The End of Globalism

The world economic and financial system will never be the same.


BY ROBERT KUTTNER
MARCH 8, 2022

IGOR GRUSSAK/PICTURE-ALLIANCE/DPA/AP IMAGES
The logos of various payment systems appear under that of Russian bank Sberbank in the window of a store, March 6, 2022, in St. Petersburg, Russia.

I keep thinking of August 1914. Before World War I, Europe’s economy was tightly intertwined by trade and finance. Capital exports were Britain’s leading product. Imports and exports of goods were a major share of every nation’s economy. You could travel anywhere on the continent without a passport. It was as if there were already a European Union.

Norman Angell, prefiguring Tom Friedman, won a Nobel Peace Prize for his 1910 book with the unintentionally ironic title The Great Illusion. Angell condemned the arms buildup of that era, and assured the public that with this degree of economic interdependence, there should never be another major European war. Europeans, unwilling to disrupt summer vacation plans, expected that the August war would be over in a matter of weeks.

World War I not only killed 20 million people and the era of prewar prosperity. It irrevocably put an end to Globalization I. The catastrophic 1919 Treaty of Versailles failed to resurrect global commerce and finance in a sustainable way.

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There followed two other brands of globalization. After World War II, the Bretton Woods system created a managed form of global trade, in which countries had plenty of policy space to pursue full employment, creation of welfare states, and economic planning. Globalization II coexisted with a Cold War, in which the Soviets had no economic contact with the West.

But as capitalists recovered their normal political influence in a capitalist system, this bout of shared prosperity and mixed economy gave way to Globalization III—the attempt to resurrect something like laissez-faire. Tariffs were cut, regulations reduced, and global deals promoted by domestic policy shifts and World Trade Organization rules.

Meanwhile, the Cold War ended. Russia and China each displayed variations on dictatorship combined with elements of capitalism.

Russia’s was built heavily on exports of oil and gas, blending corrupt klepto-capitalism with deals with new Western partners. China’s was more productive, combining extensive state subsidies with market exports, and even more deals with Western corporations and banks.

Both violated supposed Western norms about both capitalism and democracy. But Western capitalists and their allies in government didn’t mind, because there was so much money to be made.

The West will not be inclined to reward Putin by reverting to the prewar economic status quo.

Now, Vladimir Putin has blown Globalism III to hell. Even if he were to suspend military operations in Ukraine tomorrow, Humpty Dumpty will not be put back together again.

In the space of a week, economic links with Russia that took decades to create have been abruptly severed. Some banks and corporations ended commercial ties because official sanctions required it, others out of concern for reputational damage.

If the war ends well, with a retreat by Putin, he will still have killed thousands of Ukrainians and destroyed billions of dollars’ worth of homes and buildings. The West will not be inclined to reward him by reverting to the prewar economic status quo. Corporations and banks will be wary of future crises and sanctions. And if an attempted Russian occupation of Ukraine drags on, the West will act to further isolate Russia’s economy.

The fact is, the Western economic system, with more than half of the world’s GDP, got along just fine without Russia before 1989, and it can get along without Russia now. Oil prices averaged $110 a barrel between 2011 and 2014, and we adjusted to it. If oil prices stay high, that will help accelerate the shift to renewables.

Putin’s war also upends pre-existing assumptions about China and the global economy. Until Putin invaded Ukraine, there was an ongoing conflict between traditional corporate free-traders and those in the Biden administration who wanted a tougher stance on China.

The goal of the hard-liners was to limit China’s violations of trade norms and its geopolitical expansion, and also to rebuild U.S. production capacity. A middle ground called for resetting the U.S.-China relationship, and establishing a new modus vivendi, allowing each nation to pursue its own domestic model but constraining predatory trade.

Now, the hard-liners win by default, because Putin is suddenly far more dependent on China. But this is far from the desired China reset.

In the short run, China can partly finance Russia and provide a market for some of Russia’s energy exports. In the medium term, as Western corporations deny Russia everything from maintenance of Boeing and Airbus planes to Apple computers and iPhones as well as Western-based credit cards and banking services, China has the means to replace all of these.

Three major Russian banks are already working with Chinese banks in the hope of replacing lost Western credit cards. But the more China bails out Putin, the more China chills its relationship with the West. Chinese banks could be vulnerable to secondary sanctions.

Cold War II could restore the pre-1989 alliance of Russia and China, but with a far more muscular China as the dominant partner, and with both nations as even more iron dictatorships. This can only chill the U.S.-China relationship even further.

“I have trouble imagining that this plays out in a way that improves China’s relationship with the U.S. unless China plays the improbable role of peacemaker,” says James Mann, author of several books on China and the newest member of the U.S.-China Commission.

The signs so far are that Xi Jinping is less than thrilled with this new role and new risk, because China’s goal is to become a larger global economic player, not a global economic pariah like Putin, and China needs the West more than it needs Russia. China abstained on the U.N. resolution calling on Russia to withdraw.

It also remains to be seen whether Xi can act as any kind of restraint on Putin. In principle, China has a lot of leverage, but using it is another matter.

It feels almost obscene to speak of silver linings in this grotesque war. However, the laissez-faire brand of globalization, relentlessly promoted since about 1990 by U.S. banks and corporations at the expense of American workers, is now caput.

The abrupt imposition and acceptance of economic sanctions makes clear that democratic governments do have the power to rein in global corporations and banks. If they can be restricted because of gross violations of human rights, maybe labor and environmental rights are next. Let’s hope that will be a core principle of Globalization IV.



ROBERT KUTTNER is co-founder and co-editor of The American Prospect, and professor at Brandeis University’s Heller School.

Frackers Restrict the Flow and Raise the Price

After a decade of flooding the market with cheap fossil fuels, investors have cut back on production.

(Illustration by Peter and Maria Hoey)

BY LEE HARRIS
FEBRUARY 10, 2022
This article appears in The American Prospect magazine’s February 2022 special issue, “How We Broke the Supply Chain.” Subscribe here.

Following two decades of steeply rising corporate returns, Wall Street profits soared to extraordinary highs last year, despite inflation and the increased costs of securing and transporting goods. The stock market is thundering along, with S&P 500 earnings rising 45 percent in 2021, according to FactSet.

As the economy has staggered back from the pandemic, investors have ridden rising prices to higher returns. (Higher public investment during the past two years also explains some of the extraordinary profits.) “What we really want to find are companies with pricing power,” Giorgio Caputo, one portfolio manager, told Bloomberg. “In an inflationary environment, that’s the gift that keeps on giving.”

Stock buybacks helped retailers remit profits to shareholders. Best Buy CFO Matt Bilunas told investors on a November earnings call that the consumer electronics chain would spend more than $2.5 billion on buybacks in 2021 while hiking prices on appliances. “In most cases, we’ve flowed those prices on to the consumer,” he explained.

More from Lee Harris

Brokers who string together strained supply chains have also seen swollen profits. The meat industry, which has shown some of the most dramatic inflation in the economy, is patrolled by a concentrated group of meat processing middlemen who buy low from ranchers and sell high to consumers at the grocery store.

Many bottlenecks in this special issue stem from domestic underinvestment, offshoring, or oligopolies’ multiyear strategy to roll up an industry. By contrast, the saga of the shale boom—underwritten by banker ebullience, cheap credit, and public support—is a story of homegrown misinvestment. After years of struggling to cartelize, collapsing demand in 2020 finally shocked the industry into a wave of mergers. By the following summer, the investors who bailed out distressed frackers saw their demands for lower production and higher profits (and prices) finally realized.

Commodity traders, who arbitraged across pandemic-induced dislocations and benefited from the volatility of fossil fuel commodities, are poised to further exploit bottlenecks in fossil fuels.

Vitol, the world’s biggest oil trader, distributed $2.9 billion to partners in just the first half of last year, averaging a $7 million bonus per partner. That’s on top of $2 billion in payouts in 2020—the same year oil prices went negative. The pandemic-time profits weren’t a one-off. The private trading houses are gearing up for years of sustained higher profits, anticipating that the same chronic underinvestment facilitated by the fracking pullback will now deliver a “commodities supercycle.”

AS LOCKDOWNS LIFTED AND LIFE RESUMED last year, oil supply lagged surging demand. OPEC Plus, the expanded consortium of oil-exporting nations, ramped up quotas to meet a growing appetite, but inventories were low and production had idled. Prices nearly doubled over the year. Entering 2022, key OPEC producers like Nigeria and Russia are still underperforming relative to their allotments, though rising production from the United States, Canada, and Brazil—all of which expect to pump at their highest-ever levels this year—could lift supply.

The rise in energy prices has an outsize impact on inflation. Rising prices at the pump are a bigger attention-grabber than aggregate figures like the Consumer Price Index, though that measure also gives energy a heavy weighting. While lagging energy production may seem understandable following the pandemic, OPEC producers’ slow ramp-up is only part of the story.

Investors in American shale oil—in the past, the most flexible barrel available to global markets, playing a pivotal role as swing producer—have exacerbated the price spike by holding down production, compared with past run-ups, as demand resumed.

Energy, like the tech sector, had been a growth industry for the 2010s.

From 2010 to 2019, a whopping 80 percent of the addition to global oil and gas demand was met by U.S. production growth, according to Kevin Book, the head oil and gas analyst at ClearView Energy Partners.

That growth kept a lid on prices—and on profits, as many smaller players entered the sector. But as demand picked back up last year, shale oil producers postponed new expenditures, wringing out yield for their long-suffering investors. That delay, energy analysts say, drove most or all of the energy price increase last year.

That the shale boom contracted sharply in 2021, leaving consumers in the lurch, has been shrugged off by analysts as an overdue market correction. Gas output has dropped, “but with good reason.” Frackers are finally “learning to live within their means.” The shock concluded years of shoveling good money after bad. And anyway, others rightly point out, fracking must end due to its climate-heating emissions and toxic air pollution.

This indifference to fracking’s demise—reports of which may be exaggerated—ignores years of malinvestment in shale, driven by animal spirits and the kind of governmental support that renewable investors can only dream of.

“WE PRODUCE MORE NATURAL GAS than ever before—and nearly everyone’s energy bill is lower because of it,” President Obama bragged in his 2013 State of the Union.

Hydraulic fracturing—breaking up shale to suck out oil and gas—roared to life under the Obama administration, which enthusiastically backed the natural gas boom in its tender years. Claiming energy independence as a victory for Democrats helped cement the industry as a bipartisan priority. While Obama also emphasized the transition to renewables in speeches, and with anemic federal grants under his recovery act (ARRA), his unequivocal backing of shale sent a strong signal to markets, helping launch a decade-long boom. Responding to that regulatory signal, Wall Street banks joined pension funds and regional banks around the U.S. shale patch in betting hard on new drillers.

Other unconventional fuels that developed over the decade require longer-term undertakings. Deepwater rigs and Canadian tar sands mines take years to open, but then produce steadily. Shale, however, is more capital-intensive, like a treadmill. Drilling sites are quick to open, but output can fall off, meaning one site can require continuous cash infusions to hold production steady.

The firm landscape that emerged—including new heavyweights like Anadarko, Marathon, Pioneer, and Chesapeake—was diverse compared to the long-standing dominant oil companies, with the low barriers to entry leading to many small and midsize participants. The romance of the wildcatter striking out alone wasn’t entirely a myth.

All were eager, at the first sign of higher prices, to ramp up investment. OPEC would try to cut production, prices would rise. Frackers would then ramp up capital spending and production, turn on the spigots, and prices would fall. The supply glut—and efficiency gains in the developing technology—left oil prices to plunge, as they did in the 2014–2016 collapse in oil prices.

JAE C. HONG/AP PHOTO
Hydraulic fracturing, as seen in this oil field in California, boomed under the Obama administration.

For years, oil production fluctuated within the so-called “shale band”—between around $40 a barrel and $65 a barrel, the price above which shale producers aggressively ramped up production.

Frackers seemed to defy gravity. Even as profits failed to materialize, investor enthusiasm persisted. The logic was self-reinforcing: High debt burdens fueled the boom, as frackers would roll over their debts repeatedly, paying off old loans with new ones. Low interest rates helped, too. Investors were searching for yield wherever they could find it. A decade of quantitative easing made more investors willing to take risks on producers who were drilling with less regard to the profitability of their own internal balance sheets.

But low interest rates and public investment don’t explain the full story of shale’s multiple leases on life.

“One of the only reasons they got away with it was that the independence story moved hearts,” Book said. “The idea that America was winning its energy independence was just as persuasive in the 2010s as the idea that solar stocks, a decade before, were saving the world.”

The energy independence story was persuasive because it was true—even if unsustainable, both ecologically and economically. And the failure of frackers to stanch the supply glut was hardly a problem for end users of gas, who benefited from years of depressed prices.

But there was growing unrest among investors. “Half a trillion dollars was more or less set on fire, as producers chased more production, and in the process depressed the global price of oil. They never really made much money out of it,” said Rory Johnston, a commodities economist at the investment firm Price Street. “Any profits you could get out of shale producers were filed back into more investment, which is ultimately kind of self-defeating.”

ALREADY IN 2018, MARKETS WERE SOURING on shale for overpromising and underdelivering. Mergers increased, with executives, private equity investors, and corporate raiders like Carl Icahn citing disappointing profits as the impetus.

Energy, like the tech sector, had been a growth industry for the 2010s, said Andrew McConn, an oil and gas analyst at industry consultancy Enverus. As it matured, shale companies began looking to attract yield-oriented investors as opposed to the growth-oriented ones who’d been more tolerant of lower returns.

“At the beginning of an industry, if you treat shale like an independent industry, it’s good to have lots of firms that innovate and compete and grow,” McConn said. But that sentiment has changed as investors have become impatient with low returns and have sought economies of scale. “It’s just very simply a desire for profitability, a desire to pivot from the growth phase in the industry to distributions.”

That assessment triggered a spate of shale tie-ups during the pandemic. Three of the four quarters with the highest deal value for corporate mergers and acquisitions since 2012 occurred after mid-2020, an Enverus analysis found. In the second quarter of 2021, the sector saw more than 40 deals valued at $33 billion.
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By last summer, shale strategy had flipped on its head: Rather than reinvesting more than 100 percent of new investments into drilling, frackers were holding oil fields idle while raking in cash, sending payments back to investors in the form of buybacks or special dividends.

As prices marched upward into the fall, the industry’s newfound restraint held. Public shale companies clocked $4.1 billion in free cash flow—a measure of liquidity—in the first quarter of 2021. By the third quarter, consultancy Rystad found, they underspent by around $7 billion.

Only now are those companies bringing production back, and more cautiously than they used to. Rig counts are rising about one-third as fast as they did in the last few run-ups, according to Book. (The numbers aren’t perfect comparisons, because rig productivity also increased over that interval, but it’s a good proxy for level of investment.) Of course, rising prices tempt investors and individual firms to drill harder. But collectively, they’re showing more restraint.

Some observers have asked how the industry achieved this newfound capital discipline. Fewer competitors and stricter restrictive covenants on production may have helped. Public information is scant, but some analysts have speculated that it was the oil majors that may have bailed out frackers—who in previous binges have driven down prices—at the bottom of the market, and mandated lower production levels.

Asked about speculation that majors might have funded smaller operators, Book said, “It wouldn’t surprise me.” If you’re trying to raise alternative capital, he said, it would have to come from nations’ sovereign investment funds, private equity, or corporate investment. “Sovereigns probably weren’t interested. Private equity was probably more interested, although some of them got burned, and were also going to probably demand some pretty hard terms. But yeah—why not oil companies? Of course.” (If big oil companies lent to distressed shale firms, some argue that move could raise antitrust concerns, since oil majors would have an interest in holding down production as oil prices rose.)

FRACKING ALSO RECEIVED GENEROUS federal support during the pandemic. The Federal Reserve launched a Main Street Lending Program to provide emergency support to small and midsize businesses. Initially, that program wouldn’t have supported businesses as heavily indebted as shale companies. But after Trump energy secretary and former energy lobbyist Dan Brouillette pushed on behalf of the industry, the Fed changed the program’s terms to let more heavily indebted companies get loans, and allow them to use the loan funds to refinance existing debt. Researchers have found that the Fed’s secondary market bond-buying program, meant to be sector-neutral, is disproportionately tilted toward energy bonds.

As markets appear to turn on shale, it’s a good time to look back at the limitations of the boom. Between 2009 and 2014, investment in equipment for oil and gas field exploration accounted for a major share of all industrial investment.

Sleepy towns in Texas and Oklahoma and deindustrialized Pennsylvania were suddenly poster children for fracking. Cheap natural gas was said to be giving new hope to the Rust Belt. Many of those jobs, however, which never unionized, have evaporated as quickly as they appeared. Even more striking is how little America was able to capture knock-on economic gains from cheap oil, which did surprisingly little to lift growth. On the contrary: Along with slowing growth in China, the shale energy boom and resulting oil glut helped set off a commodity price shock in 2014–2015. A global slowdown ensued.

THE PAST YEAR ALSO SAW commodity traders expand their ability to influence energy prices, despite earlier efforts to limit their sway. During the tumult of 2008, the growth of ETFs and mutual funds helped push up commodity prices.

Gary Gensler, who was then chairman of the Commodity Futures Trading Commission (CFTC), decided to impose position limits to curb that speculation, with a particular focus on energy commodities like oil and natural gas. Those rules only went into effect over a decade later, however, under a Trump-appointed CFTC, at which point they had been seriously watered down by industry.

While the new position limits improve a trading environment that had previously lacked any guardrails, said Tyson Slocum, an advocate with Public Citizen and member of the CFTC’s Energy and Environmental Markets Advisory Committee, they will not achieve their goal of controlling excess speculation, since they actually expand the ability of commodity exchanges to grant exemptions to traders. For-profit exchanges make money based on trading volume, so position limits, which would reduce trading volume, could lower their fees.

“The exchanges are for-profit companies. They are financially conflicted, here, and should not be in charge of calling balls and strikes, because they’re not a neutral umpire,” Slocum told the Prospect. CFTC Commissioner Dan Berkovitz echoed those objections in a dissenting statement on the flawed rule.

Political backlash to banks’ lucrative oil trading in 2008 also changed market structure. As Congress was negotiating a TARP bailout for top Wall Street banks, news emerged that a top trader at Citigroup’s Phibro trading desk had made so much money for Citi in 2008 that he was due a $100 million cash bonus. Under pressure, Citi sold Phibro to the shale firm Occidental.

As Wall Street’s turbulent romance with fracking was kicking off, foreign commodity trading houses—Swiss-based Mercuria and Glencore, Dutch Vitol, Singapore’s Trafigura—also saw a chance to step in.

By last summer, rather than reinvesting into drilling, frackers were holding oil fields idle while raking in cash.

Private commodity traders also took advantage of pandemic-driven supply chain dislocations, snapping up barrels of crude when prices went negative and orchestrating deals as shipping lines seized up. Trafigura’s profits—its highest ever—increased by 57 percent last year as the company hauled in $231.3 billion in revenue.

The pandemic wasn’t a one-off. Trading firms do best in conditions of market turmoil, so they’ve also done well in price slumps like 2015’s. Now they are preparing for a “commodities supercycle”: sustained high prices in materials. Even as they anticipate a renewables push into metals and minerals like lithium (for batteries), energy traders expect the surge will be greased by greater investments in oil and gas.

Trafigura is well placed to continue capitalizing on market dislocations due to “chronic under-investment,” the company says in its 2021 annual report. The co-heads of oil trading add in a note that the firm is especially well positioned given its vertical integration. “Trafigura is one of the few crude oil trading houses positioned to operate an integrated supply chain from wellhead to refinery, based on close cooperation between the crude desk and the in-house shipping team and the use of Trafigura-owned vessels or long-term charters.”

While real-world disruptions furnished huge opportunities for commodity traders, a handful of the biggest houses disproportionately nabbed those deals. For most trading shops, The Wall Street Journal reported, the sector’s bumper year ironically encouraged market concentration. For smaller commodities firms, “funding has rarely been harder to come by.”

LOOKING AHEAD, PRIVATE TRADERS and commodity bulls like Goldman Sachs are predicting years of elevated prices to correct for protracted underinvestment. Some of that profitable uncertainty will come from a politically erratic push into clean energy, where a new metals-based economy will need to be fed by heavy mining of minerals like copper and lithium.

Bulls are counting on a global shift toward green industrial policy, in fits and starts, to fuel the supercycle. Top trading analysts also cheerfully predict a broader end of austerity and a shift toward more public investment.

“When you stimulate low-income groups, you create the type of demand growth that’s behind commodity supercycles,” Jeff Currie, Goldman’s global head of commodities research, recently argued on a podcast about the commodity sector.

Currie is betting that these two trends—the clean-energy transition and redistributionist fiscal policy—will drive a structural rise in demand, as people spend more on everything from gas to green appliances.

Although investors are re-entering shale more cautiously, traders are not treating the energy transition as a zero-sum pivot away from fossil fuels. On the contrary, they are especially bullish on rising oil prices, which Trafigura predicts will continue into 2022, “underpinned by general under-investment in new crude oil production.”

It’s not inevitable that commodity traders will make out like bandits in the coming investment bonanza. Their revenues depend on market fluctuations under volatile conditions. In theory, then, maximalist industrial policy that sends an unambiguous signal on clean-energy investment could decrease political whipsawing and put a damper on traders’ profits.

For now, however, the major commodity houses are still betting on a supercycle that repeats Obama’s climate-smoking energy strategy: “all of the above.”


LEE HARRIS is a writing fellow at The American Prospect.

WE NEED POSTAL BANKING IN CANADA

New Reform Bill Reinforces Authority for Postal Banking

But the only way it’s going to happen is if Postmaster General Louis DeJoy agrees to it.

BY DAVID DAYEN
MARCH 11, 2022

GRAEME JENNINGS/POOL VIA AP
United States Postmaster General Louis DeJoy testifies during a House Oversight and Reform Committee hearing on February 24, 2021.

A postal reform bill that passed Congress this week could offer another opportunity to install a postal banking system in the United States, according to a review by the Prospect.

While the $107 billion in savings from ending the Postal Service’s prefunding of retirement benefits and moving postal retirees onto Medicare has received most of the headlines, Section 103 of the bill, subsection 3704, restates USPS authority to partner to “provide property and nonpostal services” to federal government agencies, as long as whatever results raises revenue for the Postal Service.

This would appear to supersede one aspect of a ban on non-postal products from the 2006 Postal Accountability and Enhancement Act, and could pave the way to providing services that mirror a bank account for any American who wants one.

Another exception to that 2006 ban comes in subsection 3703 of Section 103, which allows the Postal Service to partner with state or local governments to again provide property or non-postal services. Just like the other provision, this would have to be a revenue-positive partnership for the USPS, but that would be the entire point, to open new revenue streams in an age of declining letter mail.

More from David Dayen

Programs of this type could include selling hunting and fishing licenses, or bus and subway passes. If a community has municipal broadband, that could be delivered through the Postal Service. If a city has an electric vehicle charging program, they could site it on postal property. Advocates argue that using the post office as a hub for various government-based services could advance a next-generation conception of how the agency can fulfill its mission of binding the nation together.

“Why is it that I can go to a CVS to add money to my Metro card, but not a post office?” asked Porter McConnell, co-founder of the Save the Post Office coalition. “The post office is an agent of the government with more branches than Starbucks and McDonald’s combined.”

But while the state and local partnerships—if actually used—could be powerful, restoring the ability to partner with federal agencies could reach beyond that.

To use an example, the Treasury Department’s Bureau of the Fiscal Service offers a program called Direct Express, which is a Mastercard prepaid debit card that allows users to obtain their federal benefits electronically, be they Social Security retirement or disability benefits, veterans benefits, or Supplemental Security Income payments. There is no minimum balance on the card.

The Direct Express card right now is a prepaid card that gets reloaded automatically. But if the Postal Service were to partner with Treasury, it could install ATM machines at its locations (providing property) so people could withdraw cash from the Direct Express cards. It could also keep a ledger of card balances, and allow customers to add funds to the cards, either on the ATMs or at the postal window.

While currently this card is limited to federal beneficiaries, another payment that the Treasury Department makes to Americans that could be integrated onto this card is the tax refund. That would open up eligibility to millions.

A prepaid card of this type, with the ability to load money onto it, check balances, pay bills and make purchases either at stores or online, is for all intents and purposes a bank account. A partnership between the USPS and the Treasury Department could formalize that, promoting financial inclusion while opening up a revenue stream for the postal service that would be much cheaper that what the unbanked pay for alternative financial services like check-cashing stores, while still contributing to USPS solvency.

Often the federal partner talked about for a postal banking system is the Federal Reserve, which could grant a bank account to everyone in the United States. But this secondary option with Treasury is also viable, according to postal banking expert Mehrsa Baradaran from the University of California, Irvine. “There’s nothing magical about the Fed,” Baradaran said. “USPS just needs authority and a line through Treasury to route benefits and taxes and just maintain a checking account.”

The Treasury Department even has federal credit programs that could be integrated into this partnership, adding lending to the postal system. The initial postal bank was run through a Treasury system, Baradaran noted, with any liquidity balance funneled into a Treasury account.

The Postal Accountability and Enhancement Act of 2006 restricted USPS’s ability to enter into non-postal services like banking, with an exception for grandfathered services that the post office was already engaged in prior to the law’s passage. That’s how the Postal Service is able to sell prepaid cards today, which is what it’s using in an active postal banking pilot program that allows customers to use paychecks to but the prepaid cards. That program has been ineffective, with no customers at one location in the first month and just six customers at the four pilot locations as of January 12 of this year.

But importantly, a Direct Express partnership wouldn’t be a USPS program, but a Treasury program. And the language of the Postal Service Reform Act of 2022, which received broad bipartisan support, clarified the existing authority for such a partnership.

The language was left over from a previous iteration of postal service reform, legislation that was 15 years in the making. According to a House aide, it was found in the 2016 version of postal reform and authored by former House Oversight Committee chair Rep. Jason Chafetz (R-UT), who is no longer in Congress.

Of course, all of these authorities, whether at the state and local level or with a federal partnership, are theoretical. They rely on the USPS to affirmatively take action. And given the muted and inadequate rollout of the postal banking pilot, it’s hard to have a lot of faith that these tools will be used.

DeJoy’s recent defiance of President Biden over the purchase of 150,000 gasoline-powered postal trucks rather than greening the fleet has further enraged Democrats.

That puts a lot in the hands of Postmaster General Louis DeJoy, the Trump ally who liberals have excoriated for the mail slowness that accompanied his entry into the agency, as well as his ten-year plan that would worsen postal performance and raise prices. DeJoy actively lobbied for the postal reform bill, encouraging his fellow Republicans to sign on. But while he has expressed some openness to new revenue streams, it’s not clear he will use the new tools granted to the USPS by Congress.

Of course, DeJoy isn’t postmaster general for life; most Democrats wonder why he is still in charge of the agency. DeJoy’s recent defiance of President Biden over the purchase of 150,000 gasoline-powered postal trucks rather than greening the fleet has further enraged Democrats.

The Postal Service Board of Governors, not Biden, actually has the power to keep or let go DeJoy. Biden appoints members to that board. The board currently has two vacancies, and Biden nominated replacements last November. If filled, Democrats would have a 5-4 majority on the board. But at least one Democrat on the board appears to support DeJoy, and the board’s newly elected chairman is also a DeJoy ally. This makes it unlikely that DeJoy will be replaced.

“By passing The Postal Service Reform Act, Congress has laid the foundation. The next step is to build the house,” McConnell said. “If Congress and the President don’t clear a path for this growth and change, we’ll just find ourselves having the same conversation again in ten years.”



DAVID DAYENis the Prospect’s executive editor. His work has appeared in The Intercept, The New Republic, HuffPost, The Washington Post, the Los Angeles Times, and more. His most recent book is ‘Monopolized: Life in the Age of Corporate Power.’

The SEC Must Avoid Legitimizing Carbon Offsets

These are nothing more than financial trickery that lets polluters shirk responsibility.

BY DYLAN GYAUCH-LEWIS
MARCH 11, 2022

QUEENSLAND FIRE AND EMERGENCY SERVICES VIA AP
Record flooding inundates streets and buildings in Maryborough, Australia, on February 28, 2022.

The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Read more from the Revolving Door Project

After months of deliberation, the Securities and Exchange Commission (SEC) is set to release their much-anticipated climate disclosure rule later this month. This first step toward measuring climate-related financial risk could be critical to setting the financial system on a more stable path through the inevitable climate transition. The financial industry, however, is likely hoping for a different outcome, one that doesn’t force it to make any fundamental changes. And, as my Revolving Door Project colleague Hannah Story Brown and I explore in a report released today, one of corporate America’s favorite mechanisms for “addressing” climate change without actually doing much is carbon offsets.

The SEC shouldn’t let them get away with that.

An offset is essentially a certificate that an entity can purchase to fund an external project which purportedly prevents or removes carbon emissions, counteracting the harm of their own carbon footprint. But there are problems. First, as many have pointed out, offsets do little to alter polluting firms’ behavior and often just dump the burden of combating climate change elsewhere. Many offset projects aim to reduce emissions in the developing world, resulting in a quasi-colonial trend of dictating natural-resource use in less industrialized countries.

Beyond ethical quagmires, there are rampant accounting problems in offset markets, such as double counting. This is when more than one entity counts an offset against their emissions. For instance, it is not uncommon for both the project’s funder and the government or entity that manages the physical location of the project to claim a reduction in their carbon footprint. Then there is the related problem of additionality: Offsets are supposed to further reduce emissions, but this can enable firms to profit from their already existing projects by promising not to change the status quo. It’s a convenient way to make money by essentially sitting on your hands. In a similar vein, some offset sellers rely on a theory of suppressed demand, where they argue that their project will reduce future pollution “based on assumed carbon emissions rather than actual carbon emissions.”

These accounting gimmicks make it possible to vastly overestimate actual emissions reductions by double-counting offsets, taking credit for existing conditions, and equating a promise to reduce in the future with addressing existing emissions today. With all of these problems, it is perhaps unsurprising that many offset projects can’t verify their emissions reductions and some actually wind up increasing carbon pollution.

These accounting problems can have a huge impact for two key reasons. First, because of the international nature of offset projects, verifying results can be difficult—especially because current carbon market registries lack basic transparency; they disclose how many offsets have been purchased, but not the identities of the buyers. Second, as the offset market grows, accounting issues become more and more difficult to police. As a result, estimates of the effectiveness of offsets can easily become inflated.

Among the many more obvious dangers resulting from a warming planet, climate change poses a dire risk to the financial system. The SEC and other financial regulators are currently developing rules to regulate (and potentially mitigate) that risk exposure. Depending on the exact shape of the framework they propose later this month, the SEC could pave the way for the carbon offset industry’s takeoff or expose its deceptions.

If the SEC’s new disclosure requirements address carbon offsets directly, it will be one of the first American financial regulations to do so. The more significant the disclosure mandated—for instance, if they require companies to report gross instead of net emissions, and to identify all specific carbon offset projects they invest in to lower their net emissions, with emissions “prevention” and emissions “reduction” qualified differently—the less likely that corporations will be able to greenwash themselves with half-baked solutions.

Corporations, unsurprisingly, are hoping for permissive standards that require only minimal disclosure of climate risk management and environmental, social, and corporate governance strategies. Additionally, polluting industries would strongly prefer that the SEC not require disclosures to distinguish investments in offsets from investments in projects that actually cut emissions or mitigate exposure to climate risks. With such rules, carbon offsets and the markets that facilitate them are more likely to become accepted and adopted as a primary mechanism for addressing the climate crisis by companies and governments alike. Knowing what we know about carbon offsets’ integrity problems, this would be disastrous. Offsets exemplify what corporatists and financiers love about unregulated financial markets: how easy they are to game.

The SEC’s climate risk disclosure rule is among the first policy moves from this administration with serious implications for the carbon offset industry, but it will not be the last. And although the administration’s domestic climate plan does not include market-based carbon trading solutions, there are reasons for concern about whether the administration will set and maintain a hard line on offsets moving forward.

Offsets have already permeated some of the government’s international development financing, with the Department of State supporting projects to generate carbon offsets in dozens of countries. As the Biden administration enacts its International Climate Finance Plan, and agencies like the Development Finance Corporation and Millennium Challenge Corporation pledge more funding for climate-related investments, it is crucial that the projects and partnerships funded by federal money go to real, equitable climate change solutions.

Right now, offset markets are still a niche industry—but that could change quickly.

Domestically, too, the opportunities for carbon offsets to secure federal funding are growing. For instance, there has been bipartisan support for heavily investing in a closely related and complementary form of greenwashing called carbon capture. Carbon capture is a fossil fuel–backed technology that the IPCC says poses a “major risk” for climate goals if relied on. It encompasses a range of techniques and equipment that can capture carbon emissions, put that carbon to use, and/or sequester it in the ground. Carbon capture is greenwashed as climate change mitigation when in fact most captured carbon is used to extract more oil, with “enhanced oil recovery.” Carbon capture is not quite the same thing as carbon offsets, but there are a number of critical connections between the two. The first, and most obvious, is that carbon capture projects can be used as offsets. Another common thread is that both carbon capture and offsets are favored fossil fuel industry “solutions” that have had abysmal returns when actually implemented.

Despite these fatal flaws, the Department of Energy poured over $1 billion into carbon capture projects in recent years, none of which have been successful. Now, carbon capture may receive $12.2 billion in funding from the infrastructure bill, and set up fossil fuel companies to make billions more in tax breaks for carbon capture.

These investments could easily continue, thanks to enthusiastic support for carbon offsets among high-ranking administration officials and legislators. Secretary of Agriculture Tom Vilsack is an ardent supporter of developing a carbon bank within his department. Vilsack’s son also works for a firm that aims to build the largest carbon capture project in the world. In the Department of Energy, both Secretary Jennifer Granholm and Assistant Secretary for Fossil Energy and Carbon Management Brad Crabtree have touted the promise of carbon capture projects. John Morton, the climate counselor to Secretary of the Treasury Janet Yellen, joined the administration from Pollination Group, a company that bills itself as a climate change investment and advisory firm and is heavily involved in nature-based investments, including carbon markets.

This makes it all the more important that the SEC’s rule proposal establishes stringent standards that undercut greenwashing from the carbon offset industry and others. With rigorous disclosure, outside organizations and investigators will be better able to pressure finance companies to put their money where their mouth is and invest in real, proven solutions and mitigation strategies, rather than questionable financial products and green PR.

This is a critical juncture not only because the SEC’s new rule will be among the first to require companies to disclose information about their emissions and management of climate risk, but also because the offset market is potentially ready to grow massively in both scale and legitimacy in the near future. Bank of America estimates that the market for offsets will grow by a factor of 50 in the next couple of decades, while BlackRock, the largest asset management company in the world, has stressed the importance of business plans that move towards “net zero” emissions. (Importantly, “net zero” pledges traditionally rely much less on actually slashing emissions than on offsetting them.)

A financial industry group is also setting up its own regulatory body for voluntary carbon markets, which can be safely dismissed out of hand. The task force is slated to include former SEC Commissioner Annette Nazareth, who has a history of supporting large banks and financial institutions over the public interest, including vocally opposing increased regulation in the wake of the Great Recession.

Right now, offset markets are still a niche industry—but that could change quickly. Strong disclosure guidelines now can help to block off the worst abuses simply by making companies back up their “net zero” pledges for the public record. But, if offset markets are allowed to continue on their current path, where they prop up projects that do more to line pockets than fight climate change, the industry may grow to the point where reining it in becomes far more difficult. And the longer that offsets are allowed to remain in the shadows, the more they will disincentivize real climate strategies.

For more on offsets and how they fit into federal regulation, see the Revolving Door Project’s Carbon Offsets Industry Agenda report.

DYLAN GYAUCH-LEWIS is a research intern at the Revolving Door Project.

The Hidden Costs of Containerization

How the unsustainable growth of the container ship industry led to the supply chain crisis

(Illustration by Peter and Maria Hoey)

LONG READ 

BY AMIR KHAFAGY
FEBRUARY 2, 2022
This article appears in The American Prospect magazine’s February 2022 special issue, “How We Broke the Supply Chain.” 

As the world celebrated the new year with family and friends, 23-year-old Filipino seafarer Vince Valeriano marked a dispiriting milestone. For over 15 months, the soft-spoken Valeriano and 22 of his fellow Filipino crewmates have been aboard Cyprus Sea Lines’ massive 54,000-ton MBSC Maria, without ever leaving the ship. This is their second consecutive holiday season without stepping ashore. Although Valeriano was well aware of the long stretches of time that he would be away from his family when he began seafaring two years ago, he could never have anticipated that he would not step on land for this long.

Valeriano says that he and his crewmates have been going stir-crazy. “We cannot go shopping. We’re very homesick here because the internet is limited and we can’t contact our family.”

To make matters worse, for two months Valeriano and the rest of the crew of the Maria have been in a seaman’s form of purgatory, indefinitely anchored off the Port of Long Beach, California, without any word when they will be able to unload their cargo and go back home. Originally, the crew of the Maria had an 11-month contract, but due to the traffic jam, their contract was involuntarily extended by four months. Valeriano makes a mere $530 a month aboard the ship. During the delays, the shipping companies have added very little in the way of hazard pay.

More from Amir Khafagy

The waiting can be excruciating. “It’s not so normal to be anchored this long,” he said via Messenger, his face visibly consumed by fatigue. “This is the first time I experienced this because with container ships you just go to the port but what can we do? They tell us the port is congested.”

Valeriano and the crew of the Maria are not alone. According to data from the Marine Exchange of Southern California, as of the first week of January, there were 105 container ships backed up outside the Ports of Los Angeles and Long Beach, by far the busiest ports in the United States. There was more cargo in the water offshore than the ports processed in all of November. Across the world, nearly 400 container vessels have piled up outside U.S. and Chinese ports, carrying 2.4 million containers.

On board with the cargo are people like Valeriano. At the start of the pandemic, 400,000 seafarers across the world were stranded at sea. As many store shelves lie bare and the cost of consumer goods continues to spike, seafarers are the unseen victims of the crisis, bearing some of the most painful costs.

By contrast, the crisis’s big winners are the nine ocean carrier companies controlling 80 percent of global shipping, which are raking in so much money that they have no reason to fix the problems and end Valeriano’s virtual imprisonment. The price of shipping a 40-foot container from China to the United States was once around $2,000. By August, it had soared to a record $20,000, a tenfold increase. By January, rates receded, but only to around $14,000, still enough to produce incredible profits for a concentrated industry. Shippers earned $25 billion in 2020; research consultant Drewry predicted $300 billion for 2021 and 2022.

This split between the fortunes of ocean shippers and their barely-hanging-on workers stems from industry-wide deregulation that supersized both container ships and the companies that pilot them. Governments handed over power to ocean shippers, and they took it, turning a global crisis into a historic jackpot, at the expense of seafarers and consumers.

The Rise of Containerization

It’s no exaggeration to say that the rise of the shipping container revolutionized the global economy. The abundance of plentiful and cheap goods we have become accustomed to finding at our local Walmart would not exist without the shipping container. Containerization drastically reduced the expense of international trade and increased the speed at which goods are delivered. Today, more than 60 percent of the world’s consumer goods, nearly $14 trillion worth of everything from iPhones to Chiquita bananas, are transported this way. Practically everything we own, will own, or ever want to own has been and will be shipped in a container.

Prior to the standardization of shipping containers between the 1960s and 1970s, most goods were stowed aboard cargo ships in individually counted units known as “break-bulk cargo.” Longshoremen, in crews of up to 25 men at a time, would manually load and unload cargo by hand in a time-consuming and laborious process that would take days. Ships would sit idle at port for far longer than they would be sailing at sea, making ocean shipping impractical, costly, and unreliable. Thus, most consumer goods were manufactured regionally and shipped by truck or rail; imports were rather limited and expensive.

It was not until 1956 that a trucking company owner named Malcolm McLean converted two old World War II oil tankers into the world’s first container ships. McLean, with the assistance of engineer Keith Tantlinger, designed a 33-foot steel intermodal container that could be easily lifted by cranes, placed snugly on the back of trucks and train cars, and locked to reduce theft. It would take only a few hours to unload a ship as opposed to days. Typically, the cost of hand-loading a ship would be about $5.86 per ton. With McLean’s new system, the price dropped to only 16 cents per ton.

Charmaine Chua, assistant professor of global studies at the University of California, Santa Barbara, has spent most of her career studying the growth and politics of the global logistics system. She explains that the move toward containerization did not take place overnight. Ports had to implement massive infrastructure upgrades, in turn radically reconfiguring the urban ecosystem. “It was a process not just about the box but about organizing the whole world transportation system in order to standardize the process in which containers would travel,” she said. “It requires ecological changes to port cities and massive expansions of trucking and shipping spaces that have huge consequences both for the lived environment for people who live in these cities as well as the ecological damage it has done to ports.”

Three ocean shipping alliances carry about 80 percent of seaborne cargo, up from 40 percent in 1998.

But the cost savings were hard to ignore. Mass containerization would allow goods to be produced in any and every low-wage country, radically reducing the biggest cost a company faces: labor. Still, the practice did not really take off until the U.S. deregulated the industries that would be newly boosted by this innovation: trucking, rail, and ocean shipping itself.

Prior to the 1980s, the Shipping Act of 1916 regulated the relatively modest ocean carrier industry like a public utility. Prices were transparent and there were no exclusive agreements for volume shippers; anyone wanting to ship cargo could access the same rates. The United States Shipping Board, later the Federal Maritime Commission (FMC), regulated prices and practices, and subsidies assisted domestic shipbuilding. The act enabled smaller companies to enter ocean shipping with stable prices to weather downturns.

But the Shipping Act of 1984, and later the Ocean Shipping Reform Act of 1998, took down this architecture. It allowed shipping companies to consolidate, and eliminated price transparency, facilitating secret deals with importers and exporters. The FMC was defanged as a regulator. Almost immediately, containerization took off. The number of goods carried by containers skyrocketed from 102 million metric tons in 1980 to about 1.83 billion metric tons as of 2017.

Ocean carriers quickly fell into three “alliances”: 2M, Ocean Alliance, and “THE Alliance.” These alliances carry about 80 percent of seaborne cargo, up from 40 percent in 1998, giving customers few options. Container ships also dramatically increased in size. Today, the average ship is capable of carrying over 20,000 containers at any given time. Many ships are absurdly gargantuan, with some as long as the length of the Empire State Building. Between 1980 and 2020, the deadweight tonnage of container ships has grown from about 11 million metric tons to around 275 million metric tons.

Infrastructure had to be altered to accommodate the increasingly large vessels. Between 2013 and 2019, the Port Authority of New York and New Jersey spent $1.7 billion to raise the 90-year-old Bayonne Bridge—which connects the New York City borough of Staten Island to New Jersey—clearance approximately 64 feet, from 151 to 215 feet, in an effort to accommodate larger ships. Several ports simply cannot handle mega-ships, narrowing the locations where they can be off-loaded.

The mega-ships reduced the per capita cost of shipping goods, which importers and exporters loved. But there were ulterior motives. No upstart carrier could possibly compete with the alliances; they couldn’t afford the massive startup costs to build or lease their own mega-ship. And ports that sunk money into accommodating the bigger ships were unlikely to alienate those mega-shippers through fees or other disfavored practices. The big bad ocean carriers had the rest of the supply chain over a barrel.
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PAUL HENNESSY/SIPA USA VIA AP
The rise of the shipping container revolutionized the globalized economy.

Unintended Consequences

While offshoring made sense to some firms before containerization, its rise significantly cut down on shipping costs and made transporting finished goods over long distances economical. “The shipping container allowed us to take advantage of cheap labor overseas and move a lot of manufacturing offshore,” said Martin Danyluk, assistant professor in the School of Geography at the University of Nottingham. “And that comes at an incredible cost for workers domestically but also for communities.”

Factories no longer needed to be near suppliers and markets, paving the way for mass migration away from manufacturing hubs in Rust Belt cities such as Detroit, Flint, Cleveland, and Buffalo. In New York City, containerization was a major factor in the collapse of its industrial base between 1967 and 1975, pushing the city into a fiscal crisis. Organized labor was also severely wounded from outsourcing. In 2020, only 10.8 percent of wage and salary workers belonged to unions, down from 20 percent in 1983.

Containerization has also had a detrimental impact on the environment. Nearly all cargo ships use low-grade ship bunker diesel combustion engines to power themselves. Some of the biggest tankers can carry approximately 4.5 million gallons of fuel. Ships emit a plethora of toxic substances such as CO2, nitrous oxides, and sulfur oxides, which are known to cause acid rain. The pollution one ship emits produces the same amount of pollution as 50 million cars; emissions from just 15 ships would be the equivalent of all of the cars in the world. A study by the National Oceanic and Atmospheric Administration found that pollution from cargo ships has led to 60,000 deaths per year and costs up to $330 billion in annual health costs from lung and heart diseases.

Port-adjacent communities in Southern California are habitually covered in a blanket of smog emitted from ships and trucks idling in and around the ports. Yale researchers found that a 1 percent increase in vessel tonnage in port “increases pollution concentrations for major air pollutants by 0.3–0.4% within a 25-mile radius of the 27 largest ports in the United States.” Black communities are disproportionately located near ports, and Black people are more likely to be hospitalized for port-related illness.

“The communities that are being harmed by shipping activity are not evenly distributed,” said Danyluk. “It tends to be low-income communities of color … People who are already being marginalized and exploited for whatever the reason are disproportionately impacted by this activity.”

Increased shipping traffic is also playing a major role in disrupting fragile marine ecosystems. Thousands of cargo containers are lost at sea every year, with a possible 10,000 metric tons of plastic being released into the ocean. Vancouver’s famed Southern Resident killer whales are facing the possibility of extinction. The noise that container ships produce is loud enough to drown out up to 97 percent of the whale’s communication range, which impedes their ability to communicate and hunt cooperatively.

An Unsustainable Model

On the ground, the exuberant and gregarious Stefan Mueller, a tugboat captain with a passion for the sea who also serves as an inspector with the International Transport Workers’ Federation (ITF), the union that represents transport workers globally, has combed the shores of Long Beach on his boat, meeting with the crews of the ships anchored offshore. Throughout his many decades of organizing seafarers, he has never seen such a bottleneck, nor has he seen crews this exhausted. As he sees it, the entire shipping industry has grown unstable; in essence, the ships have become too big to fail.

“People say why don’t the ships just go to other ports, well it’s because other ports don’t have deep enough harbors,” he says. “In this big rush for shipping, and monopolizing of the industry, they also said bigger ships mean more cargo. So the ships are really big and that’s the problem, so it became not practical.”

Supply chain experts such as Martin Danyluk agree with Mueller that the entire model on which containerization was built was unsustainable. The pandemic has only exposed the vulnerable underbelly of the supply chain system. As manufacturers, retailers, and consumers have grown to depend on constant flow on cheap container ships, any delay could lead to a domino effect. Case in point: Last March, when the massive, 1,300-foot-long Ever Given clogged the Suez Canal, one of the world’s most significant routes for global trade, it nearly brought the world to its knees. Nearly 400 ships were lined up behind it and are estimated to have prevented $9.6 billion worth of trade.

“Over the decades, we have seen manufacturing companies embrace a kind of riskier supply chain model, where they have tried to trim the fat and embrace what is called lean production systems at every point along the chain,” said Danyluk. “They are minimizing inventory, they are working to minimize labor cost, by counting out workers and automating as much of the transport system as possible. They are tightening the timeline so that goods are sitting for as little time as possible.”
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Meanwhile, the ocean carrier alliances were able to take advantage of the bottlenecks that arose in the pandemic because of their prodigious pricing power. They could raise shipping rates tenfold without fearing any loss of business because customers had next to no alternatives. And they could charge importers for use of their containers (known as detention fees) even if their cargo was buried under several stacked containers and couldn’t be reached. It’s like Uber running all the taxi companies out of town and then being able to jack up prices without limit.

Even as many businesses struggle to keep afloat during the pandemic and consumers struggle to afford consumer goods that have seen prices surge to 31-year highs, the pandemic has been generous to the container shipping industry, with profits at record highs. Mega-ship companies see the increased risk of their business model not as a problem to solve but as an opportunity to exploit. They have no reason to fix the backlog; they’re too busy making money off it.

The Hidden Cost of Labor on the High Seas

Crew members aboard ships, meanwhile, are not reaping any of the industry’s rewards. In fact, with many shipping delays, instead of switching crews at the port after the end of their contracts, companies are forcing their crews to work well beyond the end of their contracts with very little, if any, additional compensation.

“I’m blown away that they aren’t offering these crews double their wages,” said ITF inspector Mueller. “Some of the companies have been pumping up extra $100 or $200 a month. They add a little money to their basic pay, but after you have been on a ship for over a year even that is not enough.”

In 2018, the International Labour Organization (ILO) set the recommended minimum wage for an able-bodied seafarer on a global vessel at $641 a month. A well-paid worker makes a little less than twice that, Mueller explained. “That’s their basic 40-hour week, all their overtime, they live on the ship and a good-paying job is $1,200 a month total,” he said. “So basically it’s so cheap to get these guys.”

But the minimum wage set by the ILO is only a recommendation that ship owners are not bound to. Valeriano, who is just starting out, makes much less than the minimum wage set by the ILO. Although he wouldn’t mind earning extra money, what he really wants is for the company to send him home, rather than wait indefinitely to switch crews. The ITF union, which has agreements with several shipping companies, including Valeriano’s employer, has been advocating for long-delayed crews like his to be replaced and flown home, with little success.

“I should be able to relax with my family with no stress. It’s very stressful here,” Valeriano says.

One way that container shipping companies cut labor costs and avoid regulatory oversight is by adopting the flag of another nation. These are known as flags of convenience (FOC), and shipping companies around the world will often register their ships with a nation that offers less regulatory scrutiny. As of 2009, Panama, Liberia, and the Marshall Islands were the most frequent flags flown by container ships. Workers aboard FOC ships operate under the labor laws of that country, enduring much lower standards in working conditions and receiving far lower wages. Valeriano’s ship, the Maria, flies the flag of the Marshall Islands but is in fact owned by a Greek firm.

“What it has essentially allowed is a massive shifting of the burden of costs and the depressing of wages onto seafarers, who are often paid below what the ship would pay if they were beholden to regulatory standards in their home country,” says Charmaine Chua of UC Santa Barbara.

Crew members aboard ships are not reaping any of the industry’s rewards.

In 2015, Chua saw firsthand how FOC served to lower the wages of workers when she embarked on a grueling journey from Los Angeles to China on an Evergreen Marine Corp. container ship. The crew was mostly Filipinos who were subcontracted by a hiring agency, and the officers were all German.

“The differences in wages were about $3,000 per crew member at the same rate depending on if you were German or Filipino,” she said. “This turned out to be too costly for the company, so they started to move to a flag-of-convenience model and fired all of the German crew on the ship, which means that everybody worked at a lower wage.”

With companies increasingly turning to an FOC business model, it has led to a race to the bottom. To save on labor costs, shipping companies outsource much of their staffing to third-party companies in the developing world. Of the 1.6 million seafarers currently working on 50,000 commercial ships, about 230,000 of them are from the Philippines, making them the single-largest group of seafarers in the world. India represents a close second.

“Most people when they talk about races to the bottom, they are really talking about labor markets between the U.S., Europe, and the rest of the world when it comes to factories and industrial production, but this is happening on the ocean too,” Chua says.

The Loneliness of the Seafarer

On land, 72-year-old Pat Pettit and her sister Mary have been running the International Seafarers Center (ISC), a workers center supporting seafarers in Long Beach, pretty much single-handedly throughout the pandemic. Pettit first volunteered with ISC in the 1980s and eventually became the organization’s manager. Her grandfather was a seafarer and so was her stepfather. “I lived the seafarer’s life, so I know how hard it is,” she says.

For long stretches of time, seafarers are alone with their thoughts and out of contact with the outside world. In the open ocean, seafarers have no access to Wi-Fi or the telephone. This can take a toll on one’s mental health. Over 25 percent of seafarers suffer from severe depression, and nearly 6 percent of deaths at sea are caused by suicide. The pandemic has only worsened the alienation, and suicide rates have been increasing.

Since the outbreak of the pandemic, Pettit has been driving back and forth to the port nonstop, purchasing and dropping off supplies for the seafarers anchored offshore. Even if seafarers are docked at port, their companies are not allowing them to come onshore out of fear of triggering a COVID outbreak on the ship. Together with the Long Beach health department, Pettit has been working to vaccinate as many of the crews as they can, and they have already vaccinated 10,000 workers.

Although the past two years have been exhausting, the pandemic has only strengthened Pettit’s resolve in alleviating the plight of seafarers in the modest way that she can. “Work on the ship has gotten way more difficult, especially with this pandemic,” she says. “It’s just crazy and I just feel sorry for them.”

For workers like Valeriano, the nearly two years at sea have taken a toll on his body and mind. “It’s like a prison,” he said. “I can’t sleep because I want to go home and miss my family. I’m dealing with anxiety and depression. It’s not easy.”

During his wellness checks aboard anchored ships, Stefan Mueller has been working with seafarers as they try to push for the companies to send them home. However, many are reluctant to rock the boat, so to speak, out of fear their company could retaliate against them.

“There’s a blacklist,” said Mueller. “If there were 24 guys out of 200,000 seafarers that made a really big stink, those guys’ names would be faxed to all the crewing agencies and make sure never to hire them. So they don’t want to risk losing their entire careers.”

Normally clean-shaven, Valeriano has allowed his beard to grow wild as a testament to his mental state. He aches for the comforts of his mother’s home cooking and craves Jollibee, a Filipino fast-food restaurant, and guilty pleasure. Onboard the ship, mechado, a Filipino beef stew, is routinely served for dinner. He says it’s hard to swallow.

With internet access sporadic, Valeriano finds it hard to pass the time. Regardless, he fights off the depression with the hope that one day soon he will be back in the warm sun of Manila with his family and friends. As a frontline worker, he feels that has earned his right to some rest.

“I want to go home. I deserve to go home actually.”

AMIR KHAFAGY is an award-winning New York City–based journalist. He has contributed to such publications as The New Republic, Vice, The Appeal, The Guardian, Curbed, Bloomberg, and In These Times. Follow him on Twitter @AmirKhafagy91.

PR THE FIRST TWO LETTERS OF PROPAGANDA

US Congress Proposes $500 Million for Negative News Coverage of China

The effort to counter China’s ‘malign influence’ would fund negative coverage of China’s Belt and Road Initiative—while also beefing up the U.S.’s international lending.


BY LEE HARRIS
FEBRUARY 9, 2022

QINGDAO CITY/NEWS AKTUELL VIA AP IMAGES
The Second Belt and Road Energy Ministerial Conference under way at Qingdao International Convention Center, October 18, 2021

A tech and manufacturing bill currently moving through Congress allocates $500 million for media outlets to produce journalism for overseas audiences that is critical of China.

Meant to “combat Chinese disinformation,” the bill would direct funding to the U.S. Agency for Global Media, a U.S.-run foreign media service, as well as local outlets and programs to train foreign journalists.

The America COMPETES Act, just passed by the House, is an industrial policy plan for semiconductor production and supply chain resiliency. It sets aside technology investment funds for everything from high-level research to high school computer science.

If a domestic manufacturing bill seems like the wrong setting for spending on foreign news dispatches, sponsors say it’s a natural fit, since the need to stimulate American production is a matter of competition with Beijing. The sales pitch for reviving global competitiveness has been vivid: The country’s use of forced labor in Xinjiang camps, Nancy Pelosi said last week in a speech on the bill, “hurts American workers who have to compete with slave labor.”

More from Lee Harris

The House version of the legislation, which passed last week, is a companion to the Senate’s more hawkish bill on China competition, USICA, which passed in June of last year. The plan is to merge both bills through a conference committee in the coming weeks.

The bills have titles penned by the Foreign Affairs Committees of each chamber. Both include a section named “Supporting independent media and countering disinformation.”

While both bills stipulate that the U.S.-funded media coverage should be “independent,” that mandate could be at odds with other requirements in the legislation. There is, at the very least, an appearance of conflict. For example, the Senate bill aims to crowd out Chinese investment in developing countries, and also encourages criticism of China’s projects in those markets.

Critics of escalating tensions with Beijing expressed concerns over the push for anti-China coverage, saying it could potentially undermine the credibility of journalists involved in the reporting.

“We welcome support for journalism,” Tobita Chow, the director of Justice Is Global, a group that advocates for a more equitable world economy, told the Prospect. “But if the government is setting out ahead of time in legislation what the conclusion and the point of coverage is going to be, that doesn’t really qualify as genuine journalism.”
Editorially Independent State-Funded News

The Senate bill aims to produce more anti-China media for regions where it says the Chinese Communist Party and other rivals are ​​promoting “manipulated media markets.” It notes that the sponsored news will be “independent.”

Governments have long funded (relatively) impartial programming, from PBS’s educational shows for children to the titanic British Broadcasting Corporation (BBC). But the U.S. Agency for Global Media (USAGM), which would receive the majority of the media support in this bill package, has a troubled legacy.

A federally funded government agency, USAGM oversees outlets including Voice of America, Radio Free Europe, Radio Free Asia (RFA), and the Office of Cuba Broadcasting (OCB). The outlets have sometimes blurred the line between objective news coverage and pro-American propaganda—a distinction that all but dissolved in the Trump years.

After the OCB came under fire for airing a 2018 segment calling the philanthropist George Soros “a nonbelieving Jew of flexible morals,” it conducted an internal review that offers a candid look at U.S.-run foreign media’s mission.

“A primordial rule of successful political messaging and modern marketing is that to influence people, you must usually first establish empathy with them,” the report explains. “OCB’s broadcasts and postings do that far too little. They seek instead to activate overt opposition and hostility to the entirety of the Cuban Revolution.” Instead, the report recommends a subtler approach that could more effectively sway Cuban public opinion.

The Trump administration put a registered lobbyist for Taiwan in control of Radio Free Asia, drawing criticism from journalists who said the outlet’s credibility was tarnished. And staffers at Voice of America wrote in a letter that orders to broadcast a speech by Secretary of State Mike Pompeo were an attempt to “stage a propaganda event.”


Progressive critics said that media funded as part of strategic rivalry with a peer competitor can lose its objectivity, or at least the appearance of objectivity.

U.S.-run broadcast networks have been responsive to changing political currents as recently as last December, when Voice of America expanded coverage in the area and named its network’s first-ever Eastern Europe chief, citing rising tensions with Russia and “the impact of Russia’s and China’s influence throughout the region.”

In light of that history, anti-war activists have been wary of expansions to U.S.-run news networks. While they were careful not to equate reporting by state-funded media in the United States, where robust free-speech laws protect journalists, to heavily censored state media in China, several progressive critics said that media funded as part of strategic rivalry with a peer competitor can lose its objectivity, or at least the appearance of objectivity.

“When the United States funds ‘independent’ media to report critically on China, very serious guardrails must be adhered to so that the U.S. government doesn’t simply appear to be pushing its own form of propaganda and to protect the safety and credibility of reporters who cover China with a critical lens,” one congressional progressive staffer said. “Otherwise, this funding is just an exercise in crude soft-power projection, with many sources at risk of being much more easily dismissed or repressed as pawns of a U.S. geopolitical strategy.”

The staffer added that progressive legislators would push for outlets and journalists receiving U.S. funding or training to disclose that relationship transparently in their reporting.

“The Chinese state’s own attempts to manipulate public opinion overseas tend to backfire,” Jake Werner, a researcher on China at Boston University and co-founder of Justice Is Global, told the Prospect. Although the funding could produce some good journalism, he said, “it would also tend to sow doubt and hostility toward journalists doing critical reporting on China’s activities among key audiences like overseas Chinese.”

Responding to a request for comment, Rohit Mahajan, a spokesperson for Radio Free Asia, referred the Prospect to RFA’s mission statement.

“Radio Free Asia’s journalists do not engage in propaganda,” Mahajan added. “RFA brings fact-based, independent news to millions living in places where authoritarians and elites do everything in their power to silence a free press and free speech.”
Amendment to Limit Production of Propaganda

In the 1970s, following reports that Radio Free Europe and Radio Liberty were backed with CIA funds, Arkansas Sen. J. William Fulbright, a pre-eminent critic of American foreign policy, argued that the “radios … [should] take their rightful place in the graveyard of Cold War relics.” While most of Fulbright’s opposition to U.S.-run broadcasting was unsuccessful, he led a reform effort that restricted the distribution of overseas propaganda material to Americans.

Rep. Edward Zorinsky (D-NE) later extended that reform, arguing that refraining from propagandizing the American people “distinguishes us, as a free society, from the Soviet Union where domestic propaganda is a principal government activity.”

That prohibition, which extended to Radio Free Asia and other USAGM networks, was in place until 2012. An amendment in that year’s defense authorization bill repealed the ban on disseminating propaganda to domestic audiences. A spokesperson for the USAGM (then called the Broadcasting Board of Governors) said at the time that repealing the ban would increase transparency and help the agency reach diaspora groups living in America, such as Somali expats in Minnesota.

Now, progressives concerned about the new enthusiasm for producing reporting critical of competitors are hoping to limit the likelihood that new funding produces propaganda. An amendment to the House bill, introduced by Rep. Veronica Escobar (D-TX), would prohibit the use of any funds “for publicity or propaganda purposes not authorized by the Congress.”

“The initial goal was to try to revive that long-standing prohibition on propagandizing people in the United States,” Erik Sperling, the executive director of Just Foreign Policy, told the Prospect. Sperling’s group worked on developing the Escobar amendment.

When reached for comment, Sperling said he was surprised to see that language specifying “United States” had been cut from the amendment after he had last seen it. While his organization had only planned to push for the more modest request not to propagandize Americans, he welcomed a more general mandate not to distribute propaganda overseas.

The amendment passed among two dozen Congressional Progressive Caucus amendments to the House legislation. Since a ban on propaganda could be at odds with more hawkish coverage of China, it remains to be seen how it will be reconciled with the bill’s broader priorities. A progressive staffer said it is intended as a “guardrail.”
China Criticism Aimed at Arenas Where U.S. Seeks to Compete

Funding critical news coverage in a bill package that heightens competition with the subjects of that coverage could call into doubt the objectivity of U.S.-run media.

One example is coverage of China’s Belt and Road Initiative (BRI). The Senate bill encourages criticism of the BRI, which it is directly seeking to compete with.

China in recent years has erected ports, bridges, and other public works in countries from Pakistan to Peru. The result is an imperial-scale influence campaign, targeted at developing countries and geostrategic choke points, that has been compared to the Marshall Plan, America’s spending to rebuild Western Europe and contain the Soviet Union after World War II.

Since taking office, President Biden has talked about wresting back turf from China with rival investments, particularly in nearby Latin America and the Caribbean. USICA, the Senate bill, would raise U.S. spending through the Inter-American Development Bank, and introduce “conditionality measures” to block partner countries from borrowing simultaneously from China.

One subtitle of USICA creates a “Countering Chinese Influence Fund” totaling $1.5 billion over a five-year period, with more than a third of funds aimed at media outlets.

The push to counter China, the subtitle explains, should “raise awareness of and increase transparency regarding the negative impact of activities related to the Belt and Road Initiative.” It should also urge “support for market-based alternatives in key economic sectors, such as digital economy, energy, and infrastructure.”

The House and Senate Foreign Affairs Committees did not respond to questions from the Prospect, including on how bill sponsors define “disinformation” and “misinformation.” The terms are not defined in either bill.