Software Is Not Capital if You’re Not a Software Company

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PikettyCapital_coverThe Economist trumpets Thomas Piketty’s Capital and his theory, r > g, has had its first serious rebuttal, glowing like a proud parent over graduate student Matthew Rognlie’s work.

Note this bit:

Mr Rognlie mounts three main criticisms of these arguments. First, he argues that the rate of return from capital probably declines over the long run, rather than remaining high as Mr Piketty suggests, due to the law of diminishing marginal returns. Modern forms of capital, such as software, depreciate faster in value than equipment did in the past: a giant metal press might have a working life of decades while a new piece of database-management software will be obsolete in a few years at most. This means that although gross returns from wealth may well be rising, they may not necessarily be growing in net terms, since a large share of the gains that flow to owners of capital must be reinvested.

Emphasis mine.

Most commercial software used by corporations, including the example of database-management software, is licensed. Users are licensees, not owners.

Software doesn’t necessarily obsolesce, either. I’ve worked for businesses using software that was as much as twenty years old. Small businesses, in particular, can continue to run well on old accounting software, provided they don’t need highly granular reporting.

What does become obsolete is the hardware. If software no longer runs on an older system, or if it is no longer serviced by the licensor (ex: Windows XP), the licensee has simply reached the limit of the license.

This includes upgrades by software manufacturers for reasons of security improvements: if users don’t upgrade for improved security, they’re outside the limits of the license.

The only entities that might be able to claim software is capital are software companies. This might not even be the case if capital is limited to the licenses they’ve granted and claimed as assets — any accountant, tax attorney or IP attorney want to respond to this?

The confusion about software’s nature probably lies in our accounting and tax systems, which may treat software as an amortizable intangible asset. (Feel free to correct me in comments as I am not an accountant, nor a tax preparer, nor a tax attorney.)

But most commercial software remains a licensed product.

Companies are also moving toward “software as a service” (SaaS), provided a license to access software on software providers’ systems. Microsoft’s Office 365, Google Apps, Salesforce.com are examples of SaaS. There are even further reductions in companies’ need for investment in hardware when subscribing to “infrastructure as a service” and “platform as a service,” like IBM, Amazon, and other technology companies offer.

These are contracted services — definitely not rapidly depreciating capital assets.

What exactly does Rognlie mean by “modern forms of capital” when his understanding of software is flawed?

I haven’t looked deeply at the rest of the arguments Rognlie offered as a rebuttal to Piketty’s theory. This bit checked me short, giving me concerns about his remaining points addressing returns on wealth, and on distribution of net capital income.

[UPDATE: Do read Ed Walker’s comment about this piece in The Economist.]

Did John Brennan Confirm NSA’s Role in Tracking Finance?

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In his talk at the Council on Foreign Relations, John Brennan was asked about terrorists’ use of offshore bank and shell companies (just after 50:00)

I must say that the US Department of the Treasury as well as other institutions of the US government have been very very effective and successful working, again, with international partners to try to uncover and uproot this, but it’s not just for terrorism purposes, it’s for organized crime, narco, um, cartels and others.

It would be thoroughly unsurprising if NSA were spying on monetary flows. After all, their dominance of international telecom cables mean they dominate the infrastructure tracking that flow. Plus there’s that whole SWIFT thing.

But it’s nice to know from John Brennan that those “other institutions” have so thoroughly uncovered and uprooted that kind of intelligence, while presumably ignoring the crimes of Jamie Dimon.

UK More Interested in Asian Investment than Its Special Relationship

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At Salon today, I did another post on how ridiculous it is that the US just sanctioned Venezuela. As part of it, I discuss again how China and Russia are setting up new financial tools to contest our financial hegemony.

Worse, at a time when America’s dominant position in the world’s financial system is newly contested, such a claim may not only intensify Latin American opposition to U.S. intrusions, but also ignite Russian and Chinese efforts to establish alternatives to U.S. default financial tools.

For years, the U.S. has used its dominant position in the global financial system to use sanctions to punish people it doesn’t like — without much evidence those sanctions help to change the underlying behavior. The Venezuelan sanctions reflect a new degree of pettiness, given Venezuela’s own fragility in the face of depressed oil prices. And because of a confluence of issues — including the obviously bogus rationalization for these sanctions — these sanctions may backfire on several levels, both in U.S. efforts to undermine Maduro’s rule, but also in U.S. efforts to pretend its sanctions represent anything but an easy way to selectively enforce obedience to its demands.

Along those lines, the UK just ignored our concerns and joined the Chinese-financed Asian Infrastructure Investment Bank.

The UK is the first big Western economy to apply for membership of the Asian Infrastructure Investment Bank (AIIB).

The AIIB will fund Asian energy, transport and infrastructure projects.

However, the US has raised questions over the bank’s commitment to international standards on governance.

In a statement, UK Chancellor George Osborne said the UK had “actively promoted closer political and economic engagement with the Asia-Pacific region” and that joining the AIIB at the founding stage would create “an unrivalled opportunity for the UK and Asia to invest and grow together”.

The hope is that investment in the bank will give British companies an opportunity to invest in the world’s fastest growing markets.

But the US sees the Chinese effort as a ploy to dilute US control of the banking system, and has persuaded regional allies such as Australia, South Korea and Japan to stay out of the bank.

In response to the move, US National Security Council spokesman Patrick Ventrell said: “We believe any new multilateral institution should incorporate the high standards of the World Bank and the regional development banks.”

I actually think providing legitimacy for the bank will be good for Asian countries, as it will force US-backed institutions to be more responsive.

But at the same time, it will undercut whatever power the US continues to exercise through its financial hegemony.

Piketty Gets A Laugh At Mankiw’s Expense

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I’m not a fan of the former Bush economics adviser and Harvard economics professor N. Gregory Mankiw, so I was delighted to see Thomas Piketty make a joke about him at the recent meeting of the American Economics Association. Chuck Collins of the Institute for Policy Studies was there, attending one of the panels on Thomas Piketty’s Capital in the Twenty-First Century. One of those panels, packed with right-wing economists, was set up by Mankiw, who used it as a stage to attack Piketty. He and his fellow ideologues decided unanimously that the best thing to do is to impose a consumption tax, presumably as part of a package to lower taxes on the top earners and to keep capital gains taxes low and corporate taxes at their lowest level in decades.

Mankiw, at another point in his presentation, had still more embarrassing comments to make. Piketty, he intoned, must “hate the rich.” Piketty’s financial success with his best-selling book, Mankiw added, just might lead to self-loathing.

This is what passes for right wing humor in the economist class, though Collins reports that the obviously prepared bon mots “fell flat”. Then someone asked Piketty what he thought about the consumption tax idea. Collins reports his reply:

“We know something about billionaire consumption,” Piketty observed, “but it is hard to measure some of it. Some billionaires are consuming politicians, others consume reporters, and some consume academics.”

Sweet. A correspondent tells me that one of his friends was there and that this jibe brought the house down. Too bad more people don’t laugh at Mankiw and other toadies for the rich.

A Proposed Definition of Market Economy

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In this post, I give a proposed definition of the term “market”:

A market is the set of social arrangements under which people buy and sell specific goods and services at a specific point in time.

Social arrangements means all of the things that constrain and organize human action, including laws, regulations, social expectations, conventions, and standards, whether created or enforced by governments, institutions or local traditions.

With this definition in mind, how should we define the term “market economy”? To start with, my definition is meant to contrast with other definitions discussed in this post, and particularly that of Samuelson and Nordhaus, Economics, 2005 ed. p. 26.

A market is a mechanism through which buyers and sellers interact to determine prices and exchange goods and services.

That definition forms the basis for their definition of the term “market economy”:

A market economy is an elaborate mechanism for coordinating people, activities, and businesses through a system of prices and markets. It is a communication device for pooling the knowledge and actions of billions of diverse individuals. P. 26.

The terms market economy and free market economy are used by people to describe the economic system in the US. Many people are committed to the belief that free and untrammeled markets are intricately and intimately bound up with political and personal liberty. Milton Friedman is one such: here is a link to a short 1961 essay in which he explains his views. Friedman contrasts capitalism with socialism. He tries to imagine how such a socialist country might convert to capitalism. In such a country, he explains,

The first problem is that the advocates of capitalism must be able to earn a living. Since in a socialist society all persons get their incomes from the state as employees or dependents of employees of the state, this already creates quite a problem.

Presumably Friedman is talking about the Soviet Union. From this we should conclude that his target is the command and control economy which the Soviet Union and the Socialist Republics of the USSR implemented. Friedman sees the capitalist or free market system as the opposite.

Fundamentally there are only two ways in which the activities of a large number of people can be coordinated: by central direction, which is the technique of the army and of the totalitarian state and involves some people telling other people what to do; or by voluntary co-operation, which is the technique of the market place and of arrangements involving voluntary exchange.

So, it turns out that the definition of a market economy is any economy except a command and control economy. The details about the level of organization and constraint provided by various actors, including but not limited to governments at each level, are details worked out in each society in accordance with local desires. I’m not sure Friedman would approve of my pair of definitions, though.

This essay is a fascinating glimpse into early neoliberalism. Friedman gives a history of liberalism similar to the one I give here. He contrasts what we call liberalism, associated with the New Deal, with his views which he calls new liberalism, “a more attractive designation than ‘nineteenth century liberalism.’ “ He denounces what he calls “democratic socialism” as a contradiction in terms. He explains that his form of liberalism is like the 19th Century form with its emphasis on “freedom”. He says that 20th Century liberals put the emphasis on “welfare”, meaning the well-being of the members of society, not like Great Society welfare programs. His 20th Century liberal might ask what the point of Friedman’s freedom is, since it apparently isn’t the well-being of the members of society.

I take this to be his central thesis:

It is important to emphasize that economic arrangements play a dual role in the promotion of a free society. On the one hand, “freedom” in economic arrangements is itself a component of freedom broadly understood, so “economic freedom” is an end in itself to a believer in freedom. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.

For example, if you are forced to participate in Social Security, you have lost a portion of your personal freedom. But, he says, that’s what you expect of pointy-headed liberal intellectuals:

They tend to express contempt for what they regard as material aspects of life and to regard their own pursuit of allegedly higher values as on a different plane of significance and as deserving special attention.

I promise you that I consider my creature comforts more important than my intellectual pursuits, such as they are. Friedman then explains that economic power is a natural opponent of concentration of power in governments. Economic freedom is a necessary but not sufficient condition for political freedom. The rest of the essay is a surprisingly shallow explanation of these ideas. You might have thought that he would at least recognize the danger of concentrated capital for democracy. After all, he wasn’t that far removed from the Great Depression, the Palmer Raids, and the horrifying treatment of workers beginning with industrialization. But no. Instead we get this:

If I may speculate in an area in which I have little competence, there seems to be a really essential difference between political power and economic power that is at the heart of the use of a market mechanism to preserve freedom.

This is where he gives his hypothetical about a Soviet Republic that wants to switch to capitalism. It can’t happen according to his discussion; but, of course it did. Then he explains how the Hollywood Blacklist was an infringement of the right of suspected communists to earn a living, and how it was destroyed by the demands of the market. Both of these arguments show how right Friedman was to claim little competence. Or perhaps Friedman hadn’t focused on the way his ideology limited his conceptualization of complicated issues; a problem every thinker must guard against.

In any event, it seems that we don’t need a complicated definition of the term market economy. All it means is any economy that isn’t a command and control economy. Anything else is just metaphor, like the communication device conjured up by Samuelson and Nordhaus.

Bernie Sanders Warns of the Rise of Nazis if the Fed Helps ECB Further Destabilize Greece

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Bernie Sanders just wrote a letter to Fed Chair Janet Yellen asking why she is doing nothing as the European Central Bank destabilizes Greece’s newly elected Syriza government.

Several weeks ago the Greek people voted for a new government. This government canceled the privatization of key public assets, raised the minimum wage, and restored electricity to the needy. This government is seeking to restructure its relationship with the European Union to encourage economic growth in Greece and to escape from a deflationary cycle.

Recently, the European Central Bank (ECB) announced that it will no longer accept Greek official debt as collateral for loans to financial institutions in that country on the grounds that the new government is not following the dictates of the previous, failed policies. This move had an immediate destabilizing effect on the U.S. and world markets, and further moves could provoke a run on the Greek banking system in the days or weeks ahead.

The United States cannot stand idly by while the European Central Bank undermines the new democratically elected government of Greece, induces deflation and risks financial instability.  President Barack Obama was right when he recently noted, with regard to Greece: “You cannot keep on squeezing countries that are in the midst of a depression.  At some point, there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits.”

It would be a terrible mistake for the world to forget what happens when a democratically-elected government, as was the case in Germany in the 1920s, is unable to relieve the severe economic suffering of its people.  We must remember that waiting in the wings should this recently elected Greek government fail is the neo-Nazi Golden Dawn party.  We cannot allow fascism to come to power in a European country due to our unwillingness to reverse harmful austerity policies.

I doubt it’ll do much good — Yves Smith has more on how the biases of the Fed make its tacit support for ECB unsurprising.

But I love that Sanders wrote such a letter and laid out the stakes so clearly. In both Greece and Ukraine, the US seems intent on pursuing counterproductive approaches, as if it can manage any unintended consequences. Except both countries are proof that the US and its allies have failed to be able to do so.

Austerity policies have failed in Europe, as they fail almost everywhere. And yet the elite seems intent on doubling down, as if their ideological beliefs can create a reality that has thus far failed to materialize.

Less than 15 Hours After Winning Senate Majority GOP Started Laying Plans to Grow the Deficit

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As I laid out yesterday, Mitch McConnell’s victory lap made it clear he plans to set up ObamaCare — the individual mandate — as a key campaign issue for 2016.

There were another few details from that speech that were very telling.

First, McConnell said he would roll out tax reform — that is, very large tax cuts for corporations. That’s clearly payback for the Chamber of Commerce, which had a very critical role in the GOP’s success, according to this great article from the WaPo.

American Crossroads and the U.S. Chamber of Commerce played aggressively in primaries to boost the candidates they believed could win general elections — including Thom Tillis in North Carolina and Dan Sullivan in Alaska.

[snip]

For much of the primary, Cochran was sleepy and might have been defeated outright were it not for a late push from the U.S. Chamber of Commerce, which aired a pro-Cochran testimonial from football legend Brett Favre on his farm in Hattiesburg, Miss.

[snip]

Despite his corporate pedigree, Perdue was one of the few Republicans running without the backing of the U.S. Chamber. In late 2013, the Chamber’s Rob Engstrom scheduled an endorsement interview with Perdue in Atlanta at 8 a.m. Perdue arrived at 8:35 and did not apologize for being late, according to three people familiar with the exchange. Sitting with his arms folded, Perdue told Engstrom, “I don’t give a damn about the U.S. Chamber.” Perdue put his finger on the table and said, “You’re either going to endorse me right here, right now, or you’re wasting my time.”

Seven minutes in, the meeting was over.

[snip]

It was Republican former Senate leader Robert J. Dole, 91, who first sensed trouble for Roberts. Amid a tour of Kansas, Dole in May called Scott Reed, his 1996 presidential campaign manager and now an adviser at the U.S. Chamber, with a warning. “There wasn’t the enthusiasm I expected for Pat,” Dole said.

Of course, that’s going to leave a hole in the budget. Eliminating the medical device tax — another tweak McConnell promised to make to ObamaCare — will create another hole in the budget.

McConnell revealed part of how he was going to fill it with his response to a question about the Democrats’ filibuster reform. He noted that the Senate doesn’t need 60 to get things done for some issues. He noted they can use reconciliation and push stuff through with just 51 votes.

The GOP has spent 4 years complaining that the Democrats pushed ObamaCare through using reconciliation. But it took just 15 hours after winning the majority for McConnell to make clear that he plans to push through aggressive ideological legislation using the same tool.

Still, all the cutting in the world isn’t going to make up for steep drops in corporate tax cuts. Which means — as always happens when Republicans are in charge — we should expect the deficit to start growing again.

The West’s Ideological Vacuum

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One point I tried to make in this post on George Orwell’s fighting in Spain is that the fight between Bashar al-Assad and ISIS is one that has become an ideological magnet. I was trying to argue that we’re offering little by way of positive ideology to combat ISIS, particularly among those most susceptible to its draw.

Two recent commentaries have made related points. This Jocelyne Cesari NYT op-ed on Europe’s need to more fully embrace Muslims notes the “collapse” of ideologies in Europe.

Third, the collapse of all major ideologies in Europe — nationalism, Communism, and liberalism — has left room for new radical options. For some young Europeans, adherence to radical Islam provides a viable alternative ideology, comparable to that of radical leftist groups in the 1970s.

And at the New Yorker, Steve Coll notes that ISIS is the kind of thing that arises when people feel they have no other avenue for security and justice.

The group’s lightning rise is a symptom, however, of deeper instability; a cause of that instability is failed international policy in Iraq and Syria. If the United States is returning to war in the region, one might wish for a more considered vision than Whack-a-Mole against jihadists.

The restoration of human rights in the region first requires a renewed search for a tolerable—and, where possible, tolerant—path to stability. ISIS feasts above all on the suffering of Syria, and that appears to be unending. The war is in its fourth year, with almost two hundred thousand dead and nine million displaced, inside the country and out. The caliphate now seated in Raqqa is the sort of dark fantasy that can spring to life when people feel they are bereft of other plausible sources of security and justice.

Though the very terms Coll discusses may betray part of the problem — and the neoliberal ideology Cesari doesn’t account for in her piece.

It is not yet clear that ISIS will endure as a menace. Fast-moving extremist conquerors sometimes have trouble holding their ground. ISIS has promised to govern as effectively as it intimidates, but its talent lies in extortion and ethnic cleansing, not in sanitation and job creation. It is vulnerable to revolt from within.

Conceiving of governance as “job creation” may undersell what a destabilized region is looking for — not to mention ignore what ISIS has done in Syrian areas they control.

The group also has a surprisingly sophisticated bureaucracy, which typically includes an Islamic court system and a rovingpolice force. In the Syrian town of Manbij, for example, ISIS officials cut off the hands of four robbers. In Raqqa, they forced shops to close for selling poor products in the suq (market) as well as regular supermarkets and kebab stands—a move that was likely the work of its Consumer Protection Authority office. ISIS has also whipped individuals for insulting their neighbors, confiscated and destroyed counterfeit medicine, and on multiple occasions summarily executed and crucified individuals for apostasy. Members have burned cartons of cigarettes and destroyed shrines andgraves, including the famous Uways al-Qarani shrine in Raqqa.

Beyond these judicial measures, ISIS also invests in public works. In April, for instance, it completeda new suq in al-Raqqa for locals to exchange goods. Additionally, the group runs an electricity office that monitors electricity-use levels, installs new power lines, and hosts workshops on how to repair old ones. The militants fix potholes, bus people between the territories they control, rehabilitateblighted medians to make roads more aesthetically pleasing, and operate a post office and zakat (almsgiving) office (which the group claims has helped farmers with their harvests). Most importantly for Syrians and Iraqis downriver, ISIS has continued operating the Tishrin dam (renaming it al-Faruq) on the Euphrates River. Through all of these offices and departments, ISIS is able to offer a semblance of stability in unstable and marginalized areas, even if many locals do not like its ideological program.

I’m not saying this is the societal solution the Middle East seeks. Read more →

On Laughter and Forgetting Our EU Spying

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I’ve long been intrigued by the response to the discovery of CIA spies in Germany, starting last week when seemingly everyone wanted to admit that the alleged spy was CIA’s. Unlike the Pakistani, Mexican, Afghan, and other precedents, the government either didn’t succeed or didn’t care to prevent Americans from learning about our overseas spies.

Now we’ve got competing explanations for why we spy in Germany.

According to Eli Lake source David Albright (whom Jim regularly embarrasses for his Iran propaganda), we spy on Germany because AQ Khan got much of his plans for Pakistan’s nuclear program in Germany. Lake also points to Germany’s close relations with Russia. The CIA has to spy on Germany, then, because Germany is not very good at spying on others, including Russian spies.

And of course, the forerunners to Russia’s modern spy services had plenty of experience operating on German soil. Vladimir Putin famously ran agents for the KGB from 1985 to 1990 out of Dresden, which was then in communist East Germany. His successors are still in the country, albeit on less friendly terms. “There is a huge Russian presence in Germany,” said the senior U.S. intelligence official.

Part of the current concern about Russia’s activities in Germany stems from unease about Berlin’s equivalent of the FBI, known as the Bundesamt für Verfassungsschutz (BFV). One former U.S. intelligence officer who worked on European issues said the BFV had a strong reputation for identifying and neutralizing domestic threats inside Germany, but was not very good hunting so-called “moles” – foreign agents burrowed into their spy services. “I can tell you they never watched us very carefully at all,” this official said. “That is almost definitely going to change now.”

Meanwhile, German Die Zeit editor Jochen Bittner relied on CIA’s former German Station Chief Joseph Wippl for explanation; Wippl provided a bizarre suggestion that CIA was accidentally treating Germany like it treats “Third World” countries, and anyway the Germans aren’t willing to do the dirty work to gain full membership in a Five Eyes like relationship.

I asked Joseph T. Wippl, who was the C.I.A.’s Berlin station chief in the early 2000s, why the agency had recruited German sources. “The C.I.A. has developed strongly in the direction of a third world agency, in that its officers work in places where the U.S. has great leverage over others and where there is no rule of law,” he said. “They are not used to or have not been trained to work in countries with similar democratic, constitutional institutions.” At the same time, he went on, the Germans had never seemed interested in the level of cooperation that might obviate this sort of unilateral snooping — the sort of treaty relationship that America has with Australia, Britain, Canada and New Zealand, the so-called Five Eyes intelligence alliance.

To suggest that the Germans could be treated as a Sixth Eye is a flattering idea. Yet I doubt the Germans would accept the honor. As is the case with America’s nuclear umbrella, we’re happy to have the protection while being still happier not to have to carry the responsibility. If Germany entered into a real intelligence alliance with America, the government would have to deal with a load of dirty knowledge — and lose the benefit of plausible deniability.

As you read Wippl’s comments, remember his own rather dubious exploits in Germany.

This whole conversation feels a lot like Keith Alexander’s spectacularly successful effort to use a few journalists to cover up his admission that we do spy in Europe, but only for targets — Chinese, Russian, and al Qaeda — that can be deemed not-European.

But it ignores the great deal of spying we do on the European Union, which has long served to strengthen Germany, but the recent collapse of which has eliminated the most viable competing reserve currency in the world.

There has been a tremendous adjustment in the European power base in recent years, which largely stems from the EU, which in turn largely stems from Germany’s successful effort at making the rest of the EU absorb the pain of the financial crisis. I guarantee you we were aggressively spying on that, all in the name of preparing for instability (but surely using that intelligence to preserve the dollar’s competitive advantages).

Meanwhile, all this takes place against the background of negotiations on the TTIP, in which the US would demand concessions from Europe that gut many of the better policies of the EU.

We may be concerned that the Germans have good reason to want closer relations with Russia than we want them to have. But we also have a financially competitive relationship with Germany, and there’s no reason to believe we’re not doing a ton of spying to our advantage. Key details of that spying has not (yet) been fully revealed. But I do wonder if that’s part of the issue here.

US Trade Rep Complains Other Countries Aren’t Letting NSA Spy

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In the NYT, David Sanger describes US efforts to develop some common understanding over cyberattacks with China by briefing it on what our escalation process would be. Unsurprisingly, China (which hasn’t had a massive data leak as an excuse to admit to information now in the public domain) has no reciprocated.

And while Sanger makes it clear the US is still not admitting to StuxNet, his US sources are coming to understand that the rationalizations we use to excuse our spying aren’t really as meaningful as we like to tell ourselves.

Mr. Obama told the Chinese president that the United States, unlike China, did not use its technological powers to steal corporate data and give it to its own companies; its spying, one of Mr. Obama’s aides later told reporters, is solely for “national security priorities.” But to the Chinese, for whom national and economic security are one, that argument carries little weight.

“We clearly don’t occupy the moral high ground that we once thought we did,” said one senior administration official.

I especially love the spectacle of an SAO coming to grips with this, but doing so anonymously.

Yet this anonymous admission will not stop the US from imposing such double standards. On Friday, the US Trade Representative issued  its yearly report on barriers to trade in telecom and related industries.  (Reuters reported on the report here.) None of these complaints are explicitly about the NSA. And some of USTR’s demands — that Turkey stop shutting down services like Twitter — would make it harder for other countries to spy on their own citizens.

But many of the USTR’s complaints single out measures that are either deliberately meant to undermine NSA’s spying advantages, or would have the effect of doing so. So these complaints also amount to whining that other countries are making NSA’s job harder.

Consider some of the complaints against China, whose top equipment manufacturer Huawei the US has excluded from not only the US, but also Korea and Australia.

It complains about China’s limits on telecom providers — and pretends this is exclusively a trade issue, not a national security issue.

Moreover, the Chinese Government still owns and controls the three major basic telecom operators in the telecommunications industry, and appears to see these entities as important tools in broader industrial policy goals, such as promoting indigenous standards for network equipment.

USTR criticizes China’s categorization of business that can be used for spying — such as cloud computing firms — as a telecoms subject to licensing restrictions.

China’s equity restrictions on foreign participation constitute a major impediment to market access in China. These restrictions are compounded by China’s broad interpretation of services requiring a telecommunications license (and thus subject to equity caps) and narrow interpretation of the specific services foreign firms can offer in these sub-sectors.

[snip]

Several VAS definitions in the draft Catalog also raise trade restriction concerns. First, the draft Catalog created a new category of “Internet Resource Collaboration Services” that appears to covers all aspects of cloud computing. (Cloud computing is a computer service or software delivery model, and should not be misclassified as a telecommunications service.) MIIT approach to cloud computing generally raises a host of broad concerns. Second, the draft Catalog significantly expanded the definition of “Information Services” to include software application stores, software delivery platforms, social networking websites, blogs, podcasts, computer security products, and a number of other Internet and computing services. These services simply use the Internet as a platform for providing business and information to customers, and thus should not be considered as telecommunications services.

USTR complains about Chinese requirements for encryption both for information systems tied to critical infrastructure.

Starting in 2012, both bilaterally and during meetings of the WTO’s Committee on Technical Barriers to Trade, the United States raised its concerns with China about framework regulations for information security in critical infrastructure known as the Multi-Level Protection Scheme (MLPS), first issued in June 2007 by the Ministry of Public Security (MPS) and the Ministry of Industry and Information Technology (MIIT). The MLPS regulations put in place guidelines to categorize information systems according to the extent of damage a breach in the system could pose to social order, public interest, and national security. The MLPS regulations also appear to require buyers to comply with certain information security technical regulations and encryption regulations that are referenced within the MLPS regulations. If China issues implementing rules for the MLPS regulations and applies the rules broadly to commercial sector networks and IT infrastructure, they could adversely affect sales by U.S. information security technology providers in China.

And for providers on its 4G network.

At the end of 2011 and into 2012, China released a Chinese government-developed 4G Long-Term Evolution (LTE) encryption algorithm known as the ZUC standard. The European Telecommunication Standards Institute (ETSI) 3rd Generation Partnership Project (3GPP) had approved ZUC as a voluntary LTE encryption standard in September 2011. According to U.S. industry reports, MIIT, in concert with the State Encryption Management Bureau (SEMB), informally announced in early 2012 that only domestically developed encryption algorithms, such as ZUC, would be allowed for the network equipment and mobile devices comprising 4G TD-LTE networks in China. It also appeared that burdensome and invasive testing procedures threatening companies’ sensitive intellectual property could be required.

In response to U.S. industry concerns, USTR urged China not to mandate any particular encryption standard for 4G LTE telecommunications equipment, in line with its bilateral commitments and the global practice of allowing commercial telecommunications services providers to work with equipment vendors to determine which security standards to incorporate into their networks.

Finally, USTR dubs China’s limits on outsider VOIP services a trade restriction.

Restrictions on VoIP services imposed by certain countries, such as prohibiting VoIP services, requiring a VoIP provider to partner with a domestic supplier, or imposing onerous licensing requirements have the effect of restricting legitimate trade or creating a preference for local suppliers, typically former monopoly suppliers.

All of these complaints, of course, can be viewed narrowly as a trade problem. But the underlying motivation on China’s part is almost certainly about keeping the US out of its telecom networks, both to prevent spying and to sustain speech restraints behind the Great Firewall.

It’s not just China about which USTR complains. It issues similar dual purpose (trade and spying) complaints against India and Colombia, among others.

And of course, it finds European plans to require intra-EU transit limits — a plan done largely to combat US spying — a ‘draconian” trade restriction.

In particular, Deutsche Telekom AG (DTAG), Germany’s biggest phone company, is publicly advocating for EU-wide statutory requirements that electronic transmissions between EU residents stay within the territory of the EU, in the name of stronger privacy protection. Specifically, DTAG has called for statutory requirements that all data generated within the EU not be unnecessarily routed outside of the EU;

[snip]

The United States and the EU share common interests in protecting their citizens’ privacy, but the draconian approach proposed by DTAG and others appears to be a means of providing protectionist advantage to EU-based ICT suppliers.

Meanwhile, even as I was writing this, one of the EU’s top Data Privacy figures, Paul Nemitz, just floated making the reverse accusation against America, that its NSA spying is a trade impediment to European businesses trying to do business in the US.

Fun stuff.