Category Archives: political economy

European Finance Crisis

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I’ve written before about this subject.

The chart below is from Spiegel Online International, which has a related story, but I want to visit another aspect of this.  The chart’s breakout indicates German governmental exposure to Greek debt and that exposure’s cost to the German economy were Greece finally to default altogether on its debts.

 

The 50%, or so, haircut currently being sort of negotiated with Greece’s commercial financial institution creditors is a real default, albeit much lipstick has been applied to this PIIG’s lips, and much makeup is being added to its face.  The breakout elides those private banks and the cost to the German economy through the private sector generally; however, the governmental institution cost breakout has its uses.

The German economy is the EU’s and the euro zone’s largest, so the figures in the chart can be taken as an outer bound, within which the other European creditor nations’ costs can be assessed.  Alternatively, and perhaps more effectively, the German cost can be proportionally bounced against the other nations’ GDPs to get an idea of the costs to them, along with an idea of how expensive those costs really are.  Since I don’t have 2011 GDP figures, yet, my greasy spoon diner napkin analysis uses 2010 GDP estimates.

Germany’s 2010 GDP was in the neighborhood of €2.7 trillion.  The chart’s seemingly enormous €72 billion bite, presented without context, shrinks when compared to German economic strength: it’s about 2 2/3% of the German GDP.  The French GDP was €2.1 trillion; its proportional “share” then works out to a bit under €56 billion.  The Netherlands’ GDP was €641 billion; its “share” would be roughly €17 billion.  And so on.  It’s true enough that stronger economies will have an easier time than weaker economies, but in the end, these are sums that are easily absorbed.

To be sure, the private sector also will take hits from a Greek default.  Taking the private sector as a whole, not just the commercial bank interests mentioned above, but including insurance company, pension firm, and mutual fund holdings of Greek debt, the total private exposure works out to around €142 billion.  That’s about half the total Greek debt; it doesn’t add much at all to the GDP-based cost.  For individual economies, the ripple effects of private sector dislocations and occasional bank bankruptcies could seem sharp, but they would be short-lived.  The economies of the non-Mediterranean EU nations (yes, including France) are simply too large and too strong to suffer permanent, or long-lasting, damage.  And the private sector is the only place the hits should occur, anyway.  There’s no reason a French, German, Dutch, and so on, taxpayer—private citizen—should pay for the profligacy of a Greek government, or for that of any government other than their own.

Certainly, it would be suboptimal for Greek’s national creditors to walk away from the deals already made for a Greek bailout: even a bad contract must be honored.  But there should be—and there need be—no more public monies committed to this effort.

The Greeks will be better off, too, for having been released from their indenture to their creditors and allowed to default and to start over.

Government Shortfall

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Here is another example of the failures inherent in government intrusion into the market.  The Wall Street Journal describes a solar energy project that is about to founder at great cost to at least one of the investing private enterprises.

It seems that First Solar, Inc., a solar panel manufacturer, had sold a 230-megawatt plant to Exelon Corp, an electricity generating company, with the sale contingent on Department of Energy execution of a loan it had made to finance the deal.  No money has flowed from DoE, though, because the Department cannot proceed until “all applicable permitting issues are resolved,” and there is “an issue with a construction permit that First Solar obtained from Los Angeles County.”

The items underlying the “issue” are both unclear and not relevant in this context.  What matters is that the problem exists; therefor, DoE cannot proceed with its loan; so the project, starved of these funds in particular, is in jeopardy.  Since time is short for getting everything finalized, First Solar may end up having to buy the plant back from Exelon, and the project may die on the vine.

This is not a failure of the present administration, in particular, or of the preceding one, though.  It’s not a failure of any particular administration.  This sort of failure is inherent in any government involvement in private markets because of the necessarily different imperatives inherent in government efforts vs those of private enterprise.  In particular, this failure is driven by government’s necessary concern for the use of the citizens’ tax money, its equally necessary caution in committing that money, and its equally necessary concern for not intruding into other governments’ jurisdictions (here the jurisdiction of Los Angeles County).

Even in an ideal world where these concerns could be taken as effectively and efficiently satisfied by government, these three are enough to make labyrinthine any governmental efforts to commit the money.  Private enterprises in a free market, on the other hand, are free to handle these imperatives among themselves according to their own readings of the risks involved—including ignoring them altogether, using Alexander’s bronze tangle-separating implement on the knots, or not structuring the deal in this kind of way in the first place.

Taxes, Again

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Once again, a tax cut for Americans is being held hostage against a demand to offset that cut by a commensurate tax increase imposed on a government-disfavored group.  Senate Majority Leader Harry Reid (D, NV) has announced, at this late date,

We know there’s gonna have to be mandatory cuts, we understand that but also going to have to be something done with tax incentives, enhancements, revenues[.]

Unfortunately, this also is the wrong fight.  Both Democrats and Republicans are agreed that a two per centage point reduction in individuals’ taxes (or a three per centage point reduction both for individuals and businesses, if President Obama can be believed) is good for Americans.  Economists are agreed that temporary tax cuts, such as the proposed payrolls cuts, are not at all stimulative for the economy as a whole—a stimulus effect requires the cuts to be permanent.

The discussion, then, shouldn’t be a debate at all, nor should it concern payroll tax reductions, which serve only to further gut, and so to hasten the demise of, the Social Security system.

This discussion should be about a permanent income tax reduction for both individuals and businesses of two to three per centage points.  This much seems doable within the month since the idea of a tax cut and its present size already are agreed by all.  And who can understand the logic of “paying for” a tax cut with a tax increase (leaving aside the fact that there’s no need to pay for a reduction in the government’s receipt of something—our money—which doesn’t belong to it in the first place)?

This cut then should be followed by further discussion with a view to deeper income tax cuts.

Fairness

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Stephen Moore, of The Wall Street Journal, asks some questions….

about taxes

Is it fair that the richest 1% of Americans pay nearly 40% of all federal income taxes, and the richest 10% pay two-thirds of the tax?

Is it fair that the richest 10% of Americans shoulder a higher share of their country’s income-tax burden than do the richest 10% in every other industrialized nation….

Is it fair that Americans who build a family business, hire workers, reinvest and save their money—paying a lifetime of federal, state and local taxes often climbing into the millions of dollars—must then pay an additional estate tax of 35% (and as much as 55% when the law changes next year) when they die, rather than passing that money onto their loved ones?

Is it fair that nearly four out of 10 American households now pay no federal income tax at all—a number that has risen every year under Mr. Obama?

about labor

Is it fair that after the first three years of Obamanomics, the poor are poorer, the poverty rate is rising, the middle class is losing income, and some 5.5 million fewer Americans have jobs today than in 2007?

Is it fair that those who work full-time jobs (and sometimes more) to make ends meet have to pay taxes to support up to 99 weeks of unemployment benefits for those who don’t work?

Is it fair that thousands of workers won’t have jobs because the president sided with environmentalists and blocked the shovel-ready Keystone XL oil pipeline?

Is it fair that in 27 states workers can be compelled to join a union in order to keep their jobs?

Is it fair that Boeing, a private company, was threatened by a federal agency when it sought to add jobs in a right-to-work state rather than in a forced-union state?

about individual responsibility

Is it fair that those who took out responsible mortgages and pay them each month have to see their tax dollars used to subsidize those who acted recklessly, greedily and sometimes deceitfully in taking out mortgages they now can’t afford to repay?

Is it fair that our kids and grandkids and great-grandkids—who never voted for Mr. Obama—will have to pay off the $5 trillion of debt accumulated over the past four years, without any benefits to them?

Hypocrisy, Part II

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Health and Human Services Secretary Kathleen Sebelius has an opinion piece in USA Today.

In her apologia for an Obamacare regulation that requires health insurance programs provided by a vast range of Catholic, Protestant, Jewish, and so on institutions to provide contraception, sterilization and abortifacients in direct, open contravention of the teachings and beliefs of those institutions (and that requires those institutions to offer those insurance plans exclusively), she writes

One of the key benefits of the 2010 health care law is that many preventive services are now free for most Americans with insurance. … So is the full range of preventive health services recommended for women by the highly respected Institute of Medicine, including contraception.

So, no one is paying any taxes, or being forced to change their existing health insurance policies, to pay for this.

Nor is there any cancellation of religious teachings or thought or fundamental tenets by this Federal government, which used to be on the other side of a “wall of separation between Church & State.”  There’s an interesting view of “free.”

That’s why in the rule we put forward, we specifically carved out from the policy religious organizations that primarily employ people of their own faith. This exemption includes churches and other houses of worship, and could also include other church-affiliated organizations.

Umm, no.  Not hospitals, not doctors’ offices, not clinics.  These employ (quite properly) far too broad a range of employees to be able to fit within the carefully and deliberately narrowly drawn limits of this rule.

In choosing this [extremely narrow religious] exemption, we looked first at state laws already in place across the country. Of the 28 states that currently require contraception to be covered by insurance, eight have no religious exemption at all.

The religious exemption in the administration’s rule is the same as the exemption in Oregon, New York and California.

Of course, far be it from the Federal government to set an example.  Oh, wait….