Why I Don't Think the Euro Will Dissapear

Hi Everyone,

The punditocracy is waxing panic stricken about the future of the Euro. With the ongoing crisis in Greece, Italy, Spain, Portugal and Ireland, there is increasing pressure on government borrowing throughout the Eurozone. This has many TV experts pronouncing that a break up of the Euro and a return to national currencies is inevitable. From this, many go on to predict that the EU itself is in serious danger. These types are fond of referring to the EU as an "experiment." But I think there is another outcome that is at least as likely. I think the EU will become even more centralized. Here are my reasons.

First, a number of economists have reported (see this article in Der Spiegel) that the costs of abandoning the Euro will be even greater than the costs of fully committing to a bail out of all the countries in crisis. The key quotation is here:

UBS chief economist Deo, has even gone so far as to estimate that 20 to 25 percent of GDP might be realistic in the first year after a German exit alone. That would translate to a per capita cost of between €6,000 and €8,000, with costs of between €3,500 and €4,500 in subsequent years. By comparison, if, after Greece, Portugal and Ireland each had to be given a debt haircut of 50 percent, Deo estimates it would only cost around €1,000 per German citizen -- and it would be a one-time cost.

In other words, the German government has a choice between a really bad outcome and a truly horrendous one. Similar choices face the governments of the other Euro-zone countries. So long as European leaders are not so foolish as to put this choice (or more likely part of it) to a popular referendum, I'm fairly confident that each government will be wise enough to chose the really bad option and avoid the truly horrendous outcome.

Another reason I think the EU will become more centralized has to do with what the German government will demand in return for financing these bail outs. As the EU leaders begin to talk about reforming the treaties that govern the EU, the proposals all seem to be in the direction of more integration and more central control over national spending. One would be forgiven for thinking that the Germans are insisting that if they get stuck with the lion's share of the bill, then they should be allowed to remake the European Central Bank more in the image of the German Bundesbank. That is a powerful and independent central banking institution that acts to restrain inflationary government spending policies.

Furthermore, if we think about the incentives to a country like Greece to ditch the Euro, the choices have been badly misunderstood in the press. The way the story is reported in most media, it is assumed that the Greek people are being made to suffer more for the sake of staying in the Euro. This is most likely not the case. If Greece left the Euro, it will still be obliged to pay off its debts. Having left the Euro, it would have to do this by printing Drachmas... A LOT of Drachmas. Predictions of hyper inflation are not unreasonable in this event. That would hit Greece at exactly the same time that it gave up the trade advantages and attractiveness to Northern European investors that came with the Euro. In other words, Greece has a choice between painful austerity and painful austerity plus stagflation! Greek politicians have already indicated their choice... they'll take the austerity and pass on the stagflation.

Finally, even though all these changes will require heroic compromises between governments with often opposing interest, I think a deal for long term reform will happen. The consequences of failure to reach a compromise will be so dire that the governments will make the deal happen. It will be messy, lurching, awkward and push things to the final final deadline, but I think a deal will happen. And although the Germans will end up paying most of the bills for this mess, the price they will charge in return will be in the form of major reforms to the EU itself. In five or ten years we will be talking about the de facto Bundesrepublik Europa.

I should also emphasize that I'm not predicting a rapid economic recovery in Europe. I still think the EU will be hit with a nasty recession. I'm just surprised that so many people think that this recession will destroy the Euro and the EU. I get the impression that most commentators simply do not understand how firmly established the EU really is. They seem to think of it as some kind of European version of NAFTA with a currency union tacked on to it. It is far more institutionalized and deeply rooted than that.

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I'm Sick of the Greeks!

I have often blogged or commented about my opposition to direct democracy. Usually, my ire is directed at Prop 13 and other examples of how direct democracy undermines good government in California. But today I'm going to direct my disapproval at the proposal of the Greek Prime Minister, George Papandreou's, that the EU debt deal be subjected to a popular referendum in Greece. In particular, Mr. Papandreou, a social democrat from the PASOK party, is arguing that since the deal requires further austerity measures in Greece, he cannot implement them without the mandate of a popular referendum. I shall make three arguments against this step. The first is institutional: that Mr. Papandreou could in fact implement these measures immediately. The second is practical: that the average Greek citizen is not qualified to understand the implications of rejecting this plan and is even unlikely to understand which alternatives are genuinely viable. The third argument is moral: that since a significant contributing cause of the crisis is the widespread tax evasion of ordinary Greeks, they do not have the moral authority to plunge the entire European Union and the world with it, into another Great Recession.

Greek institutions are exceptionally centralized. Policy implementation in Greece, when it happens, is a relatively straightforward process. Most policies are implemented under the supervision of local prefects appointed by the interior minister. The interior minister is appointed by the Prime Minister and since Greece is nearly always governed by a single party government, Prime Ministers are the top of a highly centralized chain of command within the bureaucracy. There might be a legislative problem. Mr. Papandreou's party have a very slim majority and there have been resignations. One might suggest that this could prevent Mr. Papandreou from enacting the necessary legislation. However, the main principles of the austerity measures are in line with the typical agenda of the center right. As it happens the only serious opposition party in Greece is a center right party, New Democracy. Surely some deal could be struck that would allow cooperation between both parties. Indeed, several PASOK members of parliament have called for a grand coalition of national unity between the two major parties to do exactly that. The only reason a referendum is "necessary" is because Papandreou is trying to avoid getting the political blame for painful austerity measures.

So why is it more practical for this be done by a representative legislature instead of a referendum? There a three reasons for this. First, a referendum by its nature can only be a straight up or down vote on a given proposal. Negotiations and amendments, even minor ones, are not possible. A legislature allows for nuance and flexibility that may be critical in a time of monumental economic crisis. Second, voters cannot be expected to understand the complexity of all policies. One should not expect the average voter to understand the enormous complexity of a debt restructuring program that involves numerous national governments in Europe, North America and beyond along with global intergovernmental organizations like the International Monetary Fund. Third, if a majority of Greek voters reject the restructuring package out of a reluctance to accept the pain of the austerity elements, it would almost certainly provoke a disastrous financial tsunami on the order of the 2008 financial collapse. The Greek voters simply cannot be relied upon to understand the consequences not only for their own country but for the world if they indulge in some emotional populism in the form of this referendum.

But why, you may well ask, should a democratic society be expected to accept massive economic pain (and it will be painful) without being given the chance to vote for their own interests? Normally, I'd be quite open to this line of reasoning. However, the Greek situation is one of their own making. International banks did not force the Greek government to neglect the training and staffing of their tax collection authority. International banks did not force individual Greeks to take advantage of that lack of tax collecting enforcement by engaging in widespread tax evasion. As I have said in other blog entries that raising taxes is not a viable option because the Greek tax collection capacity combined with the ubiquitous tax evasion means that raising the nominal tax rates will simply change the text of the tax laws that everyone is ignoring. It won't actually generate more revenue. The Greek people, politicians and bureaucrats brought this catastrophe on themselves and the rest of us. They should NOT be given a veto over how the world decides to fix the mess.

There is plenty of pain being shared around the world in this restructuring. German tax payers will be paying off Greek pensions for a generation or more as it is. German taxpayers are also putting up additional emergency funds to cover future problems should the debt crisis spread to Italy or Spain. French banks are going to write off enormous portions of the debts Greek borrowers owe them. The Italian parliament just approved austerity measures of their own to stave off a similar crisis emerging in that country. Ireland has been living with these austerity policies since 2009. For the Greeks to now sabotage this plan is adding insult to the injuries already being endured around Europe! Enough! Mr. Papandreou should enact this law NOW. And if it means his political career ends after that, so be it!

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Obama's Proposals Don't Change Student Loans

It has been reported that the President wants to change the student loan program. One change that is being touted is that students are allowed to consolidate private and public student loans.

Well, this isn't a change. This is a long standing policy. I had both private (i.e. Sallie Mae) and USDE loans (Public). I consolidated them with the USDE in 2000. What they do is average out the interest rates on all your loans to get a new interest rate for your current loan. The benefit is that you make one payment to one lender at one interest rate. Usually this means a single lower monthly payment. Credit counselors have used this trick for years to help "restructure" the debt of their clients. This type of consolidation is not new nor does it represent a change to the current student loan systems.

Assuring that student loan payments don't exceed more than 10% of someone's disposable income doesn't represent much of a change either.The student loan program introduced an "income contingent" repayment plan back in the early 2000s. They take your pay stub and based your monthly student loan payment on your gross salary. The bad news here is that if your income is low, then your monthly payment under the income contingent program may not be enough to cover the interest that accumulates over the moth. Interest that is not paid is capitalized, meaning added to the principle of the loan. So there is a whole cycle there. Interest needs to amortized like they do with home mortgages to really be fair and help students pay down the loans. Building bigger principle is simply a desperate measure to alleviate today's pain. Income contingent re-payment only keeps people under the boot of debt longer.

I am not sure if the Obama Administration is being misunderstood by the media, or if it really is selling a load of crap to the "Occupy" crowd and the voters. I would hate to believe that the Obama Administration is that cynical.

Really the best deal for students and lenders is what I already proposed in my earlier post.

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The End of Gadhafi

It's official, Lybia is now well rid of Moammar Gadhafi. This may seem like a minor event to most Americans who - justifiably - may be focussed on more pressing economic troubles at home. But this could have enormous, mostly positive implications not just for the Middle East for Africa and the rest of the developing world.

Gadhafi saw himself as world revolutionary leader with particular interest in tilting at internationalist windmills. In the 1970s Gadhafi was a prime moving force behind abortive plans to unite various Arab countries into the Arab Islamic Republic or the Federation of Arab Republics. The FAR plan's collapse led eventually to a war between Egypt and Libya (Egypt won reasonably easily). In the 1990s, Gadhafi turned his vision southward and pushed for the creation of a United States of Africa.

Gadhafi was not only a consistent backer of terrorist attacks but he was also the primary source of training and weapons for some of Africa'sworst dictators and irregular militia groups. Gadhafi had close military ties with (among others): Idi Amin, Charles Taylor, Robert Mugabe, the Janjaweed, Slobodan Milosevic, FARC, Hugo Chavez, Daniel Ortega and other, less infamous, tyrants, cleptocrats, thugs and killers. It's worth noting however that Gadhafi was consistently incompetent militarily. Other than successfully winning his coup d'etat 42 years ago, I don't think he was victorious in any military operations of note (I may be wrong but a string of famous defeats is foremost in my head now).

This man was not merely a quirky and somewhat clownish dictator who oppressed his own people. He was a force for chaos and bloodshed around much of the world. He had a knack for picking loathsome allies. His only saving grace was his military incompetence. If he had succeeded in more of his plans, the world would have been even worse off than it was given his bloody failures.

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Occupy Wall Street: Student Loan Forgiveness

Some Occupy Wall Streeters are calling for student loan forgiviness. This sounds like a great idea, especially for people like me with high debt. However, I disagree with this proposal. Rep. Hansen Clarke (D-MI) has sponsored a bill to forgive student loans and MoveOn.or is sponsoring a petition in support of this.

I do not agree with complete loan forgiveness. Nor do I think it should be discharged in bankrupcy court. They tried that once and young people ended up filing for bankrupcy at alarming rates. 1) moral hazard arguments still stand 2) So long as the price of education is inflating faster than that of medical care, student loans are going to be a necessary and permanent evil. We cannot create disincentives for lenders or further barriers to qualified students. 3)Currently, there is a new bubble forming around student loans as they are packaged and sold as derivatives. The chain reaction has been sent into motion just like the housing market. This will encourage larger loans to lesser qualified students, and further fuel rising tuition costs.

But the program rules should be changed to make the loans more fair on borrowers. I have some more moderate suggestions that I would like lawmakers to consider.

Some background: I graduated with my MA in 1999 with over $60K in debt- of which about half was used for tuition and the other half for housing and expenses. I took on this debt freely, but out of necessity. The job market requires a graduate degree, I needed the money to help pay for it. I consolidated my debt with the USDE at 7.26% interest, low compared to many of my predecessors.

When interest rates began to fall in the mid-2000s, I called the USDE to see about re-financing and was told that this was not legally possible. Once consolidated, borrowers are not allowed to refinance unless they are willing to take out a private loan, usually a second mortgage. I didn't own a home and couldn't afford one with my debt levels froms school, and even in 2004 most lenders were not going to provide a loan without collateral. Therefore, I continue to pay an interest rate more than twice the current market rate.

I do receive a tax deduction on the interest I pay. However, this is little help throughout the year as monthly bills come due. Nor does it adequately address the inherent unfairness (almost usury) in how interest is handled in the student loan programs. And let's face it, it isn't an asset-backed necessity like housing. So I'd be willing to sacrifice it for some real reforms.

Interest on student loans accrues daily. And no matter how much you pay beyond your fixed amount, the interest is always paid first and it usually eats up most of the payment. And what’s worse, it's a moving target. The amount I pay in interest changes constantly and is nearly impossible to budget for, calculate, or get around. To date, the amount I have paid back in interest is nearly equal to the principle balance I started with and I still have $42K to go. Currently, if I were to make payments so that I could pay the remaining balance in 10 years, I would have to pay over $750 a month, down from the over $800 I would have paid 10 years ago. Either
way, that's not possible. But the debt is still my responsibility, students still need loans, and the USDE needs the revenue stream these loans create.

Rather than forgive debt entirely, I would suggest the following:

1) that the law be amended to allow for refinancing of all student loans down to current rates
2) once the amount paid back in interest exceeds more than say 20% of the original principle, the interest should be curtialed entirely while the remaining principle is paid down.
3) if #2 is not feasible, then the interest should be regulated in the same way has home loans.
4) outlaw the selling of derivatives on student loans.

These changes would lessen the burden on borrowers without the moral hazard associated with total loan forgiveness or the loss to the lenders, which includes the USDE. They may be enough to prevent fueling education inflation. Making the terms a bit more fair would be welcome and would help the longer term economy and a generation of young people trying to get started in a jobless economy who will default in droves if we don't do something.

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Rading Social Security Funds

This is a short post, but this article, Looting of Social Security posted on Fed-Smith.com today is the clearest explanation of what has happened to Social Security funds that I have yet seen. It is a quick and easy read.

Basically, the 2.7 trillion surplus that was to be invested in Social Security has been poured into the general fund and spent. It's gone. There is nothing but a literal cabinet filled with IOU statements.

Now, will the government repay this money?? Well that is a good question. From where will it get the money? Since it wasn't invested as promised.

Again, I remind everyone that this isn't news. Remember Al Gore and his "lock box". So we are all investors who have been swindled. So, in light of this, I agree with the President that the 2% cut in payroll taxes should be continued. And it's all legal. Because in a democracy, you can pass all kinds of laws to make what you want or need to do legal. In another context, this would be termed "corruption".

Because money paid for social security is going into the general fund, it amounts to a 2% income tax hike on the salaried class. Another reason we are the 99%.

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National Sales Tax... Worst idea ever

Herman Caine is surging in the polls as the latest "Not Romney" As he is, the media is falling all over themselves to do halfassed analyses of his 9-9-9 tax plan. As you may have heard this refers to a 9% flat income tax, 9% flat corporate tax and a 9% national sales tax. Most of them focus on whether it will raise or lower the over all tax burden on the average family or whether it will generate enough revenue to cover existing spending. It is probably not surprising that a plan put forward by a Republican reduces revenue and further shifts tax burden away from the wealthy and corporations and onto middle class families. But the problems with the 9-9-9 are, if anything, even more catastrophic than simply yet another screwing the middle class the Grand Old Plutocrats. That 9% sales tax is a like a bomb let off in the heart of the US economy.

Right now, retail sales/household spending make up about 70% of the US economy overall. If we suddenly imposed a 9% sales tax to everything bought in the US, it would certainly cause that vital sector of the economy to shrink. Consumer demand in the United States is not only a vital part of our economy it is an important driving force for the entire world economy. For example, China exports about 20% of all their exports to the US alone. If the US demand for Chinese stuff suddenly drops, it would be a serious blow to the Chinese economy as well. The same goes for Mexico, Canada, the EU, etc etc etc.

With the world economy in a fragile state now, Herman Caine's plan could plunge the world into a demand slump depression along the lines of what we saw in 1929. Imagine, just as we are showing the faintest hints of recovering from a capital crisis recession and just as the Europeans are getting their collective act together about Greece, Cain would have us voluntarily jump off the cliff again. You can't run a global economy like a pizza delivery joint.

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Oct 5th Statement from Occupy Wall Street

They didn't leave anything out. That is for sure!

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Neutron Bomb

Last night, Harry Reid exercised what is known as the "nuclear option" in some circles over Senate rules. He led a majority of Democrats to overrule a parliamentarian and cut off the right of the minority to call for multiple votes on amendments after cloture. It happened rather unexpectedly in an attempt to an amendment to the Chinese-currency-kvetching bill. McConnell wanted to force a vote on an amendment containing Obama's original jobs bill (not the current version with the millionaire's tax) to embarrass the president and cause more delay. This restricts post-cloture maneuvering by the minority. Of course, this is not really a nuclear option in the sense that that term was created to talk about outlawing the filibuster altogether in 2005. (Note, according to The Hill, a similarly arcane such use of the majority-overrule took place in 2000 under Bill Frist's leadership to eliminate votes on "sense of the senate" resolutions under such circumstances.)

This is actually a very big deal. It is the first time Harry Reid has ever done anything to stand up to the minority in the Senate worth a damn. It is the first time he has reacted seriously to the way McConnell has flouted tradition to all but shut down the Senate. Republicans are threatening direly about possibly messing with the filibuster when they're in the majority as retaliation. I have no doubt they will do so no matter what Reid does. I hope we see more of it. Part of what made it work was the Reid sprang this on McConnell unexpectedly and got the 51 votes without much fuss and bother. No showdown, just a win.

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Two Visions of Frustration

In light of the last post about the Occupy Wall Street protests and how they might be an emerging contrast to the Tea Party I thought I would post two links to the Democratic version of the "us vs elites" meme and the Republican version of the "us vs elites" meme.

Here is Elizabeth Warren's now famous statement about fair taxation and "class warfare."

Here is Governor Rick Perry's address to a Republican/Tea Party rally in Austin Texas.

One thing that strikes me is that Warren's rhetoric is must more focussed economic distribution. Who wins and who loses from the current economic regime. Perry's rhetoric does mention taxes but mainly focusses on abstracts like "states' rights" and "the constitution" and "the founding fathers" etc.

Another difference is that Perry's rhetoric - to the extent it talks about economic distribution - focusses on the idea that government should stop taking things from individuals. Warren's rhetoric focusses on the idea that corporate elites have been taking things from the community without paying anything back.

It's not obvious to me which message will have more traction in the midst of ongoing sluggish economy or renewed recession. But certainly the mere fact that there is now a clearly enunciated and easily understood alternative to the "taxes bad" mantra of the Tea Party makes the 2012 election campaign more competitive. It's also refreshing that this may turn out to be the first election in a long time in which the two parties are clearly debating rival visions of the future in a substantively meaningful way. It will be nasty and hard fought. And many people will be upset that their side didn't win but this is exactly the kind of policy debate so many people who are frustrated with politics as usual want to see.

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Occupy Wall Street A Potential Game Changer?

Something interesting is happening in response to a year of Republican austerity measures imposed by the 2010 elections at the state level and by House Republican blackmail over government shut downs and government debt defaults. A new wave of protests have emerged modeled on the "Occupy Wall Street" protests in NYC. The protests are spreading to cities across the country. What's more, while unions were not the initial driving force, they are quick to see the potential of allying themselves with these protesters. Several big unions are planning to join the protesters.

Here is why I think this is potentially a big deal. First, this seems to be a continuation of the anti-union busting protests in Wisconsin that lead to the recall of several Republican state legislators in that state and threatens to lead to the recall of Republican governor Walker. These kinds of protests are provoked by Republican policy overreach and have a record of have electoral consequences.

Second, and this may be more important, both the Wisconsin protests and the Occupy Wall Street protests are changing the nature of the anti-elite populism that the Tea Party has tried to tap. Where the Tea Party directs their ire at government and intellectuals, these protests are defining the elite in terms of wealth. Instead of calling high school teachers "communists" or railing about homosexuals, immigrants and "librul elites" these protests are zeroing in on the mega wealthy at the top of corporate America. In other words, the Tea Party now has serious competition for the leadership of the angry masses. If the new wealth-based definition of bad-guy elites takes hold, it will directly undermine the Republican 2012 political campaign and find an obvious ally in the Democratic party which is already pushing for more transfer of wealth from the mega rich to the middle class and poor.

Finally, the single greatest fear of the Republican party is a high turnout election in which large numbers of middle and low income people vote based on their rationally identified economic self interest. So long as this segment of the population can be distracted by "Guns, Gays, and God" or by the Tea Party's cartoonishly ideological rants, the GOP can survive the fact that their policies are actually likely to have a negative impact on the clear majority of voters' lives. These protest threaten to put the focus of the 2012 elections on income disparity and tax fairness. If those become the dominant themes of 2012, it gives the Democrats and inherent advantage. It also gives Democrats something to rally their otherwise demoralized base around.

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Obama's New Approach

President Obama has adopted a new approach to going after the Republicans. Rather than bending over backwards to compromise with uncompromising jerks, he is focussing the spot light on meaningful policy differences that most people can readily understand. This is a good idea. The deficit/debt problem is fundamentally a distributive one. Specifically there is no solution that makes all interested parties better off without making someone worse off. That means that any debate will ultimately boil down to WHO is going to be made to be worse off that the others may benefit. Republicans are insisting that it should be the middle class and poor who are made worse off so that the wealthy and corporations benefit. That's a hard position to defend when it is revealed for what it is.

The Democrats' position is that taxes should be raised on the top brackets and corporations. At this point the mood of the country is increasingly angry with exactly the targets of these increases.

So long as Obama continued to try to find common ground the stark differences would not be revealed and Republicans could more easily hide the real effects of their policies. But with Obama's new confrontational approach, the Republicans will be forced to state exactly why the super rich should continue to pay low tax rates while the rest of the country struggles. Obama dug quite a whole for himself through the (I think necessary) compromises to avoid defaulting on the debt, but the more the 2012 election becomes about these two competing visions, the harder it will be for Republicans to win. If the Republicans are foolish enough to nominate Perry, the contrast will only become starker.

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In Defense of Crossing T’s and Dotting I’s

There is an emerging talking point among Republicans that the way to create jobs is not to spend government money on infrastructure projects or even to cut payroll taxes or give tax breaks to companies that hire new people. All of these things have been supported by Republicans in the past. But now they swear that the only policy worth pursuing is eliminating a wide range of existing regulations. I was watching CNN this morning as I ate breakfast and it is clear that American journalists are simply not equipped to report on this subject. Instead of engaging in a discussion of what regulations are and how they are enacted, CNN ran a human interest style story where they interviewed the owner of a small car painting business in California. He swore that he was personally committed to protecting the environment etc but that some regulations were simply unreasonable intrusions into his business. He described these as regulations that did nothing but force him to “cross t’s and dot I’s.” The point of the story was clear: Regulations are silly because they make well intentioned business owners waste their time filling out paper work instead of creating new jobs. This interview reminded me of a conversation I once had with a group of small business owners at a yacht club in Santa Barbara. They are standing around grousing about exactly this sort of regulation. They hated it and blamed “socialists” in Sacramento and Washington for the whole thing. Here is the gist of what I told them.

The complexity of the paperwork is not a result of “socialist” dominance. On the contrary, the excess of paperwork is a direct result of a regulatory system that depends overwhelmingly on self-reporting. The self-reporting approach was insisted upon by conservatives who were able to force it through the necessary compromises so common in American politics. In more centralized democracies, such as the UK, there is a good deal less paperwork to fill out. However, such countries have a good deal more inspectors barging into businesses and snooping around. I asked the cluster of businessmen at the yacht club if they would rather have paperwork or government inspectors and they all said, “Paperwork!” without hesitation.

Clearly the Republicans are trying to use the persistent economic troubles as an excuse to undo a century of regulations entirely. They want to return us to a Dickensian dystopia of the 1890s. If we eliminate the paperwork without hiring thousands of new inspectors at the state and federal agencies that enforce environmental, workplace safety and other regulations, we would effectively eliminate the original regulations. These regulations were not imposed to make life difficult for business. Rather they were put in place because businesses were making life unlivable (literally) for the workers who were getting sick and injured in dangerous workplaces, the neighbors who were being poisoned by industrial run off and the many species that were being driven to extinction by the same (such as the bald eagle that Republicans love to fetishize).

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Marketing the Presidency-There Danger Lies

Prepare for a rant. Today I was reading NBC's news blog. The headline was "Obama's Rough News Day". After describing why the day was tough, the article says, "All of these stories can be explained away via individual context. But taken together, they signal how Obama’s brand has taken a big hit." (Italics are mine")

It is no secret that we market celebrities, politicians, and ideas like candy and children's toys. The lines between simple advocacy and unadulterated celebrity have long been blurred. But I beat an old horse, already whipped by Noam Chomsky. The difference today is the ability to target specific people and to gather data using new technologies. The ability to hit smaller and smaller targets only increases with each passing day. And it segments and balkinizes the body politic. Marketing to a vast audience is now narrowed to brainwashing a specific piece of the electorate. And it plays with our minds. Politics is no longer a national discussion to be held above the din of marketing. We can now target the 10 people in Indiana who we need to convince to vote for us rather than the entire state.

We use to joke about the celebrity of Bill Clinton, or JFK for that matter. But the entire presidency? This NBC thing is the first time that I have seen such a blunt admission that the presidency is now a "brand". It'd be funny if it wasn't so disturbing. Palin is a brand. I haven't heard yet of the "Bachmann or Romney brand". That's just because they haven't yet been fully market tested. But they are working on it. They already know that the one line testing well for Bachmann is "“Make no mistake about it, Barack Obama will be a one . . . term . . . President!” (New Yorker: Leap of Faith). They can do this with audience response systems. And they ensure that her "Barbie Doll"(Mattel, slogan: "Creating the future of play") image is well honed and protected. To be fair, all candidates are doing the same thing.

We now live in a landscape where the nonsensical is standard for marketing. Can you tell me what "Natural French Fries" are? If they are now natural, what the hell have they been up until now? That ranks up there with Jumbo Shrimp and all natural flavor, which means what again? Chemistry meant to taste natural, or that they actually added a dab of real fruit juice to that high fructose corn syrup? Our politics are as nonsensical. "It's time for America to be America again" (Rick Santorum). What has it been up until now? Pseudo-America? The line is actually from a Langston Hughes poem- a liberal civil rights poem.

Gee, maybe we should just give up and go all the way. Let's cut the deficit by funding our government institutions like we do sports stadiums. After all, California was ready to sell off real-estate to close its budget gap. Maybe the Super Committee (reminds me of jumbo shrimp again- just a flavorless crustacean, higher in useless cholesterol and empty calories than the regular shrimp) should try this out. We can sell the White House to Proctor & Gamble and rent it back, calling it "The Gillette White House". We can do the same with Congress. I can see "The Coca Cola Capital Dome". And on the Old Executive Office Building, we can add a digital billboard with all sorts of great advert slots for sale. Before the opening speech at the next party caucus they can announce, "This caucus, hosted in Tazo Stadium, is brought to you by Pepsi co., a family of beverage firms bringing naturally refreshing ideas to you!" And we can digitally swap out the banner ads along the balconies of the convention center like they do at Pro tennis matches. (Maybe they are already doing this?) And we can employ Google technology to insure that if you check a candidate website every banner ad on your free e-mail engine will belong to that candidate or his friends. They can link it to the local party congressional candidate (thanks to that address you provided on your Facebook page) to ensure that you get the full party slate.

Then when we can overlay consumer buying patterns at Home Depot against voting tendencies and demographic data to identify the 10 those Independent voters in central Indiana to the exclusion of everyone else. And while we are at it, we can make sure to find clever ways to disenfranchise those 50 voters in county X who always vote for the wrong state assembly representative. We need wall-to-wall one party rule, you know. And we don't even need gerrymandering to do it anymore. Gerrymandering has gone they way of the filibusterer. All of this subverts the democratic process. Everyone of us becomes nothing more than a cog in the marketing wheel- divorced from the means of production. (Gee, can you say Carl Marx? Moment for thought. Hummmm.)

My favorite brand is "The American People". What a brand that is! I can see it now, "American People" bubble gum- light, airy, and full of hot air! The label can be emblazoned with eagles and flags. I just watched a movie the other day where Susan Hayward's character says, "Millions of dollars spent to sell the American culture to the world, and still no one knows what Root Beer is." We are bought, sold, and spent.

So, to end my rant, my dad use to shake his head and say, "you can't stop progress". And he is right. But you should be able to control it. The day we turn entire branches of government into nothing more than brands and commodities, we have lost as a citizenry. The technology has taken over and we don't matter to the process. Only the 10 people in some distant corner of the nation matter. And candidates will further lock themselves in DC while radicalizing their ideas and rhetoric to capture those 10 people. And in the process, the whole purpose of getting elected by a majority to genuinely to govern and serve, is lost.

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Libya

The news is out. Libyan rebels have taken most of the capital and captured three of Gadhafi's sons including his heir apparent, Saif Al Islam, who promised that the streets would run with rivers of blood before his family gave up power.

The CNN infotainment models are making a big deal this morning about whether the US involvement was "worth it." So let's do some rough cost benefit calculations.

What did cost? CNN reports that the White House estimates that US involvement in Libya will cost $1.1 Billion. Other estimates by critics of the operation run more like $33 Billion. What did it achieve? I believe no US military people have been killed.

1) Gadhafi's forces were poised to perpetrate a mass slaughter of the populations of Benghazi and Misrata - cities with hundreds of thousands of people each. The operation clearly prevented Gadhafi's forces from capturing either city.

2) Gadhafi was a particularly nasty dictator who had sponsored some of the most infamous terrorist attacks other than 9/11. He's now out of the world picture except as a fugitive.

3) The US was able to make a high profile, tangible effort to remove an Arab dictator that the overwhelming majority of Arabs across the Middle East despised. For once the US was doing something that advanced the cause of democratic reforms in the Middle East.

4) The example of Libya should not be underestimated in relation to the ongoing rebellion against the Assad dictatorship in Syria.

5) At the time the US got involved, there were indications that some of our close European allies were keen to get involved with us or without us (especially France and the UK). Our involvement made their efforts much more likely to succeed. Preventing a European foreign policy disaster is of great value to us and should not be dismissed casually.

The cost benefit calculation for the Libyan operation is in stark contrast to the enormous costs (in lives and money) and dubious benefits of either the war in Iraq or Afghanistan. Granted, the honeymoon in post Gadhafi Libya will be brief. Libya will almost certainly have a long, painful and ultimately disappointing transition. But the same is true for Iraq and Afghanistan both of which cost much much more. As military adventures go, Obama's foray to the Shores of Tripoli will probably be shown to be a relatively costless distraction at worst but at best could end up generating a series of important benefits for US policy in the Middle East for a bargain basement price.

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If you thought you new Michele Bachmann . . .

you don't. She is a Christan Taliban. Total fringe. This article from the Aug. 15th, edition of the New Yorker is worth the read. RBR, I'd be interested in your take on the Iowa Straw Poll.

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Sunday Musings-DEBT

The recent downgrade by the S&P of US debt was lousy, but it was a wake up call. US citizens have too much debt- and it isn't all their fault. College tuition is rising faster than inflation. It's keeping pace with medical care. It's a crisis in the making, a real catch 22. So students take out loans for tuition then put their text books on credit cards. Hello!

Now the next big debt bubble: Student Loans- largely fueled by for-profit institutions. Problem here, folks, is that there is no way out for the borrows. Waltz on over to MyBudget360.com for a very good article on the next crash.

That was the morning coffee conversation with my fiance this morning. Then we went grocery shopping and we were having a conversation with the clerk. She and her husband are having trouble paying their mortgage. So they called the bank to see about renegotiating their 6% interest rate into something lower. The bank informed them that to do this, they would have to reassess the property and that they are not currently assessing property. End of conversation. She and her husband told them that they were considering strategic default. This had no effect on the bank. (People in my part of the world are rather open about their finances-oddly enough.)

After leaving the grocery store, my finance and I started to figure out what perverse incentive was keeping the bank from a simple re-negotiation. Of course, this has been written about all over, but not by me. So my turn. This is what we realized:

1) Banks don't pay property taxes on the homes they are holding.(thus the strapped states and counties)
2) Banks can keep inflated assets on their balance sheets, thus not having to recognize their losses to investors. The idea is to keep investors interested in Bank stocks. But investors have been bearish on banks stocks because of the confusing about what these banks actually hold on their balance sheets and because banks are keeping larger cash slush to cover bad debt,
3) Banks collected on the PMI. In other words, they got the insurance money on the loss.
4) all told, even if the bank tears the house down, they've made more money on it than they would have if they sold the houses at a loss.

The way this works is that the bank will foreclose. Then the house is supposed to go to auction. So the bank will bid whatever price is equal to the outstanding mortgage. Of course, the outstanding mortgage is usually based on very inflated prices. So the bank usually wins the house at auction. Then the county tax collector sends the bank a bill for the outstanding taxes, the banks asks for a deferment until they sell the house. Without the proper legal remedy, the tax collector agrees to to the deferment. But then the bank holds the property off the market, not wanting to further deflate prices with overstock.

So in the end, the original owner has a great incentive to walk away- believing that in 3 years he will be able to buy a new house at a cheaper price. The banks on the other hand were hoping to see interest rates rise. But the Fed just told them not to hold their breath. So score 1 to the people.

We need to start putting banks back in line- charging them property taxes and putting bans on their ability to package student loans into securities. They also need to change the rules on student loans. At this point, I must start to agree with those conservatives who point out that student loans encourage sharking by universities and colleges- particularly the for-profits. Loan limits need to be set lower. And students should be given a 20 day grace before interest accrues on their loans, like credit cards.

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London Calling

London has finally managed, more or less, to put an end to three nights of rioting which has also spread to other cities. The cause of the rioting is not specifically known. From across the pond, I think the reason for the rioting is not hard to discern. Teenagers have seen a massive economic collapse, their futures effectively taken away from them (in the short timeframe of youth) and nobody has yet paid for it. A kid who was 14 in 2007 saw a crash when he was 15 and is now trying to get a job at 18, with none available. This is not a specific riot over a specific thing. It is the result of an alienated and disaffected generation that is angry at society at large and sees nothing in government, church, or school that would connect them to civil society. The best analogy is to California hills in recent years that are full of unburnt fuel (trees and brush) from years of bad forest management, bone dry and ready to ignite.

Eventually, there was bound to be some violence in response to what I would call the economic violence perpetrated by bankers against the middle classes of the developed world. In London, it appears to be low scale rioting by kids. In the USA, it is taking on the darker hues of the Tea Party, a group not dissimilar to emotional teenage rioting but much more dangerous. Or random violence such as the shootings in Tucson last January. As I said to people two weeks ago, the main desire of Tea Partiers was to see an actual default by the Federal Government and the chaos that would follow: "Burn, baby, burn!" There will be blood. This was to be expected. Lucky London that it is all so mild and juvenile. Greece has not been so lucky.

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Downgrade

My opinion on this is pretty strong. Ratings agencies should not rate the credit worthiness of governments. Governments are more like non-profits. They serve a social purpose. They should not be treated like businesses. The logic of the downgrade has little to do with finance and more to do with Congress. From the S&P press release:

"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011. Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon."

The S&P should not have any power over the government finances of the United States, the hand that feeds it, the nation that allows it to exist, that provides the environment under which it thrives. This is a prime example of the corporatist model gone awry.

This is aside from the fact that the ratings agencies have had terrible track record. Didn't they give AAA ratings to toxic bonds?

I am just cynical enough to believe this is political gamesmanship.

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What's the deal with the Tea Party?

In our last post, we debated a little about whether the Tea Party was really a 3rd party or just a passing fad. I found this map at Patchwork Nation. The map is interactive. So go to the site and take a look.




What jumps out at me is that there are varying degrees of support for the Tea Party, but that this support is widespread, even if the numbers are relatively small in individual counties. It remains to be seen how this will play out in the next elections.

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The Debt Limit Compromise, Keynes And Obama

There are two lessons about this deal that most Democrats seem to be missing. First, in any "divide the dollar" type negotiation, the side that is most willing to see no deal take place has a big advantage. Second, the side that makes the proposals has a big advantage. In this case, both of those advantages were with the Republicans. We should expect, based on those two factors alone, that the Republicans would be able to get almost all of what they wanted.

The Democrats were divided between those, like Reid, who wanted a combination of modest cuts and modest tax increases and those on the left who wanted only tax increases.

The Republican House was demanding massive and immediate cuts to social security, medicare and medicaid all while refusing any consideration of tax increases. Some versions of their demands even demanded additional tax CUTS.

So what did they get? CNN has a summary of the deal here. The full text of the bill is here. The big thing is that the debt limit will be increased in stages such that we won't face this kind of crisis/deadline again until after 2013 (after the 2012 elections). There will be neither any immediate tax increases or cuts to medicare, medicaid or social security. With regard to the two biggest issues being debated, the compromises essentially punts. Neither spending cuts nor tax increases will take place immediately but both could be possible later. The bulk of immediate deficit reduction will come in the form of caps on military spending and domestic spending other than medicare, medicaid and social security. The second round of deficit reduction will take place this fall and will be proposed by a bipartisan joint committee of House and Senate members. If they can't get a deal then, the debt ceiling will automatically raised. The bottom line is that the deadline is postponed for a couple of years and one would be forgiven for thinking they're going to let the voters determine the actual outcome in November 2012.

The irony is that this is a fundamentally Keynesian deal. At least in the short term, the fragile recovery will not be burdened with either tax increases or spending cuts. So for all the wailing and gnashing of teeth on the left, we are going to see the Republicans sign onto a deal that implicitly acknowledges the legitimacy of Keynes' approach to economics. Von Hayek would not approve.

Many Democratic activists are running around bemoaning Obama's lack of backbone or the Democratic parties habbit of caving in to Republican demands. These are silly and, to the extent they hurt Democratic party chances in 2012, ultimately counter productive attitudes to take. Frankly, I'm inclined to think that Obama and the Democrats got very close to the best deal they could have gotten out of a Republican party willing to put the entire world into a global recession to prevent a few relatively minor tax increases on the rich and oil companies. Democrats had a very weak hand to play but managed to avoid their worst case scenario or even their second worst case scenario.

For those liberal activists convinced that Obama "caved," I'd like to know what they think he should have done in this situation. What should Obama have done with default looming? Should he have refused to sign anything that didn't include tax increases and dare the Republicans to join him in default? Doing that would not only be disastrous for the economy, it would be unclear who voters would blame for the misery that would result.

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Norway, Nationalism and the Consequences of Terror

By now everyone who reads this blog has heard of the tragic events in Norway. A radical, right-wing populist blew up a car bomb in front of the office building containing the Prime Minister's office, killing seven, then drove to a summer camp for the youth organization of the Norwegian Labor Party where he killed another 85 or so innocent people. The murderer was eventually caught alive and has confessed to the mass murder.

He targeted members of the Labor Party because he associates them with the generally welcoming attitude towards immigrants that has typified Scandinavian politics for most of the post WWII era. I strongly suspect his goal in murdering so many of the party's youth organization was to sabotage that party's future. I strongly suspect he may only have succeeded in radicalizing the Labor Party (the largest party in Norway) and encourage them to lead the charge against right wing populism.

He was a former member of the youth organization of a rival party in Norway, the Progress Party. The Progress Party is a far right wing populist party known for its antipathy to taxes, the welfare state and multiculturalism and immigration. The Progress Party is part of a cluster of right wing populist parties that emerged in Denmark, Norway and Sweden in the 1970s and 1980s. Today, these parties include the Norwegian Progress Party, the Danish Peoples Party (formerly the Progress Party) and the Swedish Democrats. Despite their progressive sounding names, these parties are typically nationalist, socially conservative, xenophobic and fiscally populist. In short, if an American were trying to figure out who these parties are, thinking of them as the Scandinavian answer to the "Tea Party" wouldn't be a bad start. Like the Tea Party, they often oppose the welfare state in the general rhetorical stance but just as often support aspects of it that can be restricted to those members of society they deem to be deserving (a status often implicitly or explicitly dependent on ethnicity). Also like the Tea Party they are vehemently opposed to immigration. In Scandinavia the most visible immigrant population comes from Turkey and the Middle East. Slogans like "Danmark for Danskerne" (Denmark for the Danes) and "Bevara Sverige Svenskt" (Keep Sweden Swedish) are typical of the kind of rhetoric these parties like to use. As are patently absurd claims such as Norwegian Progress Party's leader, Siv Jensen's claim that Sharia law had replaced Swedish law in Sweden.

The popularity of these parties has been rising for some time. In Denmark, the mainstream conservative coalition of the Liberal Party and the Conservative People's Party depends on votes from the Danish People's Party to pass legislation. In Norway the social democratic Labor Party governs but the Progress Party is probably the fastest growing party in the country. That said, these parties usually represent between 15% and 30% of the voters and usually closer to 15% than 30%.

The fact that the worst case of political violence in Scandinavia since the liberation of Denmark and Norway from Nazi Occupation was perpetrated by a long time supporter/member of such a party may prove to be a major development not just in Norway but in Denmark as well. Denmark's government is constitutionally required to hold an election no later than November of this year. Danish voters will know the Norwegian Progress Party very well and they will understand the issues involved and the inflammatory rhetoric in play very well. The Danish People's Party will have to be careful to distance themselves from the violence without alienating their populist base of support. Many Danes will see a direct connection between the over the top xenophobia and populism of these parties and their leaders. One consequence of these tragic murders could be the decline of the electoral success of these parties and a policy backlash against their views.

This is not to say that these countries will open up to unrestricted immigration, but the increasingly aggressive escalation of policy attacks on immigrants and immigration may stop for a time.

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LOST and the Debit Ceiling

For all you LOST fans, think about the season they found the bunker. In the bunker, there was a computer system. And every so many hours, a code had to be plugged into the system. If not, they were told that the Island would explode, and take them all out. So they entered the code. But this raised a philosophical question: what would happen if they didn’t enter the code? Would the Island really explode? How risky is risk? Was this really a manipulative game? In one scene, they decide to dare the system by refusing to put in the code, and this scary countdown starts. And suddenly,the characters are fist fighting and trying to hold each other back. But someone breaks through and enters the code. Welcome to the debt ceiling debate. Mark my words, this will happen.

But for shits, what will happen if we don’t enter the code? The Tea Partiers will have us believe that nothing will happen. But what would be the benefit? Robert Rubin, the former treasury secretary, said it best. He said, “we don't know what will happen, but why would you want to find out?” Didn’t we learn anything from the brink of disaster in 2008? Why would you want to take bigger risks? Is it for the adrenaline rush?

The Debt Ceiling is an arbitrary number that limits the amount of money we can borrow to pay our bills. It was sent by our legislators in 1917 and has been changed numerous times. Between 2001 and 2008, it was increased 5 times. Any small business owner who was unable to get a short term bank loan to cover payroll back in 2008 will understand completely the situation the US Treasury now faces. I am sure you yourself have borrowed from your savings to cover your bills, and then put it back. Maybe you ask your friend to spot you $50 with the promise to pay back $55 in a week, etc. It’s no different for the Feds.

For our readers who may not fully understand the debt, please read The Debt Limit: History and Recent Increases by the Congressional Research Service. This explains nicely how the government creates both Public and Inter-government debt. The short version is that debt is issued is through the sale of government (i.e. Treasury) bonds of varying duration. The US government currently pays the lowest interest of anyone on these bonds because it is deemed so low risk. This will change if default happens. For lessons, see Argentina.

The amount of government debt and revenue is in constant flux. Money comes in, money goes out. This further complicates the Treasury’s job of balancing the government’s check book. Because of the flux, Treasury can’t know for sure when we will actually run out of money. What we do know is that we actually hit the legal debt ceiling May 16th. But the Treasury has been able to juggle money to make ends meet-largely through accounting gimmicks and borrowing from government accounts (like civil servants’ pension funds). The Treasury estimates that it will run out of wiggle room on Aug 2. This is why stalling, gaming, and procrastinating are so serious. We may go into default without meaning to.

So if the government defaults, what happens? We don’t really know, but history offers guidance. In past instances when we have approached this limit, the markets have sometimes responded by starting to charge a larger risk premium in order to lend money to the federal government. This tends to encourage speculation on US treasuries in ways similar to what just happened with the housing market. You will start to see nations take out insurance on US debt which is a way of betting against our ability to make our debt obligations. This will further deepen our troubles.

Historically there have been many defaults and banking crises. Since 1800 France has had 12 years of banking crises, Norway 16. We had our own in 1936. Germany has spent 16 years in default or restructuring since 1800. Most victims suffered after wars. In this way, we are no exception. Usually, when there is a default, 6 things can effectively address a crisis.
1) Get a higher GDP.
2) Lower interest rates on public debt.
3) Get a bail out- go to the IMF or hope a friend will help you.
4) Tax increases and cuts to public spending (i.e. entitlements).
5) Print more money
6) Default totally. This will mean one of several things. We will a)reschedule our interest payments, b)put moratorium on paying c) restructure the debt, etc.

Items 1-2 have already been exhausted. We are practically at 0% interest now. And in a recent interview with one of Fed Chairs, he said it was time to start raising rates to encourage savings. When loan rates are low, so are interest rates on savings accounts. Item 3 was tried, but not announced. China purchased $7.6 bil. in bonds from the US Treasury back in June. That was China’s first increase in bond purchases since October. It now has $1.15 tril. in US holdings. This came after it sold US bonds for 5 straight months.

That leaves us with 4-6. Number 4 is the crux of the current debate. We will have to do both. But Congress is now looking for which groups they can slaughter with the least political consequence to themselves. We have already done 5 to some extent. For the Treasury to do Quantitative Easing, it basically bought back debt using newly printed money. And now we are on the brink of number 6.

So what has happened to other nations who defaulted? Well look no further than Europe today and the EURO.
1) Military spending is usually the first on the chopping block. Notice that we are arguing now with Europe over its lack of military funding. And we are looking to cut ours. Fine with me.
2) If there is a default or restructuring, there are usually increased conflicts with creditors. This leads to political & economic instability. Notice that there has been talk of the end of the Eurozone because the Germans are quite angry at the Greeks and Irish. See Cartoon for other possibilities.

3) Investors are dumping the Euro and running to the Swiss Franc. And they are dropping the dollar as well. The value of the Swiss Franc has been on the rise for over a year. One year ago, I was in Switzerland getting a SFr1 to $1. We were there for 3 weeks and by the end, we were getting SFr.96 to $1. Today, it is SFr. 817 to $1. And China has been pushing for a second reserve currency.

This will devalue the dollar and increase inflation across the board. Basic economics tells us that inflation leads to less job creation, higher prices, increased poverty, and capital flight. It would have a much worse effect that any tax hike because it would be broad-based and not necessarily controllable. Time for the House to get their collective heads out of their asses. Pass a Ceiling, then work on the 2012 budget with austerity measures and tax hikes.

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Rupert Murdoch, Corruption and Fox News

Rupert Murdoch is one of the most powerful men in the world. The Australian media mogul has used his massive presence in the world media market to push a right-wing/populist agenda, often with a cheap dedication to sensationalism and slight regard for facts. He owns News Corp which itself owns several newspapers in the UK as well as the Wall Street Journal and Fox News here in the US. Murdoch also is the plurality stock holder of Sky TV and only backed off a recent attempt to take complete control of Sky just this past week.

There is a growing scandal brewing in the UK about newspapers (tabloids), owned by Rupert Murdoch's NewsCorp company, have been systematically hacking into peoples' private telephones to gather information. It has also come out that they've hacked the phones of the families of British war veterans killed in action, murder victims (obstructing an investigation in the process), the Royal Family, and members of the British Government including former Labor PM, Gordon Brown. There are also reports that News of the World hacked the phones of 9/11/2001 survivors. This is highly illegal and to prevent their being prosecuted about it, they bribed very high level officials in the British police forces to prevent them conducting investigations. This has begun to spread. The manager of the News of the World (the Murdoch owned tabloid where the scandal first emerged) has resigned and has since been arrested. The chief of the London Metropolitan Police has resigned. The Sunday Times has also recently been implicated in the spreading scandal. On this side of the Atlantic, Murdoch's man running Dow Jones and the Wall Street Journal (two other divisions of Murdoch's empire) has also resigned. Make no mistake these resignations are both members of Murdoch's inner circle.

The FBI is now investigating whether US based divisions of Murdoch's media empire participated in any illegal practices overseas (which is a violation of US law). It would not surprise me at all to find out that Fox News has been engaging in the same kind of phone hacking and bribery of officials for information here in the US. For dedicated Fox News viewers, it won't matter. But anything that weakens Rubert Murdoch and his media empire is good for democracy and good for Democrats.

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The Republican Crisis

There is an article in The Economist (see link here), in which they lay the blame for the failure to resolve the deficit reduction dispute (and the related debate about the debt ceiling) squarely at the feet of the Republican Party and their refusal to consider tax increases as part of the response to the current accounts problem. This is surprising because The Economist is normally squarely on the right side of the political spectrum with regard to fiscal and economic policy. I would go further than The Economist though. I would say that not only is the Republican Party responsible for failing to solve the problem, they are responsible for creating it in the first place. Furthermore, the lack of sophistication among the national press corps has allowed the Republicans to frame the situation as an existential crisis by making baseless comparisons between the US debt and Greece's debt. At the same time, there is very little coverage of how low our tax rates are relative to other industrialized countries and relative to our own past.

According to The Economist article above, US tax receipts as a share of GDP is around 15%. To put this in perspective, I looked at the tax receipts data from the OECD (see data sheet here). The numbers from the OECD are a little different than those quoted in The Economist. OECD says that tax revenues as a share of GDP are at about 24%. According to the OECD, 24% is the lowest share of the national economy taken in taxes in the USA since 1965 (the first year for which data is reported in the table). What's more, 24% is among the lowest share of GDP taken in taxes for any OECD country since 1965! Only relatively poor OECD members such as Chile, Korea, Portugal and Turkey have lower tax/GDP ratios in their history. What's more, these countries' lowest tax/GDP ratios occurred when they were better considered as developing countries than wealthy industrialized countries (and in the cases of Chile, Korea and Turkey largely before they were democracies). Many of the countries that have similar or superior growth rates to the US tax their economies more heavily. So contrary to Republican rhetoric, we are not over taxed by any meaningful measure. At the same time, Republicans are also on thin ice when they argue that increasing our tax rates will undermine the overall economic health of the country.

What about our spending levels? According to Visualeconomics.com, the US government budget takes up about 21% of GDP. The Economist says that number is about 25%. Regardless of which figure you use, that's much lower than most industrialized democracies. So it is not the case that our spending per se is especially high or "out of control" relative to our peers. Again, the Republicans are distorting the real situation to make their case for protecting low tax rates the wealthy and corporations at the expense of public services that benefit society as a whole (like education, health care and infrastructure).

What about our debt levels? To hear Republicans talk about it, the United States is a global laughing stock because of our debt levels. Even if we accept the Republican premise that we couldn't solve our debt problem overnight by returning our tax rates back to the 1990s levels (27% to 29% of GDP), are we really in the midst of a crushing debt crisis? According to the OECD (see link here), our debt as a share of our GDP is at 74% for 2011. To put this in perspective, that's about the same debt level as found in Ireland, Portugal which are in fiscal crises but lower than Belgium (80%) and Japan (127%) which, because they are larger more advanced economies, not in fiscal crisis. Greek debt is at 125% of their GDP.

It's worth pointing out here that a number of countries that Republicans love to vilify for their supposedly budget busting welfare states have much better debt situations than we do with little to show for our borrowing other than a bloated military. Denmark's debt is only 2.7% of their GDP. Canada's is 33.7%. Germany's is 50.2%.

For all these reasons, I think we should think about the current situation with regard to taxes, spending and debt as a "Republican Crisis," rather than a genuine "Debt Crisis."

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Where Greece Should Go From Here

First, let me get to the big point first. Kicking Greece out of the Euro won't fix anything. German and French banks are still heavily exposed to bad Greek debt (both public and private). If Greece were kicked out of the Euro (or left on their own), all they would do is start printing their currency in enough quantity to pay off their debts (and make that currency increasingly worthless). The effect would be a de facto restructuring of the debt. The northern European Euro states may as well bail Greece out and let them restructure the debt while staying within the Euro. Letting Greece stay in the Euro would be about as costly as kicking them out but would prevent the nasty political crisis that such a move would probably impose on the EU as a whole.

So what should Greece do? In the short run they should do what they've just done today, namely pass a harsh austerity package that dramatically cuts government spending. They have no choice. They've been spending money they didn't have and, worse, couldn't raise for decades and it's time to pay the piper. In the long run, Greece should get serious about administrative reform. The real cause of this crisis is the Greek government's inability to collect the taxes it is owed. The reason the Greeks can't fix their debt problems without enormous outside help is because they do not have an internal revenue service worthy of the name. That needs to change as quickly as possible. The problem is that it cannot change in time to fix the current crisis. But it could change in time to prevent the next crisis.

And this administrative incapacity is the key reason why the US IS NOT LIKE GREECE. The US can fix its deficit problems by returning its tax rates to where they were in the 1990s. That would be a relatively minor adjustment all things considered. Because our government is competent (yes, I said the government is competent), when we raise the tax rate, more tax money comes in. That's not the case in Greece.

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How Did Greece Get Here

Greece is again (still) embroiled in crisis, riots and talk of default. How did it come to this? Greece is a long time in brewing this stew and the EU has let them do it.

Step 1: Greece had a ridiculously generous welfare state for a relatively poor country. For example, Greeks were allowed to retire with generous benefits as early as 55 years old. That’s great for middle aged Greeks. But where is the money going to come from? The country was poor in comparison to the rest of Europe. The Greek per capita GDP is well below the EU average. Greece also has a particularly under staffed and poorly organized tax authority. Even when taxes are – on paper – sufficient to pay for government expenditures, the Greek government has extreme difficulty collecting those taxes. So the answer to the money question was BORROW IT!

Step 2: The Greek government was initially prevented from adopting the Euro currency because their debt and deficit rates did not conform to the convergence criteria for adopting the Euro. Unfortunately, a conservative Greek government simply cooked their books to get in. In doing this they had the active help of Goldman Sachs which helped them by arranging a variety default swaps and other financial gimmicks to conceal the enormous debts that Greece was piling up. The European Central Bank authorities employ enough finance experts to see through these gimmicks or at least see that something fishy was going on. But for political reasons, there emerged a kind of norm of tolerance to failure to meet convergence criteria. Most of the current members of the Euro Zone failed to meet the strict standards for entry. But most of those failures were minor. Only Italy was really in flagrant violence of the criteria but allowed to join anyway. So, Greece hired some Wall Street city slickers to cook their books, the European Central Bank held their nose and let Greece join the Euro.

Step 3: In 2009, the Greek socialist party defeated the conservatives and reveals the true fiscal situation in Greece. With the 2008 recession in full swing, all Hell broke loose in Greece. By 2010, Greece was begging for the EU and the IMF to bail them out by restructuring their debt. A condition for that help was a substantial austerity package that included dramatically reducing the aforementioned generous welfare benefits.

Step 4: Greeks have been rioting periodically in reaction against the austerity measures – often violently.

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Same Sex Marriage Wins in New York

There were two fascinating things about the same sex marriage victory in New York on Friday night. First, the Democrats were united and crowing in victory, with Governor Cuomo seeking the limelight and the party. Contrast that with Governor Baldacci in Maine two years ago who signed the bill after publicly fretting. Second, the Republicans who had the power to block the vote in the NY Senate let the vote take place, knowing they would lose. Both point to the same thing: the view that same sex marriage is now popular enough that Democrats want to use it to get votes and money from their base. Big change. The more interesting thing was the Republican decision. I think the GOP wants to use gay marriage the way it has used abortion for years: as a rallying cry for the rubes, but without actually DOing anything that would upset their suburban, educated voters who really don't want to see abortion be illegal. "Choose life" is better than "Outlaw abortion." Even Sarah Palin seemed unable to grasp that being pro-life means wanting to outlaw abortion rather than just being sanctimonious about it. So that's where the Republicans are heading. By not actually making policy against gays, they open a space for some gays and moderates, and educated voters to cast their ballots for them despite their anti-gay rhetoric designed to attract the rural and uneducated voters. I know family members, for example, who are firmly pro-choice but vote Republican because the GOP allows them to practice this sort of cognitive dissonance.

I'll take it.

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Is the Party Over For China?

In the 1980s it was common for people to say that America's time in the sun was over, that we were about to be surpassed by the Japanese. Japanese investors were buying American real estate left and right. Japanese manufactured goods were everywhere. Workers raged about "unfair competition" from Japanese imports. But even before the tragic earthquake and tsunami, Japan's supposed economic threat to the US was fading. But by the late 1990s, the same fears were arising again, this time with China playing the role of Eastern Threat. In both these cases the fear mongers assumed that trends at the time would continue unabated. That did not prove to be the case in Japan (Japan has spent much of the last 15 to 20 years in severe economic distress) and it may be proving to be not the case in China. Here are some signs of trouble for the Chinese political-economy:

First, inflation. Chinese food prices and fuel prices are soaring. There have been numerous stories in the press lately about Chinese people finding it increasingly difficult to buy the basics of fuel, cooking oil and food staples. This is a big problem for a single party, authoritarian regime who's legitimacy is based largely, if not entirely, on continuously rising prosperity.

Second, rising transportation costs (see stories here and here for slightly different perspectives). A major driving force for China's economic boom in the last 20 years has been exports. China's vast and cheap labor force can only impact the world economy if it's products can make it to markets. That means shipping to North America and Europe. Improvements in port facility standardization and relatively cheap shipping costs in general made that easier. But as the oil that the large container ships run on gets more expensive, the advantage that manufacturers in China realize from the cheap labor will be off set by high transportation costs. That could encourage some manufactures to relocate back to older manufacturing centers closer to their markets. China's government has responded by investing heavily in alternative fuels and by trying to build their own domestic markets as quickly as they can. They may be running out of time.

Third, rising unemployment especially among young, college educated Chinese. China's economic advantages lay in a huge, cheap, relatively low skilled workforce. China has invested a lot of its recently gained wealth in university education. But now it's economy is incapable of finding rewarding jobs for all those new college graduates. Again, for a regime who's legitimacy depends on maintaining prosperity, a large population of unemployed or underemployed college graduates is a dangerous thing. It was underemployed college graduates who were much of the driving force behind the revolution in Egypt. Chinese officials are concerned about similar unrest breaking out in China.

Fourth, China is developing a nasty real estate bubble (see stories here and here). I've heard annecdotal stories from friends with relatives in China that real estate is a popular investment for middle class, urban Chinese. If this real estate bubble pops (and signs suggest it is about to), much of China's emerging middle class could see their savings wiped out in the blink of an eye just as rising prices in other areas, reduced exports and rising unemployment are becoming problems as well.

Fifth, increasing political unrest (see stories here, here, and here). Riots over local corruption, food prices and abuses of eminent domain have been popping up around China for some time now and appear to be getting more common.

Finally, all of this is a contributing factor to a final worrying development: an authoritarian retrenchment in the Communist Party of China leading to oppressive crackdowns (see stories here, here and here).

If all this comes to a head at once, I'm not sure how it would impact the world economy. I suspect that it might not be the worst thing in the world for US manufactures and jobs. If China's political economy starts to look less attractive to investors, the US will look like a safe haven in comparison. But a more repressive and insecurity Communist Party of China is probably not a good thing for the world. This could be a bumpy ride.

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Hallelujah!

Hallelujah! The Senate has done something I never in a million years expected them to do. They voted overwhelmingly to eliminate several billion in tax breaks for ethanol! (story here). This is a great development! Most of the punditry are looking at this as a symbolic blow to energy subsidies. But this is just as much a subsidy to entrenched agricultural interests. If this leads to further decreases in corporate welfare for either Big Energy or Big Ag, I would be thrilled!

The reason I never expected this is because Republicans are so committed to rural voters and big business that the combination had me thinking they would never touch ethanol or ag subsidies. I'm thrilled to be wrong about that. Well done to the 73 Senators who voted to end this waste of money!

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California Redistricting Commission

The California Citizens Redistricting Commission (CCRC) released its first draft of 2011 maps based on the 2010 census at www.wedrawthelines.ca.gov. The result has been described as a political earthquake at politico. Some analysis suggests the maps favor a Democratic pickup of 4 seats statewide. This suggests that the result is not all that different from what the legislature would do... except that specific powerful incumbents got dealt some powerful blows. That would not be likely in a legislative arena. It is interesting that the fears expressed on this blog that the CCRC maps would favor Republicans are, at this point, unlikely to be the case. Given the large Democratic registration advantage statewide and the surging Latino population, a map not explicitly gerrymandered could well lead to a larger number of mildly Democratic districts rather than a smaller number of very safe districts as we have today. I have not seen analysis of the new State Assembly and Senate District maps. Given that Dems are presently 2 assembly and 2 senate seats away from a 2/3 majority of both houses, Democratic pickups are a fascinating prospect.

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More on Republican Candidates in 2012

As the field is shaping up, I am increasingly coming to RBR's view that the nomination is open for Romney. It's a field of midgets, and he alone has some modest stature. Given that the Presidency will be an "open" seat in 2016 should Obama win in 2012 (neither Biden nor Clinton will run as an obvious successor to Obama), that is a much more enticing race to serious candidates.

Romney has three big problems, though. The first is his religious/evangelical problem. In 2008, the GOP nominated one of its few candidates who is not an evangelical, John McCain. The result, an electoral disaster of Dukakis-like proportions, is instructive in itself to some GOP operatives. Worse, Romney is a Mormon who was pro-choice until recently and presided over gay marriage in his state with hardly a peep. So he loses on religious and "values" grounds. The second is health care reform. He is not a credible critic of the program. The third is his personality. He could overcome the other problems with charisma, but he is so dull and uninspiring.

Will someone like Tim Pawlenty be able to capitalize on his noted charsima and evangelical beliefs to overcome Romney? Tough to say. It can happen. If there was ever a year the GOP was bound to nominate an insurgent candidacy, 2012 is it: most of the establishment figures have bowed out and the party is in the grip of TeaPartyMania.

I think we shouldn't count out Ron Paul. He has the enthusiasm, a clear anti-big-government message, and appeal in the battleground western states like Oregon, Nevada, New Mexico, and Colorado that the Democrats need to win in 2012. Sure, he's not an evangelical, but he has the gifts to overcome that, and he's not a mormon. Let' face it, Ron Paul really is the darling of many in the Tea Party movement. If he notches a surprise win in Iowa, NV, or NH - and he is the only one of the top four delegate finishers from 2008 other than Romney to be back - he would be such a media darling he might race to an early nomination.

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Pragramatic Flexibility vs Doctrinaire Foreign Policy

So the latest in Libya is that 8 high ranking officers in the Libyan army are defecting to the rebels. This comes after a series of cabinet officials, including the Oil Minister and Foreign Minister, have defected. Qaddafi is rapidly losing friends. The time is coming soon when Qaddafi will be hold up in some bunker somewhere with a thousand or so "dead enders."

Meanwhile, in Syria, the military has "surrounded" several towns (see BBC story here). Over a thousand people have been killed. However, because of Syria's military strength, alliance with Iran and sensitive quasi-peace with Israel, the world has largely taken a hands off approach.

Perhaps, more worrying, China has declared martial law in a number of cities in Inner Mongolia where demonstrations have taken place (see story here). To expect the world to react to China the same way they react to Libya (or even Syria) is just absurd. We cannot hope to move China with military force. Nor can we expect that economic sanctions against China would be a realistic option.

The critics of President Obama's reaction to Libya have focussed on the lack of a "doctrine" that would be consistently applied around the world. But what I like about the President's approach is its pragmatism and its flexibilty. Syria and Libya are doing exactly the same things. If Obama were to adopt the doctrinaire approach favored by the right, we should be bombing Damascus right now. But I doubt even McLieberman and the other neo-cons would advocate doing that to China. Obama's policy recognizes that different countries require different approaches.

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