Ex-Dow Scientist Admits to Economic Espionage, U.S. Says

An ex-Dow AgroSciences LLC researcher pleaded guilty to economic espionage in connection with the theft of trade secrets from his former employer to benefit a Chinese university, the U.S. Justice Department said.

Kexue Huang, 48, also admitted to stealing trade secrets from the Minneapolis-based grain distributor Cargill Inc., the U.S. said in a press statement today.

“Mr. Huang used his insider status at two of America’s largest agricultural companies to steal valuable trade secrets for use in his native China,” Assistant U.S. Attorney General Lanny Breuer said in the statement.

Huang entered guilty pleas today in two separate criminal cases before U.S. District Judge William T. Lawrence in Indianapolis. Financial losses from his conduct exceed $7 million, the U.S. said.

His attorney, James Edgar of Indianapolis, didn’t immediately reply to voice-mail and e-mail messages seeking comment on the pleas.

Huang worked for the Indianapolis-based unit of Midland, Michigan-based Dow Chemical Co., where he researched the development of organically derived pesticides, from 2003 to 2008. He then went to work for Cargill as a biotechnologist.

Two People

While at Dow, he shared confidential information with at least two people, one of whom conducted research first at the Hunan Normal University in China and later in Dresden, Germany, according to a plea agreement that didn’t name the people.

In stealing, transferring and using Dow trade secrets, Huang “intended to benefit” Hunan Normal University and the National Science Foundation of China, according to the plea agreement. Each of those institutions is controlled by the Chinese government.

A U.S. grand jury in Indianapolis indicted Huang on 17 counts in June 2010. A separate federal grand jury in Minnesota returned a single-count indictment accusing him of stealing a trade secret related to food processing from Cargill in November. That case was transferred to Indianapolis, where it was unsealed today.

Huang also admitted to sharing information taken from Cargill with a Hunan Normal University student.

“Cargill is pleased the case has been resolved,” a spokeswoman for the company, Lori Fligge, said in an e-mailed statement.

Ten Years

Garry Hamlin, a Dow spokesman, said it can take more than 10 years for the technology Huang tried to obtain to reach the market.

“Dow AgroSciences has analytical technology and processes in place to identify third-party product produced with proprietary technology stolen by Mr. Huang,” Hamlin said in an e-mailed statement. Dow is strengthening security measures to protect its technology and seeking to ensure that counterfeit products derived from it never find a market, said Hamlin.

The crime of economic espionage is punishable by as long as 15 years in prison, and trade-secret theft carries a maximum term of 10 years, the Justice Department said.

“Today’s plea underscores the continuing threat posed by the theft of business secrets for the benefit of China and other nations,” Lisa Monaco, assistant U.S. attorney general for national security, said in the Justice Department’s statement.

The Chinese embassy’s press attache in Washington also didn’t immediately reply to an e-mailed request for comment.

The cases are U.S. v. Huang, 10cr102 and 11cr163, U.S. District Court, Southern District of Indiana (Indianapolis).

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The next Nobel Prize

Monday, the next "Nobel Prize" in Economics will be announced and everybody is playing a game of predictions, so why not me? I have a wish that happens to coincide with my prediction: William Nordhaus.

Why? Because environmental economics has been long rumored to get it and it deserves to be recognized. Within that field, Nordhaus has made major contributions that brought this field to the mainstream. And he is a genuinely good guy, always helpful and willing to listen to you or help you out. Also, the signals I have been receiving from members of the Prize committee is that they really like his work.

I am afraid, though, that he may have to share his work with Martin Weitzman. Who has made the more seminal contributions to the field can be discussed, but Weitzman is all the opposite in terms of attitude. In addition, I do not like his way of trying to make a name of himself, like I showed previously. He has also been caught and punished for stealing horse manure, so his ethical standards are definitively not up to par.

Marx and Solow

For all the justified criticism one can have about the work of Karl Marx and the economic system that resulted from it, old Karl was onto something. The Industrial Revolution saw the rise of a new class, the capitalist, that generates a smaller share of its income from manual work and instead uses its brain and capital. That is in terms of welfare a positive evolution, were it for the fact that workers hardly had it better compared to their previous agricultural life and thus did not get a share of the new riches. What especially irked Karl Marx was the lot of the workers could not improve, either because they were not getting a larger share of income, or because there was no path to become capitalists themselves in large numbers, something later termed as a lack of social capilarity.

Jørgen Heibø Modasli finds some of these features in a model inspired by the Solow growth model, augmented by incomplete markets that require that one cannot borrow to become a capitalist entrepreneur and that the entrepreneur can only work for himself. This introduces a non-convexity and quickly a two-class system emerges, with workers not having any reason to save much as they have no chance to become capitalists. Also, the class division persists over time, even when credit and capital markets improve.

Yet, this is not entirely convincing. Indeed, economies with less incomplete markets, say, the United States, should see less inequalities, and inequalities should have declined over time as markets developed. This is hardly what we can see in the United States, where access to credit is widespread, yet income inequalities are high and growing, and social capilarity is largely absent.

Politicians and leisure

When you think about leisure in the utility function, for most applications you need to take a stand on some properties: is the income effect larger than the substitution effect? Is leisure a normal good in the first place? Convincing empirical evidence is surprisingly difficult to find: read the endless debate between microeconomists and macroeconomists about the size of the wage elasticity. This may be an aggregation issue, but maybe we are lacking a clear natural experiment.

Naci Mocan and Duha Altindag report on an interesting change in the way members are paid in the European parliament. Whereas previously they were compensated at wildly different levels by there home countries, since July 2009 they get money according to a uniform rule: 38.5% of a European judge's salary as a base, plus a per diem when present. Mocan and Altindag then use the difference between and with the previous schemes to highlight that an increase in the base reduces attendance (yes, the income effect! Leisure is normal!) and an increase in the per diem increases attendance (the substitution effect is larger than the income effect). Politicians are rational after all.

Mandatory health insurance and informality

Insurance suffers chronically from the problem that only bad risks want to get insured, which makes the cost of insurance prohibitive and the insurance market often collapses while its presence would be a clear welfare improvement. A workaround is to force everyone to participate, thereby avoiding that good risks could weasle out. This is the principle behind helath insurance mandates in most of the Western world, and it is part of the so-called Obamacare. But such mandates are difficult when there is a large informal economy, as it makes difficult tracking people, especially if access to government services, paying taxes, etc. are the way the mandate is enforced. Could in fact a mandate increase informality?

Reyes Aterido, Mary Hallward-Driemeier and Carmen Pagés look at Mexico and ask a somewhat different question, but it is still informative: Does the provision of health insurance to those without social security (mostly informals) increase informality? They find the formal sector decreased by 0.4 to 0.7% points because fewer people join it. It is not surprising that fewer people see the need to be cover by social security and thus declared their jobs, yet I find it interesting that the effect on formality is so low in a country where it is so easy to disappears from the books. Transpose that to, say, the US, where having a job is currently pretty much a requirement for health insurance coverage. Would then a health insurance mandate lower the incentive to have job? Most likely yes, but seeing how small the impact was in Mexico and considering that the lower elsticity of the formal/informal margin in the States, that effect is very likely to be very small.

About a (partial) return to the gold standard

In difficult times, it is easy to blame central banks for everything. Part of their role, after all, is to play the scape goat for policies the politician do not dare implementing. But then, there is only so much the central banks can do, as Europe and the United States no "nicely" show now. A substantial ingredient in the blame game is a call for a return to the gold standard, a nostalgia for supposedly better and easier times.

Olivier Ledoit and Sébastien Lotz echo this call and study what our current understanding is about the coexistence of fiat and commodity money. In principle, we can start from the idea that currency competition is good: this would force the central bank to be more careful with its fiat money. Indeed, we have learned from money search theory that bad money does not necessarily chase good money (the old Gresham's Law). Also, if the commodity has a positive return, its monetization is benefitial as long as its storage and transaction cost is sufficiently low. The question is then on how to find a commodity that has a real return from just sitting there. There is a larger problem, though, with small denominations. How do you mint coins measured in cents when the commodity is, for example, gold? Either the coins need to be very small or they have very small commodity content, to the point that they become ... fiat money. Monetary policy also becomes tricky, as quite obviously temporary easing becomes difficult if it risks driving fiat money out.

But in the end, isn't a commodity like gold only valuable because people believe it is valuable? Gold, to take an extreme and popular case, has little intrinsic value, as I argued before, and is thus just another fiat currency. It is all a question of perception.

Monetary and fical policy cooperation in a liquidity trap

We are living interesting times in terms of macroeconomic policy: the world faces big shocks and substantial challenges, and many current circumstances have no historical precedents. This means that policy makers cannot draw from experience and need to invent new policies from somewhere better than their guts. And after a few hesitations, theory is now in much better shape to answer questions from policy makers. For example, what should one do when there is a liquidity trap in a globalized economy, especially if the trap itself is globalized?

David Cook and Michael Devereux show how, and it borders on a political miracle. Not only does one need to get the cooperation of fiscal and monetary authorities (something the US is not close to acheiving) but one needs the cooperation across countries even if it entails some costs to the "winners" (something the Chinese have so far refused and the Swiss recently abandoned).

Specifically, Cook and Devereux show that with so many countries currently with negative real interest rates, we have a worldwide liquidity trap. In an open economy, the policy prescription differs from a closed economy. If there is a negative demand shock, fiscal policy needs of course to raise aggregate demand, but with a global economy, this can come from anywhere in the world and thus a coordinated fiscal policy is due. But to channel the impulse to the relevant countries, monetary policy coordination is necessary to raise interest rates in the foreign countries, even if they are in a liquidity trap. And this takes some serious courage. One can always dream.