Friday News Roundup —June 18, 2021
Happy Juneteenth National Independence Day; Limits & Promise of US-EU Geotech Cooperation; Biden, Putin & Strategic Stability; FOMC Looks at the Economy Ahead
Happy Juneteenth (Observed) from Washington, DC. When we set out to write this week’s Roundup, we assumed that we would be delivering it to your inboxes on a normal working Friday, but that does not seem like how that is going to work out. Juneteenth, our newest Federal holiday, is the anniversary of the publication of the order from Major General Gordon Granger declaring all enslaved persons in Texas freed and granted “an absolute equality of personal rights and rights of property between former masters and slaves.” The bill recognizing Juneteenth as a holiday moved with incredible speed through Congress, having been discharged from the Senate Judiciary Committee on Tuesday, on the president’s desk on Thursday, and with the federal government closed on Friday. Nothing more powerful than an idea whose time has come indeed.
Elsewhere in Washington, the House of Representatives passed a bill repealing the 2002 Authorization for the Use of Military Force (AUMF) to protect the United States from “the continuing threat posed by Iraq.” Senate Majority Leader Chuck Schumer (D-NY) has signalled his support for the repeal, but it will likely be a difficult fight in the upper chamber. In 2018, Dan and Michael wrote in Defense One that Congress needed to get back in the game on war powers and that the 2002 AUMF was a good place to start. Hopefully this will build momentum for a holistic oversight regime.
This week at CSPC, Joshua called for the United States to identify what it wants the U.S.-Russia relationship to accomplish in The Hill and negotiate accordingly. Russia hand Mark Galeotti further broke down this framework in his podcast. In Defense One, Glenn Nye and James Kitfield argued that even small confidence building measures could make a huge difference for global security. Dan and James also wrote in The Hill about the U.S. Innovation and Competition act and how the federal government is getting serious about the Geotech competition. In Diplomatic Courier, Joshua reviewed Clarity and Crisis: Leadership Lessons from the CIA by Marc Polymeropoulos.
Next Wednesday at 8am, we are also hosting a discussion with FCC Commissioner Brendan Carr and House Energy and Commerce Committee Chief Counsel Kate O’Connor on the 5G Rollout and Lessons for 6G. We hope you can join us.
Finally, we are wishing a complete and very speedy recovery to Former Governor of Pennsylvania, Secretary of Homeland Security, and CSPC Trustee Tom Ridge, who suffered a stroke earlier this week.
Progress Ahead & Questions Remain on US-EU Cooperation
Dan Mahaffee
While the Biden administration had made early progress with the Indo-Pacific allies and partners of the Quad: Australia, India, and Japan, questions had remained about how transatlantic Geotech cooperation might take shape. In our Geotech analyses over the past two years, we have repeatedly noted the dynamic where shared values and principles compete with commercial interest and realpolitik in Brussels and in individual European capitals. They do not always see eye-to-eye with Washington on the threat, nor do many of them share the same geostrategic interests for the Indo-Pacific region. That said, President Biden’s trip to the G7, NATO, and U.S.-EU summits did see progress on establishing stronger transatlantic Geotech dialogue. Still, we must be realistic about the prospects for cooperation, as well as how Moscow and Beijing will continue to seek to divide the transatlantic relationships.
At the G7 summit in Cornwall, the communiqué speaks of continued efforts building on the April meeting of Digital and Technology ministers to move ahead areas such as data free flow with trust, supply chain security, and other key Geotech areas. The NATO summit communiqué redoubles the work of the 2019 Emerging and Disruptive Technologies roadmap, as well as emphasizing deeper NATO-EU ties on this topic. Finally, at the US-E.U. summit, the US-E.U. Trade and Technology Council was announced to bridge the technological divides between Washington and Brussels on matters of emerging and critical technologies and digital trade, while also launching a Joint Technology Competition Policy Dialogue to address tech competition.
These are all positive steps forward for furthering the transatlantic Geotech dialogue, while emphasizing the shared values and interests of the transatlantic community. Emphasizing the security of supply chains, telecom and ICT security, cooperation on emerging technologies, green tech, and countering misuse of technology are all certainly shared interests. But, while dialogue on these topics will help to bring Washington and Brussels greater alignment on these interests, there are still significant hurdles towards full-on tech cooperation.
While some have looked to the Boeing-Airbus settlement as a suggestion that the European Union and United States might be taking a more cooperative approach towards dealing with China, it is worth remembering that the dispute has been 17 years in the making, and even this agreement is only a 5-year truce. Furthermore, while this is a recognition of the challenge from Chinese aircraft manufacturers, it is also an acknowledgement to protect a crown jewel of European industrial policy: Airbus.
For some in Europe, especially its Benelux-Franco-German core, there is still much chagrin about the power of American tech companies. At the same time, there are American policy makers who note that Europe’s approach to tech is Skype, Spotify, and leading-edge companies in some parts of Europe, with others choosing the approach of banning work emails after hours or devoting extensive engineering prowess to defeat emissions testing. Illiberal regimes, especially Orban’s growing ties with Beijing, serve as platforms for authoritarian influence in Europe, as well as votes to block EU and NATO consensus. So too, will there always be the economic pressures that will be used to drive a wedge in the transatlantic relationship, from trade with China to the lucre of Russian oligarchs.
We also cannot forget that there are matters closer to home that we must address to be a partner with Europe. While Congress has failed to come to agreement on national data management proposals, states have moved towards a patchwork, and concepts increasingly align with EU models (or EU via Sacramento models). As we have repeatedly said, a U.S. standard is important to have a foundation for developing cooperation with other countries in terms of digital trade and data management. Finally, we have to shake broader perceptions in Europe that the “broken” U.S. political system will be overtaken by China.
The establishment of these dialogues and the agreement to pursue and protect our shared values is laudable, but we should be realistic about dealing with Europe and the opportunities and limitations of the transatlantic partnerships in addressing the influence and malign interests of Beijing and Moscow.
Biden & Putin Meet in Geneva
Joshua C. Huminski
On Wednesday, President Joseph Biden met Russian president, Vladimir Putin, in Geneva for their first bilateral summit. The sit-down took place at a time when U.S.-Russian relations are at one of their lowest points since the end of the Cold War. While not specific agreements were on the agenda, the meeting was the first opportunity for Biden and Putin to communicate directly and begin steps towards tamping down tensions between Washington and Moscow. In recent months, the United States applied wide-ranging sanctions on Russia in response to the SolarWinds hack and election interference, and new evidence has emerged about Moscow’s aggressive intelligence operations across the European continent.
Against limited expectations, the summit was a success. The discourse was civil and straight-forward. Unlike previous interactions, there were not attempts at seeing into the soul of the Russian president, resetting relations, or public fawning. Rather, the discussions were based on pragmatic assessments of national interest and a straight-forward articulation of critical issues and points of contention. “This is not about trust” Biden said. “This is about self-interest and verification of self-interest.”
Here, both countries agreed to re-install ambassadors in Moscow and Washington, and agreed to subsequent discussions on cybersecurity. President Biden warned that the United States has significant cyber capabilities, and wondered aloud during his own, separate, press conference how Moscow would appreciate one of its pipelines being hacked like the Colonial Pipeline last month. Biden also warned of “devastating” consequences in the event Russian dissident Alexei Navalny dies in prison. Navalny, poisoned and later imprisoned, was suffering from deteriorating health and subsequently went on a hunger strike to protest his conditions.
Putin, for his part, suggested that Canada was one of the most prolific sources of cyber-attacks, denied any Russian responsibility, implied that the United States’ human rights record was worse than Russia’s — referencing the 6 January assault on the Hill — and suggested the Biden administration was responsible for a military buildup in Ukraine. Biden notably did not rise to the bait, which is as much Putin spreading mis- and dis-information, as it is an attempt to goad the president.
Interestingly, Putin was actually complimentary of Biden, saying “I want to say that the image of President Biden that our and even the American press paints has nothing to do with reality.” He added, “He’s a professional, and you have to be very careful in working with him to make sure you don’t miss anything. He doesn’t miss anything, I can assure you.” This is in contrast with Russian state media which often portrayed Biden as out of touch or bumbling.
The key question of whether deterrence was reestablished with or recommunicated to Putin on cybersecurity very much remains unanswered. American and Russian officials are due to restart bilateral discussions on red-lines and the consequences of violating those lines — 16 areas of critical national infrastructure, in particular — but how violations will be identified and what enforcement looks like very much remains unclear.
Biden and Washington very much want to establish strategic stability with Moscow as Russia simply is not a priority for the White House — a White House that wants to focus on a domestic agenda of Covid recovery, economic reinvestment, and social reconstruction, and, on the international front, a pivot to Asia and the Indo-Pacific. Putin and the Kremlin could certainly upset that effort, so Biden needs a fairly stable relationship or at least understanding with Russia.
Biden’s attempt to marshal the G7 and NATO on China prior to meeting with Putin in Geneva is illustrative of this effort. Beijing matters more at the moment and presents a far more concerning strategic competitor than Moscow at the moment. To be sure, Moscow could upset this effort and cause problems in Europe (as well as Asia), but Biden would prefer Russia to be considerably further down the list of priorities.
What comes next will be instructive. Bilateral meetings between military and security officials will start and seek to address cybersecurity issues. Will anything fundamentally change in the near term? This is unlikely. Washington has neither the tools — incentives or punishments — to really affect Moscow’s behavior, and Moscow has little interest to really change its strategy. Despite its negative actions, Putin still secured a summit with Biden, which afforded him an opportunity to be a statesman and prove those who suggested his adventurism would have adverse reactions wrong.
The Coming Post-Pandemic Economy: An Exploration in Three Parts
Michael Stecher
The Federal Reserve system has a “dual mandate” for macroeconomic policy: they are charged with using monetary policy to achieve the maximum sustainable level of employment while preserving price stability. Those two ideas can exist in tension; if unemployment is too low prices will tend to rise. The Fed thinks that the healthy long-term inflation rate is around 2% per annum and that the natural rate of unemployment is somewhere around 4%. When the FOMC met this week, the markets were watching carefully because unemployment is still too high, but inflation has been notably higher than the Fed has wanted.
On Wednesday, Federal Reserve Chairman Jerome Powell explained how the Fed sees this problem and how they plan to respond going forward. The Fed’s Summary of Economic Projections, which is a collection of the expectations of the members of the committee, shows that unemployment will trend towards 4% through mid-2023, ending that year slightly below the target. On inflation, Chairman Powell was very clear that he thinks that most of the inflation we are currently experiencing is driven by pandemic-related shocks that are unlikely to continue. He specifically pointed to prices of lumber, which shot up in May and have since started falling back towards the longer-term average. He also pointed to the price of used cars — he noted that demand for used cars accounted for more than ⅓ of total inflation — and suggested that the market for cars will also even out at some point. The FOMC decided not to raise interest rates or stop its asset purchases, which would be the normal responses to higher inflation, but the Committee now expects two rate hikes in 2023. That would still keep the Fed’s interest rate below its long term target, so it could still be many years before interest rates return to “normal.”
Looking at the economy at this level, however, makes it too abstract. One of the most tangible effects of the pandemic was the shocking mismatch between housing supply and demand. Unlike lumber or used cars, however, the trend for this mismatch is also not good. According to Moody’s Analytics, the vacancy rate for homes for sale and rent is the lowest it has been in nearly half a century. Each year, 100,000 fewer homes come on the market than are needed to meet demand. This shortfall means that demand-side efforts to make housing more affordable end up passing directly through to landlords and existing homeowners — it does not make housing more affordable, it makes it easier to pay for expensive housing.
A major problem is that control over the permitting for new housing tends to be hyper-local. In the aggregate, loosening regulations that constrain housing construction would be a huge net positive; one estimate from Edward Glaeser from Harvard University and Joseph Gyourko from the University of Pennsylvania suggest that restrictive land use reduces GDP by at least 2%. The problem is that the costs are borne by neighbors who complain that new development lowers the value of their homes and increases traffic and noise in their communities. They are not wrong, but the system is designed such that their views are the only ones heard. In my own neighborhood, a new neighborhood advocacy group has been waging a years-long battle against a new 5-story apartment building. Notwithstanding that they keep losing in court, they keep raising money for the next round.
Unsurprisingly, if it is going to take an undetermined number of years and lawyers to build new housing, developers will choose to focus on the segment of the market where the margins are highest — almost always luxury housing — and where the neighbors have the least wherewithal to fight back — almost always poor and marginalized communities. Meanwhile, the high and rising cost of living keeps people from moving to places where wages would otherwise be high. According to a blog post by Deputy Treasury Secretary Wally Adeyemo, the Biden administration is focused on creating incentives to remove restrictions “like minimum lot sizes, mandatory parking requirements, and unnecessary restrictions on multifamily housing.” This would be a great outcome, but it will require legislation and the state and local level to actually succeed in breaking the power monopoly currently held by legacy homeowners.
This will be particularly important if you believe that the changes in white collar work that were implemented during the pandemic will continue in the post-pandemic world. If we are all likely to be doing more of our work from home in the future, it will require more allocated home office space as well. American houses are already among the largest per household occupant of any country on earth, and the work-from-home trend is likely to accelerate that too.
Another trend that has its origins long before the pandemic is the changes in wages caused by automation. According to one recent estimate, the most important driver of changes in wage structure since 1980 has been the susceptibility of the tasks associated with the job to automation. This effect, the paper argues, vastly outshines the effects of immigration or offshoring. The pre-pandemic thinking about automation was that it was bad for jobs that require repetitive or mechanical work — exactly the sorts of things that machines are good at. Jobs in areas that deal with complex ideas or require personal interactions.
The pandemic has revealed that there are probably places where automation could be coming in previously labor-intensive areas. Many restaurants are adopting a system where diners order on their phones, even in the dining room. This allows fewer servers to cover the same number of tables. The same idea probably holds for a variety of retail or service jobs — I guess I have to hope that writing weekly columns about politics and economics remains too bespoke for the computers for a few more years. This, however, is not the column where we launch into a full-throated defense of fully automated luxury communism.
Now that we are [confidently but cautiously] entering the post-pandemic economy, it is easy to say that the supply and demand shocks that are currently causing shortages will work themselves out over the coming months. Looking ahead 18 months, as the FOMC did earlier this week, presents a somewhat rosy picture of an economy where a rising tide is buoying all boats. Within that, however, are a series of disruptions to the housing and labor sectors that have persisted for decades before the pandemic, but which are likely to be exacerbated by the changes to how we live and work driven by the new economy. These need to be top priorities for policymakers in the coming years;
News You Might Have Missed
It’s Pay Day for College Athletes Right in Time for Sport to be Back
Annmarie Youtt
College sports are one of the most lucrative businesses in America, just not for the players. In a normal sports year, the NCAA grosses close to $1 billion from a wide range of competitions that are broadcasted year round. The only “compensation” allowed for athletes, however, comes in the form of scholarships; they are forbidden from profiting from their names or likenesses. This week, Texas Governor Greg Abbot signed a bill that will allow athletes, most likely football players, to profit off of their “likeness.” Texas is not the first to pass a bill like this, as Governor Greg Newsom (CA) passed a bill similar to this one in 2019. Texas is an influential state for political influence in the surrounding region, but it also wants great Texas sports, specifically a winning football team. Texas football is ingrained deep into Texan culture. Creating a bill that allows players to be paid,incentivizes the best players to stay in Texas or to come to the state. Many people feel that college athletes should play simply for the love of the game, but this bill introduces a shift to that mentality. It produces the potential of a championship football team in the Lone Star State. Texas is ready to get ahead of a potential trend in college sports. They want to produce the best team they can get, and are ready to monetize the system to achieve just that. Texas is ready for football to be back and a championship team to prevail. Governor Abbot is on the forefront of creating incentives for young athletes to play for the great state of Texas. This tactic could regain the state the NCAA Division I championship title.
In Raid, Hong Kong Security Forces Crackdown on Independent Apple Daily News Paper
In a first under the new national security laws in Hong Kong, security forces arrested five executives of the Apple Daily newspaper: the editor-in-chief, publisher, and three others. The Apple Daily, founded and owned by jailed tycoon Jimmy Lai, is accused of violations of the national security law, including collaboration with foreign actors. The newspaper executives were arrested under similar charges, as they were accused of publishing editorials by Lai and others. Hong Kong officials stated that this was not a crackdown on the broader media, only those that “used ‘news coverage as a tool’ to harm national security.”
The views of authors are their own, and not that of CSPC