On the Role of Socialism in American Political Polarization

In a stunning upset in the 2012 Republican U.S. Senate primary in Indiana, Indiana's Treasurer, Richard Mourdock, beat incumbant veteran Richard Lugar by 22 percent (61-39%). Even though Lugar's 36 years of experience in the Senate had seasoned him into a statesman in foreign policy, the Tea-Party-backed Mourdock was able to portray the aged senator as out of touch and too willing to compromise with Democrats. Mourdock had no intention of extending any hand across the aisle. Is such polarization worth the loss of experience in international relations? Moreover, what role ave worries of socialism perpetuated the polarization?

See: "On the Role of Socialism on Polarization."

Raising Retirement Ages in the E.U.: The Case of Spain

The New York Times reported in 2012, “Spain has a stubbornly high budget deficit, its banks require tens of billions of euros in rescue loans and the government may soon have little choice but to request bailout funds” from the E.U.’s “TARP” program. Nevertheless, the state government’s “budget would actually increase pension payouts 1 percent [in 2013]. The money includes not only pensions for former public employees, but also the social security payments that go to all retired [residents].”[1] Pension expenditures represented nearly 40 percent of the state's budget and 9 percent of the state’s economic output, so one would think that line-item would have been first up on the chopping block. To be sure, cutting sustenance programs such as pensions could actually exacerbate a government's debt because if a resulting decline in demand adds to unemployment. In this case, the politics in the state seems to have gone along with the economics. I submit that Spain could have gone further economically were it not for entitlement politics interlarding the retirement-age issue.

The full essay is at "Raising Retirement Ages in the E.U."

1. Landon Thomas, “Pension Dilemma in Europe’s Debt Crisis,” The New York Times, September 30, 2012.

Structural Reform and Economic Sustenance in European Austerity

Speaking at the World Economic Forum in Davos, Switzerland on January 25, 2013, Mario Draghi, president of the European Central Bank(ECB), said the bank’s program to buy the bonds of heavily indebted E.U. states had been “very helpful” in reducing the perception that the euro was on the verge of collapse. He also pointed to the structural reforms that heavily indebted states had enacted as “now bearing fruit.”[1] He urged those governments to continue to implement structural reforms so those states could take advantage of the ECB’s low interest rates and easy credit to banks. In short, the strategy of the ECB was to use monetary policy as leverage for long-term-oriented structural reforms at the state level. Political risk analysts listening to the central bank official likely came away with a more optimistic stance on the long term prospects for the E.U. economy.

The full essay is at "Structural Reform and Economic Sustenance."

 1. “Davos: ECB’s Draghi Says ‘Real’ Economy Still Stagnant,” Deutsche Welle, January 25, 2013.

                                                                                                       

Greek Austerity: Pressure on the Environment

“While patrolling on a recent cold night, environmentalist Grigoris Gourdomichalis caught a young man illegally chopping down a tree on public land in the mountains above Athens. When confronted, the man broke down in tears, saying he was unemployed and needed the wood to warm the home he shares with his wife and four small children, because he could no longer afford heating oil. ‘It was a tough choice, but I decided just to let him go’ with the wood, said Mr. Gourdomichalis, head of the locally financed Environmental Association of Municipalities of Athens, which works to protect forests around Egaleo, a western suburb of the capital.”[1] Tens of thousands of trees had disappeared from parks and forests in Greece during the first half of the winter of 2013 alone as unemployed Greeks had to contend with the loss of the home heating-oil subsidy as part of the austerity program demanded by the state’s creditors. As impoverished residents too broke to pay for electricity or fuel turned to fireplaces and wood stoves for heat, smog was just one of the manifestations—the potential loss of forests being another. On Christmas Day, for example, pollution over Maroussi was more than two times the E.U.’s standard. Furthermore, many schools, especially in the north part of Greece, had to face hard choices for lack of money to heat classrooms.

Greek forests were succumbing  in 2012 to the Greeks' need to heat their homes as austerity hit.   source: Getty Images

Essentially, austerity was bringing many people back to pre-modern living, perhaps including a resurgence in vegetable gardens during the preceding summer. At least in respect to the wood, the problem was that the population was too big—and too concentrated in Athens—for the primitive ways to return, given the environment's capacity. 

The full essay is at "Greek Austerity and the Environment."

1. Nektaria Stamouli and Stelios Bouras, “Greeks Raid Forests in Search of Wood to Heat Homes,” The New York Times, January 11, 2013.
2. Skip Worden, God's Gold, available at Amazon. 

Investor Assessments of Political Events

Although the various investors in the financial markets doubtlessly pay great attention to important political events, such as were a state in the E.U. to default on its bonds, I suspect that market analysts overstate the importance of more commonplace political events. For example, The New York Times reported in late September 2012 that investors were shifting their portfolios to reduce risk out of uncertainty regarding the upcoming American elections and the ongoing negotiations in Congress to avoid the huge budget cuts and tax increases set to begin automatically at the beginning of 2013 and run for a decade. Additionally, fears that E.U. leaders might hesitate on moving forward with the bailout program oriented to indebted states were prompting investors to be more risk-averse. Generally speaking, analysts were “anticipating that politicians may not act until forced,” both in the U.S. and E.U., “setting the markets up for weeks of angst.” In my view, this account is overstated.

 Does expertise on these make one an expert on politics?  

The full essay is at "Investor Assessments."

Source:

Nathaniel Popper, “Fearing Fiscal Cliff, InvestorsCash In and Seek Safety,” The New York Times, September 28, 2012. 

The Market Mechanism: Complicit in E.U. Debt Crisis

According to The New York Times in late 2011, “How European sovereign debt became the new subprime is a story with many culprits, including governments that borrowed beyond their means, regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany.” In going through these culprits and how they interrelated, it should not be lost that the market mechanism itself can be held as suspect, for at the very least it enabled the furtive games to be played for far too long. Indeed, the market itself did not do a good job for years in providing accurate risk-return relationships.

The full essay is in, "Essays on the E.U. Political Economy," available at Amazon. 

CEOs in 2012: Avoid the “Fiscal Cliff”!

Reporting in November 2012 in anticipation of the across-the-board budget cuts and end of the Bush tax cuts, together expected to amount to around $500 million for 2013 alone, the Wall Street Journal observed that some large American corporations were “making plans to slow investments, lay off workers and pay less-generous dividends if Congress and the Obama administration don’t find a way to avert the so-called fiscal cliff.” Such plans could represent a self-fulfilling prophesy wherein a hit of just over a half trillion dollars in an economy of over $16 trillion is nonetheless depicted by the media as a cliff. In actuality, it could be more like taking a step down the stairs rather than falling off a cliff. Even if the federal budget cuts and end of the Bush tax breaks in 2013 would not in themselves drive the U.S. economy off the cliff into an economic abyss, the assumption of economic Armageddon could build-up downward momentum to something even far worse than a return to recession. The culprits are those in business, government and the media who were engaging in a series of steadily loud exaggerations. It could justifiably be asked, what’s the difference?

 J.P. Morgan led banks in bailing out Wall Street in 1907.  Source: Upsidetrader.com

The full essay is at "CEOs Warn the U.S. Government: No Fiscal Cliff!"

Contagion Beyond the Headlines in the E.U.

The E.U. states of Greece and Italy were grabbing headlines during the first two weeks of November 2011, given the dramatic resignations of Papandreou and Berlusconi. The only other state to get some attention was France. The Wall Street Journal noted on November 12^th that concerns had been quietly building about France. According to the paper,“French bond yields rose to four-month highs, one day after Standard & Poor's Ratings Services erroneously issued a message saying it had cut France's triple-A credit rating. The yield on France's benchmark 10-year bond climbed 0.02 percentage point to 3.46%. That was 1.66 percentage points over yields on comparable German government bonds. France now has the highest government bond yields among its triple-A-rated peers in the region.” However, it seems overly dramatic to say that a .02 percent increase evinces a climb. Moreover, 3.46% is well under 7 percent, which is the level that was presumed at the time to signify the need for a bailout. Relative to the changes in the Italian yield, those of the French bonds could be viewed as relatively moderate, The French yield was still closer to that of Germany. Although not a red herring, the concern over France masked some real sleepers that were poised to take a hit in 2012. 

The full essay is at "Debt Contagion in the E.U."

For more on this topic, see Essays on the E.U. Political Economy

ECB Loans: A Backdoor Bailout?

On December 8, 2011, the ECB announced that it would loan 489.2 billion euros (c. $640 billion) at 1% interest to 523 E.U. banks for a three-year term. Carl Weinberg, chief economist at a consulting firm, said that by making the move, the ECB had “shown a path toward averting catastrophic collapse in Europe.” The move has been likened to that of the Federal Reserve after the collapse of Lehman Brothers in 2008. It was hoped that the E.U. banks would use the money to buy state bonds—particularly those of Spain and Italy, which were not able to “directly tap” ECB funds. According to Investor’s Business Daily, however, early signs pointed to bank declining to purchase the riskier debt. While understandable given Angela Merkel’s objections to the ECB serving as a backdoor bailout of profligate states over their heads in debt, the ECB’s refusal to put conditions on how the loans could be used may have undercut the central bank’s effort to relieve bank liquidity (and state debt) problems in the E.U.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Democracy Deficit in the E.U.’s State-Rights Federalism: The Debt Crisis

Holding back additional transfers of governmental sovereignty from the state legislatures to the E.U.’s legislative chambers not only inevitably pushes power to non-democratic E.U.-level  institutions, notably the ECB; the democratic basis even at the state level can be compromised.

The complete essay is at Essays on Two Federal Empires.

Essays on the E.U. Political Economy: Federalism and the Debt Crisis

The collection of essays comprising The E.U. Political Economy looks broadly at the E.U.'s federal system, with particular attention to the states, including the matter of "Brexit," which refers to the secession of Britain from the Union. The text then turns more narrowly to the government-debt and banking crisis that occurred in the wake of the financial crisis of 2008. The backdrop of federalism is meant to convey the point that weaknesses in that political system hampered the E.U.'s handing of its states and banks that were in trouble with debt. Lastly, several essays are presented on some more general aspects of the E.U.'s political economy. Rather than being heavily theory-oriented, the essays draw on contemporaneous news reports to quote from practitioners from business and government.

Essays on the E.U. Political Economy is available in print or as an ebook at Amazon.

Should the ECB Spend an Unlimited Amount on Bonds?

The European Central Bank did not place any limit on its program in which the bank purchases bonds of heavily indebted states so as to keep their borrowing costs (i.e., the bonds’ interest rates) from increasing. The program, called Outright Monetary Transactions, had already accomplished that even before spending a euro. Anticipation that the ECB would enter a state bond market if its interest rate rose high enough was enough to keep the rates from skyrocketing.  So, the announcement that the ECB would spend what “would be adequate to meet [the] objectives” is perhaps more important than how much the central bank actually spends.[1]  According to Joerg Asmussen, an executive board member of the ECB, the OMT was “economically necessary, legally permissible and effective.”[2]  He made the comment as a court in the state of Germany was preparing to consider whether the OMT “infringes on the constitution’s insistence on sovereign parliamentary control over budget matters.”[3]  Hence, a tension between “legally permissible” and “infringes on . . . sovereign parliamentary control” threatened to kill a program that had already succeeded before buying one bond. Fortunately, legal experts were saying that the German court might defer to the European Court of Justice, the E.U.’s supreme court.

The full essay is at Essays on the E.U. Political Economy, available at Amazon.

Should Icelanders Push for E.U. Statehood Anyway?

In late April 2013, a slight majority of Icelanders who voted in the parliamentary election went for a return to the center-right Independence and Progressive parties even though they had been responsible for the banking crisis that bankrupted Iceland. The two parties promised to forgive or renegotiate the Icelanders’ personal debt and end the four years of austerity by lowering taxes, ending capital controls and stimulating foreign investment, according to the New York Times. The center-left governing parties, including the Social Democrats, had cut spending and raised taxes, making the carrots being offered by the center-right parties all that more alluring. Although not the main issue of the election, the prospects for Iceland becoming a state in the European Union lessened significantly with the ousting of the center-left government. Unlike that government, the center-right parties voiced skepticism and advocated a referendum before any the government would take any further steps. In the wake of the election, it might be helpful to reflect on whether Iceland should become a state. After going over some economic and political factors, I want to highlight subtler factors whose influence is typically understated in newspaper headlines.

The complete essay is at Essays on Two Federal Empires.

From this perspective, it can be said that Britain are Ireland are part of Europe, but what about Iceland? Source: luventicus

On the Ethics of the E.U. (or Germany) Making Large Cypriot Bank Depositors Pay

After an initial assessment of Cyprus’s bank shortfall of around €17.5 billion in January 2013, the matter of a bailout came to a head two months later. The sticking point was whether depositors in Cyprian banks would be charged a one-time levy as the Cypriot part of the bailout. The E.U. and the European Central Bank, backed up internationally by the IMF, insisted that the bailout be limited to €10 billion, with the remainder of the shortfall’s bailout, over €5 billion, being necessarily supplied by Cyprus through a levy on depositors. Not having been culpable in the Cypriot bankers’ decisions to buy Greek bonds, the depositors spontaneously rose in protest. For a time, that seemed to work. The Cypriot legislature initially rejected the troika’s proposal. In the end, the Cypriot legislature narrowly approved the loan agreement 29 to 27 in late April, 2013. The question I address here is whether the obligations assumed on the Cyprus side are ethical or unethical.

Cypriots protesting a proposed levy on all bank accounts.  CNN

The full essay is at Essays on the E.U. Political Economy, available at Amazon.

Romania’s Monetary Policy in Federal Europe

Sometimes monetary policy and federalism can interact in interesting ways. To grasp a particular relation, such as that of Romania in the European Union, it is first necessary to keep in mind that monetary policy is not federalism and vice versa. An anti-federalist, for example, might have an incentive to conflate the two concepts out of a desire to deny the existence of a federal system already underway.

The complete essay is at Essays on Two Federal Empires, available at Amazon.

      Romanian currency.     Source: banknotes.com

Political Risk in Systemic Risk: Finnish Pensions Err in Debt Crisis

Finland became a state in the European Union in 1995 and adopted the euro at its birth in 1999. In terms of population, the state is between Wisconsin and Minnesota, both of which are states in the United States. The Finnish culture prizes saving as well as paying-off debt on time. As the Wall Street Journal put it, the Finns are more German in this sense than are the Germans themselves. It is easy to understand, therefore, why the Finns would not have been excited about the write-offs in Greek government in 2012. The Finnish cultural attribute here is an ideological proclivity. Such a value-system so deeply held can even eclipse or interfere with an otherwise unfettered risk-return trade-off presumed to be part of the market mechanism. Just as the risk-return investment-pricing froze rather than adjusted upward with the leap in risk in CDOs and the related insurance swaps that occurred on Wall Street in 2007 and 2008, the decisions of Finnish pension fund officers in the wake of the European debt crisis to pull out of Greek and Spanish bonds rather than simply to demand a higher rate of return, given the higher risk, likely means that the market mechanism itself freezes rather than functions at levels of high risk (or when risk is increasing dramatically). In other words, the theory of the laissez-faire market, which Adam Smith never advocated, has a serious flaw that is reflected in the mechanism in operation when there is a spike in risk. Un prix ne marche pas quand il y a beaucoup du risque. The free market mechanism in the investment market tends to freeze up rather than re-price instruments whose risk is quickly increasing to a significant degree.

The full essay is in Essays on the E.U. Political Economy, available at Amazon. 

Predicting Future Events in Political Risk Analysis: On the European Debt Crisis

Political risk assessment is a nasty business in that the future has a stubborn habit of not wanting to be too predictable. Even though tomorrow displays a remarkable tendency to be similar to the world of today—the status quo enjoying the right of default—forecasting future events is notoriously difficult. To use statistics to nail down probabilities may actually involve considerable luck. Not even the stature of the person making the predictions may be decisive, after all. I have in mind the predictions of Alexei Kudrin, the former Russian finance minister, on the European debt crisis and the euro.

                                                             

The full essay is in Essays on the E.U. Political Economy, available at Amazon.

Euroskeptic Spoilers in the Council: Two-Tracks as a Solution

During its meeting in October 2012, the European Council decided to move forward on the legal underpinnings of a banking supervisor at the ECB. The position was officially accepted at the next meeting in December. The position was designed to be responsible for overseeing the banks in the states that use the euro. Some of the debate between state leaders at the October meeting involved when the supervisor would be up and running. The issue of timing was particularly relevant and indeed pressing at the time because federal bailout money would flow directly to banks only once a supervisor is in place. To the extent that Spanish banks desperately needed additional capitalization to cover their bad debts, the ability of the Council to come up with legislation for a supervisor position in a timely manner—the upcoming German election notwithstanding—was crucial to stabilizing the market not only in the E.U., but internationally as well. The Council's members can be subjected to critique in this respect.

The complete essay is at Essays on Two Federal Empires, available at Amazon.

Poor States in the U.S. and E.U.: A Drawback of Federalism

The state-debt crisis in the E.U. has had the unfortunate effect of exacerbating the prejudice in the northern states against the poorer southern states. The people in the latter states are purportedly lazier or more corrupt (e.g., Greece’s patronage system). Historically, it has even been thought that the warmer climate makes people less industriousness. Faced with this long history of prejudice, it is difficult to assume that shifting more governmental sovereignty from the states to the Union will somehow make Europe one big happy family. In other words, federalizing more competencies is unlikely to make every state economically on par with Germany.

The complete essay is in Essays on Two Federal Empires, available at Amazon.

Bailouts, Bond-Buying: E.U. Plows Ahead!

On September 12, 2012, a psychological threshold was reached in the E.U. on the way toward “ever closer union.” That is to say, at the end of that day Europeans could feel an overdue sense that come what may, the euro would be protected. Moreover, the E.U. (at least for the states willing to sign up for greater E.U. enforcement of state deficit and debt limits) would proceed along with further incremental shifts of governmental sovereignty from the states to the union thereof. The sense of relief was palpable in Europe as state and federal officials as well as commentators and citizens breathed a collective sigh of relief.

Most pressingly, the constitutional court of the state of Germany announced that that state could in fact contribute to the fund to bailout indebted states. The court held that the state legislature would have to pass any increases because the further integration of the E.U. must not be allowed to proceed without commensurate democratic legitimacy and the rule of law. The President of the E.U. Parliament observed that this holds at the E.U. level as well.

The complete essay is at Essays on Two Federal Empires.