Topic: US/World Economics' effect on Canada

[Thucydides]

They might not want our oil, but they are making it easy for the TSX to poach international capital if we work fast and offer much more attractive tax rates and transaction fees:

http://pointsandfigures.com/2011/12/12/doing-business-with-the-simpsons/

Doing Business With The Simpsons

Posted by Jeff Carter on December 12th, 2011

The Illinois legislature proposed a tax package that is designed to keep the $CME and $CBOE from leaving the state. Is it enough? Indiana governor Mitch Daniels has said that being next to Illinois is like living next door to the Simpson’s.

The bill they will pass will tax roughly 27% of exchange transactions. The rationale for taxing them is the transactions initiate and take place within state borders. That assumption is incorrect. While 15% of the exchanges transactions take place using open outcry on the floor, most of those transactions initiate from all other points in the world. If I were a floor trader, I’d be ticked at Democrats in Illinois. They just gave CME and CBOE an extra incentive to try and close the floors.

The second concept being tossed about is that CME and CBOE shouldn’t be given tax breaks because they are profitable. Does that mean we only give tax breaks to companies that are poorly run and losing money? Profitability of a company shouldn’t ever be a consideration for a tax break.

The core problem is that Illinois is one of the most expensive places to do business in the nation. The Democratic tax increase last January has cost the state many businesses, and it has lost thousands of jobs. The migration of companies from high tax/high cost states has accelerated in the last decade. The American south is rising again.

Meanwhile, taxes are killing jobs. In another study, the Illinois Policy Institute finds that Illinois was enjoying a jobs recovery until the tax hike passed this year. Then the job numbers headed south in a hurry, and payrolls shrunk by 89,000 in the six months following the revenue grab. The Illinois jobless rate is 10.1%, well above the 8.6% national rate.

Many on the right are ticked. They don’t favor a carve out for big companies. Dealmaking perpetuates the crony capitalism culture that is dominant in Illinois. Do you want to be beholden to your elected official? The left is mad too, since they incorrectly see high taxes as a path to prosperity. The left is against profits, and think that just because the government built some infrastructure, they’re entitled to all money.

Will CME or CBOE move? It depends. They will total up the cost of moving. Then figure in costs from lost network effects and disruption of operations and balance it against the cost of staying. But if I were them, I’d also try to figure out a way to calculate the cost of the political risk of my tax break going away. The exchanges are in an international competition for capital. The cost of operating a business in Illinois is expensive not just because of taxes, but because of all the rules and regulations that accompany them. It’s not fun to try and operate a business when there is a knife being held to your throat.

[E.R. Campbell]

More, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail on the potential benefits of a pipeline to West Coast ports - or the cost to Canada of obstructing such a pipeline:

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/blocking-pipelines-to-bc-would-entail-loss-of-billions-study/article2272388/

Blocking pipelines to B.C. would entail loss of billions: study

CARRIE TAIT

Calgary— Globe and Mail Update
Published Thursday, Dec. 15, 2011

Canada will forgo billions of dollars in gross domestic product and government revenue if oil companies are unable to access markets off the Pacific coast, according to a new study.

Moving Canadian heavy oil to the West Coast, where it can be shipped to markets in California and Asia, could add up to $131-billion (U.S) to Canada’s GDP between 2016 and 2030, according to a new study prepared by researchers at the School for Public Policy at the University of Calgary. This translates to $27-billion in federal, provincial and municipal tax receipts, the academics calculated.

Politicians, the energy industry, and others supporting pipelines to the West Coast continually point to the predicted economic benefits for Canada if more infrastructure designed to carry oil westward were built. However, precise numbers have been scarce. The university’s report will give pipeline proponents tangible, independent, numbers they can use to support their arguments. But at the same time, price scenarios and forecasts are notoriously difficult to nail down.

The study expects 649,000 person-years of employment would be created if greater access to Pacific tidewaters materialized. It predicts Canadian heavy oil will be worth $6.65 more per barrel in 2016 in California, and up to $8.77 more per barrel in 2013, compared to oil sold in certain other markets. Oil reaching Asia will put an extra $10.30 per barrel in producers’ pockets in 2016, minus transportation costs, and $13.60 per barrel by 2030.

“Those higher prices for Canadian heavy oil would translate into massive increases in profits, jobs and government revenues. With the necessary governmental backing for new pipelines, oil producers with easy access to international markets could add up to $131-billion (U.S.) to Canada’s GDP between 2016 and 2030,” the report said. “Every single province and territory will realize fiscal and economic gains by supporting a healthy, globally focused national oil industry.”

The report adds: “The outcome in terms of GDP throughout the Canadian economy of exploiting the full range of this differential is non-trivial, approaching 1 per cent annually in an economy currently estimated at $1.57-trillion dollars.”

Two main projects are focused on shipping Canadian crude to the West Coast: expansion of Kinder Morgan Inc.’s existing Trans Mountain pipeline; and construction of Enbridge Inc. (ENB-T36.06-0.06-0.17%)’s controversial Northern Gateway pipeline.

The federal government is a strong supporter of shipping to the West Coast, but opponents argue the potential for pipeline leaks and tanker spills make the projects unworthy. Further, green groups are pushing to block the pipelines in hopes that this will slow oil sands production, which is expected to double to three million barrels per day by 2020. At Canada’s forecast rate of oil production growth, existing pipelines in all directions could reach capacity as early as 2014, the industry calculates.

That, $131 Billion over 14 years or nearly $9.5 Billion new dollars of income every year, is a fair chunk of change. It does not seem reasonable that a few thousand people in isolated, welfare dependent first nations should be allowed to stand in the way of 650,000 person years of employment - many of them for first nation members. But I don't think they, the first nations, will stand in the way for too long. I am confident that their leadership is venal and can be bought.
 

[Retired AF Guy]

More, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail on the potential benefits of a pipeline to West Coast ports - or the cost to Canada of obstructing such a pipeline:

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/blocking-pipelines-to-bc-would-entail-loss-of-billions-study/article2272388/

That, $131 Billion over 14 years or nearly $9.5 Billion new dollars of income every year, is a fair chunk of change. It does not seem reasonable that a few thousand people in isolated, welfare dependent first nations should be allowed to stand in the way of 650,000 person years of employment - many of them for first nation members. But I don't think they, the first nations, will stand in the way for too long. I am confident that their leadership is venal and can be bought. 

Personally, I think the leadership may have already been bought - by foreign charities like the Tides Foundation and environmentalist groups. The key players here are not the band chiefs/councils, but the band members. If the provincial/federal governments are smart, they are the people I would appeal to, not the chiefs. Come up with a program that gives them jobs and security and an improvement in life, and protection of the environment and they could have a winner.

[Nemo888]

Even better build a refinery on the coast and ship fractionated product. I always wonder why we don't upsell our natural resources more. It is also possible to use nuclear power to extract the oil from the tar sands.  Make a liquid heavy metal thorium reactor to boil water. Not a huge technological hurdle. Solves so many problems. Nuclear weapons proliferation, CO2 emissions, the waste material decays very quickly so it is very safe by comparison, etc. We need to be bold IMO.

[Brad Sallows]

That's why the blocks go up - money, "squeeze".

[E.R. Campbell]

More about pipelines and oil sands reproduced under the Fair Dealing provisions of the Copyright Act from the Financial Post:

http://business.financialpost.com/2011/10/29/the-stranded-oil-sands-a-worst-case-scenario/

There is a very, very good chance that a politically weakened Obama will refuse to permit the Keystone pipeline in order to placate the environmentalists.


Protesters against the construction of the Keystone XL oil pipeline hold signs and stand on a
Keith Haring sculpture as they demonstrate outside of the W Hotel before the arrival of U.S.
President Barack Obama on October 25, 2011 in San Francisco, California.

But, and it is a big BUT for Canada, IF the USA shoots itself in the foot and prefers Saudi oil to Canadian oil we have a HUGE and growing market in Asia - mainly in China.

I am confident that Government of Canada will pull out all the stops to guarantee regulatory approval of Northern Gateway and the LNG pipeline and port if Keystone is blocked by the Obama administration.

But we want both: Keystone for quick, easy profits and Northern Gateway to secure competitive world markets (and prices) for our commodities.

The US has, for the moment, at least, nixed Keystone. I expect:

1. Obama to pay a political price for making America more dependent on Arab/Iranian oil; and

2. Harper to do everything in his (considerable) political, legislative and regulatory power to make Northern Gateway a reality ... soon.

[GAP]

I think the lost jobs argument, if done right, will cost Obama the election come November. All people see is massive unemployment and it's quite visual, especially with a little help for people to SEE 20,000 lost jobs......

[RangerRay]

I can appreciate the economic and strategic importance of a pipeline to the west coast, especially now in light of the Americans turning down Keystone.

However, I remain unconvinced that these benefits outweigh the environmental risks of this particular pipeline project, as proposed.  In this part of the world, it's a matter of when, not if, a disaster occurs.

From the BC Wildlife Federation:

http://www.bcwf.net/index.php?option=com_content&view=article&id=284%3Aannouncements&catid=58%3Alinks&Itemid=716

Enbridge Project Threatens BC's Fragile Ecosystem


The BC Wildlife Federation has submitted a detailed brief to the Judicial Review Panel investigating the proposed Enbridge Northern Gateway pipeline proposal to construct and operate two pipelines that will carry oil from Alberta to a marine export terminal at Kitimat, BC. The proposal also includes the construction and operation of an integrated marine infrastructure that will facilitate the transportation of oil and condensate.

The BCWF brief states that the project poses a significant risk to British Columbia’s rich and vibrant ecosystem, including the Great Bear Rainforest, Kitlope Conservancy, and the Gultoyees/Foch conservancy. The project places not only these protected areas at risk but the entire coastline, estuaries, marine environment and the ecosystem.

The brief asks: "Is it ethical for the Provincial and Federal governments to place high standards of protection by creating conservancies and parks only to consider and possibly of allowing the transportation of bitumen and condensate, thereby placing all of these protected areas at "high" risk? What kind of protection is this? Is this due diligence? Will this Environmental Assessment review process be remembered as a series of oversights and underestimations? We need to balance our desire, as a people, to receive economic compensation for our natural resource rich country with the actual cost of projects, such as the Enbridge Northern Gateway Pipelines."

Full report here:
http://www.bcwf.net/images/stories/pdf/enbridge_brief.pdf


Being BC's oldest conservation group representing hunters and anglers, I doubt that they would be under the influence of foreign radical greenies.

[Kirkhill]

An oil spill in a remote northwestern corner of Alberta has turned out to be the province’s largest in 36 years, according to regulators.
 
Approximately 28,000 barrels of oil were spilled in the Rainbow pipeline rupture, which was discovered April 29, the Energy Resources Conservation Board said Tuesday.
 
A spill of that magnitude on a provincial pipeline hasn’t happened since 1975 when the Bow Valley line leaked 40,000 barrels of oil, said board spokesman Davis Sheremata.

Calgary Herald Link:

28,000 Barrels = 4451 m³

With an average depth of the spill of 4 inches - 0.1m (this stuff is thick, or so I understand) that equates to an area 210m x 210m.

And that is, apparently, a large spill.

When the pressure drops, the pipeline stops.  Nothing at all like a blowout in a well, let alone a blowout in a well under the sea. 

Edit:  Further to the above - this report on Enbridge's US Record - Typically about 15 leaks a year, of a few gallons with larger ones in the 5000-10,000 barrel range (28m x 28m to 40m x 40m)

At a speech in 2010, company CEO Patrick Daniel said Enbridge pipelines spilled only about 4.2 barrels of oil for every billion barrel-miles, compared to the industry average of more than 10.7 barrels spilled. A barrel-mile is defined as one barrel of liquid moving one mile.
 

Projecting Enbridge's figure of 4.2 barrels spilled per BBM onto the Gateway pipeline would result in about 588 barrels spilled each year — about 94,000 litres.
 

The company's own data, from 2004 to 2008, shows 32,000 barrels spilled from its liquid pipelines, a rate of about 7.7 barrels per billion barrel-miles. Projected onto Gateway's average capacity, that rate would produce more than 1,000 barrels spilled each year.
 

One of Enbridge's worst pipeline accidents occurred in July 2010, when a line belonging to Houston-based Enbridge Energy Limited Partnership ruptured near Marshall, Mich., gushing 20,000 barrels into a creek and the Kalamazoo River.
 

Under the direction of the U.S. Environmental Protection Agency, Enbridge cleaned up about 18,000 barrels and kept the oil from flowing into Lake Michigan. The EPA considers the spill the worst in the history of the Midwest.
 

Less than two months later, another Enbridge line burst in Romeoville, Ill., about 30 minutes' drive south of Chicago, spilling more than 7,500 barrels of crude.
 

Also in 2010, an Enbridge line broke near Neche, North Dakota, with 3,700 barrels contained on the company's right-of-way near a highway.
 

Still, the company claimed it had a 99.99-per-cent safety record that year.

Ottawa Citizen Link

I admit the containment problem changes when the oil hits water - but we're talking about the impact on the land around the pipeline.

[recceguy]

I can appreciate the economic and strategic importance of a pipeline to the west coast, especially now in light of the Americans turning down Keystone.

However, I remain unconvinced that these benefits outweigh the environmental risks of this particular pipeline project, as proposed.  In this part of the world, it's a matter of when, not if, a disaster occurs.

From the BC Wildlife Federation:

http://www.bcwf.net/index.php?option=com_content&view=article&id=284%3Aannouncements&catid=58%3Alinks&Itemid=716

Full report here:
http://www.bcwf.net/images/stories/pdf/enbridge_brief.pdf


Being BC's oldest conservation group representing hunters and anglers, I doubt that they would be under the influence of foreign radical greenies.

To me, here's the bottom line.

You're not going to stop progress. You can stand in it's way, if you wish, it will either go over you or around you, but you won't stop it. This is way too important for Canada and it's economy.

So, if we have a spill, we'll lose some fish, listen to the naysayers bray, clean it up and go back to work pumping oil. The Gulf has had a massive spill, that we could not even begin to expect, a cleanup and a miraculous recovery. Oh, and they're still pumping out oil offshore there like nothing happened.

I almost prefer to see our oil go to Asia. It puts us on global footing and removes us just a tad bit more from US dependency.

Let's not forget, the US has done us no favours when it comes to taking our energy exports, whether they be oil or electricity. Our rates here are high because Uncle Sam makes them that way through bad agreements made when we were asleep at the wheel.
 
We're wide awake and moving back into the driver's seat.

[E.R. Campbell]

An interesting perspective from Bank of Canada Governor Mark Carney, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/us-economy-may-never-fully-recover-carney/article2310768/

US economy may never fully recover: Carney

OTTAWA— The Canadian Press

Published Sunday, Jan. 22, 2012

Bank of Canada governor Mark Carney says the U.S. economy could take years to recover from its current weak state — and may never return to its glory days.

The weakness south of the border is costing the Canadian economy $30 billion annually in lost exports, according to Mr. Carney.

And while the central bank is predicting a 0.6 per cent hit to the Canadian economy — worth about $10 billion — from the European economic crisis, Mr. Carney says consumer spending and business investment will prevent Canada from sliding backwards.

In an interview with CTV's Question Period, Mr. Carney says those two sectors will be key in countering the slowdown outside Canada and government austerity measures at home.

Mr. Carney also echoed warnings from Ottawa that measures could be taken to reduce risks of a housing price bubble in Canada.

Last week, federal Finance Minister Jim Flaherty warned that he could take action to prevent prices from skyrocketing, particularly in the Toronto and Vancouver markets.

I am repeating myself, but:

1. We cannot and must not try to "detach" ourselves from the USA, we are joined, physically, on our great, rich continent and, for better or worse, richer or poorer, they, the Americans, are our best friends, biggest trading partners and guarantors of our security; but

2. We must diversify our trade, especially with Asia, in order to "buffer" the problems in our more traditional European and American markets.

[Thucydides]

Loss of US manufacturing jobs will hurt our exports as the market contracts. We will also be fighting the same battles with our manufcturing industries. Caterpiller is showing what might happen if we don't get our costs and workers competative with the rest of the world (see what is happening with the Electromotive plant in London ON); it is not only wages but increasing energy costs, higher WISB premiums and taxes as well that make Ontario uncompetative.

http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html?_r=4&hp=&pagewanted=print

How the U.S. Lost Out on iPhone Work
By CHARLES DUHIGG and KEITH BRADSHER

When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products.

Apple has become one of the best-known, most admired and most imitated companies on earth, in part through an unrelenting mastery of global operations. Last year, it earned over $400,000 in profit per employee, more than Goldman Sachs, Exxon Mobil or Google.

However, what has vexed Mr. Obama as well as economists and policy makers is that Apple — and many of its high-technology peers — are not nearly as avid in creating American jobs as other famous companies were in their heydays.

Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.

“Apple’s an example of why it’s so hard to create middle-class jobs in the U.S. now,” said Jared Bernstein, who until last year was an economic adviser to the White House.

“If it’s the pinnacle of capitalism, we should be worried.”

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

Similar stories could be told about almost any electronics company — and outsourcing has also become common in hundreds of industries, including accounting, legal services, banking, auto manufacturing and pharmaceuticals.

But while Apple is far from alone, it offers a window into why the success of some prominent companies has not translated into large numbers of domestic jobs. What’s more, the company’s decisions pose broader questions about what corporate America owes Americans as the global and national economies are increasingly intertwined.

“Companies once felt an obligation to support American workers, even when it wasn’t the best financial choice,” said Betsey Stevenson, the chief economist at the Labor Department until last September. “That’s disappeared. Profits and efficiency have trumped generosity.”

Companies and other economists say that notion is naïve. Though Americans are among the most educated workers in the world, the nation has stopped training enough people in the mid-level skills that factories need, executives say.

To thrive, companies argue they need to move work where it can generate enough profits to keep paying for innovation. Doing otherwise risks losing even more American jobs over time, as evidenced by the legions of once-proud domestic manufacturers — including G.M. and others — that have shrunk as nimble competitors have emerged.

Apple was provided with extensive summaries of The New York Times’s reporting for this article, but the company, which has a reputation for secrecy, declined to comment.

This article is based on interviews with more than three dozen current and former Apple employees and contractors — many of whom requested anonymity to protect their jobs — as well as economists, manufacturing experts, international trade specialists, technology analysts, academic researchers, employees at Apple’s suppliers, competitors and corporate partners, and government officials.

Privately, Apple executives say the world is now such a changed place that it is a mistake to measure a company’s contribution simply by tallying its employees — though they note that Apple employs more workers in the United States than ever before.

They say Apple’s success has benefited the economy by empowering entrepreneurs and creating jobs at companies like cellular providers and businesses shipping Apple products. And, ultimately, they say curing unemployment is not their job.

“We sell iPhones in over a hundred countries,” a current Apple executive said. “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.”

‘I Want a Glass Screen’

In 2007, a little over a month before the iPhone was scheduled to appear in stores, Mr. Jobs beckoned a handful of lieutenants into an office. For weeks, he had been carrying a prototype of the device in his pocket.

Mr. Jobs angrily held up his iPhone, angling it so everyone could see the dozens of tiny scratches marring its plastic screen, according to someone who attended the meeting. He then pulled his keys from his jeans.

People will carry this phone in their pocket, he said. People also carry their keys in their pocket. “I won’t sell a product that gets scratched,” he said tensely. The only solution was using unscratchable glass instead. “I want a glass screen, and I want it perfect in six weeks.”

After one executive left that meeting, he booked a flight to Shenzhen, China. If Mr. Jobs wanted perfect, there was nowhere else to go.

For over two years, the company had been working on a project — code-named Purple 2 — that presented the same questions at every turn: how do you completely reimagine the cellphone? And how do you design it at the highest quality — with an unscratchable screen, for instance — while also ensuring that millions can be manufactured quickly and inexpensively enough to earn a significant profit?

The answers, almost every time, were found outside the United States. Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

In its early days, Apple usually didn’t look beyond its own backyard for manufacturing solutions. A few years after Apple began building the Macintosh in 1983, for instance, Mr. Jobs bragged that it was “a machine that is made in America.” In 1990, while Mr. Jobs was running NeXT, which was eventually bought by Apple, the executive told a reporter that “I’m as proud of the factory as I am of the computer.” As late as 2002, top Apple executives occasionally drove two hours northeast of their headquarters to visit the company’s iMac plant in Elk Grove, Calif.

But by 2004, Apple had largely turned to foreign manufacturing. Guiding that decision was Apple’s operations expert, Timothy D. Cook, who replaced Mr. Jobs as chief executive last August, six weeks before Mr. Jobs’s death. Most other American electronics companies had already gone abroad, and Apple, which at the time was struggling, felt it had to grasp every advantage.

In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

The impact of such advantages became obvious as soon as Mr. Jobs demanded glass screens in 2007.

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

The Chinese plant got the job.

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

In Foxconn City

An eight-hour drive from that glass factory is a complex, known informally as Foxconn City, where the iPhone is assembled. To Apple executives, Foxconn City was further evidence that China could deliver workers — and diligence — that outpaced their American counterparts.

That’s because nothing like Foxconn City exists in the United States.

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day. While factories are spotless, the air inside nearby teahouses is hazy with the smoke and stench of cigarettes.

Foxconn Technology has dozens of facilities in Asia and Eastern Europe, and in Mexico and Brazil, and it assembles an estimated 40 percent of the world’s consumer electronics for customers like Amazon, Dell, Hewlett-Packard, Motorola, Nintendo, Nokia, Samsung and Sony.

“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. Since then, Foxconn has assembled over 200 million more.

Foxconn, in statements, declined to speak about specific clients.

“Any worker recruited by our firm is covered by a clear contract outlining terms and conditions and by Chinese government law that protects their rights,” the company wrote. Foxconn “takes our responsibility to our employees very seriously and we work hard to give our more than one million employees a safe and positive environment.”

The company disputed some details of the former Apple executive’s account, and wrote that a midnight shift, such as the one described, was impossible “because we have strict regulations regarding the working hours of our employees based on their designated shifts, and every employee has computerized timecards that would bar them from working at any facility at a time outside of their approved shift.” The company said that all shifts began at either 7 a.m. or 7 p.m., and that employees receive at least 12 hours’ notice of any schedule changes.

Foxconn employees, in interviews, have challenged those assertions.

[Thucydides]

Part 2

http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html?_r=4&hp=&pagewanted=print

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.

In China, it took 15 days.

Companies like Apple “say the challenge in setting up U.S. plants is finding a technical work force,” said Martin Schmidt, associate provost at the Massachusetts Institute of Technology. In particular, companies say they need engineers with more than high school, but not necessarily a bachelor’s degree. Americans at that skill level are hard to find, executives contend. “They’re good jobs, but the country doesn’t have enough to feed the demand,” Mr. Schmidt said.

Some aspects of the iPhone are uniquely American. The device’s software, for instance, and its innovative marketing campaigns were largely created in the United States. Apple recently built a $500 million data center in North Carolina. Crucial semiconductors inside the iPhone 4 and 4S are manufactured in an Austin, Tex., factory by Samsung, of South Korea.

But even those facilities are not enormous sources of jobs. Apple’s North Carolina center, for instance, has only 100 full-time employees. The Samsung plant has an estimated 2,400 workers.

“If you scale up from selling one million phones to 30 million phones, you don’t really need more programmers,” said Jean-Louis Gassée, who oversaw product development and marketing for Apple until he left in 1990. “All these new companies — Facebook, Google, Twitter — benefit from this. They grow, but they don’t really need to hire much.”

It is hard to estimate how much more it would cost to build iPhones in the United States. However, various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense. Since Apple’s profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward.

But such calculations are, in many respects, meaningless because building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies. Apple executives believe there simply aren’t enough American workers with the skills the company needs or factories with sufficient speed and flexibility. Other companies that work with Apple, like Corning, also say they must go abroad.

Manufacturing glass for the iPhone revived a Corning factory in Kentucky, and today, much of the glass in iPhones is still made there. After the iPhone became a success, Corning received a flood of orders from other companies hoping to imitate Apple’s designs. Its strengthened glass sales have grown to more than $700 million a year, and it has hired or continued employing about 1,000 Americans to support the emerging market.

But as that market has expanded, the bulk of Corning’s strengthened glass manufacturing has occurred at plants in Japan and Taiwan.

“Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws, Corning’s vice chairman and chief financial officer. “We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that’s 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.”

Corning was founded in America 161 years ago and its headquarters are still in upstate New York. Theoretically, the company could manufacture all its glass domestically. But it would “require a total overhaul in how the industry is structured,” Mr. Flaws said. “The consumer electronics business has become an Asian business. As an American, I worry about that, but there’s nothing I can do to stop it. Asia has become what the U.S. was for the last 40 years.”

Middle-Class Jobs Fade

The first time Eric Saragoza stepped into Apple’s manufacturing plant in Elk Grove, Calif., he felt as if he were entering an engineering wonderland.

It was 1995, and the facility near Sacramento employed more than 1,500 workers. It was a kaleidoscope of robotic arms, conveyor belts ferrying circuit boards and, eventually, candy-colored iMacs in various stages of assembly. Mr. Saragoza, an engineer, quickly moved up the plant’s ranks and joined an elite diagnostic team. His salary climbed to $50,000. He and his wife had three children. They bought a home with a pool.

“It felt like, finally, school was paying off,” he said. “I knew the world needed people who can build things.”

At the same time, however, the electronics industry was changing, and Apple — with products that were declining in popularity — was struggling to remake itself. One focus was improving manufacturing. A few years after Mr. Saragoza started his job, his bosses explained how the California plant stacked up against overseas factories: the cost, excluding the materials, of building a $1,500 computer in Elk Grove was $22 a machine. In Singapore, it was $6. In Taiwan, $4.85. Wages weren’t the major reason for the disparities. Rather it was costs like inventory and how long it took workers to finish a task.

“We were told we would have to do 12-hour days, and come in on Saturdays,” Mr. Saragoza said. “I had a family. I wanted to see my kids play soccer.”

Modernization has always caused some kinds of jobs to change or disappear. As the American economy transitioned from agriculture to manufacturing and then to other industries, farmers became steelworkers, and then salesmen and middle managers. These shifts have carried many economic benefits, and in general, with each progression, even unskilled workers received better wages and greater chances at upward mobility.

But in the last two decades, something more fundamental has changed, economists say. Midwage jobs started disappearing. Particularly among Americans without college degrees, today’s new jobs are disproportionately in service occupations — at restaurants or call centers, or as hospital attendants or temporary workers — that offer fewer opportunities for reaching the middle class.

Even Mr. Saragoza, with his college degree, was vulnerable to these trends. First, some of Elk Grove’s routine tasks were sent overseas. Mr. Saragoza didn’t mind. Then the robotics that made Apple a futuristic playground allowed executives to replace workers with machines. Some diagnostic engineering went to Singapore. Middle managers who oversaw the plant’s inventory were laid off because, suddenly, a few people with Internet connections were all that were needed.

Mr. Saragoza was too expensive for an unskilled position. He was also insufficiently credentialed for upper management. He was called into a small office in 2002 after a night shift, laid off and then escorted from the plant. He taught high school for a while, and then tried a return to technology. But Apple, which had helped anoint the region as “Silicon Valley North,” had by then converted much of the Elk Grove plant into an AppleCare call center, where new employees often earn $12 an hour.

There were employment prospects in Silicon Valley, but none of them panned out. “What they really want are 30-year-olds without children,” said Mr. Saragoza, who today is 48, and whose family now includes five of his own.

After a few months of looking for work, he started feeling desperate. Even teaching jobs had dried up. So he took a position with an electronics temp agency that had been hired by Apple to check returned iPhones and iPads before they were sent back to customers. Every day, Mr. Saragoza would drive to the building where he had once worked as an engineer, and for $10 an hour with no benefits, wipe thousands of glass screens and test audio ports by plugging in headphones.

Paydays for Apple

As Apple’s overseas operations and sales have expanded, its top employees have thrived. Last fiscal year, Apple’s revenue topped $108 billion, a sum larger than the combined state budgets of Michigan, New Jersey and Massachusetts. Since 2005, when the company’s stock split, share prices have risen from about $45 to more than $427.

Some of that wealth has gone to shareholders. Apple is among the most widely held stocks, and the rising share price has benefited millions of individual investors, 401(k)’s and pension plans. The bounty has also enriched Apple workers. Last fiscal year, in addition to their salaries, Apple’s employees and directors received stock worth $2 billion and exercised or vested stock and options worth an added $1.4 billion.

The biggest rewards, however, have often gone to Apple’s top employees. Mr. Cook, Apple’s chief, last year received stock grants — which vest over a 10-year period — that, at today’s share price, would be worth $427 million, and his salary was raised to $1.4 million. In 2010, Mr. Cook’s compensation package was valued at $59 million, according to Apple’s security filings.

A person close to Apple argued that the compensation received by Apple’s employees was fair, in part because the company had brought so much value to the nation and world. As the company has grown, it has expanded its domestic work force, including manufacturing jobs. Last year, Apple’s American work force grew by 8,000 people.

While other companies have sent call centers abroad, Apple has kept its centers in the United States. One source estimated that sales of Apple’s products have caused other companies to hire tens of thousands of Americans. FedEx and United Parcel Service, for instance, both say they have created American jobs because of the volume of Apple’s shipments, though neither would provide specific figures without permission from Apple, which the company declined to provide.

“We shouldn’t be criticized for using Chinese workers,” a current Apple executive said. “The U.S. has stopped producing people with the skills we need.”

What’s more, Apple sources say the company has created plenty of good American jobs inside its retail stores and among entrepreneurs selling iPhone and iPad applications.

After two months of testing iPads, Mr. Saragoza quit. The pay was so low that he was better off, he figured, spending those hours applying for other jobs. On a recent October evening, while Mr. Saragoza sat at his MacBook and submitted another round of résumés online, halfway around the world a woman arrived at her office. The worker, Lina Lin, is a project manager in Shenzhen, China, at PCH International, which contracts with Apple and other electronics companies to coordinate production of accessories, like the cases that protect the iPad’s glass screens. She is not an Apple employee. But Mrs. Lin is integral to Apple’s ability to deliver its products.

Mrs. Lin earns a bit less than what Mr. Saragoza was paid by Apple. She speaks fluent English, learned from watching television and in a Chinese university. She and her husband put a quarter of their salaries in the bank every month. They live in a 1,080-square-foot apartment, which they share with their in-laws and son.

“There are lots of jobs,” Mrs. Lin said. “Especially in Shenzhen.”

Innovation’s Losers

Toward the end of Mr. Obama’s dinner last year with Mr. Jobs and other Silicon Valley executives, as everyone stood to leave, a crowd of photo seekers formed around the president. A slightly smaller scrum gathered around Mr. Jobs. Rumors had spread that his illness had worsened, and some hoped for a photograph with him, perhaps for the last time.

Eventually, the orbits of the men overlapped. “I’m not worried about the country’s long-term future,” Mr. Jobs told Mr. Obama, according to one observer. “This country is insanely great. What I’m worried about is that we don’t talk enough about solutions.”

At dinner, for instance, the executives had suggested that the government should reform visa programs to help companies hire foreign engineers. Some had urged the president to give companies a “tax holiday” so they could bring back overseas profits which, they argued, would be used to create work. Mr. Jobs even suggested it might be possible, someday, to locate some of Apple’s skilled manufacturing in the United States if the government helped train more American engineers.

Economists debate the usefulness of those and other efforts, and note that a struggling economy is sometimes transformed by unexpected developments. The last time analysts wrung their hands about prolonged American unemployment, for instance, in the early 1980s, the Internet hardly existed. Few at the time would have guessed that a degree in graphic design was rapidly becoming a smart bet, while studying telephone repair a dead end.

What remains unknown, however, is whether the United States will be able to leverage tomorrow’s innovations into millions of jobs.

In the last decade, technological leaps in solar and wind energy, semiconductor fabrication and display technologies have created thousands of jobs. But while many of those industries started in America, much of the employment has occurred abroad. Companies have closed major facilities in the United States to reopen in China. By way of explanation, executives say they are competing with Apple for shareholders. If they cannot rival Apple’s growth and profit margins, they won’t survive.

“New middle-class jobs will eventually emerge,” said Lawrence Katz, a Harvard economist. “But will someone in his 40s have the skills for them? Or will he be bypassed for a new graduate and never find his way back into the middle class?”

The pace of innovation, say executives from a variety of industries, has been quickened by businessmen like Mr. Jobs. G.M. went as long as half a decade between major automobile redesigns. Apple, by comparison, has released five iPhones in four years, doubling the devices’ speed and memory while dropping the price that some consumers pay.

Before Mr. Obama and Mr. Jobs said goodbye, the Apple executive pulled an iPhone from his pocket to show off a new application — a driving game — with incredibly detailed graphics. The device reflected the soft glow of the room’s lights. The other executives, whose combined worth exceeded $69 billion, jostled for position to glance over his shoulder. The game, everyone agreed, was wonderful.

There wasn’t even a tiny scratch on the screen.

David Barboza, Peter Lattman and Catherine Rampell contributed reporting.

[Thucydides]

Keystone XL. The weakening of the US economy (especially if self induced) will carry a high price for us:

http://pjmedia.com/blog/pipeline-politics-derails-more-than-jobs/?print=1

Pipeline Politics Derails More than Jobs
Posted By Patrick Richardson On January 28, 2012 @ 12:00 am In economy,Elections 2012,Environment,Money,Politics,US News | 44 Comments

The death of the Keystone XL pipeline was a blow to economic development in every state through which it would have run and has cost by, some estimates, 20,000 jobs.

What many people don’t realize is that portions of the pipeline have been done for years.

The phase 1 section, which runs through Kansas, went online in 2010. According to testimony from Jeff Glendening, vice president of political affairs for the Kansas Chamber of Commerce, before the State Department, it cost nearly a half billion dollars and generated millions in revenue for the state:

The Kansas sections of the Keystone pipeline have been completed, and its construction has been extremely beneficial to the state’s economy in a time when it was sorely needed. During the construction of the first two phases of Keystone in Kansas, it is estimated that TransCanada spent approximately $481 million in our state.  This generated significant job creation and increased sales and use tax receipts by $8 million, all of which greatly benefited Kansans.

None of this mattered to the Obama administration, which killed the pipeline earlier this month.

President Barack Obama had been forced, as part of a deal to extend a payroll tax cut, to decide within 60 days whether or not the pipeline would be in the national interest or not.

According to Rayola Dougher, senior economic affairs advisor of American Petroleum Institute, he failed to do so:

Obama was just being asked to decide if this pipeline was in the national interest or not. He decided to punt on that.

As Redstate.com [1] reported on Jan. 18 when the bill was killed, the State Department actually made the decision so Obama wouldn’t have to:

Today, the Department of State recommended to President Obama that the presidential permit for the proposed Keystone XL Pipeline be denied and, that at this time, the TransCanada Keystone XL Pipeline be determined not to serve the national interest. The President concurred with the Department’s recommendation, which was predicated on the fact that the Department does not have sufficient time to obtain the information necessary to assess whether the project, in its current state, is in the national interest. Since 2008, the Department has been conducting a transparent, thorough, and rigorous review of TransCanada’s permit application for the proposed Keystone XL Pipeline project.

Apparently three years wasn’t long enough to make the decision, but the idea that it was not in the national interest was ludicrous to say the least.

According to Dougher, the pipeline, if it’s ever completed, will reduce American dependence on Mideast oil by about half:

This kind of delay is just unacceptable; it appears to be entirely politically motivated. (It would move 830,000 barrels a day, about half what we get from the Persian Gulf.)

Dougher says that kind of reduction of dependence and increase in supply from stable countries would be beneficial to the entire world economy. Not only that, but about 25 percent of the pipeline was dedicated to moving U.S. oil to market — oil that’s currently stalled because it can’t get to where it needs to go. The Kansas sections of the pipeline are essentially useless because shippers are forced to break bulk and put the oil on tank trucks at the end of the pipeline.

One of the major complaints of environmentalists has been increased carbon emissions because of the pipeline, a complaint Dougher says is unfounded. She says there have been two environmental impact supplementary reviews and 14 federal agencies concluded carbon emissions would be greater if the Canadians build the pipeline to the west and put the oil on tankers to China, which Canada has said it [2]will [2] do [2] if the pipeline is not ultimately approved.

Moreover, from the national interest standpoint, Canada is our single largest trading partner. For every dollar we spend in Canada, they spend about $.90 here. For every dollar we spend in the Mideast, they spend $.33 here. It’s hard to comprehend that doing more business with a country that wants to do business with us is “not in the national interest.”

U.S. Rep. Lynn Jenkins (R-Kansas) agrees that the entire debacle was political from start to finish:

President Obama’s decision to block the Keystone Pipeline is simply another example of this White House putting election politics before economic recovery.  While the President’s friends in the environmental lobby may be cheering, the tens of thousands of hard working Americans who won’t have a job because of this decision are certainly not.

The Keystone Pipeline is an environmentally safe project that has adopted safety standards which go far beyond anything required of any pipeline in existence today. Additionally, the Keystone Pipeline will help lessen our dependence on Middle Eastern oil, while creating 20,000 direct American jobs and over 100,000 indirect American jobs.  The President has had more than three years to make a decision on the pipeline as it has been studied and developed, and blaming his decision on a 60 day deadline put in place after three years of study is nothing but a political farce.  We should move forward on final construction of this immensely important project immediately.  But as the President told his Jobs council … “Obviously this is an election year,” so we clearly shouldn’t expect much from the Obama White House.

Glendening also noted this would make it more difficult to secure future investments:

It dampens future projects when you have a runaway EPA or a State Department who look to the EPA for guidance.

Dougher also noted the oil companies have invested nearly double what the government has in searching for renewable sources of energy, and nearly as much as all the other industries in the U.S. have combined. Exxon Mobil, for instance, has poured more than half a billion dollars into making fuel from algae [3].

In the end Obama has himself in a cleft stick. It’s an election year, and he doesn’t need to be seen as killing jobs. But the last thing he can afford, given his approval [4]numbers [4], is to lose the support of the radical environmental movement which helped get him elected.

Article printed from PJ Media: http://pjmedia.com

URL to article: http://pjmedia.com/blog/pipeline-politics-derails-more-than-jobs/

URLs in this post:

[1] Redstate.com: http://www.redstate.com/laborunionreport/2012/01/18/obama-kills-20000-keystone-xl-jobs-laborers-union-vows-not-to-forget/
[2] it : http://www.businessweek.com/news/2012-01-25/harper-builds-oil-link-with-china-after-obama-keystone-slap-.html
[3] algae: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CD8QFjAD&url=http%3A%2F%2Fwww.scientificamerican.com%2Farticle.cfm%3Fid%3Dbiofuels-algae-exxon-venter&ei=R5MgT8rADdCg8gOUi_HfBw&usg=AFQjCNGVkwStqp5LBO27PivFDdApMuN_Mg
[4] approval : http://www.realclearpolitics.com/epolls/other/president_obama_job_approval-1044.html

[GAP]

Natives have rights, but not veto: experts
 
Most B.C. first nations oppose pipeline but UN declaration, case law unlikely to stop oil's flow
 
By Peter O'Neil, Vancouver Sun January 28, 2012
 Article Link
 
The world received two blunt messages this week on Enbridge Inc.'s proposed $5.5-billion oilsands pipeline from Alberta to B.C.'s northern coast.

Prime Minister Stephen Harper told the World Economic Forum in Davos, Switzerland, that the government will "make it a national priority to ensure we have the capacity to export our energy products beyond the United States, and specifically to Asia."

But that pitch for the pipeline megaproject, which would open up the largely landlocked oilsands resource to non-U.S. buyers, was countered by a report quoting Assembly of First Nations National Chief Shawn Atleo. Atleo said the federal government and Calgarybased Enbridge required the "consent" of B.C. first nations who are mostly opposed to the project.

So do aboriginals have the legal ability to stop a major energy megaproject that the Harper government touts as the key to creation of numerous jobs and billions of dollars in new wealth?

They probably don't, legal experts said this week, though uncertainty remains about how courts might deal with a legal challenge.

Atleo's claim was made at a news conference after this week's Crown-first nations summit in Ottawa.

"The notion of first nations having free, prior and informed consent means exactly that," he said.

Atleo, of B.C.'s Nuuchahnulth First Nation, avoided using the word "veto." Instead, he adopted the "free, prior and informed consent" that is taken directly from the United Nations Declaration on the Rights of Indigenous Peoples.

Another of B.C.'s aboriginal leaders, Jody WilsonRaybould, concurred.

"There are impacts of major development projects that, based upon our rights and our territories, may and potentially will require the consent of first nations," said WilsonRaybould, a lawyer and the AFN's regional chief in B.C.
More on link
 

[GAP]

I had to add this simply because it's such a great political cartoon.......with a focus....

[E.R. Campbell]

Here is an interesting article, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail, that connects two points that get made here, on Army.ca, on a regular basis: don't count America out just yet; and watch for the Chinese to "hit the wall:"

http://www.theglobeandmail.com/report-on-business/commentary/neil-reynolds/americas-down-but-not-out/article2325859/

America’s down, but not out

NEIL REYNOLDS

From Monday's Globe and Mail
Published Monday, Feb. 06, 2012

Bank of Canada Governor Mark Carney thinks the United States is in permanent economic disarray. At best, it will take the country years to recover. At worst, it will never recover. “It’s going to take a number of years before they get back to the U.S. that we used to know,” Mr. Carney told CTV’s Question Period. “In fact, they are not in our opinion ultimately going to get back fully to the U.S. we used to know.”

Well, perhaps. He could be right. (U.S. Federal Reserve chairman Ben Bernanke appears to agree with him.) But he could be wrong – as noted historian and political science scholar Charles Doran, for one, would readily affirm. In a January musing on Canadian-U.S. relations, he said: “Misjudging either the vitality of the American political system, or the capacity of the U.S. economy to recover, is a fool’s game.”

Prof. Doran, an American, is a professor of international relations and director of Canadian studies at the Johns Hopkins School of Advanced International Studies in Washington. He developed the “power cycle” theory of the rise and fall of great states – the latter of which, he says, almost always ends in great wars. On this basis, we must hope Mr. Carney is wrong. A never-ending American recession would surely imply a cataclysmic “power cycle” event of one kind or another.

Prof. Doran understands why people think the U.S. is in decline. “Oh America!” he writes. “Still buried in a painful recovery from recession, while coping with record 9 per cent unemployment levels, the United States appears unable to reach conclusive decisions about a strategic path for recovery. At least to outsiders, the two-party political system seems fatefully polarized. … The United States seems less dominant on the world stage.”

But it would be a serious mistake to underestimate America, he says. “Still by far the largest and richest economy in the world, possessing the most flexible and massive military capability, which remains the backstop of global order, the United States enjoys a diverse and balanced economy marked by a capacity for innovation and entrepreneurship.” The invention of shale gas “fracking,” he says, is only the most recent example. The coming U.S. recovery will be based on a stronger foundation than ever: the highest labour productivity in the world.

Further, the U.S. political process is not as dizzy as it appears, Prof. Doran says. “Politics in the time of James Madison was no less turbulent than it is today. … Despite the noise and contention, the bills do get paid.” Watch for a return to sanity after the November election, he says. Whoever wins, the Keystone XL oil pipeline will be approved – and everyone knows it. “Washington has not given up on the 21st century – far from it.”

Mr. Carney’s pessimistic prediction implies turbulence for Canada – whether the U.S. recovery is merely prolonged or whether it’s permanent. In an average recovery, he notes, American GDP would already be 2.5 per cent higher and Canadian exports would be 6.5 per cent greater. This weak U.S. recovery means that Canadian businesses have lost $30-billion in export sales – so far.

Extrapolate this slow recovery across a decade, Mr. Carney says, and the cumulative loss of income could equal $30,000 for every man, woman and child in Canada. Canadians would be well advised to pray for a speedier U.S. economic recovery.

Not to despair. Economists who predict the future are frequently wrong. Historians who predict the future are frequently wrong, too. In neither profession does prognostication imply predestination. But chances are that Prof. Doran is more apt to be right on American manifest destiny than Mr. Carney. Prof. Doran’s expectations are shaped more by the character of the country than by thousands of statistical data points.

For his part, Prof. Doran anticipates that history’s next “power cycle” peak will coincide with wrenching economic turbulence in China – the country Mr. Carney thinks essential to safeguard Canada from U.S. decline. Prof. Doran sees an abrupt end to China’s “accelerating rise up its power cycle.” When China’s economy hits the wall, he says, the country will enter a period of social collapse and national paranoia that will require major U.S. help – “beyond trade and commerce” – to survive. He could be wrong. But he could be right.

I suspect Mark Carney is right: we will never, again, see "the U.S. we used to know.” I am pretty certain that Doran is also right: China must "hit a wall," if not, necessarily, "the" wall. Neither prognostication is "good" for Canada but we need - the whole world needs - to hope, mostly, that they are not coincidental.

[Thucydides]

The dead hand of government becomes lethal. Since virtually all drug research and much non generic drug manufacturing is done in the United States, it should be worrying for us as well; how will this affect our drug supply and health care system?

http://togetrichisglorious.blogspot.com/2012/02/drug-shortages.html

Drug shortages

Today's New York Times has an article noting the shortage of methotrexate in the US, a drug used to treat a form of cancer known as acute lymphoblastic leukemia. The shortage is so severe that the newspaper says that "hospitals across the country may exhaust their stores within the next two weeks, leaving hundreds and perhaps thousands of children at risk of dying from a largely curable disease" according to federal officials and cancer doctors.

Drug shortages? In the United States? What on earth is going on? Here is the explanation offered up:

Ben Venue Laboratories was one of the nation’s largest suppliers of injectable preservative-free methotrexate, but the company voluntarily suspended operations at its plant in Bedford, Ohio, in November because of “significant manufacturing and quality concerns,” the company announced.
Since then, supplies of methotrexate have gradually dwindled to the point where oncologists now say they are fearful that shortfalls may occur at many hospitals within two weeks.

...There are four other manufacturers of methotrexate in the United States, and they are trying to increase production, [said Ms. Valerie Jensen, associate director of the Food and Drug Administration’s drug shortages program]. The F.D.A. is also seeking a foreign supplier to provide emergency imports until the approved domestic ones can meet demand, she said.
“We’re working on many fronts, and will keep this a priority,” Ms. Jensen said.
Likely reactions from the average reader:

The private sector is either criminally incompetent or evil. How can five manufacturers fail to produce a drug when there are literally children's lives on the line?

Thank goodness for the FDA, doing what it can to alleviate the shortage by reaching out to foreign producers.

But nothing about this makes any sense. Methotrexate is not a new drug, first coming into use during the 1950s. Given how long it has been around and that it no longer faces patent restrictions, production should be straightforward. Why has it suddenly become more difficult? Even more puzzling is the fact that the FDA is apparently trying to convince foreign producers to sell their product here in the US. Think about that for a second: how often does the government have to induce foreigners to export their product to the US to make money?

But here's the kicker:

So far this year, at least 180 drugs that are crucial for treating childhood leukemia, breast and colon cancer, infections and other diseases have been declared in short supply — a record number. Prices for some have risen as much as eightyfold. President Obama issued an executive order in October to help ease the problems.

Again, the reader is left with the impression that drug manufacturers are hugely incompetent, failing to produce the needed amount of drugs even in the face of rising prices. Thank goodness President Obama is on the case, issuing executive orders!

But the existence of any kind of shortage in a market-driven economy should make one's nose twinkle. One drug shortage might be some kind of freakish anomaly, but 180 crucial drug shortages? The usual suspect in these kind of situations is the dead hand of government, and according to bioethicist Ezekiel Emanuel, writing in last August's New York Times, that's exactly the case:

Only about 10 percent of the shortages can be attributed to a lack of raw materials and essential ingredients to manufacture the drugs. Most shortages appear instead to be the consequence of corporate decisions to cease production, or interruptions in production caused by money or quality problems, which manufacturers do not appear to be in a rush to fix.

If the laws of supply and demand were working properly, a drug shortage would cause a price rise that would induce other manufacturers to fill the gap. But such laws do not really apply to cancer drugs.

The underlying reason for this is that cancer patients do not buy chemotherapy drugs from their local pharmacies the way they buy asthma inhalers or insulin. Instead, it is their oncologists who buy the drugs, administer them and then bill Medicare and insurance companies for the costs.
Historically, this “buy and bill” system was quite lucrative; drug companies charged Medicare and insurance companies inflated, essentially made-up “average wholesale prices.” The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed by President George W. Bush, put an end to this arrangement. It required Medicare to pay the physicians who prescribed the drugs based on a drug’s actual average selling price, plus 6 percent for handling. And indirectly — because of the time it takes drug companies to compile actual sales data and the government to revise the average selling price — it restricted the price from increasing by more than 6 percent every six months.

The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug’s price should be able to increase again to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug.
The result is clear: in 2004 there were 58 new drug shortages, but by 2010 the number had steadily increased to 211. (These numbers include noncancer drugs as well.) 

...You don’t have to be a cynical capitalist to see that the long-term solution is to make the production of generic cancer drugs more profitable. Most of Europe, where brand-name drugs are cheaper than in the United States, while generics are slightly more expensive, has no shortage of these cancer drugs. 

...A more radical approach would be to take Medicare out of the generic cancer drug business entirely. Once a drug becomes generic, Medicare should stop paying, and it should be covered by a private pharmacy plan. That way prices can better reflect the market, and market incentives can work to prevent shortages.

In other words, government has distorted the market and removed incentives for the production of life-saving drugs. And the New York Times' readership, unless they somehow recall Emanuel's opinion piece, are left none the wiser.

Update: Well, it's an Instalanche -- thanks Professor Reynolds! Second time that's happened around these parts.

[E.R. Campbell]

An interesting development, to say the least, is reported in this article which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/economy/iceland-eyes-loonie-canada-ready-to-talk/article2356634/

Iceland eyes loonie, Canada ready to talk

BARRIE MCKENNA

OTTAWA— Globe and Mail Update
Published Friday, Mar. 02, 2012

For 150 years, no country has expressed interest in adopting the Canadian dollar -- the poor cousin to the coveted greenback.

But now tiny Iceland, still reeling from the aftershocks of the devastating collapse of its banks in 2008, is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls.


And for the first time, the Canadian government says it’s open to discussing the idea.

In brief remarks to be delivered Saturday in Reykjavik, Canadian ambassador Alan Bones will tell Icelanders that if they truly want the Canadian dollar, Canada is ready to talk.

But he will warn Icelanders that unilaterally adopting the loonie comes with significant risk, including complete loss of control over their monetary policy because the Bank of Canada makes decisions only for Canadians and the Canadian economy. He’ll caution, for example, that giving up the krona in favour of the Canadian dollar (CAD/USD-I1.01-0.003-0.34%) will leave the country with few levers, short of layoffs, to counter financial shocks and fluctuations in the loonie.

A group of prominent Icelandic business leaders approached Mr. Bones last year about the idea. And his speech Saturday, to a meeting of the opposition Progressive Party, marks Canada’s first public response.

The Bank of Canada, which referred all calls to the Finance department remains tight-lipped.

“We don’t speculate on another country’s currency or domestic issues,” Finance department spokesman Jack Aubry said.

There’s a compelling economic case why Iceland would want to adopt the Canadian dollar. It offers the tantalizing prospect of a stable, liquid currency that roughly tracks global commodity prices, nicely matching Iceland’s own economy, which is dependent on fish and aluminum exports.

There’s also a more sentimental reason.

“The average person looks at it this way: Canada is a younger version of the U.S. Canada has more natural resources than the U.S., it’s less developed, has more land, lots of water,” explained Heidar Gudjonsson, an economist and chairman of the Research Center for Social and Economic Studies, Iceland’s largest think tank.

“And Canada thinks about the Arctic.”

In a recent Gallup poll, seven out of 10 Icelanders said they would happily dump their volatile and fragile krona for another currency. And their favoured alternative is the Canadian dollar, easily outscoring the U.S. dollar, the euro and the Norwegian krona.

Iceland is also in a bind. The country imposed strict currency controls after its spectacular banking collapse in 2008. Foreign-exchange transactions are capped 350,000 kronas (about $3,000). A major downside of those controls is that foreign investors can’t repatriate their profits, making Iceland an unattractive place to do business.

Those capital controls are slated to come off next year. And many experts fear a return to the wild swings of the past -- in inflation, lending rates and the currency itself. Iceland is the smallest country in the world still clinging to its own currency and monetary policy. The krona soared nearly 90 per cent between 2001 and 2007, only to crash 92 per cent after the financial crisis in 2008.

The official government plan is to go to the euro. Iceland has applied to join the European Union and eventually the euro zone. But that’s not looking like a very attractive option these days. And formal entry could take a decade, experts said.

The other options are to peg the krona to another currency, such as the yen, greenback or euro.

And finally, there’s the route of unilaterally adopting another country’s money.

Icelandic officials have apparently reached out to the Bank of Canada and the Finance department about the idea.

It’s hard to imagine Canada would object. Iceland wouldn’t have a say in Canadian monetary policy and the dollars coursing through its small economy ($12-billion in GDP versus Canada’s $1.8-trillion) would be a blip in the Bank of Canada’s management of the money supply.

Unilaterally taking on another country’s currency is not unheard of. El Salvador took on the U.S. dollar in 2001. Ecuador did the same in 2000. And Kosovo adopted the euro in 2002.

There are some good reasons Canada might want to see Iceland embrace the loonie.

“If you join a new currency area it means you are completely open to businesses from that area,” Mr. Gudjonsson pointed out.

Adoption of the Canadian dollar could open opportunities for Canadian shipping companies, fish packers, banks, insurers and eventually oil distributors and service companies as the country taps undeveloped resources.

“Trade between the countries would obviously multiply,” Mr. Gudjonsson argued.

But the greatest benefit for Canada could be enhanced geopolitical influence in a region that’s poised to grow in economic clout.

The Arctic is the last frontier for the mining and oil and gas industries, sectors where Canada is already a global player. It holds an estimated 22 per cent of the world’s remaining conventional oil and gas, and vast untapped mineral potential.

The transition wouldn’t be easy. The Icelandic government, through its central bank, would authorize commercial banks to exchange kronas for loonies. At today’s exchange rate, it would take roughly 100 kronas to buy a dollar. Iceland would need very strong reserves to conduct the operation, which might require an extended period when both currencies would be in circulation as kronas are soaked up.

The implications of this are far more than just financial and they would invite, maybe demand, closer social and even political integration.

[Kirkhill]

Interesting turn of events indeed.

But Icelanders have been associated with Canada for a while.

http://www.icelandicfestival.com/

The include one of my wife's bridesmaids.

[Retired AF Guy]

Iceland eyes loonie, Canada ready to talk

Next step ... a couple of those islands in the Caribbean that wanted to join Canada.

[E.R. Campbell]

It will be interesting to see how this impacts Iceland's application to join the EU.

[Kernewek]

If we can present them with a better offer than the European Union - which should not be altogether too hard but for Quebec, could they not cancel their application to our, and their favour? After all, our prospects are better, and I do not think I am exaggerating too greatly to say, simply as a matter of comparison, that it would probably be less demanding of them to become a Canadian province (which I am not suggesting, but merely proposing for the sake of comparison) then obeying the regulations of the Eurozone.

[E.R. Campbell]

I'm not sure where it may lead, but Norway and Switzerland are also outside the EU and, with Iceland and Liechtenstein, for the EFTA.

[E.R. Campbell]

Double post, sorry.