"They will be subsidizing scroungers, lounging in cafes on the Mediterranean beaches.
Monetary union, in the end, will result in a gigantic blackmailing operation.
When we Germans demand monetray discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More they will perceive us as a kind of economic policeman.
We risk once again becoming the most hated people in Europe."
Posts tagged ‘Europe’
The Heritage Foundation ranks Greece #130 on its economic freedom list, which puts it in the "mostly unfree" category. Of course, these rankings depend a lot on the categories and the weighting, but the story here is still telling. The next worst European country I can find is Slovenia at #88 and the first EU country I see is Italy at #80, not great but a good fifty spots higher.
Which begs the question, asked by Megan McArdle today, of why Europe wants Greece anyway. In terms of political-economy, it had little in common with the rest of the continent. Everyone assumes the EU is trying to prevent a domino effect, with the other PIGS nations defecting from the Euro, but I think the Greek capitulation this weekend shows how unlikely this is -- it is clear Greece will do absolutely anything to stay in the Euro, and so it is reasonable to assume Portugal, Spain, and Italy face the same incentives and are thus not ready to leave the Euro on a whim just because Greece does.
A reader sent me a link to this Vox article on streetcars. What I thought was interesting is just how weak the case for streetcars is, even when made by folks are are presumably sympathetic to them. This page is entitled "Why do cities want streeetcars." The arguments are:
- Tourists like them, because you can't get lost like you can on buses. My response is, "so what." Unless you are one of a very few unique cities, tourists are a trivial percentage of transit riders anyway. Why build a huge system just to serve out-of-town visitors? I would add that many of these same cities (e.g. Las Vegas) considering streetcars are the same ones banning Uber, which tourists REALLY love.
- Developers like them. Ahh, now we are getting somewhere. So they are corporate welfare? But not so fast, they are not even very good corporate welfare. Because most of the studies they cite are total BS, of the same quality as studies that say sports stadium construction spurs all sorts of business. In fact, most cities have linked huge tax abatement and subsidy programs to their streetcars, such that the development you get with the subsidy and the streetcar is about what you would expect from the subsidies alone. Reminds me of the old joke that mimicked cereal commercials: "As part of a breakfast with juice, toast, and milk, Trix cereal has all the nutrition of juice, toast, and milk."
- Good for the environment. But even Vox asks, "as compared to what." Since they are generally an alternative buses, as compared to buses that have little environmental advantage and often are worse (they have a lot more weight to drag around when empty).
- The Obama Administration likes them. LOL, that's a recommendation? When you read the text, what they actually say is that mayors like the fact that the Obama Administration likes them, for it means the Feds will throw lots of Federal money at these projects to help mayors look good using other peoples' money
- Jobs. This is hilarious Keynesianism, trying to make the fact that streetcars are 10-100x more expensive than buses some sort of positive. Because they are more inefficient, they employ more people! One could make the exact same argument for banning mechanical harvesters and going back to scythes. Left unquestioned, as Bastiat would tell us, is how many people that money would have employed if it had not been seized by the government for streetcar use.
- Je ne sais quoi. I kid you not, that is their final argument, that streetcars add that special something to a neighborhood. In my mind, this is Vox's way of saying the same thing I did the other day -- that the streetcar's appeal is primarily based on class, in that middle and upper class folks don't want to ride on a bus with the masses. The streetcar feels more upscale than buses. The poor of course, for whom public transit is most vital, don't want to pay 10 times more for sexiness. Oh, and watch this video of Washington streetcars blocking traffic and crunching parked cars and tell me what it is adding to the neighborhood.
Every argument I have ever been in on streetcars always boils down to something like "well, all the cool kids like them." Once, after defending the US approach to rail (vs. Europe and Japan) as (correctly) focusing on productivity vs. sexiness, having gone into a lot of detail on the economics of freight vs. passengers, I got a one sentence answer from Joel Epstein of the HuffPo: “You should get out of the country more often.” That was it -- the cool cosmopolitan kids who vacation in Gstaad but never would be caught dead driving across Nebraska were all against me.
People keep talking about reducing Greek debt to a sustainable level, but part of the problem is that there is not such level. Even at zero. The problem is that Greece is running a government deficit even before any debt service, so if creditors were to waive all of its debt, it would still need to be borrowing new money tomorrow. Debt forgiveness is not enough -- what the Greeks need is for Europe to write off all its debt, and then (having lost all their money on the old debt) start lending new money immediately. Note also that any bailout agreement reached this month will just put everyone back in the exact same place a few months from now.
This situation cannot be expected to change any time soon, for a variety of reasons from demographics (Greece has the oldest population in Europe, and a relatively rich pension system) to ideology (the current pseudo-Marxist government will never implement the reforms needed to turn the economy around, even if they promise to do so under duress).
With structural solutions unlikely, Greece has only the options of charity and inflation. Greece still seems to be hoping for charity, which they make harder by spewing derision at the same folks whom they are begging for alms. Europe, certainly Germany, is in no mood to be charitable any longer, but may still do so depending on their calculation about which action -- bailout or exit -- has the worse long-term consequences for keeping Portugal, Spain, and Italy both in the Euro and continuing to pay their debts.
Lacking charity, the only thing left is inflation. Some folks think I am advocating that option. I am not. The best possible hope for Greece is to slash its economic regulation, privatize business, and cut back on the public sector -- but that is not going to happen with the current government. Or maybe any government.
I say inflation is the only option because that is what balances the budget and "solves" debt problems when politicians are unable or unwilling to make any hard choices. It is sort of the default. If they can't balance the budget or figure out how to pay off debt, then inflation does it for them by reducing the value of pensions and outstanding debts**. This is what will happen with a Grexit -- a massive bout of devaluation and inflation what will greatly reduce the value of any IOU, whether it be a pension or a bank deposit.
Eventually, the one good thing that comes from inflation and devaluation is that the country becomes really cheap to outsiders. Tourists will flock in and olive oil will sell well internationally as the new drachma loses its value, creating value for people holding stronger currencies and potentially forming the basis for some sort of economic revival. My wife and I decided a few months back to postpone the Greek vacation we wanted this year -- too much turmoil is still possible -- and wait for it to be a bargain in 2016 or 2017.
**Postscript: This is exactly why the Euro is both immensely seductive and a dangerous trap for countries like Greece. Seductive, because it could pursue any sort of destructive banana republic fiscal policy it wished and still have a strong currency. A trap because it can no longer print money and inflate away its debt problems.
One of the hardest things to do in history is to read history in context, shutting out our foreknowledge of what is going to happen -- knowledge the players at the time did not have.
Apparently Neville Chamberlain is back in the public discourse, again raised from the dead as the boogeyman to scare us away from any insufficiently militaristic approach to international affairs.
There is no doubt that Neville Chamberlain sold out the Czechs at Munich, and the Munich agreement was shown to be a fraud on Hitler's part when he invaded the rest of Czechoslovakia just months later. In retrospect, we can weep at the lost opportunity as we now know, but no one knew then, that Hitler's generals planned a coup against him that was undermined by the Munich agreement.
But all that being said, let's not forget the historic context. World War I was a cataclysm for England and Europe. It was probably the worst thing to happen to Europe since the black death. And many learned folks at the time felt that this disaster had been avoidable (and many historians today might agree). They felt that there had been too much rush to war, and too little diplomacy. If someone like Britain had been more aggressive in dragging all the parties to the bargaining table in 1914, perhaps a European-wide war could have been avoided or at least contained to the Balkans.
There simply was no energy in 1938, no collective will to start another war. Even in France, which arguably had the most to lose from a reinvigorated Germany, the country simply could not face another war. As an illustration, one could argue that an even better and more logical time to "stop Hitler" occurred before Munich in March of 1936 when Hitler violated the Versailles Treaty and reoccupied the Rhineland with military forces. France had every right to oppose this occupation, and Hitler's generals said later that their forces were so puny at the time that the French could have stopped them with a brigade and sent them running back across the Rhine. And the French did nothing.
In addition, Britain and France had very little ability to do much about Hitler's ambitions in Eastern Europe anyway. How were they going to get troops to the Sudetenland? We saw later in Poland how little ability they had to do anything in Eastern Europe.
And finally, everyone was boxed in by having accepted Woodrow Wilson's formula of "self-determination of peoples." Building the entire post-war realignment on this shoddy building block is what really led to disaster. Emphasizing this essentially nationalist formulation as the fundamental moral principle of international relations -- rather than, say, the protection of individual rights of all peoples -- really empowered Hitler. In the Saarland, in the Rhineland, in Austria, and in the Sudetenland, it lent him the moral high ground. He was just fulfilling Wilson's formulation, wasn't he? These were all majority-German lands coming home to Germany.
Postscript: Years ago in my youth I used to excoriate FDR for caving into Stalin at Yalta, specifically in giving away most of Eastern Europe. I still wish he hadn't given his moral authority and approval to the move, but even if we stood on the table and screamed at Stalin in opposition, what were we going to do? Was there any appetite for extending the war? Zero. That is what folks who oppose the dropping of the atomic bombs on Japan get wrong in suggesting there were alternatives. All those alternatives involved a longer war and more American deaths which no one wanted.
I think this author, like many others, gets it wrong by comparing Jesus and Mohammad to try to get at the roots of modern Islamic violence. I don't think you can explain the (relative) non-violence of Christians today vs. the prevalence of violence among certain portions of the Islamic religion by looking at their scriptures.
The reason is that for hundreds of years ago, Christians were the world's crazed terrorists. They would burn you to death for being a heretic, or being gay, or being suspected of witchcraft. When the first Crusade was called by the Pope, hordes of Christians in the Rhine Valley headed north (rather than south and east) to forcibly convert or kill Jews in numerous German communities. The Christian on Christian sectarian violence of the 30 years war was perhaps the worst cataclysm Europe ever endured until the 20th Century.
I am sure Christians would say that such violence is inconsistent with true Christianity, etc. but never-the-less history shows that Christians have no less inherent propensity to religious violence than Muslims. Christians have moved on -- matured, maybe? I am not sure what the word is. Unfortunately, parts of Islam have not, which makes it dangerous today in a way that Christianity is not.
The Left spends a lot of time railing against the rich and large corporations. But in practice, they seem hell-bent on lining the pockets of exactly these groups. Today the ECB announces a one trillion plus euro government buyback of public and private securities.
Between Japan, the US, and now Europe, the world's central banks are printing money like crazy to inflate securities values around the world -- debt securities directly by buying them but indirectly a lot of the money spills over into stocks as well. This has been a huge windfall for people whose income mostly comes from capital gains (i.e. rich people) and institutions that have access to bond and equity markets (i.e. large corporations). You can see the effects in the skyrocketing income inequality numbers over the last 6 years. On the other end, as a small business person, you sure can't see any difference in my access or cost of capital. It is still just as impossible to get a cash flow loan as it always was.
Greece is looking like it's falling apart again. Or perhaps more accurately: Greece continues to fall apart and the lipstick Europe put on the pig a few years ago is wearing off and people are noticing again.
I warned about this less than a year ago:
Kevin Drum quotes Hugo Dixon on the Greek recovery:
Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.
There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent....The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.
That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.
Color me suspicious. Both the media and investors fall for this kind of thing all the time -- the dead cat bounce masquerading as a structural improvement. I hope like hell Greece has gotten its act together, but I would not bet my own money on it.
In that same article, I expressed myself skeptical that the Greeks had done anything long-term meaningful in their labor markets. They "reformed" their labor markets in the same way the Obama administration "reformed" the VA -- a lot of impressive statements about the need for change, a few press releases and a few promised but forgotten reforms. At the time, the Left wanted desperately to believe that countries could continue to take on near-infinite amounts of debt with no consequences, and so desperately wanted to believe Greece was OK.
I have said it for four years: There are only two choices here: 1. The rest of Europe essentially pays off Greek debt for it or 2. Greece leaves the Euro. And since it is likely Greece will get itself into the same hole again some time in the future if #1 is pursued, there is really only leaving the Euro. The latter will be a mess, with rampant inflation in Greece and destruction savings, but essentially the savings have already been destroyed by irresponsible government borrowing and bank bail-ins. At least the falling value of Greek currency would make it an attractive place at for tourism if not investment and Greece could start rebuilding its economy on some sort of foundation. Instead of bailing out banks and Greek officials, Germany should let it all fall apart and spend its money on helping Greece to pick up the pieces.
By letting Greece join the Euro, the Germans essentially let their irresponsible country cousins use their American Express Platinum card, and the Greeks went on a bender with the card. The Germans can't keep paying the bill -- at some point you have to take the card away.
I was reading Stephen Ambose's Band of Brothers the other day, and there was a story in there that really struck me. One of the paratroopers was hauling his reserve parachute, something usually ditched right at landing, all over Europe with him. When asked why, he said he was getting married and he wanted the silk (what parachutes were made of at the time) for his wife's wedding dress.
For some reason this struck me as odd and economically irrational. It took me a while to figure it out. I was applying my intuition to the situation based on modern price levels, where the value of the silk would be just a minor part of a wedding dress -- the larger part of the value is in the design and cutting and sewing, ie the labor. We live in a time where skilled labor is far more dear than basic materials, which are relatively cheap. The hard part of making a wedding dress would not be getting the silk, but finding someone skilled enough to manufacture the dress.
This soldier grew up in the 1930's, where exactly the opposite conditions obtained. Skilled labor was cheap. In fact, unlike today, most every household likely had someone who could sew a dress in their spare time, labor that might well be donated for free to the wedding dress cause. It was raw materials that were expensive, particularly those like silk that had to be imported at great expense from afar.
Over time, my understanding of the importance of the D-Day invasions has shifted. Growing up, I considered these events to be the single key event in defeating the Nazis. Listening to the radio this morning, this still seems to be the common understanding.
Over time, I have had to face the fact that the US (or at least the US Army) was not primarily responsible for defeating Germany -- the Russians defeated Germany, and what's more, would have defeated them whether the Allies had landed in France or not. Check out the casualties by front, from Wikipedia:
The Russians defeated Germany. Period. And I don't think the western allies would ever have had the stomach to inflict the kind of casualties on Germany that were ultimately necessary to defeat her without Russian help. To me, this is the great irony of WWII, that it was not ultimately a victory for democracy. Only totalitarian Russia could defeat totalitarian Germany. This thought often bothers me a lot. It doesn't fit with how we want to view the war.
However, D-Day did have an important effect -- it kept Western Europe out of Soviet hands. We did not know it at the time, but I would argue in retrospect that from mid-1944 on we were competing with Russia to see how Europe would get divided up after the war. D-Day allowed the western allies to overrun most of Western Europe and keep it out of Soviet hands, perhaps an even more important outcome than just speeding the defeat of the Germans. Sure, FDR gets grief for giving the farm away to Russia at Yalta, but what could he do? The Soviet occupation of Eastern Europe at that point was a fait accompli. What would have been FDR & Churchill's negotiation position at Yalta if their armies were not even on the continent (excepting Italy, where we might still be fighting in 2014 and getting nowhere)?
I mostly ignore, and tend to be skeptical of, most pronouncements on foods that supposedly kill us and foods that are supposedly superfoods. I have a solid love of meat and have never let the fear of saturated fat stop me from enjoying a good steak from time to time.
I had heard that a lot of the "settled science" on saturated fat was iffy but I had no idea it was this bad.
Our distrust of saturated fat can be traced back to the 1950s, to a man named Ancel Benjamin Keys, a scientist at the University of Minnesota. Dr. Keys was formidably persuasive and, through sheer force of will, rose to the top of the nutrition world...
As the director of the largest nutrition study to date, Dr. Keys was in an excellent position to promote his idea. The "Seven Countries" study that he conducted on nearly 13,000 men in the U.S., Japan and Europe ostensibly demonstrated that heart disease wasn't the inevitable result of aging but could be linked to poor nutrition.
Critics have pointed out that Dr. Keys violated several basic scientific norms in his study. For one, he didn't choose countries randomly but instead selected only those likely to prove his beliefs, including Yugoslavia, Finland and Italy. Excluded were France, land of the famously healthy omelet eater, as well as other countries where people consumed a lot of fat yet didn't suffer from high rates of heart disease, such as Switzerland, Sweden and West Germany. The study's star subjects—upon whom much of our current understanding of the Mediterranean diet is based—were peasants from Crete, islanders who tilled their fields well into old age and who appeared to eat very little meat or cheese.
As it turns out, Dr. Keys visited Crete during an unrepresentative period of extreme hardship after World War II. Furthermore, he made the mistake of measuring the islanders' diet partly during Lent, when they were forgoing meat and cheese. Dr. Keys therefore undercounted their consumption of saturated fat. Also, due to problems with the surveys, he ended up relying on data from just a few dozen men—far from the representative sample of 655 that he had initially selected. These flaws weren't revealed until much later, in a 2002 paper by scientists investigating the work on Crete—but by then, the misimpression left by his erroneous data had become international dogma.
In 1961, Dr. Keys sealed saturated fat's fate by landing a position on the nutrition committee of the American Heart Association, whose dietary guidelines are considered the gold standard. Although the committee had originally been skeptical of his hypothesis, it issued, in that year, the country's first-ever guidelines targeting saturated fats. The U.S. Department of Agriculture followed in 1980.
Don't these guys know this is settled science? These saturated fat skeptics must be in the pay of big cattle.
The cherry-picking and small sample sizes are unfortunately a staple of science, but I particularly laughed at the practice of assessing meat consumption during Lent.
Long time readers will know that if I were asked to relive my life doing something entirely different, I would like to try studying economic history. Today, in a bit of a coincidence, my son called me with a question about the effect of the Black Death in Europe on labor and grain prices ... just days after I had been learning about the exact same part of history in Professor Daileader's awesome Teaching Company course on the Middle Ages (actually he has three courses - early, high, late - which are all excellent).
From the beginning of the 14th century, Europe suffered a series of demographic disasters. Climate change in the form of the end of the Medieval warm period led to failed crops and several years of famine early in the century. Then, later in the century, the Black Death came... over and over, perhaps made worse by the fact that Europeans were weakened already from famine. As a result, the population of Europe dropped by something like half.
It is not entirely obvious to me what such a demographic disaster would do to prices. Panic and uncertainty usually drive them up in the near term, but what about after that? Both the supply and demand curves for most everything will be dropping in tandem. So what happens to prices?
In the case of the 14th century, we know the answer: the price of labor rose dramatically, while the price of grain dropped. The combination tended to bankrupt the landholding aristocracy, who went so far as to try to reimpose serfdom to get their finances back in balance (some things never change). The nobility pretty much failed at this in the West (England, France) and were met with a series of peasant revolts. They generally succeeded in the East (Germany, Poland, Russia) which is why a quasi-feudal agricultural system persisted so long in those countries.
But why? Why did grain price go down rather than up? Why did labor go in the opposite direction? I could look it up, but that is no fun.
A first answer, which does not satisfy
People who think of all of the middle ages as "the dark ages" miss the boom that occurred between 1000-1300. Population increased, and technology advanced (just because this technology seems pedestrian to us, like the plow harness for horses or the stirrup, does not make it any less so). It was the only time between about 300 and 1500 when the population was growing (a fact we climate skeptics will note coincided with the Medieval warm period).
But even without the setbacks of the 1300's, historians probably would argue that Europe was headed for a Malthusian collapse no matter what in the 14th century. An enormous amount of forest had been cleared and new farmland created, such that by 1300 some pretty marginal land was being farmed just so Europe could barely keep up with demand. At the margin, really low productivity land was being farmed.
So if there is a sudden 50% population cut, then that means that all that marginal farm land will be abandoned first. While the number of farmers would be cut in half, production would be reduced by less than half because presumably the least productive farms would be abandoned first. With demand cut by half and production cut by less than half, prices would fall for grain.
But this doesn't work for labor. The same argument should apply. To get everyone fed, we would actually need less than half the prior labor force because they would concentrate on the best land. Labor prices should fall in this model as well, but in fact they went up. A lot. In fact, they went up not by a few percent but by multiples, enough to cause enormous social problems across Europe.
A second answer, that makes more sense
After thinking about this for a while, I came to realize that I had the wrong model for the economy in my head. I was thinking about our modern economy. If suddenly, say, online retailing reduces demand for physical stores dramatically, people close stores and redeploy capital and labor and assets to other investments in other industries. That is how I was thinking about the Middle Ages.
But it may be more correct to see the Middle Ages as a one product economy. There was agriculture, period. Everything else was a rounding error.
So now let's think about the "farmers" in the Middle Ages. They are primarily all the 1%, the titled nobility, who either farm big estates with peasant labor or lease large parts of their estates to peasants for farming.
OK, half the population is suddenly gone. The Noble's family has lots of death but someone is still around to inherit. They have a big estate where growing grain supports their lifestyle as well as any military obligations they may have to their lord (though this style of fighting with knights on horseback supported by grants of land is having its last hurrah in the 100 years war).
Then grain prices collapse. That is a clear pricing signal. In the modern economy, that would tell us to get out and find a new place for our capital. So, as Lord Coyote of the Castle Aaaaargh, I am going to do what, exactly? How can I redeploy my capital, when it is essentially illiquid? I can't sell the family land. And if I did, land prices, along with grain prices and the demographic collapse, are falling through the floor. And even if I could sell for cash, what would I do for a living? What would I reinvest the money in? Running an estate is all I know. It's all anyone knows. I have to support myself and my 3 mistresses and my squires and my string of warhorses.
All I can do is try to farm the land I have always farmed. And everyone else does the same. The result is far more grain than anyone needs with the reduced population, so prices fall. But I still need the same number of people to grow the food, irregardless of the price it fetches, but there are now half as many workers available so the price of labor goes through the roof. When grain demand collapsed, there was no way to clear the excess capacity. It turns out everyone had a nearly vertical supply curve, because irregardless of price, they had nothing else they could do with their time and money. You can see now why they tried to solve their problem by reimposing serfdom (combined with price controls, a bad idea for Diocletian and for Nixon and everyone in between).
Of course, nothing is stuck forever. One way capacity cleared was through the growth of the bureaucratic state over the next 2 centuries. Nobles eventually had to find some new way to support themselves, and did so by taking jobs in growing state bureaucracies. They became salaried ministers rather than feudal knights supported by agriculture. At the same time, rising wealth among the 99% non-nobility allowed kings to support themselves through taxes rather than the granting of fiefs, which in turn paid for the nobility to take jobs in the bureaucracy and paid for peasant armies with guns and bows that replaced the lords fighting on horseback. So in the long term, the price signal was inordinately powerful -- so powerful it helped reshape much of European government and society.
By the way, if you are reading this expecting some point about modern politics, sorry. Just something I was thinking about and it helped to write it down. Comments are appreciated. I still have not cribbed the answer from the history texts yet.
The media tends to talk about the growth of the Chinese economy as if it is something new and different. In fact, there probably have been only about 200 years in the history of civilization when China was not the largest economy on Earth. China still held this title into the early 18th century, and will get it back early in this century.
This map from the Economist (via Mark Perry) illustrates the point.
Of course there is a problem with this map. It is easy to do a center of gravity for a country, but for the whole Earth? The center in this case (unless one rightly puts it somewhere in the depths of the planet itself) depends on arbitrary decisions about where one puts the edges of the map. I presume this is from a map with North America on the far left side and Japan on the far right. If one redid the map, say, with North America in the center, Asia on the left and Europe on the right, the center of gravity would roam around North America through history.
I thought this was interesting. I guess I never realized that poverty rate excludes anti-poverty programs, nor that frequent comparisons made by the Left that our poverty rates compare unfavorably to those in Europe are essentially completely disingenuous as they are comparing apples and oranges.
the only way anyone’s ever really found to reduce the number living in poverty is to give the poor money n’stuff so that they’re no longer living in poverty. But if we don’t count the money n’stuff that is being given to the poor then we’re not going to be able to show that giving the poor money n’stuff alleviates poverty, are we?
And that’s the point at the heart of this necessary correction to the US poverty numbers. The 15% number is not the number living in poverty. It is the number who would be living in poverty if it weren’t for all the money n’stuff we give to the poor. For when we calculate the poverty number we ignore almost all of what is done to alleviate poverty. We leave out all four of the largest anti-poverty programs in fact. We don’t count the money spent on Medicaid, we don’t count the EITC, we ignore the costs of SNAP and we completely overlook Section 8 housing vouchers. That’s hundreds of billions of dollars worth of spending on poverty alleviation right there and all of it is entirely ignored when calculating the poverty numbers. What’s worse, we could double the amount of money we spend to alleviate poverty and the number under the poverty line wouldn’t change by one single digit.
These alternative measures are explained in WAY more depth here (pdf) by Bruce Meyer and James Sullivan
I have been taking a course in World War I, something I know little about relative to the rest of the 20th century.
We often think of WWI as a horrible, wasteful, pointless war that solved nothing and WWII as an expensive yet "good" war that achieved positive aims. But as we approach the 75th anniversary of the Munich conference, it is interesting to note that if you ask someone in Eastern Europe, you are likely to get the opposite answer. Most Eastern European countries can date their modern statehood from the end of WWI, while WWII led to 50+ years of Soviet subjugation. WWI was their good war.
I have not reread this little classic article from 9 years ago, until a customer in California found it and complained that it was outrageous that the state would actually allow such a person as its author to operate anything in a state park. So I suppose it is worth relinking, if just for that reason. Most of it holds up pretty well, though I regret the jab implying that progressives supported suicide bombers. Here is an example:
Beyond just the concept of individual decision-making, progressives are hugely uncomfortable with capitalism. Ironically, though progressives want to posture as being "dynamic", the fact is that capitalism is in fact too dynamic for them. Industries rise and fall, jobs are won and lost, recessions give way to booms. Progressives want comfort and certainty. They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount. That is why, in the end, progressives are all statists, because, to paraphrase Hayek, only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave.
Progressive elements in this country have always tried to freeze commerce, to lock this country's economy down in its then-current patterns. Progressives in the late 19th century were terrified the American economy was shifting from agriculture to industry. They wanted to stop this, to cement in place patterns where 80-90% of Americans worked on farms. I, for one, am glad they failed, since for all of the soft glow we have in this country around our description of the family farmer, farming was and can still be a brutal, dawn to dusk endeavor that never really rewards the work people put into it.
This story of progressives trying to stop history has continued to repeat itself through the generations. In the seventies and eighties, progressives tried to maintain the traditional dominance of heavy industry like steel and automotive, and to prevent the shift of these industries overseas in favor of more service-oriented industries. Just like the passing of agriculture to industry a century ago inflamed progressives, so too does the current passing of heavy industry to services....
Take prescription drugs in the US - isn't it pretty clear that the progressive position is that they would be willing to pretty much gut incentives for any future drug innovations in trade for having a system in place that guaranteed everyone minimum access to what exists today? Or take the welfare state in Continental Europe -- isn't it clear that a generation of workers/voters chose certainty over growth and improvement? That workers 30 years ago voted themselves jobs for life, but at the cost of tremendous unemployment amongst the succeeding generations?
Over the course of Lance Armstrong's career, the US Postal Service paid him over $40 million in sponsorship money (at least according to the radio report I heard this morning).
I don't necessarily begrudge advertising -- the USPS was nominally acting as a business enterprise, and businesses advertise to promote their services.
But I do find this expenditure odd in the extreme for a couple of reasons.
- First, sponsorship money of this sort generally can only build name recognition. Paying to name a ballpark "Chase Field" builds name recognition for Chase, but by necessity does not communicate anything else about its services or value proposition. The same is true for putting one's name on Lance Armstrong's jersey. Does the US Post Officer really need name recognition? Are there people wandering around unaware of the US mail? I could understand advertising such as "this is why our express mail is better than Fedex" or "you should send a real paper thank you note and not just an email to really thank someone." But name recognition for the USPS? "Oh, so that is what that funny box in front of my house is...."
- Second, to the extent one did indeed feel the need to build name recognition, why in the hell would one do it in a sport primarily competed and followed in Europe? This seems an odd strategy for a service that is essentially limited by statute to US operations.
The only thing I can guess is that someone in the USPS decided, "Hey, everyone hates us. Let's sponsor someone (preferably in a tangential sport that we could actually afford) who is beloved so some of those positive feelings might transfer to us." That worked out well, huh?
There are people who will swear to this day that, despite all evidence to the contrary, Bigfoot exists and they have seen it. Paul Krugman similarly is just sure he has seen European austerity. The rest of us are left scratching our heads for the evidence -- he doesn't even have a blurry photo or footprint. Just tales from a friend of a friend, who is not only sure there has been austerity, but that it caused an old lady to dry her cat in a microwave and that if you swim 20 minutes after eating you will get cramps.
The official Keynesian story is that the PIIGS of Europe (Portugal, Italy, Ireland, Greece and Spain) have been devastated by cutbacks in public spending. Austerity has made things worse rather than better – clear proof that Keynesian stimulus is the answer. Keynesians claim the lack of stimulus (of course paid for by someone else) has spawned costly recessions which threaten to spread. In other words, watch out Germany and Scandinavia: If you don’t pony up, you’ll be next.
Erber finds fault with this Keynesian narrative. The official figures show that PIIGS governments embarked on massive spending sprees between 2000 and 2008. During this period, their combined general government expenditures rose from 775 billion Euros to 1.3 trillion – a 75 percent increase. Ireland had the largest percentage increase (130 percent), and Italy the smallest (40 percent). These spending binges gave public sector workers generous salaries and benefits, paid for bridges to nowhere, and financed a gold-plated transfer state. What the state gave has proven hard to take away as the riots in Southern Europe show.
Then in 2008, the financial crisis hit. No one wanted to lend to the insolvent PIIGS, and, according to the Keynesian narrative, the PIIGS were forced into extreme austerity by their miserly neighbors to the north. Instead of the stimulus they desperately needed, the PIIGS economies were wrecked by austerity.
Not so according to the official European statistics. Between the onset of the crisis in 2008 and 2011, PIIGS government spending increased by six percent from an already high plateau. Eurostat’sprojections (which make the unlikely assumption that the PIIGS will honor the fiscal discipline promised their creditors) still show the PIIGS spending more in 2014 than at the end of their spending binge in 2008.
As Erber wryly notes: “Austerity is everywhere but in the statistics.”
There was no particularly good way to resolve the banking mess in Cyprus. But what worries me about how things played out is that there appears to be no rule of law that applies to bank failure in Europe. There should be some clear principle that guides a bank resolution - e.g. equity holders and bondholders get wiped out first, then uninsured depositors, then insured depositors. Or perhaps there is some ratio of pain between insured and uninsured depositors.
It is clear that no such rule exists across Europe (or if it does, it does not enjoy any particular force such that folks feel free to ignore it in real time). That is the real danger here. Results, however bad, should be transparent and predictable in advance, which is far from what happened in Cyprus. Without a rule of law, one gets a rule of men -- in other words, rules are set by individual whim, often based on which government or corporate interests wield the most influence.
Think I am being too cynical? Here is a detail that was new to me about the depositor haircuts in Cyprus:
A few weeks ago, the Central Bank of Cyprus published a curious set of "clarifications for the better understanding of the resolution measures." The principle of a bail-in—that uninsured creditors should suffer losses before taxpayers are on the hook—turns out to contain a few lacunae. "Financial institutions, the government, municipalities, municipal councils and other public entities, insurance companies, charities, schools, and educational institutions" will be excused from contributing to the depositor haircuts, though insurers later were removed from the exempt list.
Apparently, individual parties are lining up for special exemptions as well (much like connected corporations did with the Obama Administration to get exemptions from early provisions of the PPACA). Essentially, all bank losses will be assigned to depositors who don't have access to powerful friends in the government.
Some professors are arguing about online education. I will not comment on that particular topic right now, though it sounds a bit like two apatosauruses arguing about whether they should be worried about the comet they just saw.
I did, however, want to comment on this, from an SJSU professor to a Harvard professor, I assume pushing back on online course work designed by Harvard. Emphasis added.
what kind of message are we sending our students if we tell them that they should best learn what justice is by listening to the reflections of the largely white student population from a privileged institution like Harvard? Our very diverse students gain far more when their own experience is central to the course and when they are learning from our own very diverse faculty, who bring their varied perspectives to the content of courses that bear on social justice…
having our students read a variety of texts, perhaps including your own, is far superior to having them listen to your lectures. This is especially important for a digital generation that reads far too little. If we can do something as educators we would like to increase literacy, not decrease it…the thought of the exact same social justice course being taught in various philosophy departments across the country is downright scary — something out of a dystopian novel…
I would have said that teaching social justice at all and requiring students to take it at many universities was something out of a dystopian novel. In fact, the whole concept of social justice, wherein it is justified that certain groups can use the coercive force of government to get whatever they may fancy merely by declaring that there is a right to it (e.g. health care), actually underlies a number of dystopian novels.
Postscript #1: If find it hilarious that the SJSU rejects Harvard-created course materials because they are the product of white privilege. I cannot speak to Harvard undergrad, but my son is at Amherst which could certainly be lumped into the same category (any college named after an early proponent of biological warfare against Native Americans has to be up there in the white privilege category). My son actually gave up his earlier plan to study history when he looked at the course catalog. It was impossible to simply study, say, the political and economic history of Western Europe. All the courses are such things as "the role of women in the development of Paraguayan aboriginal rights."
Postscript #2: I don't have the larger context for this letter but it strikes me the professor is stuck in the typical leftist technocratic top-down and centralized single mandated approach to anything. Why is it that online courses would end up with no viewpoint or content competition? The Internet has increased the access of most people to a diversity of ideas that go beyond what they got in the morning fish-wrap and from Uncle Walter on TV. Why would it have the opposite effect in education? Or perhaps that is what the professor is worried about, a loss of control of the education message by the current academic elite, to be feared in the same way the Left hates Fox News.
How many times does an argument have to be wrong, and for how long, before it finally loses credibility? I suppose the answer must be nearly infinite, because the "they will not assimilate" argument is rising again, despite being about 0 for 19 on the groups to which it has been applied. Germans, Irish, Italians, Eastern Europeans, Chinese, Mexicans and now Chechnyans. This argument always seems to be treated seriously in real time and then looks stupid 20 or 30 years later. As an extreme example, here is Benjamin Franklin writing about Germans in 1751:
why should the Palatine Boors [ie Germans] be suffered to swarm into our Settlements, and by herding together establish their Language and Manners to the Exclusion of ours? Why should Pennsylvania, founded by the English, become a Colony of Aliens, who will shortly be so numerous as to Germanize us instead of our Anglifying them, and will never adopt our Language or Customs, any more than they can acquire our Complexion.
(By the way, if you want to retain an unadulterated rosy image of Franklin, who was a great man for many reasons, do not read the last paragraph at that link. People are complicated and sometimes even great men could not shed all the prejudices of their day.)
The only good news is that the circle of those acceptable to the xenophobic keeps getting larger. It used to be just the English, then it was Northern Europeans, then much later it was all Europe and today I would say it is Europe and parts of Asia. So that's progress, I suppose.
Fun fact: Ironically, the English King at the time Franklin wrote the quote above was George II. He was actually a German immigrant, born in Germany before his father came to England as King George I, jumping over numerous better claimants who were Catholic. His son actually assimilated very well, as George III spoke English as a first language, and his granddaughter Victoria practically defined English-ness. By the way, Victoria would marry another German immigrant.
...uh, just because
Update: Whenever I argue with people about this, I find out that we share different assumptions. Those who seem to support the bailouts assume that given some breathing space, the reckoning in Europe can be avoided. I assumed the reckoning is unavoidable, and will come either soon or at best in the next cyclical downturn. And it will be far worse in, say, 2015 than it would have been in 2010. Every time we delay the reckoning, we make it far worse.
And then there are politicians. I don't think they honestly know or care if the reckoning is unavoidable. They only care if it does not happen this minute. For politicians, the discount rate on pain is infinite. Future pain is thus always better than current pain.
Frequent readers will know that last year, I declared that the end of full-time employment in the American service industry (due to Obamacare) would be the biggest economic story of 2013. The mainstream media either has not yet noticed or cannot be bothered with a story that does not put Obama in the best possible light, but the story is starting to get out none-the-less.
Expect a lot more of this. The service industry generally does not operate 8 hours a day, 5 days a week anyway, so its labor needs do not match traditional full-time shifts. Those of us who run service companies already have to piece together multiple employees and shifts to cover our operating hours. In this environment, there is no reason one can't stitch together employees making 29 hours a week (that don't have to be given expensive health care policies) nearly as easily as one can stitch together 40 hours a week employees. In fact, it can be easier -- a store that needs to cover 10AM to 9PM can cover with two 5.5 hour a day employees. If they work 5 days a week, that is 27.5 hours a week, safely part-time. Three people working such hours with staggered days off can cover the store's hours for 7 days.
Based on the numbers above, a store might prefer to only have <30 hour shifts, but may provide full-time 40 hours work because good employees expect it and other employers are offering it. But if everyone in the service business stops offering full-time work, there will be no reason not to go to such a plan, and thousands of dollars per employee to do so.
I am a bit late to the game in addressing Krugman's comments several days ago when he said:
But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.
This was in response to the implosion of Cyprus banks, which was exacerbated (but not necessarily caused) by the banks being a home for a lot of international hot money - deposits so large they actually dwarfed the country's GDP.
I generally rely on Bastiat's definition of the role of the economist, which I will quote from Wikipedia (being too lazy on this Friday morning to find a better source):
One of Bastiat's most important contributions to the field of economics was his admonition to the effect that good economic decisions can be made only by taking into account the "full picture." That is, economic truths should be arrived at by observing not only the immediate consequences – that is, benefits or liabilities – of an economic decision, but also by examining the long-term second and third consequences. Additionally, one must examine the decision's effect not only on a single group of people (say candlemakers) or a single industry (say candlemaking), but on all people and all industries in the society as a whole. As Bastiat famously put it, an economist must take into account both "What is Seen and What is Not Seen."
By this definition, Krugman has become the world's leading anti-economist. Rather than reject the immediate and obvious (in favor of the larger picture and the unseen), he panders to it. He increasingly spends his time giving intellectual justification to the political predilection for addressing symptoms rather than root causes. He has become the patron saint of the candle-makers petition.
I am not naive to the fact that there are pools of international hot money that seem to be some of the dumbest money out there. Over the last few years it has piled into one market or another, creating local asset bubbles as it goes.
But to suggest that international capital flows need to be greatly curtailed merely to slow down this dumb money, without even considering the costs, is tantamount to economic malpractice.
You want to know what much of the world outside of Western Europe and the US would look like without free capital flows? It would look like Africa. In fact, for the younger folks out there, when I grew up, countries like China and India and Taiwan and Vietnam and Thailand looked just like Africa. They were poor and economically backwards. Capital flows from developed nations seeking new markets and lower cost labor has changed all of that. Over the last decade, more people have escaped grinding subsistence poverty in these nations than at any other time in history.
So we have the seen: A million people in Cyprus face years of economic turmoil
And the unseen: A billion people exiting poverty
By pandering to those who want to expand politicians' power based on a trivial understanding of the seen and a blindness to the unseen, Krugman has failed the most important role of an economist.
Other thoughts: I would offer a few other random, related thoughts on Cyprus
- Capital controls are like gun and narcotics controls: They stop honest people and do little to deter the dishonest. In the case of Cyprus, Krugman obviously would have wanted capital controls to avoid the enormous influx of Russian money the overwhelmed the government's effort to stabilize the banks. But over the last several weeks, the Cyprus banks have had absolute capital controls in place - supposedly no withdrawals were allowed. And yet when the banks reopened, it become increasingly clear that many of the Russians had gotten their money out. Capital controls don't work as a deterrence to money that is already corrupt and being hidden.
- No matter what anyone says, the huge capital inflows into Cyprus had nothing to do with the banking collapse. The banks had the ability to invest the money in a range of international securities, and the money was tiny compared to the size of those security pools. So this is not like, say, a housing market where in influx of money might cause a bubble. The only harm caused by the size of the Russian investments is that once the bank went bad, the huge size of the problem meant that the Cyprus government did not have the resources to bail out the bank and protect depositors from losses.
- Capital controls are as likely to make bubbles worse as they are to make them better. Certainly a lot of international money piling into a small market can cause a bubble. But do capital controls really create fewer bubbles? One could easily argue that the Japanese asset bubble of the late 80's would have been worse if all the money were bottled up in the country. When the Japanese went around the world buying up American movie studios and landmark real estate, that was in some sense a safety valve reducing the inflationary pressure in Japan.
- Capital controls are the worst sort of government expropriation. You hear on the news that the "haircut" taken by depositors in Cyprus might be 20% or 80% or whatever. But in my mind it does not matter. Because once the government put strict capital controls in place, the haircut effectively became 100%, at least for honest people that don't have the criminal ability or crony connections to beat the system. Cyprus basically produces nothing. Since money is only useful to the extent that it can buy or invest in something, then bottling up one's money in Cyprus basically makes it worthless.
- Capital controls are a prelude to protectionism. First, international trade is impossible without free flow of capital. No way Apple is going to sell ipods in Cyprus if they cannot at some point repatriate their profits. Capital controls can also lead to export controls. If I can't export money, I might instead buy jets, fly them out of the country, and then sell the jets.
- Let's not forget that the core of this entire problem is a government, not a private, failure. Banks and investors treated sovereign euro-denominated debt as a risk-free investment, and banking law (e.g. Basil II) and pension law in most countries built this assumption into law. Cyprus banks went belly-up because the Greeks, in whom they had (unwisely) invested most of their funds, can't exercise any fiscal responsibility in their government. If European countries could exercise fiscal responsibility in their government borrowing, 80% of the banking crisis would not exist (housing bubbles and bad mortgage securities have contributed in some countries like Spain). There is a circle here: Politicians like to deficit spend. They write regulations to encourage banks to preferentially invest in this government paper. When the government debt gets iffy, and the banks face collapse, the governments have to bail them out because otherwise there is no home for their future debt. The bailouts get paid for with more debt, which gets crammed back into increasingly over-leveraged banks. What a mess.
- All of this creates an interesting business school problem for the future: What happens when there are no longer risk-free investments? Throughout finance one talks about risk free rates and all other risks and risk premiums and discussed in reference to this risk-free benchmark. In regulation, much of banking capital regulation and pension regulation is based on there being a core of risk free, liquid investments. But what if these do not exist any more?
- I have thought a lot about a banking model where the bank accepts deposits and provides basic services but does no lending - a pure deposit bank with absolute transparency on its balance sheet and investments. I think about a web site depositors can check every day to see exactly where depositors money is invested and its real time values. Only listed, liquid securities with daily mark to market. Open source investing, as it were. In the past, deposit insurance has basically killed this business model, but I think public confidence in deposit insurance just took a big-ass hit this week.
Postscript: I don't want to fall into a Godwin's law trap here, but I am currently reading Eichmann in Jerusalem and it is impossible for me to ignore the role strict capital controls played in Nazi Germany's trapping and liquidation of the Jews.
The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.
Dan Mitchell describes three possible government responses to an impending bank failure:
- In a free market, it’s easy to understand what happens when a financial institution becomes insolvent. It goes into bankruptcy, wiping out shareholders. The institution is then liquidated and the recovered money is used to partially pay of depositors, bondholders, and other creditors based on the underlying contracts and laws.
- In a system with government-imposed deposit insurance, taxpayers are on the hook to compensate depositors when the liquidation occurs. This is what is called the “FDIC resolution” approach in the United States.
- And in a system of cronyism, the government gives taxpayer money directly to the banks, which protects depositors but also bails out the shareholders and bondholders and allows the institutions to continue operating.
I would argue that in fact Cyprus has gone off the board and chosen a fourth option: In addition to bailing out shareholder and bondholders with taxpayer money, it will protect them by giving depositors a haircut as well.
The Cyprus solution is so disturbing because, hearkening back to Obama's auto bailout, it completely upends seniority and distribution of risk on a company balance sheet. Whereas depositors should be the most senior creditors and equity holders the least (so that equity holders take the first loss and depositors take the last), Cyprus has completely reversed this.
One reason that should never be discounted for such behavior is cronyism. In the US auto industry, for example, Steven Rattner and President Obama engineered a screwing of secured creditors in favor of the UAW, which directly supported Obama's election. In Cyprus, I have no doubt that the large banks have deep tendrils into the ruling government.
But it is doubtful that the Cyprus banks have strong influence over, say, Germany, and that is where the bailout and its terms originate. So why is Germany bailing out Cyprus bank owners? Well, there are two reasons, at least.
First, they are worried about a chain reaction that might hurt Germany's banks, which most definitely do have influence over German and EU policy. There is cronyism here, but perhaps once removed.
But even if you were to entirely remove cronyism, Germany and the EU have a second problem: They absolutely rely on the banks to consume their new government debt and continue to finance their deficit spending. Far more than in the US, the EU countries rely on their major banks continuing to leverage up their balance sheets to buy more government debt. The implicit deal here is: You banks expand your balance sheets and buy our debt, and we will shelter you and prevent external shocks from toppling you in your increasingly precarious, over-leveraged position.
Update: Apparently, there is very little equity and bondholder debt on the balance sheets -- its depositor money or nothing. My thoughts: First, the equity and bondholders better be wiped out. If not, this is a travesty. Two, the bank management should be gone -- it is as bad or worse to bail out to protect salaried manager jobs as to protect equity holders. And three, if depositor losses have to be taken, its insane to take insured depositor money ahead of or even in parallel with uninsured deposits.