saturation point with respect to nuclear power. Even though it is a major electricity exporter (including to Germany), France has so much nuclear capacity that it uses it not just for base-load production but also in a load-following role that is less optimal for nuclear plants. This is reflected in the lower capacity factors seen in France than most other advanced nuclear countries. (A capacity factor is a proportion representing what a plant actually produces over what it could theoretically deliver if it operated at its rated capacity constantly over a time period.) At any rate, when a Frenchman says don’t build more, he or she may just be saying that there is enough to meet the need and it would not be cost-effective to build more, whereas a German, not being near that saturation point, may be more likely to be expressing a negative view toward nuclear energy. However, if one examines the polling data for whether nuclear energy should be expanded to mitigate climate change, French and Germans are quite similar in the proportions that want expansion (about 40% each), but Germans have a somewhat higher proportion that are opposed to building more nuclear plants for this purpose (56% to France’s 43%).

Germany has been advancing renewable energy plants. However, as I have mentioned in past posts, these sources are not yet up to replacing coal and nuclear. While it has been posited that Germans are more environmentally conscientious, as observed in their build up of renewables, it should be noted that German emissions of greenhouse gases from energy production is significantly higher than France’s, even when one normalizes per capita or per GDP dollar (i.e. carbon intensity) the French come out ahead. It is also worth noting that it has only been quite recently that Germany has outdone France with respect to either the proportion of electricity coming from renewables or the absolute value of renewable electricity generated.

Besides differing policies toward nuclear energy, what else separates France and Germany? One prominent difference is that France is a nuclear weapons state, but Germany is not. This is not to imply that there is a connection between the difference on nuclear weapons and on nuclear energy – particularly given the fact that these two countries were building nuclear energy capacity side-by-side  in earlier times. However, it does act as a reminder that this policy gulf may, in fact, be idiosyncratic to the two countries in question. It may be tied to the history of each going back to the early days of the Cold War.

There are some differences that may have some generalizability. One factor is that French nuclear infrastructure is owned by firms that are super-majority owned by the French government, while German nuclear infrastructures are primarily owned by private sector firms. This may make a difference in that governments presumably have different attitudes towards risk and uncertainty than private-sector firms. Governments are used to being able to redistribute risk across the entire population, and, being expected to assume certain high consequence operations, are more used to such activities. Firms have to think about risk and uncertainty differently because they can only distribute their risk through costly insurance programs. If one considers the 53 nuclear power plants currently under construction, only two are being built in a country, Japan, where the private-sector dominates power plant ownership. Even the one plant currently under construction in the US is being built by the Tennessee Valley Authority, which is one of the few Federally owned corporations in the United States. It is very common to have mixed public-private ownership of nuclear power plants, but strictly privately owned plants are a rarity, even with the many policies put in place to facilitate them.

Another notable difference is that Germany has massive stocks of coal.While Germany’s reliance on coal has been dropping, it is still true that both its production and consumption of coal are several times that of France.  Coal, like nuclear, is ideal for base-load power production, and, for that reason, coal may be considered the primary competitor of nuclear power in its domain. It is true that natural gas, which is ideal for peak-load production, is also used widely for base-load capacity – particularly when natural gas prices are low.

The case of France and Germany is an interesting one for considering why one state might be bullish on nuclear power while another, facing many similar circumstances, is bearish. Of course, as mentioned it may or may not be possible to generalize from this case to others. It is certainly possible that there are idiosyncratic explanations for this difference in policy. Even some of the more generalizable explanations just beg further questions. For example, if the public-sector versus private-sector ownership is an important factor, this raises the question of why the two countries took different approaches to plant ownership. Applying the hypothesis that having an abundance of fossil fuel deposits reduces the incentive to build nuclear plants to a broader set of countries can yield ambiguous results.

When I started studying the question of how nuclear power’s expansion was likely to transpire, I, like many, took it as  a given that there would be a substantial global expansion of nuclear power plant construction. I expected the “renaissance” would include both growth in countries that have long had a near de facto moratorium on plant construction (e.g. the United States) as well as some of the more promising aspirant countries that have not previously had commercial nuclear power such as Indonesia and Turkey. While I never believed that most of the states clamoring for nuclear energy would achieve it in my lifetime, I did expect a significant swing. After all, with a price on carbon and renewables not ready to take a chunk out of king coal at an affordable cost, nuclear power seemed to stand to be a big winner from climate change.

Today I am far less sanguine about an expansion that could be reasonably be termed a “global renaissance of nuclear power”. Perhaps it can be said that Asia is experiencing a nuclear boom. 57%  of the plants currently under construction are being built in just five Asian countries (China [over 25% of the total alone], India, Japan, South Korea, and Taiwan), and if you add Russia you have accounted for almost 3/4ths of the current construction. However, beyond rhetoric and political attempts to signal support for nuclear energy, there is little evidence of a full-fledged renaissance yet. The graph below shows the number of power plants being brought on-line each year, and the number of countries in which plants were brought on-line.

Just recently, the US government has signalled support for nuclear. The EPA predicted 180 new plants constructed by 2050 as a result of climate change legislation in its recent analysis (see: http://www.examiner.com/x-19285-Chicago-Economic-Policy-Examiner~y2009m10d26-EPA-sees-180-new-nuclear-power-plants-over-the-horizon ). Furthermore, there is evidence that the Obama Administration is backing nuclear expansion as part of a bid to get the required legislative support for passing carbon-constraining legislation. (see: http://www.washingtonpost.com/wp-dyn/content/article/2009/10/27/AR2009102704081.html )

Should we expand nuclear power? I believe that, if we want to slow the pace of and eventually reduce carbon output, nuclear will have to be part of the solution. When you consider the scale on which we use electricity, wind, solar,  geothermal, and conservation in their current state of development don’t do the job . Hopefully, one day we will be able to cost-effectively tap the power of the sun for most of our electricity needs and will be vastly more efficient in our use of power, but that day isn’t today and by the time it arrives we may have suffered a dire price. 

It is essential to  understand the differences between nuclear power and renewables in terms of scale. Nuclear plants are typically both rated higher in terms of the amount of electricity they generate, and have much higher capacity factors than renewable plants. The capacity factor is a percentage of the rated power that a unit actually produces over the course of a year. For nuclear, capacity factors tend to be above 90% on average, and can be 100% in years in which fuel is not changed out and there are no other disruptions. For wind, a reasonable capacity factor is about 33%. This means that a typically sized nuclear plant (1000 MW(e)) produces more than 4000  wind turbines of 600 KW (e) or almost the same as 500 massive 5 MW(e) wind turbines. (These are at conservative capacity factors of 85% for nuclear and 35% for wind.)

So what is the tough nut to crack if the legislative environment is suitable for nuclear power’s growth? If one asks what policies need to be put into effect to spur US nuclear renaissance, one might quickly note that said policies are largely already in place, and still the evidence of a resurgence is primarily on paper.

First, you would need to provide loan guarantees. Why? Because private utilities don’t typically have enough assets to get people to loan them billions of dollars over a relatively short timeframe. It is not that these firms are small or not profitable, but rather that the magnitude of costs and risks for nuclear is so high. This is exacerbated by the many examples of planned plants that have not panned out. Famously, the Shoreham Nuclear Power Plant in Long Island, New York was completed but never made a return on investment. The operator eventually went out of business / was subsumed by a government entity. The Energy Policy Act of 2005 provides for a program that would reimburse lenders up to a cap in case of default. Current discussions are considering increasing the $18.5 billion pot for this program as that, sadly, is a scant amount on the scale of spurring a massive increase in nuclear power.

Second, while the nuclear power industry has had a quite respectable safety record, the scale of possible consequences and liabilities makes it impossible for utilities to afford the kind of insurance they would need to ensure they could stay in business in the aftermath of an accident. The government has the utilities covered on that front as well with the Price-Anderson Act that caps the liability of private firms so that they only have to insure up to a certain level.

Third, a major problem in nuclear power plant construction, much as in Defense Department acquisitions, is a proclivity towards cost-overruns and delays. One can imagine that stretching out the interest payments on an $8 billion dollar loan could be quite costly proposition.

It is useful to understand that nuclear plants are cost-intensive in front-loaded construction costs, but are relatively cheap in terms of fuel and operations and maintainance. This means that, once plants are built, they are relatively profitable when the utilities no longer have to funnel a big chunk of the money back into paying off the capital costs. I’ve heard an employee from Georgia Power say that nuclear was by far their least expensive power source, but this was, of course, based on the fact that the plant costs had depreciated off their books. The Federal government has provided delay insurance to cover delays that are due to the regulatory requirements (i.e. if the NRC puts a hold on you, the government picks up the tab) for a limited number of early plants. Furthermore, some jurisdictions (i.e. Georgia and Florida) have approved the extremely controversial practice of allowing their utilities to charge customers for plants before they are even running (for that matter, before construction has even begun.)

Despite all these policies, I remain skeptical that we will see a major nuclear power plant construction boom given the magnitude of costs and risks involved. This puts me at a loss. While I believe in the benefits of nuclear power, I am also quite concerned about our massive deficit, so I’m not too sure about the one policy prescription that remains available to jump start a renaissance. That is, if the government buys or substantially increases subsidization of nuclear power that may make a difference. Any such policy would have to ensure that taxpayers got their investment back in terms of a cut of the earlier mentioned profitability.

I was disappointed to see that the Obama administration rejected a meeting with the Dalai Lama on his upcoming visit to Washington DC. This symbolic act of deference to the Chinese seems like an interesting follow up to slapping a massive 35 percent tariff on tires imported from China.

This shows just how politics results in bass-ackwards policy. While comparing the Chinese Tire Tariff to the Hawley Smoot Tariff Act may be hyperbole, it cannot be said to be sound economic policy by any stretch of the imagination. (Proponents of tariffs often forget that the US exports things as well, and life gets a lot harder for those US companies that export goods and services when tariffs are imposed. [Why shouldn't other countries return the favor.] So, in essence, you are hamstringing the companies that do things well relative to the rest of the world in support of those companies that are not competitive of their own faculties.) Of course, the tariff is not an economic policy in that it is not a plan of action designed to achieve an optimal effect on US national income. Instead, it is a political policy designed to increase / maintain support for a political party, and no doubt there was some sort of tit-for-tat agreement (presumably related to support for healthcare and / or carbon constraints) that played into the agreement.

On the other hand, because there are relatively few voters of Tibetan origin in the US, it is quite easy to use turning down a meeting with a the Tibetan religious leader as a means to buy good will with the Chinese. Of course, the Chinese may gladly accept the actual injury imposed by the tariff in exchange for the imagined victory of being able to point out that the US doesn’t recognize the Dalai Lama’s status. The Chinese often seem more concerned about what appears trivial and symbolic than real offenses. However, from the Communist Party of China’s perspective, the economic cost of a tire tariff may be inconsequential compared to the boon of realizing that they can do as they please domestically and regionally without suffering the slightest loss of legitimacy on the international stage.

Of course, as we in the United States have gleefully accepted a situation in which we gluttonously overspend while the Chinese willingly buy up our debt, we are not in a great position to say anything if the Chinese say… abscond with a little boy in order to usurp a religious lineage (particularly one which has relatively few adherents / voters in the US.) [This referring to the Panchen Lama, who disappeared and was replaced with a Party-sanctioned puppet. I, of course, don't know that he was killed, just that he has been kept out of the public eye and incommunicado.]   

 Needless to say, I think, in this particular case, the Obama Administration got it entirely wrong. The Administration should foster free trade, and not encourage China to believe that they can set the White House’s meeting agenda and /or replace religious leaders without loss of legitimacy. It was big news that Italy dropped in the most recent Freedom House rankings from “Free” to “Partially Free”, but no one would imagine that Italy could get away with saying: “Sorry Cardinals, we know you picked this ‘Benedict’ guy, but we’ve got this other guy- ‘Antonio’, and he’s now the real Pope. By the way, before you complain, Vatican City is no longer a sovereign country - we took it over as it was never really its own country anyway.”  There would be outrage, and people would stop treating Italy like a first world power.

Last week the National Academies Press released a symposium report entitled: Avoiding Technology Surprise for Tomorrow’s Warfighter. (see:  www.nap.edu/catalog/12735.html) This is part of an ongoing project of the National Research Council’s Air Force Studies Board. While it is certainly a laudable goal to try to minimize the degree to which one is caught off guard by the technological developments of other states (and, more dauntingly, how those new technologies will be used), the report revives my concern about whether we are fooling ourselves about our ability to make accurate predictions in the domain of social activity.  It is interesting that the report notes, as suggested above, that predicting the technologies that will develop is not the hard part, but rather determining how they will be used. The latter has a lot to do with behavior and human decision-making, which are subjects humanity seems to have much less of a handle upon than that of modeling the physical world (spoken by someone whose education is in Economics and Political Science.) We still don’t have a definite answer to the most fundamental question relevent to this discussion- does free will exist?

This is not to say that we are outstanding at getting the technology piece right. There are many hilarious examples of both over- and under-prediction of technology development. With respect to over-prediction, Alex Lewyt, president of a vacuum company, said in 1955  that “Nuclear powered vacuum cleaners probably be a reality in ten years.” On the under-prediction front, there is, of course, the famous Ken Olson quote that “There is no reason anyone would want a computer in their home.”

It seems to me that we (as a society through tax money) have spent tons of money on forecasting models that don’t work. We do this because nothing scares humanity like uncertainty.  I think we may be more terrified of what we cannot know than any certain calamity imaginable. I’m not an anthropologist or a geneticist, but I would guess that this visceral fear of the unknown is probably evolutionarily hard-wired into us. At any rate, it is certainly engrained.

I have seen at least two or three different papers that were all essentially probabilistic models of the likelihood that we will suffer a nuclear terrorist attack withing “x” years. At the risk of creating  more enemies than my al-Megrahi release post, these papers are complete crap. Mathematically they are invariably sound as they are usually fairly simple and straightforward  probabilistic models. However,  when the authors pluck probability figures from the air to insert into the model, they are just making a smooth-running garbage-in garbage-out machine. 

I am not saying that we should give up on developing a better predictive ability, but I scratch my head at the fact that we keep paying to have people misapply the same methods to similar problems. I am also by no means a critic of probabilistic and statistical models, we just need to know what problems they work for, and which they don’t. Even with all the popular works about the limitations of probabilistic models (perhaps most famously Nassim Taleb’s Black Swan), we are still enamored of applying these methods to problems for which they lack utility.

Unfortunately, I think that we will continue to give big grants to people to build fallacious predictive models, and will probably continue to spend far too little on models of how to achieve an optimal outcome where uncertainty is a given. The former give people a measure of comfort, and policymakers can readily understand the output of such models. Just as policymakers would usually rather throw money at an activity that gives  [false] hope of preventing calamity than management of the consequence of a disaster that has already transpired. I think there is little support for activities that work from the assumption that things are going to happen that catch us off guard, and we need to minimize this impact.

Data Source: Energy Information Administration: Short-Term Energy Outlook, August 2009

 The answer to the question posed by the title, of course, varies depending upon the nature of one’s yardstick. As one can see, renewables are minor players in US electricity generation when compared with coal, natural gas, and nuclear. Geothermal displays less than 0.8% of the output of coal, and the figures for solar and wind are 0.07% and - a whopping  – 2.4% respectively.

If the point of comparison is how much other countries generate by renewables in absolute terms, the US is certainly prominent, coming in behind only a few other large countries. Of course, this may lead one to note that the US is a collosal juggernaut in terms of both electricity consumption and generation, and the fact that countries like China, Canada, and, recently and presumbly based on its bio-fuel pursuits, Brazil are bigger lead one to wonder where the US falls in electricity generated by renewables as a percentage of total electricity generated. At about 9% of net electricity generation coming from renewables, the US is not near the top of countries using renewables, and for 2005 (the most recent year for which their is widespread data) the US came in about 117th out of 212 countries.

The US has been ramping up wind power as of late, and did recently surpass Germany as the world’s number one country for wind generation of electricity. However, it should be noted that the total net electricity generation by wind in the US in 2007 (when Germany still reigned supreme) was about equal to the output of four typical nuclear power plants (i.e. assuming 1,000MW(e) plants running at a modest 90% of capacity.)

The magnitude of the United States’ Department of Defense (DoD) is, on many levels, awe-inspiring. This led me to create this little trivia game called “DoD or Country” that considers which is larger in various aspects - our defense complex or given countries. I hope you enjoy it. The anwers appear below. Don’t peak.

 Questions:  

1.) Weighing in at $583 billion US dollars, which is more expensive: the US DoD budget or the budget of the entire government of Australia?

2.) At 9,500 square kilometers, which is more extensive: America’s largest military installation -White Sands Missile Range – or the country of Cyprus?

3.) Consisting of about 3,600,000 people, which is larger: the combined active, reserve, and civilian components of the DoD or the population of Mongolia?

4.) At 440,000 barrels per day, who consumed more oil in 2006: the Department of Defense or the country of Argentina?

5.) Consisting of 45 ships, which is larger: the US Naval Fleet Auxillary Force (i.e. the ships that supply the Navy’s combat fleet) or the merchant marine fleet of Lithuania? 

6.) Consisting of 185 aircraft, which contains more aircraft:  the current C-17 cargo plane fleet of the US Air Force or the current Singapore Airline’s fleet (all models of aircraft combined)?

7.) At 764 dead, which involved a greater number of lost lives: the US military’s Killed in Action figure for 2007 or the number of fatalities due to terrorism (as defined by the US NCTC) in Somalia in the same year.

8.)At 2,150 Megawatts (electrical) [MW(e)], which has a higher combined output rating from all nuclear reactors: all of the active  aircraft carriers of the US Navy or all the commercial nuclear power plants in Brazil?

Answers:

1.) DoD; Australia’s annual budget in the same year (2008) was a mere $340 billion.

2.) Cyprus; White Sands is 8,300 square kilometers (1,2oo km. sq. less.)

3.) DoD; Mongolia’s population is only about 3.041 million.

4.) Argentina; The South American nation’s oil consumption was 120,000 barrels per day more.

5.) Lithuania; The Baltic state’s fleet consists of about five more merchant ships than the US Navy’s Auxillary force. (Perhaps a few more than that depending upon how you define “ship.”)

6.) DoD; The Air Force has almost 80 more C-17s (of all varients) than the Singapore Airline has in total aircraft (of all models.)

7.) DoD; The DoD reported 25 more killed in action in 2007 than was the number of Somali terrorism fatalities (739) that year.

8.) DoD; Brazil’s two reactors are rated at 2,007 MW(e), while the 10 Nimitz and one Enterprise class carriers have ratings of 194 MW(e) (both reactors on a Nimitz combined [times 10]) and 210 MW(e) (all eight Enterprise reactors combined).

Is Iran on the verge of a revolution? Can Kim Jong Un maintain power if his father transfers it to him in the near future? Are we seeing the leading indicators of America’s decline in conditions like debt that is completely out of control, failing business giants, the crippling costs of persistent asymmetric warfare, and looming unaddressed crises such as the mathematically infeasible pay-go social security system? What will the rise of massive high-growth emerging economies mean for world affairs? What will the world look like politically, economically, and diplomatically 3 months from now?; 6 months?; 1 year?; 2 years?  

We are living in interesting times. We could be on the precipice of some very major changes to the international system. Sometimes change is slow and evolutionary; sometimes it is faster and more revolutionary; and, rarely but occasionally, the conditions evolve to converge to the point where it is catastrophically instantaneous. There is a vigorous tug of war in progress between inertia and the winds of change.

I would love to be able to make some definitive predictions about what the world will look like next year. Like the vast majority of people, I am motivated by discomfort with uncertainty to want to think that I can have a grasp on how events will unfold. However, the lesson (an unintended lesson to be sure) that has most stuck with me in completing graduate degrees in International Relations and Economics  is that anyone who thinks they can predict the future unfolding of large-scale political and economic events is full of crap. This will no doubt be considered heresy to many who have made lucrative livings because we (as a species) would rather pay millions to someone who makes an incorrect prediction than to accept that we have no idea what will transpire. One can read papers that misapply probabilistic and statistical models in some of the most elite scholarly journals because even the most educated of our society are addicted to thinking that the future can be known in a system whose level of complexity remains beyond our capacity to unravel.

My advice to those trying to get a handle on the future, save your soothsayer money, hedge your bets, and enjoy the ride.

With respect to government culpability for the financial crisis, the primary lesson that people have taken away seems to be that the executive and legislative branches were just negligent and did not regulate businesses enough. That is, while business was actively at fault, the government was merely too passive.

It is true that there were certainly specific areas in which the existing incentives created an economically unstable condition, and regulation (and 20/20 hindsight) might have negated the problem. For example, the recently proposed legislation to require loan originators to keep five percent of the loans they make on their books is probably a good idea for new regulation. After all, a major part of the problem was that those who madeloans had no incentive to ensure they were good loans because they were selling them off in securitized form as the ink was still drying on the paperwork. This meant that their only incentive as to make more loans, not good loans.

However, I don’t think we should be quite so quick to conclude that the government’s only role was in failures of omission. The government has long supported the notion that virtually everyone should be homeowners. They supported and implemented policies that facilitated a move toward a greater proportion of home-ownership, and, in doing so, they too are culpable for a condition in which there were way too many people without the incomes to be homeowners who were buying homes.  Until a year ago or so, many people would have thought this a laudable policy, but seeing the effects of having so many people owning homes they cannot afford, we must recognize that the government should not have been supporting housing ownership in the manner it did.

Why is this distinction between active and passive culpability important? My worry is that we seem to be in a period in which people just want government to get off their duffs and be active, and we may not be conscientious enough about whether they are actively doing the right things. No one can say the Obama Administration hasn’t been bold in its policies, but whether it turns out to have been smart in them remains to be seen.

To be frank, I am a little terrified about the idea of a $1.8 trillion deficit for the year. A budget deficit of well over 10% of the entire Gross Domestic Product (GDP) is nothing to take lightly. I certainly hope President Obama will be true to his words to engage in deficit reduction at some point, but I am afraid that like the Republicans, without facing legislative opposition, he will go just as hog-wild as they did. The President certainly has lofty goals, but they all come with price-tags attached.

Source: Kay Chernush for US State Department

The State Department’s 2009 Trafficking in Persons (TIP) Report was released on Tuesday (June 16, 2009.) The TIP is part of a laudable effort to fight one of the most heinous stains on the current state of humanity, which is that the buying and selling of human beings continues to take place around the world. Released with the report was an online photo album of pictures taken by Kay Chernush. Most of the photos, like the one above of a Nepalese mother in search of her daughter, show the human dimension of this injustice. 

The idea behind the TIP is simple. States are ranked into tiers according to their level of compliance with a stated set of standards for combating trafficking. Those in the lowest group are subject to possible sanctions in addition to the potential national embarrassment of being seen as one of the most backward countries in the world (and the presumed indirect effects of this status, such as the fact that people are less likely to want to be tourists in, do business with, or generally associate with your country.) The report states that measures with concrete effects like the number of prosecutions, convictions, and length of prison terms are given deference over symbolic activities like conference-hosting or information campaigns in determining in which of the three tiers a nation is placed (compliant, partially compliant, or not compliant).

I do have one potential concern about the TIP report itself. Despite the fact that the report lays out the ranking criteria and discusses methodology (though vaguely), I remain worried that the TIP classification is politicized. While countries like Cuba, North Korea, and Iran offer a wide variety of defects and challenges to global security, from what little I know of the trafficking issue, they don’t come to mind as the worst violators as their Tier 3 rankings imply. There is a great danger in politicization of the list because it must be seen as legitimate to have any influence on behavior. If the TIP report is seen as just another outlet for the US to badmouth the countries it has problems with in general while saying nice things about those it likes or is courting the favor of, then no one will take it seriously, and states in violation will feel no compulsion to change their behavior. My worries stem from an observation about the State-sponsored Terrorism list, and how it is sometimes used in ways that are unrelated to terrorism. I fear that we will be negotiating bumping North Korea and Iran up a level in coming years in exchange for changes in their nuclear policies without any discernible change to their policies on trafficking.

My skepticism may be falsely rooted, due both to the fact that there can legitimately be a great disparity between volume of trafficking and ranking, and that the methodology of how various criteria are weighted or scored is not clear. The first issue revolves around the fact that countries are being graded on perceived compliance efforts, and not the scale of the problem in the country. There are good reasons for doing it this way (besides the fact that if volume of traffic were the primary criteria I suspect the United States would have to place itself on the bad boys list.) The idea is to reward moves in the right direction, and punish lack of rules and enforcement on trafficking. Therefore, you don’t want to keep countries with high trafficking volume but active campaigns for defeating trafficking in the 3rd tier, neither do you want to reward small countries who are not effective in fighting this crime but whose trafficking level is small because of reasons unrelated to the government’s efforts.

However, if there are many high volume of trafficking countries among those on the full and partial compliance (Tier I and II) lists, it might be telling about the efficacy of these enforcement efforts. It might tell us that, for the past nine years the activities to increase arrests and prosecutions have not staunched the flow. The report shows each country’s tier rank over time. It would be interesting to know: a.) how the trafficking level of countries that have moved up to Tier I have changed over time; b.) what has happened to the overall level of trafficking (i.e. is it being reduced or just shifted into other countries?) Unfortunately, I think it is probably difficult to have faith in models projecting trafficking amounts because it is not like these criminals are filing monthly reports to some data clearinghouse, and projections based on interdictions and arrests may be confounded by more effective criminal methods or any number of other causes. Even indications gleaned from interviews or interrogation with arrested criminals may not be trustworthy if there is an incentive for the prisoner to be deceptive.

How would one strategically combat human trafficking? The idea is to recognize and realign the incentives. In other words, one needs to get an accurate and honest picture of what is driving this behavior, and then restructure the costs and benefits so that the incentives no longer remain conducive to engaging in these activities. While the increased enforcement activities by governments realigns incentives by increasing the costs of trafficking, there will never be enough resources available to eliminate the problem in that way.

 The TIP report, and accompanying sanctions, recognize STATE incentives (e.g. to be a member of the global community in good standing) and may potentially realign them. There has been success in recent years in states heavily utilized (as origins, destinations, or transhipment points) for trafficking in making efforts to combat these activities, and some portion of this progress may be attributable to US and global pressures. However, the problem remains alive and well because the core motives are not recognized or eliminated.

While the State Department report is a positive step as far as it goes, it (when combined with public policy more broadly) does not leave me sanguine about the fight against modern day slavery. This lack of optimism is rooted in the fact that deep structural incentives exist to engage in this behavior that are not countered by existing activities.  One of these structural drivers is poverty, and, the fact is, we don’t have a good idea of how poor nations and regions can be brought to significantly higher standards of living. The few countries that have succeeded in going from Third World to First World are anomalies, rather than the product of well-understood Macroeconomic policies. Another structural factor is that many countries, including the United States, have extremely untargeted approaches to sex trade regulation. I suspect that this has greatly exacerbated the sex slavery problem by eliminating a prostitution labor supply of willing adults of sound-mind who stay out of the market solely because they consider themselves law-abiding citizens.

By an “untargeted” approach to sex trade regulation, I mean one akin to the Prohibition Era with respect to alcohol. This is in contrast to a much more effective present-day policy that is targeted toward preventing usage of alcohol that creates a danger to the health and well-being of those other than the (uncoerced) drinker. Prohibition, as we all know and most will admit, was an unmitigated disaster. Prohibition spawned its own violent crime, people died drinking low-grade “bathtub gin”, and, most importantly, people still drank alcohol because the demand was still there. On top of that, the few unscrupulous characters that were most willing to break the law were handed a very high profit margin oligopoly. Fortunately,  the country learned its lesson vis-a-vis alcohol prohibition and rescinded the law with the 21st amendment. Unfortunately, we haven’t made the leap to applying the lesson very similar issues.

While I am skeptical of its feasibility of implementation on the grounds of the deeply rooted religious mores of the US and other countries, I would advocate an approach similar to that taken with alcohol. Instead of trying to prohibit every sexual act of a commercial nature, you put your limited resources into a targeted fight against exploitation, slavery, and abuse. In other words, a woman or man who society would deem capable of making sound decisions for themself (i.e. a mentally-competent adult) would be able to choose prostitution as a job or career path. If they thought they needed assistance, they could hire security or an agent and pay them a pre-negotiated rate as any other employer would pay an employee. What would not be legal would be for any person to force a person to select this job, or to insinuate themselves as a “protector” or “manager” who would dictate what pay is received by the working party. Like other businesses, the prostitute would be free to determine what clients he or she took on, how many in a period, to set a price on a take it or leave it basis, and to cancel the transaction for cause. In essence, regulations would exist to prohibit force, fraud, or the illegal use of third-party property (conducting this business in a place against the owner’s wishes.)

What does this do for society? First, given a demand that we have no reason to think will go away soon (sex drives are pretty much biological imperatives, and some fraction of the population will either be undesirous, or unable, to meet these needs with a person with whom they share a relationship), the influx of voluntary participants would reduce the incentive for abducting and enslaving people. Second, if someone were trying to force another person into prostitution or to exploit them, the victim would have a clear legal recourse. Third, the vast sums of risk premium money associated with illicit activities that attract violent criminals into the market would not exist, and we might expect a few less shoot-outs in the world. Finally, if there were activities resulting in societal costs remaining, you could tax them to regulate them.