Wednesday Night #1532

The Scribe’s Prologue
Political summer theatre has come to Washington and Strasbourg; the drama unfolds using such props as paper (or electronic) money which has no intrinsic value and the fiction that some characters are more active and productive than others.
The U.S. Government is now debating whether a greater debt limit should be permitted, the sub-plot being the required tax increase, should the answer be positive. As the play unfolds, an agreement will be reached on the inevitable decision to raise the debt ceiling and the taxpayer audience will resent the resulting tax increases. In the European counterpart, Greece will be helped to resolve its problems and the Americans will applaud the ingenuity of its government in surmounting adversity. In both theatres the actors will receive a standing ovation.

Europe and The Greek Crisis
Greece
Following a month spent in Greece and France, Kimon Valaskakis has produced the first of a two-part paper on the Greek Crisis.  The departure point, which he illustrated with an amusing personal anecdote about the inability/unwillingness of a doctor to give a diagnosis, is that the diagnostics of the Greek Crisis are erroneous and therefore, so are the proposed cures. The paper addresses three questions: (1) What are the root causes of the Greek Crisis? ; (2) Are these root causes internal or external;  (3) Is the cure working?  What Kimon terms the Wednesday Night Economists Caucus has contributed a number of valuable comments on the draft paper that is in (limited) circulation. Once the final edit is completed and published, the Wednesday Night websites will link to it.
In the paper, Kimon argues that
(1) The Crisis can be viewed in three concentric circles, Greece, Europe, World
(2) That the most important one is the middle circle Europe, as it moves towards a quasi federal union with an harmonization of fiscal and monetary policy.
(3) That because the European Integration project is more political than just economic, when Europeans are backed to the wall they make innovative moves. Crises are opportunities. Every step forward in European integration so far has been preceded by a major crisis threatening the existence of Europe.
With reference to the first point,  although described as a Greek (or PIIGS) crisis, it is a crisis on several levels. First, a worldwide crisis with debt, public and private, increasing. Second, a European crisis as the European nations have not managed to put their fiscal and monetary policies together. If California goes bankrupt, it will not be expelled from the dollar zone, nor from the United States; ways will be found to fix the problem; however, in Europe the lack of solidarity creates an atmosphere in which many advocate Greece’s expulsion from the eurozone and the EU. Finally, there are exacerbating factors that are peculiar to Greece.
Greece is only the first patient and the risk of contagion is high, thus the solution should lie in first treating the global disease. But, the cures will likely be found in the European where there is a real chance of creating solutions.
Europe
The current European crisis is not unique to the present. Europe, in fact, is an artificial construct.
When the ancient regiments returned home to Rome, many promises were made which the government could not afford, a situation that continues to this day. Throughout the world with the notable exception of China, governments are bankrupt. Ultimately, The EU is expected to resolve the problem, but will they find the right solutions?

The difference between tax evasion and tax avoidance is a number of highly-paid lawyers and accountants

The obvious truth is that people, wherever they live, are reluctant to pay taxes but do insist on receiving benefits from their government funded by other taxpayers.

The current situation is far from unique. England has lived through the same drama. Greece has been the scapegoat because of generally unfounded allegations of the ineptitude of the population and inability or unwillingness on the part of the government to collect adequate taxation. The fact is that the Greek population is more productive in terms of hours worked than is Germany and the allegations are statistically unfounded. It must also be recognized that Greece’s debt is in euros so that failure to resolve that situation will affect the entire EU. It was noted that Germany has, on two occasions, defaulted on debt payments.
Some Wednesday Nighters propose as a solution, transfer payments to less affluent member countries such as provided by Canada to the provinces. It is noted that this device was instrumental, indeed positive, in the reunification of East and West Germany. However, the Treaty of Maastrich is said to prohibit one member country from helping out another, despite the fact that in the 1980s Germany is said to have helped out Italy, with positive results. The concern about national debt appears to vary according to the image of the country involved. The virtual bankruptcy of some states in the U.S. hardly warrants a footnote in any discussion of national debts.
In the past ten years, growth in the European Union has been on average 1% per year, while indebtedness has increased by 3%.  In recent years, the ability to generate economic growth, the product of demand and investment, appears to have defeated  the advance of the global economy, with the notable exception of Asian nations which ‘have a different system’.

The 2011 world economy is said to be the richest in the history of the world, effectively- produced by sixty percent of the population (inferring a global unemployment rate of forty percent). The problem may be defined as the gap in the distribution of wealth between the wealthy and the poor. In other words, if the children cannot live as well as their parents, it is not because of the economy but rather, of the distribution.

The fiction that money has intrinsic value also must be kept alive. Although consciously, we are aware of the lack of intrinsic value of currency, it is perhaps, convenient to bring this fact into the equation. In other words, money is made by people who do not contribute palpably to the society in which they live. Many people gain from other people’s defaults without contributing to society; the sub-prime mortgage scandal being an obvious, but certainly not unique, instance. Banks can, in most countries of the world, contribute to this, secure in the knowledge that governments will not permit them to go bankrupt because they control so much of the personal wealth of the citizens. In the case of pre E-U. Greece, their debt was in drachmas but they must repay it in Euros, that fact being part of the problem. The European Union must rethink the model or face the possible disaster of the Euro zone, a highly unlikely scenario at this point; despite all its problems the time is long past for going back. A solution might be in the creation of a European Fiscal Bankruptcy unit as in the United States or default without expulsion from the Union. Many of Europe’s problems could be resolved if the euro were at par with the dollar. Some Wednesday Nighters believe that much of the current crisis could be resolved by the reestablishment of the gold standard, but have not yet convincingly  explained the mechanism through which that resolution would be achieved.

Education, innovation and competitiveness are held to be key to the emergence of countries from the  present situation, China and India are offered as the prime examples, but there are a number of others, although not, unfortunately, those of North America.

The market
On the financial markets, June 24 marked the start of a new up-leg, expected to continue until the first quarter of 2012. The absence of a negative reaction to current national debt problems is explained as providing confirmation of the accuracy of the hypothesis that the stock market is the precursor of the event, that the market problems of 2007-2009 were the bellwether of the current situation.

The Prologue

We start the week with World Population Day and a reminder from CBC that “Sometime this year – the UN figures around Oct. 31 – global population will hit seven billion. That’s a growth of 40 per cent in just over 20 years. The planet’s population has doubled since 1968.” What does that mean for the planet and for us as individuals? As the population moves from rural to urban settings inevitably, the issues include the impact on urban growth, infrastructure, health, food production and the environment, along with competing demands – which likely will flare into local wars – for energy, water, natural and financial resources – and that’s just the beginning. Migration will not simply be from rural to urban centres; we may expect large numbers of emigrants to move from the developing world to nations where they believe they, and especially their children, will have a brighter future. And while the developed world, with its low birthrates welcomes immigrants who will help to pay for the needs of the aging population, the influx of people from other cultures puts a strain not only on the social, but also the economic fabric of the host countries … housing, employment, educational facilities … the list is endless.
How will we cope? Who is thinking about these problems? Is the fallout from the population growth simply too big for holistic thinking? There are so many pieces in the puzzle. But can it be solved any other way? We think not, but we would welcome encouraging comments and proposed solutions.
Which leads us to our favorite futurist, Kimon Valaskakis and the mission of the New School of Athens. We will not ask Kimon to solve these problems this week; rather, we anticipate his fascinating and timely insights into the Greek Crisis. He has just returned from a month in Europe (Greece and France) viewing the crisis first-hand and interviewing “key analysts and officials (including a few cab drivers who are surprisingly sophisticated on these matters).” Kimon is preparing a major paper on the topic and has been enjoying a fascinating dialogue with those he refers to as the WN Economists’ Caucus, elements of which can be found in the Comments on Greece, EU and world economy ; he plans to share with us some of the conclusions of the first part of the paper, which deals with the diagnostics of the situation, and is provocatively titled Wrong Diagnosis, Losing Strategies.  The Executive Summary offers this basic assumption:  The Greek Crisis has been misdiagnosed and is not well understood. Although some of its causes are clearly internal, its true origin is external and should be seen as a special case of a larger socio-economic ‘disease.’ Kimon actively solicits comments before completing this oeuvre.
The Greek Crisis is of course, only one part of the wobbly world economy. Many of us are equally preoccupied by the cliff-hanger negotiations on the U.S. Debt Ceiling. We were happily reassured last Friday when in his weekly appearance on PBS Newshour, David Brooks was surprisingly optimistic about the possibility of a deal on the debt ceiling. ” I think they [Boehner and Obama] have made significant progress in private. … I have to say, for those of us who have been waiting for the leaders of the two parties to have serious negotiations about big things, that is happening now. And, overall, I think it’s excellent news.” But that was Friday. The tone has changed: Barack Obama tells Republicans: It’s time to eat your peas over debt Barack Obama warned Republican leaders that they risked tipping the world back into a recession and throwing “millions of more people out of work” unless they could reach a deal with him on increasing the US’s debt. The world waits and worries.
Update: Now we can add Italy to the public worries list. (The Guardian) European debt crisis: stock markets tumble as Italy fears mount Economists have warned that Italian borrowing costs are approaching unsustainable levels ; (FT)Italy’s borrowing costs soar – PM tries to rebut widespread criticism in the Italian media and the markets that his coalition was rudderless and divided
Steven Lightfoot, with a certain amount of professional bias forwarded the TIME review of Bob Lutz’s book  Car Guys vs. Bean Counters: The Battle for the Soul of American Business, whose message is “To get the U.S. economy growing again … we need to fire the MBAs and let engineers run the show. A logical segue is to this analysis of MPs previous careers – it will come as no surprise that the highest percentage of Conservatives are from Business and the highest percentage of Liberals are lawyers (Shakespeare anyone?), but who knew that an equal number (8%) of Liberals were farmers and authors? No engineers figured among the top four careers, so maybe that’s what is wrong with our country?
Liam has offered several thought-provoking topics (we love it when someone else does our work for us!):

First, I note that, in line with the suggestions made by some WN participants, John Ibbitson has suggested that one of the few possible ways in which the Liberal party may save itself is by implementing a series of open-to-all primaries.
Second, I wanted to bring together a set of articles which gave me pause regarding the political future of the United States. First, I noted with interest the data noted in a Saturday piece regarding amendments to the DSM that 10% of the US population is on anti-depressants, that 10 per cent of North American boys now take drugs for attention-deficit hyperactivity disorder and that half a million US children have subscriptions to anti-psychotic medications. Whether this is a problem with over-prescription or a de facto health care crisis, the scale of the problem seems comparable to the US debt problem.Indeed, the level of what can only be called self-destructive madness which seems to have seized the American Republican fringe is best characterized by Jezebel, who points out that congress-woman and Presidential candidate Michelle Bachmann has, in her first presidential marketing, promised to destroy the American economy. Yet the inability of Americans to understand the consequences of a failure to extend the debt ceiling is perhaps unsurprising, given recent revelations that Americans have no idea what the Federal government does, even about the things that government is doing for them individually.
Yet the unquestioning schizophrenia does not seem limited to the masses; after all, the Supreme Court’s recent decision on the constitutionality of restricting the sale of video-games to children – even if such video-games include “people actively hitting schoolgirls over the head with a shovel so they’ll beg for mercy” and “pouring gasoline over them, set[ting] them on fire, and urinat[ing] on them”- is not only striking because it, in the words of Jon Stewart, creates a law where essentially no limit can be placed on the violent imagery made available to children “if while being disemboweled, a woman were to suffer a ‘nip-slip’, regulate away.” No, indeed, the truly disconcerting dimensions of the decision is the radical split between the content of the four separate judgments rendered, including Justice Thomas’ decision, which was based on the holding that “[t]he historical evidence shows that the founding generation believed parents had absolute authority over their minor children.” [Liam adds: I warn that the imagery in that last video clip is stomach turning – we agree, it is horrible.]

We don’t plan to address the turmoil in the Arab world this week. On the one hand, the media reports developments hourly, but the overall picture changes ever so slowly. We will however, remind you that the world has welcomed South Sudan as the newest member of the community of nations, but the outlook for the oil-rich, infrastructure-poor nation is very uncertain. The only lighter note we have seen is this BBC guide –  South Sudan: How do you set up a nation? … what does this involve? Passports, currency, stamps, anthem, internet domain name – and a decent football team. These are just some of the requirements. Then there are state institutions to be established, a constitution to draw up and an overseas charm offensive to conduct. … Joining the UN is a country’s most important act of international diplomacy, but finding a seat can be a game of “musical chairs”.
Finally, in the tradition of trying to find something to amuse and entertain, George Monbiot in his recent post Jellyfish Rule tells us that  “last week a monstrous swarm of jellyfish succeeded where Greenpeace has failed, and shut down both reactors at the Torness nuclear power station in Scotland [and] The Israeli branch of Jellyfish Action pulled off a similar feat at the nuclear power station in Hadera this week.”

2 Comments on "Wednesday Night #1532"

  1. Guy Stanley July 11, 2011 at 7:26 pm · Reply

    How interesting!
    It isn’t really clear from the categories of the study, but there appears to be a striking absence of engineers, scientists and technologists…despite the importance of technology in public policy.

  2. Antal (Tony) Deutsch July 11, 2011 at 9:56 pm · Reply

    Dear Kimon,
    I enjoyed reading your paper, and fully agree with your hypothesis that the underlying problem is not Greece-specific. It probably goes back to the Cold War. Italy, France, Greece, Portugal and Spain had influential communist parties/movements, sometimes legal, sometimes illegal. The containment doctrine (Kennan) implied that the Soviet zone of influence best be confined to where the Red Army found itself in 1945. New communist governments in Europe were not to be welcomed. The conventional wisdom of those days held, that having generous social programmes run by Social Democratic, Christian Democratic, and Christian Socialist governments are preventive devices that will keep the communists out. Whether or not that theory was right, I cannot tell, but the Soviets did fail to expand in Europe. In any case, the Soviet danger is gone, but the welfare states remain.
    Along comes the demographic transition, with the price tags on the welfare arrangements rising. Cutting “entitlements” is a vote-loser, so is raising taxes. The self-interest of politicians of all parties is to finance welfare schemes out of borrowed money, so that the unavoidable loss of popularity will accrue to some other politicians down the road. The end of that road has come in Greece, and it is pretty close in Italy, Portugal and Spain. I fear that we shall have opportunities to add France and Belgium to our list before long.
    Who shall pay for Greece’s debts? I am looking forward to reading the second part of your essay. What I would keep in mind, is that whatever is done for Greece, will most likely have to be done for the rest of the countries on the list. With some potential outcomes, it may turn out that not the weak economies will be tempted to leave the Eurozone, but the strong ones.
    Thank you for launching a very timely discussion.
    Tony

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