George Friedman:

It is difficult to know what the Russian team was up to in the United States from news reports, but there are two things we know about the Russians: They are not stupid, and they are extremely patient. If we were to guess – and we are guessing – this was a team of talent scouts. They were not going to meetings at the think tanks because they were interested in listening to the papers; rather, they were searching for recruits.

Sounds right.

Labor is getting more expensive in China, so manufacturing companies are racing to find ways to reduce costs:

But what it does not reveal is that manufacturing in China is about to get far more expensive. Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones.

Desperate factory owners are already shifting production away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions far west of here, even deep in China’s mountainous interior.

That’s precisely what I’ve hoped would happen. China is a nation of contrast—while the east is rich from manufacturing and exports, the landlocked western interior of China is still incredibly poor. China is almost two nations, one developed and one developing.

But development based on unskilled, cheap labor inevitably leads to higher standards of living and increasing wages. Over time, the “cheap” part of it disappears, so manufacturers move elsewhere in search of low costs. As this happens, areas that were dependent on unskilled labor for economic growth must transition toward skilled labor. This is China’s largest challenge—their incredible economic growth is a result of labor that’s laid dormant for decades suddenly coming online all at once, but they must now move from unskilled to skilled labor. In other words, they must move up the supply chain from merely putting things together to manufacturing intricate parts and to even designing them.

As manufacturers move toward other regions and countries with lower wages, the same process plays out. I’m hoping this will have the same effect on China’s interior, but there are natural barriers for it. Using unskilled labor in China’s east is easy: it’s close to the coast, so moving goods to port is cheap. The west doesn’t have this same advantage. Anything manufactured there will have to be moved by truck or rail to the coast.

A writer on the Pileus blog wrote today:

In my view, the United States can live with a nuclear Iran, just as it currently lives with a nuclear Pakistan, a nuclear China, a nuclear Soviet Union Russia, and so on.

Perhaps in a vacuum the U.S. may be able to live with a nuclear Iran, but Arab nations can’t and thus we can’t, either.

Let’s just think about what a nuclear Iran would mean for the Middle East. Iran sits along the Persian Gulf, next to Iraq and Kuwait, and is just a short distance from Saudi Arabia. Those three countries account for an incredible percentage of the world’s proven oil reserves—Saudi Arabia has the largest reserves in the world and Iraq and Kuwait have the fourth and fifth-largest proven reserves, respectively.

A nuclear Iran would make the Middle East its plaything. Iraq and Kuwait would be theirs for the taking, Saudi Arabia’s oilfields would be just a short jump away, and the other Arab nations would be subject to Iran’s will. By controlling those oil reserves, the Persian Gulf (where it flows out of to the rest of the world) and taking the rest of the region into its sphere of influence, Iran could dictate to the world.

Arab countries are just as, if not more, afraid of a nuclear Iran than the west is. They would lose control of their nations, and they do not want that to happen. A nuclear Iran would set off an arms race across the Middle East—they will try to develop nuclear weapons as quickly as possible to eliminate Iran’s advantage. This may be enough to keep Iran in check, but tensions would be terribly high. The last thing we want is a nuclear Middle East.

Those are the options presented by a nuclear Iran, and none of them are acceptable to the U.S. or the world. This isn’t as simple as pointing to other nations who have developed nuclear weapons without threatening the U.S.

Stanford professor and entrepreneur Paul Romer has a fascinating idea for how to turn developing nations into developed nations: charter cities. His model for these cities is British-controlled Hong Kong. The host developing nation will lease land to a developed country which will govern it, providing stable, business-friendly rules.

Sebastian Mallaby has a fantastic piece in the Atlantic on Romer’s idea and his push for it. In the introduction, Mallaby describes Lübeck, a Germanic town built by Henry the Lion into a prosperous city in the 12th century:

The stultifying feudal hierarchy was cast aside; an autonomous council of local burgesses would govern Lübeck. Onerous taxes and trade restrictions were ruled out; merchants who settled in Lübeck would be exempt from duties and customs throughout Henry the Lion’s lands, which stretched south as far as Bavaria. The residents of Lübeck were promised fair treatment before the law and an independent mint that would shelter them from confiscatory inflation. With this bill of rights in place, Henry dispatched messengers to Russia, Denmark, Norway, and Sweden. Merchants who liked the sound of his charter were invited to migrate to Lübeck.

This is an apt description of what Romer hopes to build. This concept assumes that the main limitation on growth in developing nations isn’t natural resources or human capital, but capricious, inconsistent and controlling governing. Businesses cannot develop because the government suffocates them, or fits of business-friendly rules are quickly scrapped when political winds change.

That’s precisely right and his idea is intriguing. It raises a whole host of issues which Mallaby nicely discusses and I may write about them, but this makes something else clear: it isn’t the rules that is the important part. It’s the environment they create.

Simple, limited and consistent regulation allows for a clean slate. There’s no mental and physical overhead dedicated toward understanding arcane and complicated rules, and arbitrary political dealings, to do business and create things—you just do it. That’s what America was when Europeans began emigrating to the continent—a land where there were no priests, lords or kings to please, nor limiting vestiges of your reputation. It was a dangerous place to live, but America promised a new life with unlimited opportunity. There were no artificial constraints.

The east coast soon developed, with the rules and controls that come along with it. But the west always beckoned, that same feeling of unlimited opportunity.

It’s that spirit that is important for development. It struck me while reading this that it isn’t just the developing world that needs this feeling. We need it again as well.

In 1900, government spending accounted for 20 percent of total GDP; in 2010, it is almost 45 percent. Our income tax law is mind-numbingly complex. Government has assumed responsibility for not only controlling the economy’s general tone, but specific industries, like the housing market, and guaranteeing the safety of certain companies that are too important to the nation to fail. The government not only has its finger on the economy’s pulse, but around its heart and neck. Washington, D.C. is the new arbiter of economic success.

James Madison’s great genius in construction the Constitution was not just in its separation of powers, but reserving wide power for the states. By allowing the states to function freely (within the context of the federal government’s reserved powers), states could choose their own political and economic path. By allowing states to manage themselves how they choose, they could experiment without affecting the entire nation.

That’s no longer true and hasn’t been for decades. As the federal government becomes the dominant body in society, it makes what was once flexible and agile—the many states—into something slow and rigid. The federal government cannot experiment because failure would affect the entire nation. But worse, this process has shifted societal responsibility from the local and private spheres into the national and public spheres. Poverty is no longer our individual responsibility, for us to work with friends in our communities to alleviate, but a national one. Depending on oil for powering our economy isn’t something for individuals to solve by forming new ventures that succeed based on economic viability, but a problem for Congress to solve by choosing what alternative form of energy, and existing companies, will succeed. Nothing is my problem anymore. It’s the government’s.

That’s eliminating personal responsibility. When the government is responsible for everything, there’s no dynamism, no motivation to create something for ourselves.

We need a new frontier.

Jonathan Fenby comments on China’s currency policy:

It has to bring the economy back from the runaway 12% growth reported early this year to a sustainable level of around 8% which would create sufficient jobs, keep the population happy and underpin the Communist party’s claim to be the only force that can ensure material progress. It needs to rein-in industries whose excess output adds to the perennial problem of over-capacity, but without creating mass unemployment. It needs to guard against inflation and boost wages.

China’s economy is still heavily dependent on exports. Their incredible economic growth, and thus employment for the population, is driven by it. Allowing the Yuan to appreciate as much as U.S. critics desire would severely harm their export sector, so it isn’t an option.

China does need to become a more self-dependent economy, which entails building a larger and sustained middle class (so consumer goods can be a larger part of the economy) and moving up the supply chain into a product design role.

There still is, though, a huge portion of the population just looking for a steady job of any sort. While the east of China is well developed and in some parts feels very much like a developed country, the west of China is also very much a developing country. The incredible amount of migrant workers in China’s eastern cities bear this out. The CCP knows China’s history well, so it knows that the largest threat to its power is poor economic conditions. They want to continue developing the west and secure the east’s affluence so their power isn’t threatened.

Allowing the Yuan to significantly appreciate against the dollar would threaten this. China’s move away from manufacturing must happen, but the CCP wants to develop the economy in a controlled manner to prevent significant social shocks.

China is allowing its currency, the renminbi, to float, but it is controlling how much it will appreciate:

On the Monday after its statement, the PBOC let the currency appreciate by over 0.4%, generating quite a bit of excitement. At that rate the yuan would double in value in just 174 trading days. The next morning the central bank set its parity to reflect the previous day’s close. But as Tuesday wore on, it decided that “market supply and demand” needed a bit of a nudge. Heavy dollar-buying by the country’s big state banks, presumably at the PBOC’s behest, pushed the yuan down against the dollar, allowing the central bank to set a Wednesday-morning parity of 6.81 (see chart 1).

It’s a smart move on China’s part to try to placate the U.S., but I don’t think it’s going to matter. They aren’t going to let it appreciate as much as critics in the U.S. want (they would like our trade deficit with China wiped out).

The sun may be entering a period of low solar activity:

But for the past two years, the sunspots have mostly been missing. Their absence, the most prolonged for nearly a hundred years, has taken even seasoned sun watchers by surprise. “This is solar behaviour we haven’t seen in living memory,” says David Hathaway, a physicist at NASA’s Marshall Space Flight Center in Huntsville, Alabama.

The sun is under scrutiny as never before thanks to an armada of space telescopes. The results they beam back are portraying our nearest star, and its influence on Earth, in a new light. Sunspots and other clues indicate that the sun’s magnetic activity is diminishing, and that the sun may even be shrinking. Together the results hint that something profound is happening inside the sun. The big question is what?

The New York Times interviewed several North Koreans living in China, and the picture they show is disturbing:

Others were more skeptical of the government’s propaganda, but still cast war as an inevitability. “We always wait for the invasion,” said one former primary school teacher. “My son says he wishes the war would come because life is too hard, and we will probably die anyway from starvation.”

They struggle to even survive, are brainwashed, and are forced into a state of deep depression as a mode of everyday life, where each new day is another day of suffering. This is how people in North Korea live in 2010.

Steve Jobs nicely explains Picasso’s famous “great artists steal” line:

Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something. It seemed obvious to them after a while. That’s because they were able to connect experiences they’ve had and synthesize new things. And the reason they were able to do that was that they’ve had more experiences or they have thought more about their experiences than other people.

That’s from a 1996 interview Wired did with Jobs, and it is well worth your time. There’s an especially good section on why Jobs thinks our education system is broken.

After the New York Times complained, Apple pulled the Pulse News Reader from the App Store.

The New York Times claims the application violates its RSS feed terms of use because the application, by default, comes with the Times’ RSS feed installed and must be purchased.

Absolutely ridiculous. The New York Times is, in essence, forcing an application to be removed for sending them too many readers. Good move, guys.

Update: Looks like it’s back up on the App Store. I wonder if the Times received a little phone call.

Columbia professor Ang Yuen Yuen thinks China’s cheap labor advantage is slipping away:

Apparel production is a prime example of China’s declining competiveness in markets dependent on low-cost labor. According to a study by the US consulting firm Jassin O’Rourke, labor costs in China are higher than in seven other Asian countries. The average cost for a worker is $1.08 per hour in China’s coastal provinces and $0.55-0.80 in the inland provinces. India was in seventh place, at $0.51 per hour. Bangladesh offers the lowest cost, only one-fifth the price of locations like Shanghai and Suzhou.

That’s how developing markets work: an economy based on cheap labor leads to rising standards of living and wages, and that advantage erodes over time. The economy must then shift to different economic advantages, or higher up the supply chain, as Ang says.

Ezra Klein visited China recently and just posted some thoughts on where the country is heading.

Insightful and dead-on.

Charles Murray comments on Ayn Rand:

That’s a heroic vision of a blue-collar worker doing his job. There are many others. Critics often accuse Rand of portraying a few geniuses as the only people worth valuing. That’s not what I took away from her. I saw her celebrating people who did their work well and condemning people who settled for less, in great endeavors or small; celebrating those who took responsibility for their lives, and condemning those who did not. That sounded right to me in 1960 and still sounds right in 2010.

That’s what I love about Rand’s novels. The Fountainhead was the first time in my life I read someone who saw work as not only something positive, but something to be passionate about and celebrated. Until that point, every book I read or movie I watched portrayed work as a necessary but painful and hated part of life that we do to allow us to do what we love–leisure.

Rand rejected this. In her novels, work does not need to be separate from what we enjoy doing. Rather, work should be something we are proud of and pour our lives into, because we are creating or doing something beneficial. That is profoundly important on an individual level. This idea is very freeing–work does not need to be a lifetime of suffering, but can be a driver of our own happiness and well being. We no longer have decades of boring, monotonous, meaningless work, but decades of creating something meaningful and doing our absolute best work. A lifetime of contribution.

This is important for how society functions, too. If a society’s dominant conception of work is that it is suffering and only a means of receiving money, then people will approach it as such. They won’t choose careers that they find personally meaningful and interesting, and they won’t do their absolute best work. They’ll choose the most “lucrative” career and they will do the minimum level of work to receive their pay, so they can maximize time doing what they actually like doing (which we’ve been convinced is “leisure”–e.g., doing nothing). The result is a lack of creativity (because people aren’t choosing careers they actually love), and a culture of mediocrity (because people have no personal investment in their work).

Worse, because people only look at work as a means of being paid, they will look at others who have greater success than them with anger and jealousy. Those who are more successful than them are competitors with them for the limited amount of pay available, and they are getting more than them. This mindset justifies getting ahead of the more successful (or potentially more successful) by any means necessary. Sabotaging others and office politics spring from this.

But if your work is your passion, and you take pride in it, then other people’s success isn’t a threat to you nor something to be jealous of. It’s an inspiration, because they are someone who–like you–cares a lot about what they are doing, and they have seen success as a result. This makes for a society where people engage each other positively and by their successes, rather than through anger and jealousy.

That’s what I loved about Rand’s novels. They gave a glimpse of a world based on a celebration of success and work, where people engage each other through their successes. That is a world much more healthy, respectful and inspirational than the one we live in.

Here is a video of Israeli soldiers dropping onto the “aid” ship.

The soldiers are immediately grabbed by the ship members, beaten with pipes and chairs, and even thrown off of the ship.

Is it any wonder why several of these idiots were killed? The soldiers were attacked and defended themselves. I have absolutely no sympathy for the people aboard these ships. Their real goal is to provoke Israel into creating a negative PR image, and that’s what they did.

This outrage is ridiculous.

Peter Beinhart on Israel’s blockade of Gaza:

If all this were actually turning the people of Gaza against Hamas, perhaps—perhaps—it might have a cold-blooded justification. But if there is anything that the U.S. has learned from its half-century long embargo of Cuba, it is that policies of collective punishment don’t turn people against their regimes. To the contrary, they usually offer those regimes an excuse for their inability to govern.

That’s the proper context to consider Monday’s events.

Insofar as the blockade exists and is legal, boarding ships intentionally violating it is perfectly valid. Firing on individuals attacking the soldiers is also perfectly justified. I don’t think the “attack” is unjustified per se, but rather that the blockade it is a result of may be.

Placing sanctions on the Gaza Strip because a terrorist organization, whose professed goal is the destruction of Israel, is a valid response. A blockade may even be justified, but if your goal is to turn the people against Hamas, it is not. The blockade serves only to enrage Palestinians, and that anger results in support for the government. Rather than split the people and government, it provides the government powerful propaganda.

Comparing this to our policy on North Korea, though, is interesting. North Korea is almost entirely cut off from trade with the world community as a result of sanctions, and North Korean ships can be boarded and searched for illegal weaponry. North Korea’s aid comes from the U.S. and South Korea.

The North Korean people live in unimaginable misery due to the government’s idiotic economic policies and military spending. But it could be argued that preventing North Korea from freely trading with the world leads directly to the suffering of their people. After all, selling weapons to other countries does provide revenue that could pay for food and medical supplies for their people. What is different between Israel’s embargo on the Gaza Strip and the world embargo on North Korea?

The difference is their goal. The world’s policy on North Korea is meant to starve the government of goods and funding so it collapses, while Israel’s policy is meant both to starve the government and to make life difficult for the people. The North Korean policy almost certainly contributes to the North Korean people’s suffering, but it does so unintentionally. Israel’s policy, however, seeks to make life difficult on regular people to try to turn them against the Hamas-controlled government.

I’m not sure this distinction matters much at all, however. Both seek to topple the government, or at least make its operations so difficult that they are willing to negotiate with us. Both contribute to the suffering of regular people who have nothing to do with their government’s policies. Both haven’t worked–the North Korean government still exists, and is even more recalcitrant now than before–so using Beinhart’s analysis, both should be equally unjustified.

Why, then, is there so much outrage at Israel’s embargo, but not sanctions placed on North Korea? If we accept Beinhart’s argument, and the equivalency of Israel’s embargo and ours on North Korea, does this mean all sanctions are futile, immoral, and should not be used? If sanctions cannot be used, then, what options (besides war) do governments and the world economy have in dealing with nations acting against their interests?