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.

Report on the Future of Europe: Federalism and Democracy

The report of the Future of Europe Group, released on 17 September 2012, warrants careful consideration by E.U. citizens and their state and federal officials. Beyond the various reforms proposed in the document is the critical notion that not every state need be a part of the enhanced integration (i.e., the additional governmental sovereignty being shifted to the Union from the states). This assumption applies both to the proposals themselves and to the application of a super-majority in place of unanimous consent to future amendments to the E.U.’s basic law. It follows that if the Czech Republic and Britain prefer the status quo, this would not prevent other states from going on to closer union. From an American standpoint, this “dual or multiple track” approach to federalism is quite foreign.

The complete essay is at Essays on Two Federal Empires.

The E.U. flag at the European Commission.  

Barroso's State of the Union: Is the E.U. a Political Union?

On September 12, 2012, President Barroso delivered his State of the Union Address. His depiction of the E.U. itself can be regarded as blurry, and his notion of "political union" as being misplaced as something somehow not yet extant. Even so, he does manage to accurately characterize the epoch at the time in terms of the Union being in its development stage. He correctly labels this stage as decisive for Europe.

The complete essay is at Essays on Two Federal Empires.

  President Barroso talking with Angela Merkel of the state of Germany.         NYT

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.

Should Catalonia Be a New E.U. State?

                                      Catalons rally in favor of secession from the state of Spain.     Globalpost.com

A crowd estimated at 1.5 million rallied in Barcelona on September 11, 2012 to urge the secession of the Catalonia region from the E.U. state of Spain. I put it this way because the fact that Spain was at the time a semi-sovereign state of the European Union mitigates the importance of whether Catalonia becomes a separate state or not. Similarly, the Egypt region of the U.S. state of Illinois had thrice in the history of Illinois hosted a movement to secede from that republic to form a new state in the U.S.

Whether a Catalonia in the E.U. or Egypt in the U.S., the fact that federal law would presumably still apply lessens the impact of the change, especially in the U.S. because of all of the competencies or domains that had been claimed by the Union at the expense of the powers of the state governments (something the Europeans have been assiduously trying to avoid).


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

Should Entitlement Programs Be Cut?

If human beings have survival among our inalienable rights as citizens for whom both rights and duties apply, then we as a society must grapple with how sustenance can be guaranteed to those among us who are not meeting their own needs. I put it this way to highlight the lack of conditionality in the right. That is to say, if it is inalienable, then it is irrelevant whether the person is lazy or of a bad temperament.

The entire essay is at "Should Entitlement Programs Be Cut?"

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.

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

 

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, available at Amazon.

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.

The Federal Reserve on Full Employment: A Democracy Deficit?

The American economy expanded during the second quarter of 2012 at an annualized rate of 1.7 percent. Meanwhile, the unemployment rate for all of the American states combined was expected to remain above 8 percent. In this context, the chairman of the Federal Reserve, Ben Bernanke, remarked, “It is important to achieve further progress, particularly in the labor market.” In other words, the free market cannot be relied on to reach full employment. More is needed. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” In other words, the central bank would enact a pro-employment policy. From the standpoint of democracy, the choice of the Fed to engage in such a policy is a double-edged sword.

                                                                                                   Fed Chairman Bernanke.                    Reuters
 

On the one hand, Bernanke was able to defy political pressure from Republicans to refrain from such a measure. Sen. Charles Schumer (D-NY) said that the Fed chief “should not let any political backlash deter him from following through and doing the right thing.” At the very least, short-term political pressures oriented to an upcoming election should not be allowed to thwart more long-term policy oriented to full employment.
 

On the other hand, from the standpoint of democratic legitimacy, a policy enacted by a body that is buffered from elected representatives can be problematic. Ironically, it was Bernanke who had urged Henry Paulson of the U.S. Treasury to appeal to Congress to pass the bank bailout (TARP) because only such passage could have democratic legitimacy. Accordingly, Sen. Bob Corker (R-TN) had this to say of Bernanke’s musings on a pro-employment policy from the central bank. “Policies from Congress, not more short-term stimulus from the Fed, are the ingredients necessary for restoring growth in the American economy.” The senator could have cited the U.S. constitutional convention, whose delegates had vested the U.S. House of Representatives with the sole power to initiate spending (i.e., the power of the purse). It is particularly dangerous for a body insulated from political pressure to engage in economic stimulus if that body has the unlimited power to create money. At the very least, inflation could ensue from too much stimulating; and yet, it should not be supposed that the market itself can reach full employment.
 

It may be that the constitutional design of American federalism wherein the various checks and balances on the federal level operate in effect to “push” policy down to the republic or state level. Employment policy from the Federal Reserve could simply be the point of least resistance. In other words, the central bank may be the only option short of the state governments when the Congress and the U.S. president are at logger-heads. The cost is not simply in terms of democratic legitimacy, for the American founders made federal legislation difficult to enact in part so the federal government would not encroach on the powers reserved to the member states. In other words, action by the Fed may take the pressure off the federal elected representatives, but at the expense of federalism (i.e., the state governments being able to check the federal government). To be sure, full employment is a worthy objective, but the “how” and “by whom” are also worthy of consideration.
 

Source:

Binyamin Appelbaum, “Fed Chairman Makes Case, in Strong Terms, for New Action,” The New York Times, August 31, 2012. http://www.nytimes.com/2012/09/01/business/economy/fed-chairman-pushes-hard-for-new-steps-to-spur-growth.html?_r=1&hp

 

Full Employment in a Republic: Hollande’s France

Facing an unemployment rate of 10% in his state, with youth particularly hard-hit (23% for those under the age of 25), Francois Hollande of the state of France announced in August 2012 a new initiative for the legislature to pay most of the salaries of tens of thousands of young people hired in 2013. Young Europeans have  been hard-hit by the laborious labor laws that make it difficult for companies to let people go. Some E.U. states, including France, have proposed modest tax breaks for companies that hire people just entering the workforce, but no one is under the impression that such proposals will redress the underlying structural problem.

 Hollande, a Socialist, of the E.U. state of France.            The Telegraph

Fundamentally, there is no guarantee that a competitive market will come to an equilibrium at full employment. Accordingly, government has a legitimate role in picking up the slack, such that ideally any able-bodied adult who wants to work can have a job. In the state of France, the plan being proposed by Hollande in August 2012 would have companies that hire a person between 16 and 25 for at least a year pay as little as 25 percent of the person’s salary (for up to three years). In this way, the state hoped to create 100,000 new jobs in 2013 and 50,000 in 2014.

While managements would doubtless see this as a bargain, the question is whether other jobs would be put at risk given the 25 percent of the salary being paid by the companies. A clever manager might try to increase the proportion of the employees for whom the company must pay only 25 percent. Increasing the proportion would mean letting some non-subsidized employees go. The cost structure assumed could be a basis of sustainable competitive advantage if competitors do not also have such an arrangement. In other words, do government-subsidized jobs in the private sector add much in the way of the total employment of a company (and thus of the economy as a whole)?

One might also consider the matter of France’s deficit. Under E.U. law, it cannot exceed 3.5% of the state’s total economic output. Hollande’s strategy going into office was to offset the additional spending with a tax increase on the rich, yet even in anticipation of this some rich French were relocating to Belgium, a state with lower income taxes on the rich. California, which at the time also had an unemployment rate of just over 10 percent and a youth rate of 23 percent, also suffered from a budget deficit and a proposal by Brown to increase taxes. Unlike France, however, California faced no federal law limiting the deficit. In this respect, the E.U. was already a more consolidated federal system than was the U.S.

In short, the problem of individuals undercutting a policy for the whole is evident. A company’s manager seeking to take undue advantage of subsidized labor is like the rich person who seeks to avoid paying higher taxes by going to another state. To be more effective, government policy needs to figure out how to minimize such opportunism that is at the expense of the whole. Thomas Jefferson and John Adams both assumed that a virtuous citizenry is required for a republic to work. In the cases both of France and California, reaching full employment and achieving fiscal balance in the government may well come down to whether the respective citizenry does not try to exploit the requisite government policies.

It could even be said that a society or civil contract that is disvalued in the face of widespread opportunism deserves to fail.  Managers use “corporate citizenship” as window-dressing, yet without any sense of obligation to anything beyond the company. Doubtless there are rich people whose motivation to minimize even taxes they can pay dwarfs any sense of staying put and riding out the storm with everyone else (i.e., we are all in it together). If we are not all “in it,” then there is no We, as in We the People.

Source:

Sylvie Corbet and Sarah DiLorenzo, “French Government Offers to Pay Most of Young Hires’ Salaries,” The Huffington Post, August 28, 2012. http://www.huffingtonpost.com/2012/08/29/french-salaries-young-hires_n_1839663.html?utm_hp_ref=business

No Guilt at Citibank

In the days leading up to Labor Day 2012, Citigroup announced that the bank would pay $590 million to settle a class-action lawsuit by stockholders who contended that the bank’s management as well as some directors had misled the stockholders about the bank’s exposure to subprime mortgage debt in 2007. The bank had used improper accounting practices to show an inflated asset base. The shareholders claim that the bank assured them that it had sold billions of dollars in collateralized debt obligations based on subprime mortgages. However, the bank had actually guaranteed the securities against any losses. To further disguise the risks to the stockholders, the bank moved the guarantees to separate entities. Unfortunately, the settlement is insufficient as a means to thwart banks such as Citibank from misleading investors. Legislators might want to look at two reforms in particular.

The full essay is at "No Guilt at Citibank."

See: Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

The West Crawling on Syria

Those who laud the efficiency of the market mechanism are particularly wont to point to the slow mechanizations of government machinery. Cautiousness along with a subtle bias in favor of the status quo may be the culprit. For example, after perhaps a year of urgings by Western governments for Assad of Syria to step down, finally a lone governor of a large E.U. state ventured to say that his state would recognize Assad’s opposition as the legitimate government of Syria. “France asks the Syrian opposition to form a provisional government — inclusive and representative — that can become the legitimate representative of the new Syria,” Francois Hollande was quoted by news agencies as saying on August 27, 2012 during a speech at the Élysée Palace. “France will recognize the provisional government of Syria once it is formed.” It is perfectly reasonable to ask whether the statement would make any difference in Syria.
 

Part of the reason why European states formed a union was because a united front would have more power both economically and politically. Were the E.U. Parliament to offer to recognize Assad’s opposition as the legitimate government of Syria, the announcement would have more punch behind it. This is why the American states consolidated their foreign-policy power at the union level. Simply put, the world would be more likely to deem it as important.
 

Beyond the question of whether the E.U. should take on a greater role in foreign policy (the union does have a foreign minister) is the matter of why Western governments were so reluctant (or slow) to recognize Assad’s opposition as the government of Syria. American officials had stated that Assad had lost the right to rule because his government had turned on so many Syrian civilians in killing them. The recognition of another government is more or less implied. Why not make it official? Why hold on so to the status quo, even after it has been deemed to be illegitimate?  Put another way, why must so many people be killed before even an implied step is taken?
 

Strategic concerns typically weigh heavily in the formulation of foreign policy. The possible reactions of China and Russia were no doubt salient in the calculations of the foreign policy experts at the time. Even so, it seems that too much cautiousness (i.e., avoiding even a low-probability negative reaction) goes with the calculating orientation itself in the formulation of foreign policy, which can be at the expense of common sense. If Assad was no longer held as the legitimate ruler of Syria, it follows that some other person or group could (and should) be recognized as legitimate. Furthermore, that such recognition would trigger Russian military retaliation should have been regarded as a stretch at best. The result of the excess cautiousness is that Russia and China were essentially able to proclaim the status quo as the default (a default whose legitimacy had been explicitly refuted in the West).
 

Put another way, the desire not to rock the boat even just a bit by paddling can be self-defeating if the boat is filling up with water. The mechanism by which Western governments formulate and implement foreign policy may be too mired in statecraft at the expense of not only common sense, but also the human rights of a people elsewhere in the world.
 

Source:

Kareem Fahim and Rick Gladstone, “France Says It Would Recognize Provisional Syrian Government,” The New York Times, August 27, 2012. http://www.nytimes.com/2012/08/28/world/middleeast/rebels-claim-to-shoot-down-syrian-helicopter.html?_r=1&ref=world

 

 

Foe of Glass-Steagall: Break Up the Big Banks

A few years after the financial crisis of 2008, Sanford Weill, the man behind the $70 billion merger of Travelers and Citigroup in 1998, urged the separation of investment banking from commercial banking. “Have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.” Even though banks had been able to exploit loopholes such that Glass-Steagall had essentially been eviscerated by the mid-1980s, Weill’s lobbying helped take down the law formally in 1999.

Weill might be illustrative of the saying, “be careful of what you wish for; you might just get it.” By enabling Citigroup to be a financial supermarket, he also made the bank “too unwieldy to manage, hunched over by the weight of disparate businesses with little in common and with byzantine corporate structures that made running the behemoth incredibly difficult,” according to the New York Times. In such a condition and yet too big to fail, the bank needed bailouts by the U.S. Government in September 2008. Referring to breaking up banks like Citigroup, Morgan Stanley and Goldman Sachs, Weill told CNBC on July 25, 2012, “I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable.” Why this thinking had not gone into the Dodd-Frank Act of 2010 may point to the inordinate influence of the regulated on law-making affecting them.

In other words, the public interest in U.S. law may be dependent on business coming to the realization that additional regulation is in the firms’ own financial interest. This does not bode well for the public interest, being so conditioned. For the regulated do not normally have such an enlightened self-interest. In the case of Weill, he may have realized that especially with the incentives in Dodd-Frank, banks could be more profitable were they smaller. For example, the law requires additional capital reserves for the biggest banks. Nevertheless, greater profitability can result from losing the disproportionate costs of integrating disparate businesses in a huge financial supermarket or combination (this was Rockefeller’s name for Standard Oil Co, as it replaced competition with coordination via a monopolistic organization). Dodd-Frank comes up short even in terms of why being big may not pay.

So why, one might ask, did Weill want a financial empire in the first place? Even if empire-building does not pay off financially in proportional terms, running a bigger company can pay off in terms of experiencing the pleasure of power over others. Moreover, one can feel that one’s hackneyed managerial tasks (even as a  CEO) are somehow significant, if only in terms of getting into the headlines. In explaining big business, more than a financial calculator is necessary. In the end, the bankers’ resistance to Dodd-Frank breaking up the biggies may have come down not just to ignorance, but also to the lust for power (rather than merely for money). Whatever the dominant motive, it is pretty clear that Congress has been following in its wake rather than molding or channeling it from out in front.

Source:

Michael J. De La Merced, “Weill Calls for Splitting Up Big Banks,” The New York Times, July 25, 2012. http://dealbook.nytimes.com/2012/07/25/weill-calls-for-splitting-up-big-banks/