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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