I did a spot on CNBC Squawk Box this morning to discuss the impact of the recent unrest in China. Much of the news surrounds stories about migrant worker protests. As I wrote yesterday, the drivers for the protests making the news is not ideology–it is practical life issues like pay, jobs, work practices, discrimination, and corrupt local government officials. Wen Jiabao recently said that corrupt officials is China’s greatest crisis. Last year more than 146,000 corrupt officials were arrested in China; 97% of them were at the county, city, or village level.

Our discussion this morning turned on the impact on the US. The biggest US risk is supply chain interruptions, much like the Japanese earthquake. Just under half the manufacturing capacity in the world is in China. Much of it is in southern China, especially Guangdong, where the factories are operated by migrant workers from Sichuan, Hunan, and Xinjiang. Recent job losses in Guangdong caused by “hollowing out,” (businesses moving to cheaper locations in Vietnam and other Asian countries) are a real problem. Migrant workers are often the only source of income for their families in poor villages in western provinces. Rising food prices has also put the squeeze on migrant worker incomes, even though the incomes are rising at 10% per year.

All this is interesting, but what I care about are the people. It is easy to lump groups of people together and call them “migrant workers” if you have never met them. Not so easy when you know their names.

I thought I would just take a minute to inject a little humanity into the story by posting a few pictures of the kids I work with in the migrant worker schools in China. For several years, my partner Fred and I have organized teams of university students to work in primary schools in poor villages, often migrant worker schools. We have done projects in Tibet, Yunnan, northern China, and tried to do one in North Korea that failed to happen. In each case, we supply the students with books and materials to build libraries and kitchens, plant gardens, pay student fees, and give the children pencils and paper. The students spend a month or more in the schools teaching and working with the children.

Here are a few pictures from one of our recent projects in a migrant worker school in northern China.

The photo above is our team for a migrant worker school project. Fred (white t-shirt just in front of me) is my partner in all the projects we do. Ethan (black Rutledge capital shirt in front of me) was team leader for this project. The other team members are students at China Agriculture University.

Below are a few of the children, including an unforgettable kindergarten student showing me her very beautiful graduation dress.

This is a migrant worker school classroom. The classrooms have no doors and no heat in the winter–the students weal heavy coats in class to stay warm.

Finally, the picture below is a very special one for me. We were able to arrange for 15 of the students graduating from the migrant worker school to go to the official public school nearby, which will allow them to later go to university. They needed clothes, school supplies, and the like to fir into the new school. This is a picture we took on their first day of class. I keep this photo on my desk.

I hope you get to meet some of these wonderful children one day for yourself.

JR

The chart below shows the amount of currency held by the public through last Friday. Can you detect a pattern? When people get scared, as they are now, they pull money out of the bank, out of money funds, and out of their brokerage accounts and stick it under the mattress.

 

 
When this happens, the initial impact is to shrink bank reserves by draining off increases in the monetary base outside the banking system. This is important because (at least until 2 weeks ago)the monetary base was growing quite slowly. During the period 9/27/07 to 8/27/08 the monetary base increased at a 2.6% annual rate, while bank reserves increased by just 0.9%. Both are too low to allow banks to provide working capital to their growing business customers, let alone to solve a credit freeze. That’s why I have been complaining about the Fed’s sterilization policy and that’s why I have been advising the administration, in a series of White House conference calls, that the rescue plan cannot succeed unless it has the proper Fed policy to support it.

Over the past 2 weeks, of course, all this has changed. The Fed has nearly doubled reserves, from $98.3B on Sept. 10 to $166.3B on Sept. 24. It is too soon to tell if this is a new policy (i.e., if they have abandoned sterilization), or if it is a one-time hail Mary pass. It would help if the Fed would clarify this in writing.

The increase in currency holdings also highlights one more thing. I think it is dereliction of duty for policy makers and political leaders to use fear as a weapon. Can you imagine Winston Churchill, or FDR, or President Reagan intentionally scaring people? In my book, a real leader helps people remain calm in difficult situations and helps them marshall their energies to fix whatever issues need to be addressed. At least since 9/11, we have used fear as a tactic for mobilizing public support for various policies and for manipulating people’s behavior. But fear, over long periods of time, is physically and psychologically debilitating. And fear tactics undermine the public’s willingness to respond when there is a genuine problem. I can’t help wondering how much of today’s fear is a reaction to that history.
JR

Here’s a great article to read on Easter weekend. The Secret to Happiness? Giving. It reports a recent study by social psychologist Elizabeth Dunn of the University of British Columbia showing that people who donate their dollars to charities or splurge on gifts for others are more content than those who squander all the dough on themselves.

The real question is why this is such a hard lesson for all of us to learn–and remember. I know it’s true for myself. When people ask what I did last year that gave me the most joy, the answer is easy. 1) Being with my daughter Manda the day she had her first child and meeting granddaughter, Isabela for the first time, and 2) helping a group of student build a library in a school for disabled orphans in Llasa, Tibet. (I will write more on both later.) Good days in the market and fancy dinners don’t seem to hold their value.

This is good because there is so much work to do to help other people, both at home and far away from home.

I have been reading a lot of articles in Behavioral (or experimental) Economics and Evolutionary Economics, as well as Cognitive Science, System Theory and Nonequilibrium Thermodynamics. All are much more interesting than so-called modern economics and finance (the neoclassical synthesis). Economics has largely become a church to worship increasingly irrelevant equilibrium theorems rather than challenge old ideas.

JR

I mentioned a Benjamin Franklin quote a few days ago in a story discussing the damage that has been done in history by ordinarily decent people who have become frightened by a chaotic event which has penetrated the patina of our illusion of order.

They that give up essential liberty to obtain a little temporary safety deserve neither liberty nor security. Benjamin Franklin

Franklin’s experience in both the American and French revolutions gave him a full palette of atrocities as examples of frightened man’s inhumanity to man.

These events always appear to be non sequiturs when observed from the comfort of our living rooms. The Turk threatening Venice in Othello; Plague in Spain and war with the Moors led Isabella to expel the Jews from Spain in 1492; Plague in Italy burned Savonorolla in Florence; in Italy, 2 million unemployed and 50% inflation led to food riots in 1920, the occupation of the factories by 500,000 workers in September 1920, and the March on Rome by fascist squadristi in October 1922, made 39 year old (former Socialist) newspaper editor, Benito Mussolini Italy’s youngest Prime Minister; the Great Depression triggered the election of Hitler and the Holocaust that followed. But they are not random acts; they are the inhumane acts of frightened people. Unfortunately, people will do almost anything to restore our imaginary sense of order.

History also provides examples of leaders great enough to stand up against reactionary pressures to restore both order and humanity. Thomas Jefferson, for example, acted the moment he became President to rescind the Alien and Sedition Acts, which had been passed by a fearful Congress and signed by John Adams in 1798.

There is an opportunity today to provide the same leadership Thomas Jefferson showed 200 years ago. But it will require courage to stand up to the mob, tell them it’s time to calm down, that we’re OK now, that it’s time to go back to work. And it will require selfless dedication to forego the popularity and easy political gains to be had by fanning the flames of people’s fears. We badly need that leadership today.

The American public was so frightened by the attacks on 2001 that we stand up and cheer whenever a political leader promises the return of our sense of security. This has fostered reactionary policies we have not seen since the days of Joe McCarthy. End-runs around due process and right to trial (Guantanamo), end runs around restrictions on search and seizure in the Patriot Act, the bloated Homeland Security and TSA programs, restrictions on visas of all kinds, the finan cial terrorism of Sarbanes-Oxley, and the rampages of Elliott Spitzer are the practical manifestations of our fears.

We have allowed our fears to compromise our lives and our principles in ways Benjamin Franklin would have found dangerous and destructive of ourselves. Fear is by far more destructive than terrorists. Our sense of security lives in our minds, not in our airports. That is where it will ultimately be restored. It couldn’t be soon enough.

JR