AMID all the fevered talk and high-tech details surrounding the “cyber cold war” that China seems to be waging—and perhaps winning—against America and many other nations, there is something refreshingly nostalgic about new accusations that China is, in the high style of the actual cold war, jamming the BBC’s shortwave radio broadcasts.

"The BBC has received reports that World Service English shortwave frequencies are being jammed in China," the British broadcaster said in a statement on February 25th.

"Though it is not possible at this stage to attribute the source of the jamming definitively, the extensive and co-ordinated efforts are indicative of a well-resourced country such as China," the BBC statement added. China has yet to respond officially to the accusation.

The BBC’s language echoed the conclusions of a report issued last week by an American information-security firm, Mandiant, which detailed a vast and sophisticated computer hacking operation based in a nondescript building in Shanghai.

Mandiant said it could not definitively prove that the cyber-hacking was sponsored by China’s military and government, but it dismissed any other explanation as extremely unlikely. There can be little doubt that America, like many other countries, conducts its fair share of illicit computer snooping around the world. Indeed, would it come as a surprise to anyone if we were to learn that, somewhere in the neighbourhood of Mandiant’s headquarters, in Alexandria, Virginia, an equally nondescript building housed an equally sophisticated and well-funded team of government-sponsored hackers?

The potential impact of China’s alleged computer hacking far outweighs that of any news about radio jamming. In his recent State of the Union address, Barack Obama refrained from mentioning China specifically, but warned that “foreign countries and companies swipe our corporate secrets” and that “our enemies are also seeking the ability to sabotage our power grid, our financial institutions and our air-traffic control systems.”

That would be far more ominous than any attempt to block listeners in China from listening to BBC news reports read aloud in English. Anyone in China who is able to understand such a broadcast in the first place is also likely able to read all kinds of news and information in many other ways. It has been years since I fired up my own shortwave radio in Beijing, or found myself within earshot of anyone else firing up his.

According to computer experts, the fact that Mandiant and other investigators have been able to learn so much about the hacking operation based in Shanghai reveals a certain degree of sloppiness or ineptitude on the part of the Chinese hackers. But the sheer scope of that allegedly Chinese operation bespeaks an impressive level of ambition.

This week’s news about shortwave jamming is only a fresh reminder that—in its cyber-snooping as in other endeavours—China tends to keep an eye on the lower rungs of the technological ladder, even as it climbs ever higher.

(Picture credit: Wikimedia Commons)

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Business Insider johalputt The Economist

05:20

Europe looks set to limit bank bonuses

LUXURY-CAR dealers in London and posh estate agents in Paris must be spluttering. It looks increasingly likely that demands by the European Parliament for a limit on bankers' bonuses will become law. The parliament wants bonuses to be no higher than their salaries (or double their salaries, if three-quarters of a bank's shareholders agree).

That limit may yet be watered down in negotiations between the parliament and the EU Council, which consists of European governments. But the principle of a specified cap seems to have been accepted, despite opposition from Britain. Other European governments are keener to ensure new capital rules get passed--the bonus proposals have been appended to the directive implementing the Basel 3 rules--than to stand up in public to defend bankers' pay. "The British government understands they are walking a fine line between appeasing the masses and chasing business out of town," says a senior investment-bank executive. "Unfortunately they have to toe the line" if the statute passes.

The logic of capping bonuses looks appealing. Lavish payouts may create an asymmetric bet for bankers. If they take a big gamble that pays off, they get a huge bonus. If it goes horribly wrong, they face only limited downside. Sony Kapoor, a former banker who now runs Re-Define, a think-tank, says the cap will "help tackle the culture of excessive risk-taking and the bending of rules that has now become endemic to banking".

In fact, there is surprisingly little evidence to show that big cash bonuses lead to increased risk-taking or that capping the ratio of bonus to basic pay would reduce it. Rather, a cap on variable pay risks driving up fixed salaries as European banks seek to compete for talent with foreign and non-bank rivals.

A higher fixed-cost base would weaken the link between pay and performance. It would also limit banks' ability to cut costs in a downturn. Pay has come down sharply since the financial crisis, partly because higher capital ratios have reduced the profitability of banks. CEBR, a consultancy, reckons that the total bonus pool paid out to London-based bankers in the current pay round will fall to about £1.6 billion ($2.5 billion), down from a peak of £11.6 billion in 2008. That sort of flexibility is useful if you want banks to preserve capital in a crisis.

Bankers also argue that a lot has been done to pay structures to align the interests of employees and shareholders. The deferred portion of bonuses is much bigger than it was; this money can be "clawed back" if the bank subsequently does badly. Some firms are rewarding employees with subordinated debt in their own institutions, meaning they will take a hit if the bank goes bust. Unsurprisingly, the politicians in Brussels are paying little attention.

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Business Insider johalputt The Economist

04:51

In his State of the Union speech Barack Obama warmed Democratic hearts by calling for an increase in the federal minimum wage to $9 an hour, and indexation of the wage to inflation.

Predictably, an op-ed battle immediately sprang up, with half of the commentariat arguing that a higher minimum wage would simply hurt low-skill workers seeking a job (and some adding that wage subsidies would be a far better option) and the other half arguing that higher wages at the bottom of the income spectrum are long overdue.

Ezra Klein falls into the latter camp, saying that the chart below should tell us everything we need to know about the case for a minimum wage:

Mr Klein argues that a minimum wage is like a proxy labour union; sure it may have some employment effects, but it effectively raises the wage bargaining power of those workers who do manage to find employment. In the absence of such bargaining power, we can't expect any meaningful increase in wages at the low end of the income spectrum.

What should low-skill workers themselves want? The empirics of the minimum wage debate are complex, but it isn't impossible to draw some conclusions. A recent Free exchange column attempted to do just that:

America’s academics still do not agree on the employment effects. But both sides have honed their methods and, in some ways, the gap between them has shrunk. Messrs Card and Krueger moved on to other work, but Arindrajit Dube at the University of Massachusetts-Amherst and Michael Reich of the University of California at Berkeley have generalised the case-study approach, comparing restaurant employment across all contiguous counties with different minimum-wage levels between 1990 and 2006.

They found no adverse effects on employment from a higher minimum wage. They also argue that if research showed such effects, these mostly reflected other differences between American states and had nothing to do with the minimum wage.

Messrs Neumark and Wascher still demur. They have published stacks of studies (and a book) purporting to show that minimum wages hit jobs. In a forthcoming paper they defend their methods and argue that the evidence still favours their view. But even they are no longer blanket opponents.

In a 2011 paper they pointed out that a higher minimum wage along with the Earned Income Tax Credit (which tops up income for poor workers in America) boosted both employment and earnings for single women with children (though it cost less-skilled, minority men jobs).

Britain’s experience offers another set of insights. The country’s national minimum wage was introduced at 46% of the median wage, slightly higher than America’s. A lower floor applied to young people.

Both are adjusted annually on the advice of the Low Pay Commission. Before the law took effect, worries about potential damage to employment were widespread. Yet today the consensus is that Britain’s minimum wage has done little or no harm.

The most striking impact of Britain’s minimum wage has been on the spread of wages. Not only has it pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale—and thus reduced wage inequality. Wage gaps in the bottom half of Britain’s pay scale have shrunk sharply since the late 1990s.

A new study by a trio of British labour-market economists (including one at the Low Pay Commission) attributes much of that contraction to the minimum wage. Wage inequality fell more for women (a higher proportion of whom are on the minimum wage) than for men and the effect was most pronounced in low-wage parts of Britain.

In sum, the employment effects we'd expect if labour-markets were perfectly competitive don't emerge. That's because there is some monopsony power to labour markets, associated with frictions like the cost of searching for new jobs. Those frictions give employers a bargaining-power advantage that a minimum wage can in some cases counteract.

Further, minimum wage increases may give both workers and employers an incentive to raise their productivity levels in order to preserve jobs: people work harder to justify the higher wage. That helps explain why minimum wage increases can influence pay higher up the income scale.

That dynamic—that higher minimum wages often have less of an employment effect because they cause workers to exert more effort—is also something that left-leaning supporters of higher minimum wages should take into account.

One thing that should seem clear is that the search frictions that give rise to low levels of employer monopsony power are not at all sufficient to explain the extraordinary surge in capital's income share.

For that we probably need to point to technology, which has substantially increased labour-market competition for many low- and medium-skill tasks. Interesting new economic work is modeling a world in which offshoring and automation are often substitutes, and a firm's choice to employ local workers, offshore, or automate is determined by both relative productivities and relative costs.

The implication of this work is that some labour-market segments are likely to show more of an employment effect than others. In occupations consisting of mostly routine work, it will be very easy for an employer to respond to higher costs by moving the job elsewhere or swapping in a machine. Think of check-out clerks.

While many retailers have invested substantially in automated check-out, others have not, presumably because the cost difference between human and robot is not yet big enough to justify the change. It seems very probable that higher minimum wages will in some cases tip that balance.

In other segments, consisting of much less routine work, one would expect less of an employment effect—maybe none, for modest increases. That doesn't necessarily mean that the minimum wage increase would be entirely benign, however.

It's possible that displacement from routine-task occupations could increase competition for non-routine-task occupations. That may push down wages in some cases (where wages remain above the minimum wage), and raise joblessness in others.

The latest research suggests that a carefully imposed minimum wage (and I would consider Britain's carefully imposed, and one indexed to inflation carelessly imposed) can raise incomes at the bottom of the wage spectrum without much reducing employment.

But a higher minimum wage is neither a sufficient or a particularly germane response to labour-market polarisation and capital's rising income share. The problem is simply that the supply of people and robots available to do routine work is exploding.

A proper response to this dynamic must either be a big change in relative skill supplies or relative productivities, or a move toward wage subsidies that are far larger and broader than have been considered in the past.

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Business Insider johalputt The Economist

05:35

“THERE is much progress to report,” Barack Obama stated with satisfaction at the beginning of his state-of-the-union address. He was referring to the improving health of the economy and the diminishing number of American soldiers in harm’s way abroad. But he might just as well have been speaking of his strategy for facing down Republican opposition in a time of divided government.

During last year’s election campaign, a line in the president’s standard stump speech decried the idea of cutting spending on popular government programmes, “while asking nothing” from the richest Americans. This depiction of himself as the champion of ordinary Americans, and the Republicans as hand-maidens to the rich, was very effective. It not only helped him to win a second term, but also prompted the Republicans in Congress to acquiesce to his demand for higher taxes on the rich at the beginning of the year, for fear of living up to the president’s jibes.

No wonder, then, that Mr Obama has returned to the theme. In fact, he used exactly the same line in his address to Congress, modified only by a single word: “more”. “We can’t ask senior citizens and working families to shoulder the entire burden of deficit reduction while asking nothing more from the wealthiest and most powerful,” he intoned. The implication was that Republicans should agree to another tax increase in exchange for spending cuts that together would help stabilise America’s ballooning debt and avert the various fiscal stand-offs that loom. The president, it seems, has concluded that he can only get what he wants out of his political adversaries by rallying public opinion to his side, and that accusing them of coddling the rich is the easiest way to do it.

Thus instead of striking a conciliatory tone and proposing compromises, as he did throughout much of his first term, Mr Obama laid out an unashamedly partisan agenda. He reiterated past calls not just for higher taxes on the rich, but also for more restrictive gun laws and for concerted action to slow climate change—all ideas which Republicans abhor, and which will therefore struggle to make headway in the House of Representatives, which is under Republican control.

To his past demands Mr Obama added some new suggestions which are bound to be unpopular with Republicans, such as raising the minimum wage and indexing it to inflation. He also talked about making it easier to vote, not a popular cause on the right. On top of all this came various proposals which, while not especially controversial in themselves, sounded rather expensive. The president said he wants to ensure universal access to pre-school, and to expand vocational training in high school, and to set up a network of institutes promoting manufacturing and to create a tax credit for hiring the long-term unemployed, among other new schemes. All of this, he promised, would not add a dime to the deficit, although he provided no details of how it would be paid for.

Republicans immediately pointed out that the public debt has grown by 58.4 trillion dimes on Mr Obama’s watch. How could a man with such a record be trusted, they asked. Marco Rubio, a senator from Florida who gave the Republican rebuttal to the president’s speech, complained, “his solution to virtually every problem we face is for Washington to tax more, borrow more and spend more.” Referring to his own, working-class parents, Mr Rubio rejected the idea that the Republicans were the party of the rich and accused the president of being obsessed with raising taxes.

Mr Rubio made all this sound plausible, but Mr Obama has a much bigger bullhorn. No sooner had he finished his speech than he joined an online call with supporters. He is due to hold a series of rallies over the coming days to press his case. The president seems to see his ongoing stand-off with the Republicans over the budget as a win-win. Either they back down, and he gets the concessions he wants on policy, or they stand firm, and he gets to accuse them of recalcitrance. For a president who spent much of his first term courting Republicans without success, that must feel like progress.

(Photo credit: AFP)

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Business Insider johalputt The Economist

04:20