Category Archives: political economy

It Isn’t Just Our Own Progressives….

Posted on by
Reply

In an interview with Spiegel Online International, ex-Greek Prime Minister Giorgios Papandreou had this to say in response to Spiegel‘s question of where fault lies for the present crisis:

…we need strict budgetary discipline, and we have to reduce expenditures, but we also need growth strategies. And we cannot lose sight of the markets, either. It is unacceptable that they are the ones driving the countries…not giving their governments the time that democratic institutions need. This undermines our democratic foundation. That’s why we need strict regulation of the markets and more transparency, and why we have to contain the rating agencies. We, as socialists, have demanded this again and again, because we cannot do this alone as a single country. This is a mistake being made by the global political class and, in particular, by conservative Europe.

And this brief exchange:

SPIEGEL: They have dictated the strategies for some time now. The primacy of the political class seems to have been suspended.

Papandreou: That’s true, unfortunately. If we decide at 2 a.m. that we have to make a decision because the stock market in Japan is about to open, it’s an acknowledgement of the superior power of the markets.

What a breathtaking lack of understanding of economics, of free markets, even of democratic principles.  With Europe as their role model, it’s no wonder our own Progressives have so damaged our economy and our government.

Papandreou wants growth strategies.  What more powerful growth strategy can there be than to get government out of people’s and business’ way, to let labor go back to being mobile, to let citizens and businesses make their own decisions?  How much more stimulative (to coin a phrase) can government be than to reduce the cost of doing business by reducing taxes on businesses, on citizens, on exchanges between citizens along with that “budget discipline” and those “reduced expenditures?”

A concern, expressed in complete seriousness, is that markets are driving the nations, and not the governments.  Are not the people sovereign in Europe?  Is government truly the Sovereign in the land of John Locke and Jean-Jacques Rousseau?  People, in a free environment, are free to express their will over their government politically, but that’s not all.  To have a truly free environment, they must be free, as well, to instruct their government economically in a free market.  Every citizen in a free country gets two votes: one at the ballot box and one in his economic exchanges with his fellow citizens.

Another concern, expressed with the same lack of understanding, is that people, with their economic decisions, are not giving their governments the time that democratic institutions need in which to act.  But this is to assume that governments must be in the business of governing citizens’ economic decisions in the first place.  Since legitimate government has no such role, legitimate government needs much less time.

As if that’s not enough—or perhaps it’s deliberate (this would be consistent with the European attitude that government must decide for the people)—Papandreou wants to censor the information that people and businesses use in making their economic decisions: “contain the rating agencies.”  Government will make better decisions with its information base than can the citizens for themselves.  Hmm….  How’s that working out today in Greece and in the EU generally?  Do the people or the government, even in Europe, have the better record over the last several decades?

“We cannot do this alone as a single country.”  No closed economy—no economy that has no access to exogenous funding—can “do this alone,” since “this” is government making the decisions, government taxing everyone to pay for the welfare of everyone.  However, expanding this to the euro zone, or all across Europe, begs the question.  The expansion just expands the bounds on what is still a closed economy whose policies depend on outside financing to pay the difference between what the taxes can provide and what the government has promised.  An expansion only ensures that everyone else is dragged into the pit, also.  Making the thing be global changes the situation not a bit.

But in a huge misunderstanding that’s entirely consistent with the European view of “democracy,” of “freedom,” of “markets,” European government Progressives have completely missed the fact that their markets, at bottom, have very little freedom in economies so heavily laden with regulations and government “oversight.”  The polities have only limited freedom in government-controlled societies that limit labor mobility, that limit business choice, and that discourage entrepreneurship (which is entirely consistent with the lack of market freedom).  The Progressives have no understanding whatsoever of the concept of democracy and of individual liberty.  Papandreou’s own government was brought down by the other governments of the EU for the unpardonable sin of asking the Greek people for their opinion of the latest round of bailouts.  The wills of the French and Dutch citizens, when they rejected the European Union Constitution in their plebiscites, were blithely overruled by their governments signing the Treaty of Lisbon, which enacted that Constitution in all but name.  But this failure to understand is not all on the elitists.  In societies where tax evasion is a sport, where the rule of law is a thing of ridicule—this is not the stuff of freedom and democracy, either.

The failure of understanding can be summed up in Papandreou’s own lament: the superior power of the markets.  How terrible it is that government should be subordinate to the will of its people as expressed in a truly free market.

Democracy, free markets, individual liberty demand that the sovereign people make their own decisions, and live with the outcomes and prosper from those outcomes, or recover from the outcomes and then prosper.  These three—free markets, democracy, and individual freedom—are bound up tightly among each other.  None can exist without the others also existing.  Governments must accord citizens the respect of being responsible for their own actions, and the citizens must reassert this right for themselves.

Can We Afford This?

Posted on by
Reply

The International Monetary Fund, reports Belmont Club, is being lined up bail out Italy and Spain to the tune of an $800 billion aid package.  With the US as the IMF’s largest contributor, our “share” of this works out to more than $140 billion.  Can we afford this bailout (I won’t go into “after all the other bailouts” in which our government—we—have participated, both domestically and foreign)?  As an old econ professor of mine used to ask, “Suppose not?”  That is, what are the consequences of our not participating in this new bailout scheme?

Here’s one estimate of those consequences.  The EU’s designated “systemically important” banks hold a lot of European sovereign debt, including, in particular, Greek, Spanish, and Italian (and Portuguese) debt.  So do a lot of the other European banks.  So do a lot of Europe’s national central banks.  On top of this, most of the rest of Europe’s major banks hold the debt (non-sovereign; commercial) debt of those commercial entities that hold all that sovereign debt.

Because of these risks, the EU governing bodies have required those major banks to increase their capital reserves to 9% of their assets in anticipation of a Greek, or other sovereign, default.  But instead of acquiring more capital to reach that 9% threshold, those banks have been busily reducing their asset base to get their existing reserves to 9% of that reduced base—beginning with unloading the sovereign debt they presently hold.  Beyond this, the banks are not buying anymore sovereign debt, in what Spiegel Online International refers to as a “buyers’ strike on euro-zone debt.”  Mutual funds, money market funds, and other financial entities outside the EU have stopped buying European debt, also, even to the point of the US Federal Reserve Bank having to make dollars available to Europe because the commercial entities are even decreasing their willingness to roll over short term debt instruments.  It’s gotten so bad that not even Germany could sell its 10-year bonds in last week’s sale; one-third of their offering was left on the table.

In this environment, suppose Italy defaults (Greece has already defaulted with the agreed 50% write-down of their sovereign debt, but since sufficient government arm-twisting (“Nice banks you got there, Karl, Pierre.  Shame if something happened to them.”) was applied by the other European governments to get private lenders to “volunteer”, a “default” didn’t actually happen).  The banks still holding Italian sovereign debt fail because their assets—those debt instruments—become worthless and are (were) too much of their asset base.  This cascades as banks holding those banks’ own debt fail from the worthlessness of the failed banks’ debt.  And so on.  With the resulting severe economic downturn, the nations of the EU suffer, unemployment rises, output falls; all the things associated with a sharp, steep dislocation occur.  Since Europe is a major trading partner, and so customer, of ours, our economy worsens, our ongoing recession deepens, perhaps sharply, and lengthens.

On the other hand, suppose we go along with this IMF scheme and participate in yet another bailout.  What happens then?  The IMF money, claims La Stampa (via the Belmont Club link above), would give Italy a year to a year-and-a-half to push through reform without actually having to refinance their existing debt.  But, in reality, this just means the string will be pushed down the road.  Politicians, including Italian Prime Minister Mario Monti, won’t use the time to implement real reform, only to pay lip service while continuing to spend.  The rioting in the Italian streets over existing timid spending cuts show this (as they showed in Greece).

Further, with the cost of sovereign—and private—borrowing increasing rapidly as private entities—the only entities, in their aggregate, with the money to continue funding (but even for them, only to a point) national deficit spending, which is sovereign debt, what happens when the money runs out?  Recall that those private entities already are walking away from lending to Europe: they’re not going to lend until they run out of money.

Indeed, Spiegel Online International notes that their sources say that all of the previous bailout attempts have been worthless.  Those sources insist that, as a result, the European Central Bank must finance the debtor nations, even if the EU’s treaties bar it from doing so.  The central bank has enough money, goes the claim, and it can also print money if necessary.  Aside from what blithely ignoring the fundamental law of the land does for binding political entities—and people—together into a coherent polity, such printing of money for the sake of generating dollarseuros is the stuff of very great, if not runaway, inflation, as the Germans know full well.  Sharp inflation represents a devaluation of the currency that is little different from an outright default.

It won’t work, anyway—bailouts cannot work.  The prior bailouts failed, not because there wasn’t enough money transferred, but because the concept of bailouts is a failure: all they do is reward the behaviors that led to the condition by excusing the actors from the consequences of their actions.

In the end, then, Italy (Spain/Portugal) will default anyway.  Only if we’re active participants, we’re out those $140 billion, and a lot more, as all of us, EU and the US, keep trying until the inevitable happens.  Better to cut the cord, stop feeding the habit.  Better if the EU did this, also.  The default will happen sooner, the economic downturn will be extremely sharp, and it will be over.  The defaulting nations will recover, and they’ll be stronger than before for having learned a painful lesson.  For a couple of generations, anyway.  The rest of the nations will be better off, and sooner, for not having ridden this sinking ship down.

Distorting the Question

Posted on by
Reply

There they go again.

Senator Dick Durbin (D, IL) suggests that the Republicans are being a tad disingenuous with their reluctance to extend the payroll tax “cut” of two per centage points on employee payrolls.  Pretending to not understand the reluctance, Durbin asserts

The Republican position is they’d raise the payroll tax on working families.  That just defies logic.  What we should do is to help these working families struggle through.

What defies logic, though, as Durbin understands full well, is the concept of reducing the payroll tax in the first place.  Regardless of what we might think of the present structure of Social Security and Medicare, the fact is both of these programs are within just a very few election cycles of being utterly bankrupt, and the payroll tax is the only way—by design—of funding these programs.  Reducing that funding only hastens those failures.

Americans aren’t as dumb as Progressives like Durbin would have it, either, and so we’re fully capable of seeing the foolishness of a payroll tax cut, and we’re fully capable of not confusing such a cut with an income tax cut.  Indeed, far from the jobs stimulus the Progressives claimed this would be when President Obama proposed the cut, most Americans promptly saved those few extra bucks, or used them to pay down personal debt.  Of course, since businesses had no such cuts to their payroll expenses, they received no incentive to hire, and the missing “cut” spending potentiated that lack.

Aside from this, though, the Durbin claim is little more than a Progressive distortion of the opposition party’s tax position.  To use the payroll tax reluctance in this way—as a “demonstration” that Republicans want to raise taxes in the middle of this deep recession—is to isolate one irrelevant position, payroll taxes that have nothing to do with jobs and everything to do with the way Social Security and Medicare are funded, and to ignore the whole position: that lower income and business tax rates are themselves job creators and further that they increase tax revenue through increased economic activity—producing, selling, hiring—which leads to additional hiring in a virtuous circle.  Which “help[s] these working families struggle through.”

Further, Republicans have been advocating for some time closing tax loopholes and ending subsidies as an additional means of raising revenues, another aspect of their composite tax position that Durbin carefully elides.  And his distortion ignores the fact  that the Progressives themselves insist on outright tax rate increases—to the tune of $1 trillion, as Obama threw in at  the last second to blow up an already tentatively agreed deal during the debt limit increase talks last summer, and which the six Progressives on the recently deceased Supercommittee used to blow up that group’s chances of fulfilling its mandate.

Then Durbin added a wholly irrelevant canard to explain Obama’s absence from the just concluded Supercommittee charade:

This was a congressional undertaking. And the Republicans made it clear that if President Obama weighed in, it would become another presidential issue.

Really?  In what way?  Durbin chooses to offer no facts to support his assertion.  He does choose to ignore, though, the fact that Obama has repeatedly refused Republican invitations to talk about any economic matter, preferring instead to hit the campaign trail and to dally in Bali for East Asia summit talks.

Energy Consumption and Quality of Life

Posted on by
1

Power Line displays a graph that is one of several from an article by Oil Drum that shows a developing relationship between energy consumption and GDP growth, and it’s reproduced here:

Growth in world energy consumption

Growth in world energy consumption

This graph summarizes a series of national-level graphs and it indicates an increasingly tight coupling between energy growth and GDP growth.  As Power Line and Oil Drum point out, this has implications for any ability to reduce, at least in the near-term, dependency on CO2-based energy in our economies.  Aside from the fact that CO2-based energy has never been shown to be inherently bad—anthropogenic climate change, according to an increasingly deep and broad fossil record, seems a non-event—I want to talk about some other implications of this coupling, and I’ll do that with the explicit assumption that GDP is a good enough stand-in for the quality of life of the world’s inhabitants.

We have reached a point in the improvement of our quality of life where it’s no longer possible, for instance, merely to plant more acres in order to grow more food; it’s no longer possible merely to hire more calculator operators to do more calculations; it’s no longer possible to do more science simply by observing with the naked eye, or with crudely ground glass lenses, the world around us.  It’s no longer possible to increase our comforts in our homes simply by burning more wood in the fireplace.  We need more and better technologies.  It’s technology that produces the medicines that help us defeat yesterday’s killer diseases and will help us against today’s and tomorrow’s, it’s technology that produces and improves the computers underlying and controlling our infrastructure and personal activities, that manages the technologies that let us do the science that make our lives better and that underlie tomorrow’s technological and scientific advances that continue this spiraling cycle of improvement.

But each new advance in technology needs more energy to sustain it and it took more energy to develop it.  The increase in energy use shown in the graph isn’t driven only by population growth yielding more people to consume energy; that growth is driven by the increasing energy demands that an increasing quality of life represents.

We’re faced with a choice, then, as GDP increases and energy consumption increases become tied to each other: do we continue to develop our technologies and the energy to support them so that our GDP, our quality of life, can continue to improve, or do we say enough—this is as good as it gets, stop the improvement train?

I decline the Malthusian solution.  But to do otherwise requires more of that CO2-based energy, more of those fossil fuels.  Whatever we might think of alternative energy sources, they aren’t ready for market.  They can’t produce the energy in the amounts we need to supplement what we have, much less to replace much of it.  Not only are market prices not able to compete—and forcing them would damage our economy even more than it already is—the production efficiencies aren’t there, either.  The energy density of a solar cell doesn’t compare with the energy density of a unit of oil or gas, even if the cell will last longer than the unit of oil or gas.  Subsidizing the alternate energy sources doesn’t answer the problem, either; this merely shifts the price from the utility bill to the tax bill.

A partial answer, then, demands that we increase fossil fuel production, and this demands that the government get out of the way of this increase.  Travesties like the Keystone XL pipeline delay must be undone.  Off shore drilling must be allowed, dry-land drilling must be allowed, fracking must be allowed, and so on.  The government’s regulations that impede these must be withdrawn.  So, too must the regulations that enable frivolous environmental lawsuits and their delays be withdrawn.  For example, despite three years of environmental study for the Keystone XL project, despite the existence of 25,000 miles of oil and gas pipeline already criss-crossing the Oglala Aquifer, additional suits are permitted.  For example, a solar farm in the desert on the other side of the mountains from Los Angeles cannot deliver its green electricity to the city because environmentalists object to every plausible route along which the power lines needed to carry the electricity might run.  For example, a wind farm off the Martha’s Vineyard coast has been blocked by NIMBYers convincing the FAA to rule that the windmills would present a hazard to aviation.  Delays like these simply increase the importance of fossil fuel production.

So, too, must the subsidies, which only inflate the cost of the thing being subsidized, whether oil and gas or “green” energy, be withdrawn.

But the rest of the answer demands that we need energy from all sources.  We need the solar energy, the wind energy, the nuclear energy (and cheap fusion energy is just around the corner.  Still).  But these can’t be forced into the market before their time.  Solar energy remains roughly three times more expensive than fossil-fuel (CO2-based) energy for the consumer.  Permitting requirements can double the cost of building a nuclear power plant, and we still don’t have a place set up in which to store spent fuel—even though a suitable location has been identified.

When any other element of our infrastructure, a road or a bridge or a stretch of railroad line, for instance, has utility, then it can be sold on that basis.  Again, so it is with “green” energy.  When those sources have utility, when they are useful in the market place for the end users, then these can also be sold to us on that basis.  Neither energy source needs to hyped on the basis, for instance, of the jobs that will be created.  Those jobs will appear automatically from the need to produce to satisfy the market’s demand.

Insurance, Bonds, Risk, and Welfare

Posted on by
Reply

Insurance policies and bonds are quite similar in an important respect: they both are instruments used by industries that are founded on the transfer of risk from one person or entity to another in return for a fee of some sort, a fee which most often is characterized by an ongoing transfer payments from the one transferring the risk to the other accepting the risk.  The policies and bonds are the documents that represent these exchanges of risk and fee.

In essence, insurance transfers both the risk—the likelihood—of an undesirable event happening (vis., a person getting sick or dying, or one’s house burning down) and the cost of that event, to another entity, an insurance company.  In return for paying out that cost to an insuree, the insurer receives from the insuree a stream of premiums.  Notice that: the exchange is solely between the two parties; no one else is involved.

It’s quite similar with bonds.  A lender transfers a sum of money to a borrower in return for a stream of payments from the borrower back to the lender.  Here the risk  transferred from the borrower to the lender—the undesirable event—is the risk that the borrower won’t repay the principle transferred at the start.  In return for accepting this risk, the lender charges a premium to the borrower—the interest to be charged that represents an additional amount included in each payment beyond simply a prorated repayment of the principle.  Notice here, too: the exchange is solely between the two parties; no one else is involved.

The insurer makes its money by insuring lots of people so that the cost of having to pay out on any particular policy is covered by the totality of the stream of premium payments from all of the company’s customers, and the expectation that those customers will not suffer their loss simultaneously.  Similarly, the lender makes its money by pooling borrowers so that the cost to the lender due to default of a particular borrower is covered by the totality of the stream of bond repayments from all of the lender’s customers, and the expectation that those borrowers will not all default simultaneously.

The aspects of these two risk transfer industries that are of interest here are the sizes of those premiums and the relationships of the risks from one insuree/borrower to another.  In both cases, the risk transfer fees must be commensurate with the risk being accepted.  If an event—dying, or defaulting on a loan—is highly likely, than the fee must approximate the cost of the event, else the risk acceptor quickly will go bankrupt from routinely paying out more than it receives in return for taking on the risk.  If the event is not very likely at all, than the risk transfer fee similarly can be quite small.

Note, though, that insurance only works if the risks being pooled are similar.  Forcing into a pool people of significantly different risks—mixing a healthy, exercising young women into the same pool as octogenarian, heavily smoking men, for instance—artificially inflates the cost of that insurance to those young women, who won’t benefit from the insurance; it artificially deflates the premiums for those geriatrics who would benefit from the (relatively high risk) insurance; and it distorts the measures of risk for the pool insured, making it difficult for the risk acceptor to accurately price the cost of that risk transfer.

Bonds, also, only work only if the risks being pooled are similar.  Forcing fiscally sound, low borrowing entities to pay the same interest rates as unstable, heavily spending (with little income to cover the spending) borrowers makes such bonds similarly riskier: the risk is pooled on artificial criteria and so the interest required can have nothing to do with the condition of the borrowers in the pool.  This makes it next to impossible for a lender accurately to price this risk transfer.

This arbitrariness also makes it difficult for investors to evaluate the efficacy of a bond or an insurance company investment.

Wealth transfer schema, welfare payment plans, on the other hand, make no pretense of transferring risk, nor should they—that’s not their purpose.  Wealth transfer programs have only one purpose—to subsidize those whom the relevant government has determined should be subsidized.

That’s a long-winded introduction for my briefly stated thesis.  Only when the concepts of risk transfer and welfare are understood to be separate, and kept that way, can we have serious discussions of the utility of providing health cost welfare for some in the form of tax payments from all, or of  the utility of providing debt cost national welfare for some nations (their citizens) in the form of tax payments from all nations (their citizens).  Both Progressives and modern Conservatives (and social philosophies in between) routinely ignore these differences.  Instead, the insurance industry gets treated as a privately funded, government controlled welfare program, and the bond industry (of which the proposed Eurobond is an example) gets treated as a privately funded, meta-government controlled national welfare program.  This conflation invalidates argument on both sides of the question.