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Thursday, September 6, 2012

ECB Bond-Buying: Democracy Deficit


In September 2012, the European Central Bank unveiled the Outright Monetary Transactions program in which the central bank would purchase bonds from debt-laden E.U. states that use that euro and agree to “strict and effective” budget policy. The bank’s head, Mario Draghi, insisted that the program is within the bank’s mandate to protect the value of the euro. Indirectly, if a state government that uses the euro were to default, the currency itself would face downward pressure that could cascade into the collapse of the currency.

Will the ECB be the one to save the euro?     Estonian Free Times


The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

Should Greece Cut Military Spending?

As the government of Greece was in the process of working out a 11.5 euro austerity plan that would involve forced retirements in public sector and pension cuts so the E.U. would approve another installment of the bailout to the state,  one Greek remarked, “Mark my words. In the coming months, there will be a revolution, and this government will fall.” This sounds a bit like “buyer’s remorse” concerning the June election wherein the anti-bailout/austerity party barely lost. What about all the Greeks who voted for Samaras? Were they so quickly turning into radicals? Is democracy so fickle?  If so, the notion of terms, extant in republics other than in Walker’s Wisconsin, is vital. That is to say, if a people would so soon turn on their own votes, it is important that the elected representatives have some protection from the momentary passion of the masses.
 
On the other hand, the German-led “austerity-only” approach to Greece had clearly exacerbated the Greek fiscal condition, as rising unemployment demands more cash from the state government so people don’t starve. Absent any sort of admission of error on the part of Angela Merkel, revolution could be the only option for a people suffering from the wrong course. That is to say, revolution is justified when government officials refuse to admit to and correct a course of action that is counter-productive and even ruinous.

                                                                                  Is keeping Greece in the euro worth the austerity?    source: times.com
 
The good in enabling elected representatives to “do the right thing” even when the masses at the moment feel otherwise can be distinguished from the bad in a stubborn politician whose ideological policy is ruinous to the people. The problem is how to design a democratic process wherein the good is protected while the bad is thwarted. Samaras needs some space to do what might not match the momentary passions of the mob, but at the same time the people need some way to “just say no” to a policy shown to have made fiscal matters worse. Recalling a head of state, such as Scott Walker in Wisconsin, just because of disagreement with a bill signed by the official is not only jejune, but also counter to the protection an elected official needs in order to be a statesman. How, therefore, can the Greek citizens “just say no” to still more austerity without eviscerating representative democracy in their state? The problem is one of constitutional design permitting statesmanship while checking tyranny. I cannot say I have a solution.
 
In terms of the austerity proposal itself, I suspect that much more could be cut without having to touch pensions or sustenance programs. Specifically, I would point to the Greek defense budget and ask whether the state requires any military at all. Greece is a state in the E.U. which mitigates the need for Greece to have a military. For instance, whereas formerly armies were needed to resolve conflicts between states, now the European Court of Justice or the European Court of Human Rights can be appealed to in resolving a dispute. Furthermore, simply being in a union reduces the likelihood of a conflict that would reach the need for military action. Lastly, the E.U. itself has a military force (at one point this was set at 60,000 troops). The notion that every E.U. state needs a defense budget is antiquated. To be sure, the American states have armies, which the U.S. president can use, but these national guards are I suspect much less costly to the U.S. states than are the defense budgets of the E.U. states.
 
In short, the Europeans may be looking too closely at budget items in cutting spending. A broader perspective is needed, from which I suspect a lot more money can be cut without “reaching bone.” Put another way, the Greek people need not suffer so much, if only their state officials would reconfigure their notions of Greece as a state in a union. The status quo can become antiquated yet people can fail to realize this. Such a deficient perspective can prevent alternatives that would show current choices to be unnecessarily difficult. Perhaps there are other broad categories of spending that Greece could reduce with relative impunity from the standpoint of citizens feeling the need to revolt. I contend that a paradigmatic shift is necessary for such benefits to be realized.

Source:

Liz Alderman, “Greek Government and Public at Odds Over New Cuts,” The New York Times, September 6, 2012. http://www.nytimes.com/2012/09/06/business/global/greek-government-and-public-at-odds-over-new-cuts.html

 

Aid to Egypt vs. Paying Down Debt

The debt of the U.S. Government—some $16 trillion in 2012—can be difficult even to grasp conceptually. One does not run into a trillion of anything in daily life, much less sixteen times a trillion. Without any tangible examples that can give us some inkling of the magnitude of the number, “sixteen trillion” can easily become a number one rattles off as if a “oh, by the way,” as in, “Oh, by the way, that sort of number will never be paid off.” One can point to the debt as a symptom of a systemic imbalance, as in that of consolidation over the constitutional federalism. That is to say, the magnitude of the debt can point to the lack of limitations facing Congress in its appropriating capacity. It could be argued that the ballot box is such a limitation, but what if the electorate themselves have a similar imbalance in terms of spending what they don’t have. With student loan debt at $1 trillion as of 2012 and a third of the amount in default, the federal debt can easily be seen as a manifestation of a more basic or fundamental imbalance of the psyche that transcends yet subtly fuels policy.


 
 
In reading of the Obama administration’s preparation of a pact to cut $1 billion from what Egypt owes the U.S. Government for agricultural purchases, I was stunned to read that “money that would otherwise pay down the American debt” would instead be spent on “training and infrastructure projects in Egypt intended to attract private investment and create jobs.” To be sure, rising unemployment in Egypt could undermine the democratically-elected Morsi government, so a strategic argument could be made on behalf of the American aid. However, the almost cavalier attitude toward paying down the federal debt is rather strange, and misplaced, given the gravity of the problem. Put another way, to put a strategic objective primarily oriented to the unemployment of a state that is not in the U.S. above paying down U.S. debt can be viewed as a questionable priority. It seems to indicate a desire to fix another’s problems at the expense of making a dent in one’s own. The scenario of the homeowner who lets his own grass grow out of control yet lends his mower to his neighbor whose lawn is has become “unbecoming” captures this sort of mentality.
 
In short, the debt of $16 trillion can be read as a mirror of sorts of a certain mentality—one that falls far short of that which a virtuous and responsible citizenry would have. It is no accident that Jefferson and Adams agreed in their later correspondence that such a citizenry is necessary for a republic to remain viable.
Source:

Steven Myers, “U.S. Is Near Pact to Cut $1 Billion from Egypt Debt,” The New York Times, September 4, 2012. http://www.nytimes.com/2012/09/04/world/middleeast/us-prepares-economic-aid-to-bolster-democracy-in-egypt.html?pagewanted=all

 

Wednesday, September 5, 2012

Facebook Holds Employees to Declining Stock

With Facebook’s stock trading at $17.73 a share just after Labor Day 2012, down more than half from the IPO issue-price of $38, further downward pressure was anticipated due to the upcoming expirations of the lock-up. Employees would be able to cash in approximately 220 million shares at the end of October, 780 million shares in mid-November, and still more in December and then in the following May 2013. Experts were not putting much stock in Mark Zuckerberg’s decision to hold onto his options for at least a year. Rather than trying to assess the impact of the downward pressure on where the price might go, a business ethicist would be apt to notice a subtle point of fairness by class pertaining to when the options can be sold.

                                                                                     
The full essay is at "Taking the Face Off Facebook."

Bulgaria Shrugs Off the Euro

In early September 2012, Reuters reported that Bulgaria had “abandoned plans to adopt the single currency in response to deteriorating economic conditions and rising uncertainty over the prospects of the European Union. Finance Minister Simeon Djankov was quoted as saying as much.  Bulgaria was at the time the poorest state in the E.U. (similar perhaps to Mississippi in the U.S.). It is significant that Bulgaria was one of the least indebted states and was “trying to stick to tight fiscal discipline to avoid risks to the lev currency, which [was at the time] pegged to the euro.” In this regard, Bulgaria was like Finland and Germany in that it faced the prospect of paying for other states’ profligacy and lack of self-discipline. From this vantage point, it makes perfect sense for Bulgaria to demur. However, the perspective may be short-sighted in another respect. Specifically, Bulgaria risked missing the boat on the E.U.



The full essay is in Essays on the E.U. Political Economy," available in print and as an ebook at Amazon.

Monday, September 3, 2012

China: Modest Growth or Full Employment?

As summer slid into fall in 2012, the Chinese government was giving no hint of any ensuing economic stimulus program. This was more than slightly unnerving for some, as a recent manufacturing survey had slumped more than expected, to 49.2 in August. A score of 50 separates expansion from contraction. A similar survey, by HSBC, came in at 47.6, down from 49.3 the previous month. Bloomberg suggested that China might face a recession in the third quarter. So why no stimulus announcement?  Is the Chinese government really just one giant tease?

 
Wang Tao, an economist at UBS, explained the “very reactionary, cautious approach” as motivated by the desire to avoid repeating the “excesses of last time.” Specifically, the stimulus policy in the wake of the 2008 global downturn sparked inflation and caused a housing bubble. According to the New York Times, China was avoiding “measures that could reignite another investment binge of the sort that sent prices for property and other assets soaring in 2009 and 2010.” Any binge cannot be good, particularly given the irrational excitement that can take on a life of its own in the market.
 
So too much stimulus can cause inflation and put people’s homes at risk of foreclosure, whereas a lack of stimulus means that a moderate growth rate is likely, rather than that which could give rise to full employment. It almost comes down to a choice between stability of shelter and income.  Is there no way out of this tradeoff?
 
Targeted government spending directed at providing jobs beyond that which the market is providing can unhinge the employment criterion from the management of the macro growth rate. That is to say, the Chinese government could see to it that citizens who want a job have one (paid for by the Chinese government). The government would not need to balance employment with inflation and housing in deciding whether to stimulate the economy. A modest growth rate can co-exist with full employment, but it takes a partnership between government and the market.

Source:

Bettina Wassener, “As Growth Flags, China Shies From Stimulus,” The New York Times, September 3, 2012. http://www.nytimes.com/2012/09/04/business/global/as-growth-flags-china-shies-from-stimulus.html?_r=1&hp