Archive for the ‘Keynesianism’ Category

“Tsipras caved to many European demands”


David Francis writes that “The Greek government is now in default to the International Monetary Fund, and the stark reality of the financial upheaval Athens is facing appears to have Prime Minister Alexis Tsipras in a panic. Tsipras executed an about-face Wednesday, agreeing to spending cuts he previously rejected. But Europe isn’t having it. Pensioners stormed Greek banks, which are closed to the rest of the public, to collect a maximum of 120 euros, or $134. More and more ATMs in Greece are empty. And as concerns reached a fever pitch, Tsipras tried to reassure Greeks that their bank deposits were safe. “I provide my personal guarantee that I will do whatever is possible to make these difficulties temporary,” the prime minister said in a televised address Wednesday evening”.

He goes on to argue “even a casual observer of the five-year crisis knows this isn’t the case. As part of a $270 billion bailout package, the European Central Bank had given Greek financial institutions emergency lines of credit when they were short on cash. With the expiration of the bailout Wednesday morning, that lifeline no longer exists. It’s why Greek banks are closed until Monday, at least, and withdrawals from accounts are limited to 60 euros, or about $67, per day. Perhaps sensing the growing unease within his population, Tsipras caved to many European demands late Tuesday. In a letter to his creditors — the European Central Bank, the IMF, and the European Commission — he acquiesced to many previously rejected austerity demands, including pension reforms. In exchange, he wants a guarantee that Europe will help Athens pay its bills for the next two years. Officials from Syriza, Tsipras’s party, hinted an agreement would cancel Sunday’s referendum for the Greek people to decide”

Interestingly the writer reports that “Olaf Boehnke, head of the Berlin office of the European Council on Foreign Relations, told Foreign Policy on Wednesday these comments reflect the sentiment within the German government. Simply put, Berlin wants Greece out of the Eurozone. “People are really fed up with them. They’re trying to provoke the establishment as much as possible,” Boehnke said”.

The problem with this view is that, as Merkel has said the euro is the EU. Thus, a member that leaves the euro and thus the EU would end the fiction that the EU will last through this crisis. If Greece does leave the euro and thus the EU then the “markets” will turn to Spain or Italy or Ireland. The integrity of the whole project will be seen for what it is, a sham. Thus while the Germans may be tired of Greece they also know that if Greece leaves the EU someone else will be next.

The report ends “It now appears Merkel and Schaeuble might not get the “no” vote outcome they want from Sunday’s upcoming Greek referendum. A poll by ProRata found that support for rejecting the bailout is shrinking. Before Greece closed its banks, 57 percent of Greeks wanted to reject European austerity. Now, that percentage has dropped to 46″.


“United Kingdom’s outsized and overleveraged financial sector made the nation suffer disproportionately”


A report in Foreign Affairs discusses the recent British general election. It argues that both main parties mislead the public about their economic policies.

It opens “This May’s general election wins for British Prime Minister David Cameron and his Conservative Party confounded opinion pollsters and surely surprised Cameron himself. Despite presiding over five years of budgetary austerity and welfare cuts, a drop in wages by over eight percent from their 2007 peakzero growth in national productivity (which reflects the growth of part-time low-skill employment since the crisis), and missed budgetary targets, the electorate punished not Conservatives but rather their junior coalition partner, the Liberal Democrats, who lost all but eight of their 57 seats in the House of Commons. The Labour Party’s failure to improve significantly on its weak 2010 performance, paired with the quirks of the United Kingdom’s first-past-the-post electoral system, did the rest of the work needed to secure a Conservative victory”.

The author correctly notes that “Commentators on the right have been quick to interpret this result as a triumph for austerity politics and fiscal rigour over supposedly anticapitalist (or at least pro-Keynesian) policies advocated by former Labour Party leader Ed Miliband, who resigned following the results. The Conservatives’ political message throughout the election revolved around the “tough decisions” it had made to cut government programs in order to reduce the budget deficit left behind by the previous Labour administration. Meanwhile, on the center-left, Labour’s failure is seen as proof that it should never have abandoned Tony Blair’s “third way” strategy of socially progressive neoliberalism, which had successfully attracted aspirational middle-class voters”.

He goes on to argue that “A closer look at this election’s results suggests that both of these interpretations are off the mark. Although Labour gained only 700,000 votes since 2010, the true cause of the Conservatives’ success is the spectacular collapse of the Liberal Democrats. By associating with the Conservatives’ austerity policies, the Liberal Democrats forfeited some 4.5 million votes—two-thirds of its vote share. The Conservatives’ real vote share—although the party claimed that it provided Cameron with a mandate to govern—only increased by half a percent”.

As ever in UK politics the major culprit for these skewed figures is the wacky electoral system of fptp, a system that should only ever by used in a two party system. Now however the two party system is dead but the two main parties are trying desperately to cling onto it instead of having some form of PR and a more representative and democratic system of electing MPs.

He mentions that “Cameron’s party may have another five years in power, but the real winners of this year’s election were fringe parties such as the UK Independence Party, which advocates a freeze on immigration and an exit from the European Union, and the Scottish National Party, which wants Scottish independence and an end to austerity. Both of these parties took millions of votes that Labour was hoping to claim, clearing a path for Cameron’s victory despite most of the British public actively rejecting his party’s policies”.

Pointedly he argues that for all the talks about cutting the deficit the Tories did not really do want they proudly said they would, “Despite Conservative spending cuts, the United Kingdom’s deficit was reduced by only half of what the party anticipated when it took office in 2010. The nation’s economy did not start to grow until late 2013, after a panicked treasury minister, George Osborne, relaxed austerity measures. The United Kingdom’s economic problems, the Conservatives maintained, were the result of Labour’s supposed profligacy in running budget deficits during the boom years of the early 2000s, leaving the economy exposed to the financial crisis. This, they argued, made draconian spending cuts inevitable. However, as the crisis hit in 2007, the United Kingdom had the lowest debt to GDP ratio in the G7, lower than when Labour had taken power a decade earlier. And if Labour was supposedly running excessive deficits, the markets remained strangely unconcerned, with market rates on British bonds running close to pre-collapse lows. This left many wondering why the British budget exploded in 2008 and what it might say about coalition rule in the United Kingdom”.

The writer makes the excellent point that “Cameron did not discuss why the United Kingdom’s outsized and overleveraged financial sector made the nation suffer disproportionately from the worst financial crisis since the 1930s. Financial deregulation and the unsustainable growth in private, not public, credit fatally exposed the United Kingdom’s banks to the United States’ subprime credit crisis. The collapse in credit growth in 2007–09 hurt the United Kingdom’s budget not because the Labour government was too deep in debt but because the national economy was more dependent on financial activity than elsewhere. By 2007, the British Exchequer was taking nearly 25 percent of total tax revenue out of the financial sector just prior to the crisis, which was a mere ten percent of the economy. With the financial crisis, these revenues plummeted, leaving the government short of cash and needing to borrow heavily”.

He correctly writes that the poor suffered most under the government, “The Conservative–Liberal Democratic coalition diagnosed the nation’s woes as symptoms of Labour spending excessively on welfare and wealth redistribution. The government then set about reducing the deficit by slashing social programs and public employment. Austerity policies very quickly pushed the economy back to a near recession, averted only by slowing the pace of deficit reduction and encouraging private sector credit growth through government guarantees on home loans. The coalition’s spending cuts were never reinstated once the economy began to recover, and its austerity policies were politically selective. Health care and pensions were spared the ax—programs that disproportionately benefit older citizens who tend to vote Conservative. The government focused its cuts instead on the younger end of the working population. Spending on these groups was already lower than on the elderly, which required cuts to be deeper in order to provide substantial savings”.

He concludes “The economic crisis that hastened New Labour’s demise had nothing to do with overspending and everything to do with its uncritical acceptance of twenty-first-century financial innovation and its excesses. Before analysts conclude that Labour has no choice but to shift to the right, we need to remember the lessons of the global financial crisis: a balanced budget will not save a government from the failures of a banking sector that is too big to bail out, and mere economic facts seldom defeat ideologies”.

Kill over capture


A piece from Foreign Policy discusses the drone policy of President Obama which is to kill rather than capture. It opens “The New York Times published an important article on Monday, April 13, by Mark Mazzetti and Eric Schmidt that explores an important question regarding U.S. counterterrorism policy: Is it better policy to simply kill suspected terrorists with drones, or to attempt to capture them with U.S. special operations forces in order to collect intelligence from the detained individuals? Mazzetti and Schmidt’s article reviews specifically the Obama administration’s decision to work with Pakistan to capture U.S. citizen Mohanad Mahmoud Al Farekh, who, according to an unsealed Justice Department complaint, traveled to Pakistan in 2007 to provide material support to al Qaeda. The decision to capture Farekh was made even though “[d]rones spotted him several times in the early months of 2013” and both the Pentagon and CIA sought to have him placed on a kill list so he could be lawfully targeted”.

He continues, “The capture of Farekh and his eventual transfer to the United States for trial is notable because it is one of the rare occasions when U.S. counterterrorism practice aligned with stated U.S. policy objectives. Since September 2011, the Obama administration has repeatedly and strenuously claimed that it always prefers capturing suspected terrorists rather than killing them. This was first put forth by then-senior White House counterterrorism advisor John Brennan at a Harvard Law School speech entitled ‘Strengthening our Security by Adhering to our Values and Laws.’

He writes that “That relatively few counterterrorism capture operations have been attempted in comparison to drone strikes suggests that whatever unique intelligence these suspected terrorists hold is not particularly valuable or timely. If that information was key to saving the lives of U.S. citizens, then surely it would be worth placing U.S. special forces’ lives at some degree of risk, or potentially upsetting bilateral relations with the government where the individuals reside. However, these suspected terrorists are being killed continuously at a safe distance with little apparent regard for or interest in retrieving the intelligence that they possess. This also suggests that they are overwhelmingly neither “high-value” terrorists nor engaged in ongoing plots against the United States or U.S. citizens living abroad. It is useful to remember that capturing terrorists to extract intelligence was once the norm in U.S. counterterrorism strategy. As the State Department’s Patterns of Global Terrorism: 2002 report reads: “In January, the Government of Pakistan arrested and transferred to U.S. custody nearly 500 suspected al-Qaida and Taliban terrorists.” And that’s just Pakistan. In December 2002, CIA Director George Tenet stated: “Since September 2001, more than 3,000 al-Qaida operatives or associates have been detained in over 100 countries.” From there, they entered the CIA’s “black sites,” undeclared Pentagon detention facilities, and Guantánamo Bay”.

He goes on to argue “it is undeniable that the United States shifted markedly from capture to kill in George W. Bush’s second term. Moreover, this habit has been expanded markedly under President Obama’s watch. Whereas Bush authorized an estimated 50 drone strikes while in office, there have been 470 under Obama, which have killed an estimated 3,300 suspected terrorists and militants. We can never know what information they held, and whether it would have been useful to better understanding the tactics, techniques, and procedures of terrorist organisations or would have revealed any external plotting. All we know is that they — and several hundred civilians along with them — are dead”.

He ends “President Obama could reverse this practice if he was willing to approve the assumption of some risks and consequences for U.S. service members. In my conversations with a significant number of active-duty and retired officials and planners in the special operations community, they repeatedly emphasize the belief that they can execute capture missions at little risk to themselves or noncombatants, and they enthusiastically wish that the opportunity to conduct such missions were more forthcoming. They are better trained, equipped, and prepared to do this than any specialized military units in the history of the world”.

Economist 2015:Cuts and savings


Continuing the coverage of the Economist of the UK general election. It notes the differences of the parties on the economy. It begins “ALL the big political parties agree: Britain badly needs to get its public finances in order. The country probably borrowed about £90 billion, or 5% of GDP, in the 2014-15 fiscal year—more than Italy, France or even Greece. Yet the parties do not agree in the slightest on how much further borrowing ought to fall, or how to bring it down. The Conservative-Liberal Democrat coalition came to power in 2010 declaring that deficit reduction was “the most urgent issue facing Britain” and that it should be achieved mostly by cutting spending, not by raising taxes. Barely a month into his new job, the flinty Conservative chancellor, George Osborne, laid out a bold plan to do this. It turned out to be considerably more flexible than he implied”.

It goes on to mention “Osborne set out two targets. First and most important, the structural current deficit—that is, the deficit adjusted to reflect the economic cycle, and excluding investment—would be forecast to be in balance five years in the future. Second, national debt would fall as a percentage of GDP by 2015-16. At the time both targets sounded like a plan to finish the job of deficit reduction in one parliament. A euro crisis and sluggish growth quickly messed it up. The Treasury brought in less tax revenue than it had expected and had to spend more on benefits. As a result, borrowing stayed high”.

The author seems to think that this was all out of Osborne’s control. He could have easily borrowed less or taxed more but instead he was too afraid to do either of these as it would cut against his narrative of “fixing the country”. The result was the worst of both worlds.

The writer does admit that “ever more of the output lost to the recession was written off as gone forever, making more of the deficit look structural. Mr Osborne could have got back on track by cutting spending more deeply or raising taxes. Instead, he quietly allowed the completion date to slip. As long as the job was still forecast to be completed five years in the future, he had not missed his main goal”.

The piece goes on to mention that “Beyond the protective “ring-fence” the coalition erected around the NHS, schools and international aid, departmental budgets have been slashed by 21% on average. Local government is getting by on two-thirds of its pre-austerity budget. Public-sector employment has fallen from 6.3m to 5.4m. Civil servants’ pay was frozen for three years and then rose by only 1%. The government saved about £25 billion from the welfare budget, mainly by limiting annual increases and means-testing child benefit, a previously universal handout. (Other welfare reforms grabbed headlines without saving much money.) But an ageing population and generous increases in the state pension—which accounts for 40% of the welfare budget—have offset these savings. Overall, welfare spending has barely changed since 2010”.
This means that the cuts inflicted were worst on areas like defence, where the UK still insists on thinking of itself as a great power when it is really nothing of the sort. The refusal to cut the international aid budget is laughable but seems to be based wholly on polling data. The refusal of both main parties to cut it and transfer the money to defence or have smaller cuts elsewhere has not been countenanced. At the same time the savage cuts to welfare and the refusal to tax the richest in society has made this “rebalancing” not only immoral but in the long run dangerous. It has transferred vast amounts of wealth to the richest in society in the wrong belief that it will “trickle down” and all of society will therefore somehow benefit.

The piece adds “If the Tories win, Mr Osborne must do it all again. Provided the recovery is sustained, the chancellor wants a £7 billion overall surplus by the end of the parliament in 2020. Current government plans imply a further cut of 16% to departments outside the ring-fence, according to the Institute for Fiscal Studies, a think-tank. That will be tough, for three reasons. First, the easiest cuts have been made. It is hard to see local government repeating the big savings made during this parliament, for example: councils will soon run up against their legal obligations to provide services. Reforms to university funding, which provided the bulk of the business department’s savings, were a one-off. Second, holding down public-sector salaries will become harder as private-sector pay rises. Third, the population is older and needier. The NHS says a freeze in its budget will not do—it wants an £8 billion boost”.

He goes on to note that “Labour promises only a surplus on the current budget, excluding investment—which on current plans will be £30 billion in today’s money (or 1.4% of GDP) in 2019-20. The party has not specified when exactly it would achieve this. By contrast, both coalition parties want current balance in 2017-18, which would demand deep cuts for two years. From then on, the Lib Dems would borrow about half the investment budget, putting them, as so often, in a middle ground. The SNP does not want to cut at all, and instead suggests a 0.5% annual boost to departments’ budgets. That would leave a small current budget deficit in 2020”.

The piece concludes “The gap between Labour and the Tories is huge—£30 billion amounts to about a quarter of the entire health budget. The IFS reckons Labour could, as a result, make no cuts and instead raise departmental budgets by 2%. The two parties have not been so far apart on fiscal policy for at least five elections. Labour does not emphasise this difference, for fear of looking spendthrift. But the choice facing voters is stark”.

Economist 2015:Economy


The Economist has published a series of reports on the UK general election which is to take place on 7th May. The piece begins “LISTEN to a Conservative politician for more than one minute and he or she is sure to utter the words “long-term economic plan”. The slogan is projected behind them when they give speeches and plastered across their campaign literature. It has been shoehorned into any number of policy announcements, no matter how uncomfortably. A scheme to give miscreant drivers 10 minutes’ grace before they are slapped with parking tickets, for example, was said to be part of a long-term economic plan. The phrase bores Tories to tears—yet it might win them the election. Just two and a half years elapsed between the run on Northern Rock bank, which marked the start of Britain’s financial crisis, and the formation of the coalition government in May 2010. In the meantime the economy took a huge hit. From the peak in early 2008 to the trough in 2009, GDP per person fell by 6.9%”.

The author notes “The new government promptly dedicated itself to fixing the resulting hole in the public finances (see article). But the big economic problem was weak demand. Fearing for their jobs, consumers were paying down debt rather than splashing out on new cars or televisions. Businesses were not investing. Unemployment rose to 8.5%—lower than in other wealthy countries, but still painfully high. And many of those in work had too little of it: part-time jobs and self-employment had replaced many full-time jobs. Then, just as things began to look up, the euro crisis crushed Britain’s biggest export market. By 2013 the IMF was complaining that Britain remained “a long way from a strong and sustainable recovery”. Moody’s, a credit-rating agency, downgraded the country’s debt from AAA to AA1, citing “continuing weakness” in growth. And the Labour Party, which had lost economic credibility during the financial crisis, began to close the gap with the Conservatives on economic competence”.

Predictably with the Economist everything and everyone is boiled down to numbers. The fact that the author tries to minimise the 8.5% unemployment figure shows where its priorities lie. The closeness of the Tories to the banking sector, having sold Northern Rock cheaply to Richard Branson and let the taxpayer taken the hit does little to help their economic reputation. At the same time the cuts they inflicted have been criticised on both the left and the right. The real point however was that it was the worst of both worlds. They did not commit fully to their (savage) cuts and have firm ideological principles, nor did they admit that their cutting was mitigated by massive borrowing. They had the worst of both worlds and now are only associated with cuts to the great annoyance of a raft of academic economists and many in the public.

The article chimes with the Tories excuse of blaming the euro zone crisis but the fact that they expected the economy to improve in time for the 2015 general election and held off shows that they are little more compentent than Labour. The veneer of competence given to them by being allied to the banking industry, that supports them heavily, shows their competence is really only a vested interest in the City of London at the expense of a more mature, rounded economics.

The author goes on “Then things began to turn round. The economy grew by 1.6% in 2013. The next year, growth accelerated to 2.8%—faster than any other member of the G7 group of rich countries. On the way Britain created a million net new jobs, taking the employment rate to its highest ever level, 73.3%, and unemployment back down to 5.7%. In January Christine Lagarde, head of the IMF, praised Britain’s leadership as “eloquent and convincing”. The recovery would appear to set the Conservatives on course to win the election. Voters often tell pollsters that they are most concerned about things like immigration and health care, but their behaviour suggests economics trumps such worries: Labour won big victories in the 2000s despite dire ratings on immigration, for example. And the public is crediting the Tories. David Cameron and George Osborne, the chancellor of the exchequer, have a 15- to 20-point lead on economic competence over Ed Miliband, Labour’s leader, and Ed Balls, his economics spokesman. But it is not as simple as that, because Britain’s recovery has been so joyless”.

Pointedly the author writes that “Real wages had already been falling for two years when Mr Osborne entered the Treasury. For most of the 2010-15 parliament they continued to decline. This was all the more painful because Britons had become accustomed to steady rises in living standards. From the turn of the millennium to the eve of the crash, real earnings had grown by an average of 2.6% per year. Since then they have fallen by an average of 1.2% a year, putting Britons through the longest period of real wage falls since records began in 1855, according to the Bank of England’s data”.

He notes “Much of this was caused by imported inflation. The tumble of the pound after the crisis made imports more costly, before energy and food prices soared in 2011-12. In the government’s first two years, inflation was more than a percentage point above its 2% target for 22 of 24 months. Little could be done about this: tighter monetary or fiscal policy would have strangled a weak economy and further pummeled wages”.

The piece does make the fair point that “Labour and the Conservatives go into this election talking across each other. The Conservatives argue that the economy is recovering. Labour says that households are struggling. Both are right. Yet this is something of a puzzle when one considers what has driven Britain’s growth over the past few years. A few years ago it was an article of faith among all the major parties that the economy would have to be sustained by something less gluttonous than consumer spending. There was talk of Britain paying its way in the world through stronger exports, and of a manufacturing revival. That has not happened. Instead, the recovery has been domestic. Since 2013 consumer spending has grown at a healthy annualised rate of 2%. Buoyed by the return of consumer confidence, firms have boosted investment in tandem”.

He does thankfully admit that “Another, classically British, stimulus kicked in at about the same time. House prices went up by 5.5% in 2013 and by another 9.8% in 2014. In crowded London they have risen by 27% in the last two years. This made household finances healthier and may have given consumers the confidence to open their wallets. The sober-headed will not celebrate that trend. Young people—nicknamed “generation rent”—find it ever harder to buy a home. To address this, in 2013 the coalition launched a scheme—named “help to buy”—to top up some mortgages with government loans and guarantee others. That, of course, probably pushed prices even higher. In his final budget, Mr Osborne announced subsidies for those saving for a first home. That would be likely to create still more demand. The fundamental problem is too few houses: in the decade to 2014 only 176,000 were built per year on average, when perhaps 240,000 were needed. Antiquated planning regulations constrain supply, especially in the prosperous south-east. Britons are ever more desperate to get on the housing ladder before it is pulled up out of reach. As a result, the Bank of England worries about a debt-fuelled bubble and in 2014 intervened in the mortgage market to curb excessive lending”.

In a damning indictment of the Tories he writes “Britain has returned to its old ways: growth has been led by consumers and fuelled by house-price increases. Net trade has in fact made a slightly negative contribution since 2009, as British firms have struggled to export to a Eurozone that is only starting to recover. British consumers, meanwhile, continue to import aplenty. This, together with a drying up of income on Britain’s overseas investments, has pushed the current-account deficit to fully 5.5% of GDP”.

He ends “A consumer-driven recovery is not necessarily a concern. There is nothing inherently good about exports or inherently bad about consumption. But in the long run, more household spending must be funded by wage rises, not declining saving or a boom in house prices. The next government’s main challenge will to boost productivity rather than demand. That will require careful thought, targeted investment, and an acknowledgment that cutting the budget deficit is not the be-all and end-all of economic policy”.

An excuse for independence?


An opinion piece from the Daily Telegraph argues correctly that the SNP will go to any lengths to breakup the United Kingdom. It opens “‘The SNP is a social democratic political party committed to Scottish independence.’ That is how the SNP defines itself, and that commitment must never be forgotten when assessing the party and its consequences. Independence is the objective; everything else is just a way to bring it about. So while any other party might regard the sort of general election results the SNP is heading for as a triumph in its own right, for the Nationalists overwhelming victory will be just another step in a longer journey”.

The only question is how would the SNP do such a thing so close after its defeat in the independence referendum. All parties after the failed independence vote said they would deliver more powers to Scotland. If the SNP would be satisfied with this then a compromise could be reached. However it would be unusual for the SNP to do this and end its raison d’etre. If however they push too hard they could get an independent country but at the same time they could fundamentally divided Scottish society for generations to come.

He author writes “How would the SNP use its 40 or even 50 MPs to advance the cause of independence? The answer depends a little on who is prime minister, but perhaps less than many would expect. Yes, another David Cameron premiership would allow the SNP to trade off Scottish unhappiness at being ruled by an English-led Tory party that is still hated by some Scots. But the Labour Party is these days not much more popular with Scots, and its leader Ed Miliband actually polls worse than Mr Cameron. A UK government of either sort can equally easily be portrayed as “the Westminster establishment” indifferent to Scots’ interests”.

The author adds “the SNP accepted some years ago that grievance alone will never lead Scots to independence. Instead of fixating on constitutional principles, its focus is on bread-and-butter politics, trying to prove to Scots that the more they are left to their own devices, the better everyday life is. Since 2011 the party has run Scotland’s devolved government, and winning more money and power for that administration is central to SNP strategy”.

He posits the theory that “The thinking is that the more power the Scotland (and thus the SNP) gets, the more different the country grows from the rest of the UK, the better things get for Scots. So why not take the next step to full independence? So instead of trying to wreck a London government’s agenda for ideological reasons, the SNP leadership (though maybe not some wild-eyed new MPs) would be likely to take a more hard-headed approach: yes, they’d withhold support on key votes if they didn’t get what they wanted. But they’d always have a price, if ministers in London were willing to meet it. Wrecking Westminster for its own sake – even bringing down a UK government — would win fewer votes for the SNP at future elections than forcing Westminster to give Scotland more money and power”.

It ends “And future elections matter very much to the SNP. Winning the Scottish Parliament elections next year matters at least as much as next month’s likely triumph. If the Scots chose a party committed to independence at both UK and Scottish elections, the nationalists would be in a strong position to claim a new mandate for independence – and perhaps even hold a second referendum whether politicians at Westminster agreed to it or not. After all, that was the threat that led to last year’s vote”.

A deal with Tsipras?


A report from Foreign Policy seems to posit the theory that the deal could be reached between Greece and its creditors after the election of the new government.

It opens “Left-wing European politicians have in the last five years faced an uncomfortable question: Why, in the midst of an economic crisis that has seen the rich get rich and the poor get poorer, have leftists failed to gain elected executive office? But with Alexis Tsipras’s electoral win in Greece this past weekend, all that has changed, and the continent’s left now has tangible power in hand and a seat at the bargaining table with Europe’s most feared creditors. Tsipras — whose Syriza party won 149 seats in parliament, falling just two short of an outright majority — has now partnered with a right-wing populist group, the Independent Greeks, to form a government”.

He continues, “Nonetheless, the two parties agree where it matters most: the need to oppose the imposition of austerity-minded budget policies on Greece, whose social safety net has been devastated as its creditors force it to slash its spending as a way of balancing its budget. The International Monetary Fund has admitted to underestimating the damage measures like cuts in health and education spending would impose on the Greek economy, and Tsipras’s electoral triumph, the first such victory by a staunchly leftist politician in the post-crisis years, represents the culmination of a backlash against dismal unemployment figures and what can only be described as a social crisis in public health, drug use, and homelessness”.

The fact that the IMF underestimated the scale of the damage the cuts to Greece should be cause enough to relent on what has been done to Greece. Anyone who seeks to keep the Greek people on this track is either heartless or is so wedded to what has patently not worked, should be ignored.

The writer fairly notes that “To be sure, the Greek economy collapsed in the first place as a result of astounding budgetary profligacy and corruption, and it is that era of excess — underwritten by frequently predatory Western banks — that Greece is now paying off”.

Yet, this overlooks the fact that the Greeks fed the German export boom and created jobs by using the credit from the artificially low interest rates set by the ECB, to help Germany, to buy German products. To then say that the Greeks are to blame is laughable.

The writer goes on to note “Tsipras campaigned on a vague platform of debt reduction and a renegotiation of the terms of Greece’s bailout, but on Monday European politicians rushed to say that they will staunchly oppose any serious write-down in Greece’s outstanding debt, which stands at about 175 percent of its GDP”.

Naturally the Germans are wedded, unbendingly to the old view, “‘In our view, it is important that the new government take measures so that the economic recovery continues,’ German Chancellor Angela Merkel’s spokesman, Steffen Seibert, said Monday. ‘A part of that is Greece holding to its prior commitments and that the new government be tied in to the reform’s achievements.’ Jeroen Dijsselbloem, the head of the eurozone’s group of finance ministers, was even more blunt. ‘There is very little support for a write-off in Europe,’ he told reporters”.

Interestingly he notes “even as Tsipras’s future negotiating partners stake out hard-line positions, there is little evidence that Europe is barreling head-first toward another economic crisis. In fact, the outlines of a deal between the two partners are already readily apparent. The only real question is whether Tsipras can sell it to his coalition. Greece’s creditors have already provided the country with some relief in the form of repayment extensions, interest rate reductions, and a decision to return any profits from the loans to Athens. The average maturity of Greek debt — or when the bill comes due — now stands at 16.5 years. That figure compares favorably to other exposed European economies, including Italy, Portugal, and Ireland. Extending maturity would give Greece more time to pay up”.

He continues “Germany and other creditors could easily extend such concessions further. Tsipras campaigned mostly on a platform of debt reduction, and these proposals would allow him to make a reasonable case of having achieved that goal, though in reality they focus on the cost to Greece of financing its debt. According to calculations carried out by the Bruegel think tank, further reducing interest rates on current loans, a move it says wouldn’t hurt lenders’ bottom lines, would save Greece 6.4 billion euros, or 3.4 percent of its 2015 GDP. Extending when the loans come due by another 10 years would save Greece 4.5 percent of 2015 GDP. Extending the due date for loans provided by the European Financial Stability Facility by 10 years would save 17 percent of 2015 GDP. Implemented together, these options would save Greece 31.7 billion euros, or 17 percent of 2015 GDP”.

There is some questions however if this will be enough. Such is the state of Greece debt that whole tranches of debt will need to be written off. For the Germans this would appear to be a “red line”. Yet, there a few other measures that can bring life and dignity back to the Greek people and its economy.

He ends “Still, one can envision a scenario that’s politically acceptable to European leaders, most notably Merkel, that sees borrowing costs slightly reduced and in which a stimulus package for the Greek economy is cobbled together to help restore the Greek social safety net. Unsaid in all of this is that the Greek economy has quietly rebounded. Its economy is growing, and the government is running a budget surplus. That does little to do away with its mountain of debt, but it does reduce the impetus for a Greek exit from the eurozone. The left-wing political project in Europe, then, faces several key tests in the coming weeks. Tsipras’s allies in Spain, the political party Podemos, will be closely watching to see whether Syriza is able to extract financial concessions from Berlin. And if all Tsipras can deliver is marginal concessions on the neoliberal economics that have defined the last half-decade in Greece, his supporters are bound to come away disappointed, and Tsipras may face a crisis inside his own government”.

The Germans have to decide, how badly they want the euro, and the EU for that matter. Do they want it enough to give Greece enough of a writedown so it can stay in the EU, or are they so inflexible that they are willing to see Greece, then Ireland and then probably Spain or Italy leave the euro and thus the spectacular collapse of the EU as a whole.

Warren and the future of the Democratic Party


A long article in the current issue of Foreign Affairs discusses the future of the American left. This follows on from the long piece by David Frum who wrote about the need for the GOP to modernise.

It begins “Talk of the Republican Party’s internal divisions has become a staple of the American news diet. Battles between the conservative establishment and the Tea Party, over matters ranging from foreign policy to immigration, have played out on cable news channels like movie-house serials. Yet no such internal malady seems to be afflicting the Democrats. That’s not because things are going so swimmingly on the left. After all, the median American household income — the amount earned by the very people the Democrats claim to champion — totaled just over $51,371 in 2012, a staggering 6.6 percent decline since 2000. The Democrats want to deliver more for the middle class, but after more than five years under President Barack Obama, they haven’t. Luckily for the Democrats, they have reactionary Republicans to blame for their inability to make headway on their top priorities, from creating an infrastructure bank to enacting a carbon tax to raising the minimum wage“.

He asks if the Democrats had 68 senators and a veto proof majority in the House, the party would not be united, but then neither would the GOP, he makes the point that “Such divides among Democrats are generally not matters of deep ideological conviction”. He argues that there is no Rand Paul for the Democrats. This is true and does lend to a more cohesive party but at the same time there are a number of Democrats which would be use this supposed majority to move America in a European direction. This is of course not a bad thing but America is not Europe and the Democrats would still be operating within an American political context. The author writes that the party was pushed left by President Bush. This may be true but Bush presided over the biggest expansion of Medicare in the programme’s history and at the same time increased the size of government during the beginnings of the financial crisis and with the creation of the DHS. Crucially he does note that ” the gradual leftward movement of U.S. public opinion, compounded by broader demographic changes, permitted Democrats to take more openly liberal positions on a few controversial issues, such as same-sex marriage and immigration. That landed the Democratic Party of today slightly to the left of where it was under Clinton. But the party’s approach has remained largely Clintonian when it comes to what matters most: the economy”.

He correctly argues that “Obama, in fact, has not departed from Clintonism on the economic front in any significant way. He appointed two former Clinton administration officials to key posts: Lawrence Summers, as director of the National Economic Council, and Timothy Geithner, as treasury secretary. And he settled for what many liberals saw as a measly $800 billion stimulus, nearly 40 percent of which took the form of tax cuts”.

He goes on to argue that polls of have shown that majorities support higher taxes, “This is the source of the real fissure that divides Democrats today: the split between the party’s rank and file and its donor and policymaking elites over economic issues. As polls suggest, ordinary Democrats overwhelmingly support paying higher taxes to advance progressive policies. But the elites regard such a posture as too left wing. Until recently, the Democratic masses were starved for a spokesperson, a leader unafraid to challenge elite assumptions. And in Massachusetts Senator Elizabeth Warren, they have found one”.

He goes on to argue that Senator Warren expresses the views of many when she argued in 2011 that the notion of the individualist businessman fighting against state regulation is a myth when the roads and people he employs were built and educated by the state and paid for by taxes.

He goes on to make the point that “In contrast to many political aspirants who emerge from the legal world, including Obama, Warren was not taken with constitutional law and other abstract matters. Instead, this daughter of near poverty ‘headed straight for the money courses’ because she ‘loved the idea of mastery over money.’ Her fascination with money led to years of groundbreaking research on bankruptcy that challenged several old-school assumptions about who declares bankruptcy and why, and it won her the recognition that led to tenure at the University of Pennsylvania Law School and Harvard Law School — and, eventually, to the government appointments in Washington that first gained her national prominence”.

He says that the memoir of Warren discusses TARP and “the genesis of the Consumer Financial Protection Bureau (CFPB), a government agency that Warren first promoted in 2007 and helped launch in 2010; and her Senate race. Here, Warren gets to the meat of her story and to the kind of dishy details required of any proper (and marketable) political memoir. Warren hasn’t included such anecdotes, however, simply to boost book sales. Her narrative has an obvious political point: to distinguish her from the party establishment”.

He continues writing that there are Democrats who are insiders with access who get stuff done and those on the outside who don’t and can’t.

He adds later in the article that both Ted Kennedy and Barney Frank helped her create that CFPB. The writer goes on to describe how she became the interim head of the new agency but that she was not able to be confirmed on a full time basis. The result of this was that “Ultimately, she served as a handy bargaining chip: Obama agreed not to name her, and Republicans agreed not to filibuster the candidate he did name, Richard Cordray, a former attorney general of Ohio. Being spurned in this way by the Washington establishment only helped transform Warren into an object of liberal adulation. When discussion in Massachusetts turned to finding someone to unseat then Republican Senator Scott Brown, despised by the left because he was occupying Kennedy’s old seat, Warren was a natural choice. The campaign was rocky for a while — and was almost knocked off course by allegations that Warren had exaggerated the extent of her Native American heritage while applying for jobs. But the race was a perfect setup for Warren. Brown was one of Wall Street’s favorite senators, which gave Warren ample opportunity to draw a stark contrast between them. The polls were neck and neck for most of the race. Yet in the end, with turnout at 73 percent, Warren won by nearly eight points”.

Interestingly he makes the point that “As a senator, Warren has done exactly what she advertised: she focuses on those households making $51,371 or less. And since the Democrats’ donor class remains wary of her, she hasn’t sought its sign-off on her efforts to increase funding for science research or to require banks to provide fairer student loans. Talk of her becoming president will probably remain just talk: Warren is 65 years old and has suggested that she won’t run if Hillary Clinton does. Since a Clinton run seems likely, it may never be in the cards for Warren to have a shot at the presidency. But her gravitational pull within the party will remain strong, and her influence on Clinton could be immense”.

He ends “More broadly, how will the divide between the party’s rank-and-file progressives and its more pro-business, centrist establishment play out? That will depend to a considerable extent on what happens in the 2016 election. If Clinton wins the White House, she will probably be able to maintain a rough consensus by shifting a few ticks to the left on some household economic matters — backing a modest program for paid family leave, say — while still trying to make sure that Wall Street knows she’s no lefty. Clinton understands that the liberal wing is now more powerful than it was in 1992, and, within limits, she would respond to their demands accordingly. If a Republican wins, however, then the two Democratic camps will likely revert to the kinds of recriminatory debates that they carried out during the Reagan era and after the 2000 election. And in both of those cases, the centrists basically won”.

“Europe may be lucky only to lose a decade”


A piece in the Economist argues that the engine of the euro zone, Germany, is not growing enough to pull the rest of the region up with it.

The article begins “‘THE world cannot afford a European lost decade,’ says Jacob Lew, America’s treasury secretary. The latest European figures were uninspiring. In the third quarter the euro zone grew by just 0.6% at an annualised rate. This sluggishness was not primarily due to the countries hit hardest by the crisis—Greece’s economy grew faster than any other euro-zone country, and Spain and Ireland are recovering. Rather, it is the core countries that are exhausted—and few more so than the biggest, Germany. It grew by just 0.1% in the third quarter, after contracting by the same amount in the previous three months”.

He goes on to make the point “Merkel, the German chancellor, has been subject to a rising chorus of foreign criticism. Germany should do more to stimulate domestic consumption and investment, goes the refrain. This would help countries like France and Italy as they undergo tough structural reforms. Higher imports would also reduce Germany’s current-account surplus, the largest in the world and a cause of imbalances within Europe and beyond. Stimulating demand would push up prices, which could save the euro zone from tipping into deflation. Prices in the zone rose at an annualised 0.4% in October, far below the 2% ceiling set by the European Central Bank (ECB). Such demands are echoed by some at home. Marcel Fratzscher, an adviser to Sigmar Gabriel, the economics minister, says that Germany should boost investment for its own good. Much of Germany’s recent success, he argues, has been an “illusion” bought by underinvestment in everything from roads to education to factories. Wolfgang Schäuble, the finance minister, has responded by pledging an extra €10 billion ($12.5 billion) in investment by the federal government over three years from 2016, on top of €5 billion already earmarked for roads and bridges. Yet at barely 0.1% of GDP, that is more symbolic than substantial. And it will not raise the budget deficit because Mr Schäuble’s top priority remains the “black zero”: balancing the budget from 2015”.

He goes on to mention that “The differences between foreign economists who want more stimulus and German ones who think the problems lie elsewhere partly reflect diverging philosophies. Anglo-Saxon economists assess the problems of Europe and Germany in terms of insufficient demand. Most German economists do not. “We don’t have a Keynesian crisis in Europe, so Keynesian measures won’t work,” says Hans-Werner Sinn, boss of the CES-Ifo Institute in Munich. German economists worry more about the conditions, or “order” of the economy, in the tradition of Ordoliberalism that disdains state intervention and dates back to an early 20th-century economist, Walter Eucken. In practice, says Mr Schmidt, the dichotomy is exaggerated. “We don’t deny Keynesianism” when appropriate, he says—as it was in 2009, when Germany responded to a demand shock with a hefty stimulus. Demand-side sceptics respond that “Keynesianism is not the answer” when what is most urgently needed is structural reform in crisis-hit countries”.

He ends the piece “Yet low inflation in Germany is both a sign of weakness and a source of pain for peripheral countries. The ultimate aim of reforms, says Mr Sinn, is to lower prices in the south of the euro zone relative to those in the north, so as to reflect lower productivity. He reckons that would require German inflation of 5% for ten years, or a similar level of deflation in the south, or some combination of the two. Progress towards that goal is slow. The economics think-tank of the Hans-Böckler foundation, which is tied to the trade unions, says German wages are growing only slightly faster than the euro-zone average. Unit labour costs in Germany rose by 2.3% in 2013 and 1.7% in the first half of 2014, compared with the euro zone’s 1.2% and 0.7%, respectively. At that snail-like pace, Europe may be lucky only to lose a decade”.

A year of retirement


On this, the first anniversary on the resignation of Pope Benedict XVI, Peter Kwasniewski at the New Liturgical Movement blog has written a homage to the sorely missed Pope emeritus.

He notes “Through his own unappealable decision and at a time appointed by himself, Pope Benedict XVI had ceased to be the Vicar of Christ on earth. The past year has been, to say the least, a dramatic and tempestuous one, in which I have often wondered exactly what providential role the nearly eight-year pontificate of Benedict XVI was meant to have in the life of the Church—and what role it is meant to continue to have, through the rich teaching and inspiring example this pontificate left us, and through the enormous energies for reform it has unleashed throughout the Church”.

He goes on to mention that “In company with Pope Benedict, we observed the fiftieth anniversary of the opening of the Second Vatican Council—a Council in which he vigorously took part, a Council whose legacy he later witnessed being manipulated or forgotten as the “virtual” or “media” Council and its antinomian “spirit” took the upper hand, and finally, a Council that he rightly demanded must be read in a “hermeneutic of continuity” with everything that had come before or had been clarified since. All of this suggests that Pope Benedict was passionately concerned with rectifying something, or many things, that had gone desperately wrong in the past five decades. One way of understanding what has happened over this half-century is to think about the delicate balance between ad intra and ad extra concerns, which are two sides of the same coin. The Church has her own life, one could say—a liturgical, sacramental, spiritual, intellectual life, defined by the confluence of Sacred Scripture, Sacred Tradition, and the Magisterium—and this life must be tended, nurtured, guarded, deepened. But simultaneously the Church always has a calling to go outwards into the world of unbelief, to preach to it, convert it, sanctify it, confront its errors and wrestle with its problems. It seems to me that the noble intention of Blessed John XXIII, a very traditional Pope in many ways, was to bring the treasures of the Church’s inner life to bear on modernity and the modern world. To this end he convened the Roman Synod and, more fatefully, the Second Vatican Council. He wanted the Catholic Church to send forth God’s light and truth, to intensify an apostolic activity that, under Pius XII, was already flourishing”.

He concludes, “Hence, after forty years of wandering in the desert, the pontificate of Benedict XVI seemed, and truly was, a watershed moment, a breath of fresh air—a realization that it was time to attend to the state of our soul, to put our own house in order, to renew our liturgy from its deepest sources, and to learn once again what exactly is the Good News we are supposed to be sharing in the New Evangelization. This pontificate began to undo, in a systematic way, the amnesia and the intoxication. In addition to its burgeoning fruits in the daily life of the Church, Summorum Pontificum stands forever as a symbol of the effort to bring about meaningful change by recalling the faithful to a tradition, spirituality, and way of life that are not in flux, as, indeed, its symbolic date—the seventh day of the seventh month of the seventh year of the new millennium—plainly announced. In God’s Providence, it was a short pontificate, but the teaching and legislation of those eight years will, as the new century moves on, prove to be either the mustard-seed of an authentic renewal or the prophetic condemnation of a failed one. In any case, it is our privilege, through no merits of our own, to embrace with gratitude, humility, and zeal the traditional Catholic identity, the fragrant living memory of God’s gifts, that Joseph Ratzinger/Benedict XVI has done so much to protect and promote, and to let these seeds bear fruit in our own lives. There is no more any one of us can do, and yet this is enough. For God can take the few loaves and fishes we have, and multiply them endlessly. When one thinks of the greatness of the task Pope Benedict entrusted to us—the task of authentic renewal from the very sources of faith and in continuity with tradition—and when we contemplate how much work and suffering faces us as we strive to put into practice the profound teaching on the sacred liturgy Our Lord has given us through this great pope, we might be tempted to grow weary of the fight and fall away from it, especially in a time when so many in the Church seem to be running away from the dawning light back into the stygian darkness of the seventies”.

Thomas Reese meanwhile looks at his own relationship with Ratzinger/Benedict, “Whenever a reporter asks me about Benedict, I first acknowledge that I have some history with him. One of Cardinal Joseph Ratzinger’s last actions as prefect of the Congregation for the Doctrine of the Faith was to tell the Jesuit superior general that I needed to be replaced as editor of America magazine, so I cannot claim to be an indifferent observer. Perhaps this is another reason I did not meet my deadline. This was a painful period in my life, so I warn reporters (and readers) that my own experience can bias my views. The temptation with any pope, even Francis, is to see him as black or white, all bad or all good. Nothing is that simple, especially a human being”.

Reese adds that “There is much to praise in the papacy of Pope Benedict. If for no other reason, he will be remembered for centuries as the pope who was not afraid to resign when he felt it was best for the church. Such humility, courage and trust in the Spirit are not easy virtues when everyone around you is telling you that you are indispensable. The resignation caused former supporters to turn on him and former critics to praise him. John L. Allen Jr. reports in The Boston Globe that Antonio Socci, a high-profile Italian conservative, has floated the question of whether Benedict’s resignation was actually valid under church law. This kind of talk is very dangerous and could lead to schism, but they will get no support from Benedict for such nonsense. Likewise, those who feared Benedict would try to run things from behind the scenes have been proved paranoid”.

He goes on to write that “As prefect of the Congregation for the Doctrine of the Faith, Cardinal Ratzinger was the first Vatican official to take seriously the sexual abuse crisis. He was not perfect, but he listened to American bishops and learned faster than anyone else in Rome, including Pope John Paul II. He supported a zero-tolerance policy on abuse and threw hundreds of priests out of the priesthood for abusing minors. Pope Benedict also started the reform of Vatican finances, which is now beginning to bear fruit under Pope Francis. It was Benedict who finally said, “Enough,” and demanded that the Vatican observe the standards set by Moneyval, the European agency that deals with money laundering. Up until Benedict, the Vatican always argued that it was unique and could not be judged by outsiders. Now Vatican finances are periodically reviewed by Moneyval, which publishes its reports for everyone to see. All of the subsequent financial reforms have flowed from this decision by Benedict. Benedict must also be praised for the clarity of his writing. His first encyclical, Deus Caritas Est, was universally praised for its explanation of the different types of love. The second part was an excellent guide for the ministry of charity in the church. In it, he described the ministry of charity as equally important as the ministry of the Word and the ministry of the sacraments. He stressed the importance of both professional and spiritual formation for those working with the poor. Sadly, the media were so focused on what he had to say about abortion, gays and condoms that what he had to say on other issues was ignored. People forget that he, like John Paul, was opposed to both Gulf Wars, and they proved wiser than all the policy wonks in Washington”.

Reese continues, “He was no fan of libertarian capitalism. He went further in saying that government has a role in the redistribution of wealth. Not even liberal Democrats say things like that. On economic issues, Benedict was to the left of President Barack Obama; he was even to the left of Nancy Pelosi. In fact, Benedict’s views on the relationship between religion and politics were quite sophisticated, as articulated at Westminster Hall in London and at the German Parliament, the Bundestag in Berlin. He was not a single-issue ideologue, and he recognized the role of prudence in political decision-making. Pope Benedict’s strength and weaknesses came from his background as a German professor, which was his life before Pope Paul VI appointed him archbishop of Munich in 1977*. His was the life of the mind where clarity of thought was prized. As a German professor, he was used to lecturing students who took down his words, memorized them and gave them back in exams. As a professor, he used technical language that might mean one thing in the classroom but something completely different on the street. Thus, he could say most Protestant churches were not true churches because he had defined “church” as a Christian community with a legitimate episcopacy. He could also use a word like “disordered,” which for him had philosophical meaning while on the street it would be interpreted as a psychological term”.

He closes, “To explain the Christian message to people of the 21st century will require the same kind of creativity shown by Augustine and Aquinas. We cannot simply quote them; we must imitate them. Augustine took the best thought of his age, Neoplatonism, and used it to explain Christianity to his time. Aquinas took the rediscovered Aristotle to explain Christianity to his generation. Theologians must be free to do the same today. Remember, Aquinas had his books burned by the archbishop of Paris. In his first Easter homily as pope, Benedict said the risen Christ is the next step in human evolution. I wish he had developed that thought, but that is a way of thinking that would be attractive to people today. To simply call Pope Benedict a conservative is a way of avoiding thoughtful analysis of a complex character. He gave and continues to give much to the church. He should be respected and honored for that while being clear-eyed about his limitations”.

Back in fashion?


An interesting article by Charles Kenny argues that Marxism is once again in vogue with the working class. He begins, “The inscription on Karl Marx’s tombstone in London’s Highgate Cemetery reads, ‘Workers of all lands, unite.’ Of course, it hasn’t quite ended up that way. As much buzz as the global Occupy movement managed to produce in a few short months, the silence is deafening now. And it’s not often that you hear of shop workers in Detroit making common cause with their Chinese brethren in Dalian to stick it to the boss man. Indeed, as global multinational companies have eaten away at labor’s bargaining power, the factory workers of the rich world have become some of the least keen on helping out their fellow wage laborers in poor countries. But there’s a school of thought — and no, it’s not just from the few remaining Trotskyite professors at the New School — that envisions a type of global class politics making a comeback. If so, it might be time for global elites to start trembling. Sure, it doesn’t sound quite as threatening as the original call to arms, but a new specter may soon be haunting the world’s 1 percent: middle-class activism”.

He adds, “Marx argued that the revolutionary proletarian impulse was also a fundamentally global one — that working classes would be united across countries and oceans by their shared experience of crushing poverty and the soullessness of factory life. At the time Marx was writing, the idea that poor people were pretty similar across countries — or at least would be soon — was eminently reasonable. According to World Bank economist Branko Milanovic, when The Communist Manifesto was written in 1848, most income inequality at the global level was driven by class differences within countries”.

Kenny writes that the reason there was no revolution was that the wages of workers rose, “The Maddison Project database of historical statistics suggests that per capita GDP in 1870 (in 1990 dollars, adjusting for purchasing power) was around $3,190 in Britain — compared with an African average of $648. Compare that with Britain in 2010, which had a per capita GDP of $23,777; the African average was $2,034. One hundred and forty years ago, the average African person was about one-fifth as rich as his British comrade. Today, he’s worth less than one-tenth”.

He mentions that “The simple fact that poor people in Europe and America are in the income elite according to the standards of South Asia and Africa is why the workers of all lands have not yet united. The second congress of the Communist International, in 1920, condemned the despicable betrayal by many European and American socialists during World War I, who “used ‘defense of the fatherland’ to conceal the ‘right’ of ‘their’ bourgeoisie to enslave the colonies.” The gathered representatives argued that the mistrust generated could ‘be eradicated only after imperialism is destroyed in the advanced countries and after the entire basis of economic life of the backward countries is radically transformed.’ Yet all that might soon be changing. Globalization may have been the watchword of the 1990s, but it’s still a work in progress. As interconnected global markets get ever more interconnected, average incomes are converging. The last 10 years have seen developing countries grow far more rapidly than high-income countries, closing the gap in average incomes. Economist Arvind Subramanian estimates that China in 2030 will be about as rich as the whole European Union today and that Brazil won’t be far behind”.

He makes the interesting point,” Put simply, this means that within the space of hardly a generation, a good chunk of the world will soon be rich, or at least solidly middle class. According to forecasts I’ve developed with my Center for Global Development colleague Sarah Dykstra, about 16 percent of the Earth’s population lives in countries rich enough to be labeled “high income” by the World Bank. If growth rates continue as they have in the past decade, 41 percent of the world’s people will find themselves in the “high income” bracket by 2030. In short, if developing countries continue growing at the rate we’ve seen recently, inequality among countries will shrink — and inequality withinnations will return as the dominant source of global inequality. Does that mean Marx was right — if just a couple of centuries off on his timing? Not exactly. The reality is that this new middle class will have lives that Victorian-era working-class Brits could only dream about. They’ll work in LED-lit shops and offices”.

Kenny ends the piece “that doesn’t mean Warren Buffett should breathe easily. In fact, it is exactly because the rich and poor will look increasingly similar in Lagos and London that it’s more likely that the workers of the world in 2030 will unite. As technology and trade level the playing field and bring humanity closer together, the world’s projected 3.5 billion laborers may finally realise how much more they have in common with each other than with the über-wealthy elites in their own countries. They’ll pressure governments to collaborate to ensure that their sweat and blood don’t excessively enrich a tiny, global capitalist elite, but are spread more widely. They’ll work to shut down tax havens where the world’s plutocrats hide their earnings, and they’ll advocate for treaties to prevent a “race to the bottom” in labor regulations and tax rates designed to attract companies. And they’ll push to ensure it isn’t just the world’s richest who benefit from a global lifestyle — by striving to open up free movement of labor for all, not just within countries but among them. Sure, it’s not quite a proletarian revolution. But then again, the middle class has never been the most ardent of revolutionaries — only the most effective. The next decade won’t so much see the politics of desperate poverty taking on plutocracy, as the middle class taking back its own. But it all might put a ghostly smile on Karl’s face nonetheless”.

A return to agonism?


An article in Foreign Affairs discusses the need for the social democratic left in politics to return to its roots, thus saving itself, and society with it.

It opens, When the global financial crisis hit in 2008, social democrats in Europe believed that their moment had finally arrived. After a decade in which European politics had drifted toward the market-friendly policies of the right, the crisis represented an opportunity for the political center left’s champions of more effective government regulation and greater social justice to reassert themselves. After all, it was thanks to center-right policies that deregulated financial markets had devolved into a kind of black hole, detached from the wider global economy but exerting a powerful force on all kinds of economic activity. When the financial services industry finally collapsed, the effects went far beyond Wall Street and the U.S. economy, plunging financial markets and economies everywhere into a deep crisis that has still not been resolved”.

The author writes crucially, “social democrats in Europe sensed a possible silver lining. For decades, they had argued for stiffer regulations to steady inherently unstable financial markets, to no avail. The crisis, it seemed, proved them right. Moreover, in the wake of a massive global recession, millions of people had to turn for support to the welfare systems that social democrats had built and sustained: yet another vindication, they believed. And yet five years later, Europe’s social democratic moment has yet to materialise. Social democrats have won victories at the national level in a number of countries, including Denmark, France, and Slovakia. But these relatively modest gains have been overshadowed by a sense that Europe has fallen into a period of political volatility, a permanent emergency of sorts brought on by the flaws revealed in the euro system and the European Union as the global financial crisis morphed into a eurozone crisis. Even though social democrats have not yet been able to fully capitalise on the situation, they still have a chance to do so, but only if they come to see how the mistakes they made during the previous two decades reduced their political capital and left them ill prepared to take advantage of a political environment that should play to their strengths”.

The writer argues for social democrats to return to thier old ways of challenging unfettered immoral capitalism and at the same time protect the welfare state that so many now rely on during these times. The piece adds that “From the late 1970s until the mid-1990s, they had suffered significant declines in electoral support in key countries, such as Germany and the United Kingdom. These declines prompted soul-searching on the European left, which took different forms in different countries. One common conclusion, however, was that as neoliberalism spread and economies around the world changed dramatically, traditional social democratic politics seemed outdated to many voters. Across the Atlantic, in the United States, the Democratic Party, led by President Bill Clinton, responded by shifting to the right, plotting a “third way” that accommodated market-friendly neoliberal policies”.

Of course what actually happened was that the so called “New Democrats” in fact adopted, almost wholesale, the GOP platform of mass privitisation and welfare cuts. Naturally other parties joined Clinton in ditching their values and jumping off the cliff. Part of the result of this was a decline in voter turnout. People saw little ideological difference between the parties and saw fewer and fewer reasons to vote.

As the writer says, “The key intellectual shift shared by the many different third-way currents that emerged in the 1990s was their application of pro-market policies to almost every area of governing. Third-way proponents saw social security systems not primarily as insurance against major life risks, such as unemployment, illness, and infirmity, but rather as a means of economic reintegration. Their goal was to transform the social safety net into a trampoline, focused less on addressing the immediate needs of the poor and disadvantaged and more on helping such people rapidly rejoin the economy. In practice, these reforms increased the risk that the unemployed would face permanent downward mobility, with the government subsidizing their reentry into the very bottom end of the labor market”.

The writer argues, correctly that “Still, in electoral terms, the third way worked well, at least for a time. By the end of the 1990s, social democrats led most of the EU states”, the piece goes on to say that “to many voters, the extent to which social democrats had changed their stripes represented an opportunistic betrayal of their core beliefs that left them almost indistinguishable from their political competitors. Such accusations took their toll, but the weakness of the third way became undeniable only after the financial crisis. Suddenly, traditional social democratic warnings about the inherent instability of markets — the kind of talk that third-way leaders such as Blair had left behind — seemed prescient, not old-fashioned. But because social democratic leaders had spent the previous two decades adopting, rather than adapting, neglecting to develop a true alternative to neoliberalism’s insistence on unfettered markets, the crisis found them intellectually unprepared”.

The writer continues, “Today, while they should be riding high, the social democrats appear overwhelmed by the rapid change that is taking place around them — just like almost every other group in the European political ecosystem”. She goes on to add later that “To accomplish those goals in the midst of a continent-wide political crisis, social democrats must abandon their recent obsession with short-term electoral tactics and return to their political and ideological roots, offering voters in their countries a vision of a “good society.” The core social democratic values of freedom, equality, and social justice should be the guiding ideals for a good society that recalibrates the relationship among citizens, the economy, and the state. A dynamic and sustainable economy must be not an end in itself but a means to improve the lives of all citizens, not just a few at the top. The allocation of income and wealth in many places today has little to do with people’s performance; it is mostly the result of power and influence. A good society would reinstate the performance principle”.

She gives the example of Apple. In an old fashioned and paternalistic way, though these are not inherently bad concepts she writes, “It should have come as no surprise that retrofitting the techniques of retail marketing to electoral strategy would not make for coherent politics — it rarely makes for good business, either. Steve Jobs, the visionary founder of Apple, understood this well. When asked by his biographer, Walter Isaacson, why he refused to rely on traditional market research, Jobs replied, “Some people say, ‘Give the customers what they want.’ But that’s not my approach. Our job is to figure out what they’re going to want before they do. . . . People don’t know what they want until you show it to them.” Europe’s social democrats should heed Jobs’ advice and craft a new and convincing political agenda that reflects their core values, rather than trying to reverse-engineer a platform that just reflects what opinion research suggests the public wants to hear. An electoral strategy based on articulating core social democratic values would also offer a tactical advantage. As European societies become more culturally and socially fragmented, trying to target particular groups of voters with tailored messages means chasing ever-smaller segments of society with ever-narrower messages. This divide-and-conquer approach served third-way politicians well during the years of stability and prosperity. But during a crisis or a prolonged period of instability, it has prevented social democratic parties from putting forward broad-based platforms that could unite otherwise diverse social groups around a single economic and political vision”.

She ends the article, “if Europe’s social democrats are to have a real shot at winning office and governing successfully, they need to think big. Rhetorical adjustments will not suffice, nor will simply rebranding third-way ideas for the current situation. To finally seize the moment, social democrats need to return to their roots and offer Europeans a vision of a good society, one that can redeem the promise of social justice and a prosperous economy”.

“Tried to dismiss”


“[Chancellor George] Osborne had tried to dismiss calls by the IMF’s chief economist Olivier Blanchard last week for the UK to ease the £130bn programme of spending cuts and tax rises as ‘just one voice’, claiming: ‘The IMF’s position has not changed.’ But David Lipton, the IMF’s second-in-charge, has waded into the battle alongside Mr Blanchard. ‘The UK economy has turned out to be somewhat weaker than had been foreseen, so our view is that the pace of consolidation ought to be reconsidered, and we’ll want to come and have some discussions about that,’ he told Sky News. Mr Lipton’s intervention will heap more pressure on Mr Osborne to change course after a difficult week in which a second credit rating agency stripped the UK of its AAA status and the Chancellor’s favourite economists had their work called into question”.

What austerity?


An interesting article has appeared in the Daily Telegraph by Peter Oborne. He argues that the Conservative led coalition is in effect making things worse for the UK economy rather than better.

He begins the piece “Even the dogs in the street sensed that something had gone wrong. Even Labour voters got the point that Gordon Brown had spent far too much money, with the result that the economy had ground to a halt. Admittedly, few people exactly cheered when the Chancellor pledged his age of austerity. But a surprisingly large number of them understood. A groundswell of sensible, moderate, mainstream opinion – some of it on the Left – was behind the new Chancellor and his pledge to sort out Labour’s mess. Sadly, Mr Osborne has missed his chance”.

Obrone then proceeds to rightly criticise Chancellor George Osborne for his budget which among other things reduced the tax of beer and at the same time encouraged people to buy houses using government money. This measure alone will be a disaster and harks back to the disaterous policies of the previous populist government that had little regard for the consequences. They however had some, minor, excuse in that they assumed house prices would rise, Osborne has none.

The journalist goes on to argue “Osborne has talked of austerity ever since his ’emergency Budget’ almost three years ago. But at no stage has he delivered it, or anything like it. He has lacked the courage to challenge Mr Brown’s inheritance. His general approach to the economy has been the same – massive spending, tempered by deceit”.

He goes on to write “Osborne has made no attempt to reduce the Brown debt mountain. In fact, the national debt has grown far faster. According to yesterday’s figures, it is scheduled to stand at approximately £1,400 billion in 2015, up from the £800 billion inherited from Labour in 2010 – a rise of £600 billion in just five years, or the equivalent of roughly £25,000 for every household in the country. Remember that pledge to eliminate the deficit within the lifetime of this parliament? The deficit is instead in a position of equilibrium. The Government is spending approximately £120 billion more than it earns every year. This was the outcome in 2011/12, and in the financial year just ending. According to the Office for Budget Responsibility (OBR), the same result is expected next year as well. Admittedly, the OBR then projects that the deficit will start falling – but only because it forecasts the return of economic growth. Unfortunately, its estimates have been so hopeless that they can be ignored. Meanwhile, Mr Osborne’s much-vaunted spending cuts scarcely exist. Yesterday’s Budget figures show that annual expenditure is due to fall, in real terms, by 2.7 per cent between 2010 and 2017 (as the Centre for Policy Studies has usefully pointed out). By contrast, public spending rose by approximately 53 per cent in real terms – repeat, 53 per cent – over the previous decade. In such a context, the Chancellor’s cuts cannot be regarded as a serious contribution towards solving our economic crisis. They amount, on the contrary, to an abdication of responsibility”.

One of the largest reasons for the total lack of real austerity is the fact that the Ministries of Health, Education and International Development have all been ringfenced and therefore any cuts affect other ministries but the real spending of the government remains fundamentally untouched.

He adds later in the article “he [George Osborne] retains the bearing and style of a boom-time Chancellor, unloading various wheezes, stunts and giveaways aimed at key groups of swing voters, such as drinkers and house buyers, in the constituencies the Conservatives must win if they are to have a chance in the 2015 election. Fundamentally, this Budget was about that general election”.

He ends the article “So we should all ponder whether there is an ugly truth lurking out there: is the British electoral system simply incapable of coping any more with serious economic crises? New Labour racheted up spending by half in a decade, and nobody thought anything of it. By contrast, David Cameron’s Coalition has had the audacity to slice back a measly 2.7 per cent of that, and its members get lampooned as a bunch of sadists. The next election is starting to loom. Will any party dare enter it pledging cuts on the scale we need? More likely, all three will pledge to maintain a “ring-fence” around vital areas of public spending, and perhaps even court popularity through yet more spending promises. The markets are starting to sniff this weakness out. Yesterday’s Budget papers disclosed that, well before the end of this parliament, British national debt (judged by the Maastricht criteria, and so free of the tricks Mr Osborne is starting to use to hide its scale) will rise above 100 per cent of economic output. Yields on government bonds are starting to rise”.

However, Osborne has had the worst of both worlds. He has not cut truly into the debt and therefore has not had the (long term) benefits that this would have brought. Equally he has not embarked on all out Keynesianism borrowing through the economic crisis to build infrastructure and development . It is the worst of both worlds.

Give me taxes, or give me death


In an excellent article in a recent issue of Foreign Affairs Andrea Louise Campbell, discusses the tax policy in the United States. This topic has already been discussed here before yet Campbell gives greater depth to the issue.

She writes that “Democrats think Washington can and should play a more active part, using taxation, regulation, and spending to keep the economy growing while protecting vulnerable citizens from the ravages of volatile markets. Republicans, in contrast, think Washington already does too much; they want to scale government back to liberate markets and spur economic dynamism”.

She goes on to argue that “Compared with other developed countries, the United States has very low taxes, little redistribution of income, and an extraordinarily complex tax code. These three aspects of American exceptionalism deserve more attention than they typically receive”. In the article she gives a graph showing total tax revenues as a percentage of GDP. Denmark tops the list at 48.1% with Sweden second and Italy third at 43.8%. Various countries follow, Belgium, Norway, Austria, Finland, France. America comes third from the bottom at 24.1%, just above Chile at 18.4% and Mexico at 17.4%.

She writes that “The first striking feature of the fiscal state of the United States, when compared with those of other developed countries, is its small size. As of 2009, among the 34 members of the Organization for Economic Cooperation and Development (OECD), a collection of the world’s most economically advanced democracies, the United States had the third-lowest ratio of taxes to GDP (see chart). But it is important to look at pre-recession data, which better reflect long-term trends. In 2006, before the financial crisis struck, OECD tax statistics showed that total taxes in the United States — at all levels of government: federal, state, and local — were 27.9 percent of GDP, three-quarters the percentages in Germany and the United Kingdom and about half of those in Denmark and Sweden”.

She goes on to write persuasively, “The reason for this discrepancy is not that the United States has lower personal income tax revenues than its OECD counterparts. In fact, in 2006, personal income taxes at the federal, state, and local levels in the United States came to 10.1 percent of GDP, just above the OECD average of 9.2 percent. Instead, the disparity results from the low effective rates — or nonexistence — of other forms of taxation. To take one example, in 2006, the U.S. corporate income tax at all levels of government collected 3.4 percent of GDP, compared with an average of 3.8 percent across the OECD”.

Indeed, much of the reason, though obviously, not all, is as a result of he voodoo economics of President Reagan and the infamous Laffer curve, which seemingly by magic, or voodoo, promised high tax collection rates as a direct result of lower tax rates. Naturally enough those that benefited most from whatever tax cuts did take place were the wealthiest which in turn concentrated wealth further in the hands of a smaller and smaller group of people. Both President Clinton and President Bush carried on this disastrous legacy of Reagan into the twenty first century.

Campbell goes on to write “U.S. tax revenue is not only low but also consistently low, having equaled roughly the same share of the economy for 60 years. Since the tremendous growth of the federal government during World War II, federal tax revenues have hovered around 18 percent of GDP. This stability has also proved to be true of state and local tax levels, which have fluctuated between eight and ten percent of GDP over the same period”.

Therefore for someone to argue about ever increasing taxes and the biggest tax increase in history as some commentators famously did is utterly false and should be treated with utter disdain. She adds “n 1965, total tax revenues stood at about 25 percent of GDP in the United States and across the rest of the OECD. But by 2000, tax revenue represented 30 percent of GDP in the United States and 37 percent in the rest of the OECD”.

These figures, added to Reagan’s mistake, which has been built on by both parties, has lead to the situation America is in currently. Campbell goes on to argue “according to a report issued by the U.S. Treasury Department, between 2000 and 2005, on average, U.S. businesses paid an effective tax rate of only 13 percent, nearly three percent below the OECD average and the lowest rate among the G-7 countries. Whereas corporate tax revenues have fallen, revenues from payroll taxes for programs such as Social Security and Medicare have grown”.

She goes on to write “The largest tax reductions from these changes went to high-income households. In fact, the United States currently taxes top earners at some of the lowest effective rates in the country’s history. Data from the Internal Revenue Service (IRS) show that the top one percent of taxpayers paid an average federal income tax rate of 23 percent in 2008, about one-third less than they paid in 1980, despite the fact that their incomes are now much higher in both real and relative terms. Although the rich enjoyed by far the largest tax cuts, the middle class is also paying lower taxes. In 2011, the effective federal income tax rate for a family of four with a median income was just 5.6 percent, compared with 12 percent in 1980”. She writes later in the paragraph “the individual income tax now constitutes a smaller share of the economy than it did 30 years ago, falling from 10.4 percent of GDP in 1981 to 8.8 percent in 2005. By permitting extensive loopholes, failing to create effective consumption taxes, and cutting individual income taxes, the United States has created a tax system that collects far less revenue relative to GDP than many of its OECD counterparts”.

Campbell goes on to note depressingly, “Although the 2008 financial crisis reduced the incomes of the top one percent in the United States by a fifth, by 2010 their earnings had largely recovered. And wealth is even more concentrated than income. According to the economist Edward Wolff, in 2007, the top one percent in the country earned just over 20 percent of all income but held more than 30 percent of all wealth. As the top has risen, the bottom and the middle have faltered. Congressional Budget Office data show that between 1979 and 2007, before-tax incomes increased by 240 percent for the top one percent but by just 20 percent for the middle fifth of earners and by ten percent for the bottom fifth. Although the bottom 90 percent lost less income than the top one percent as a result of the financial crisis, their earnings have not recovered as much as those of the top earners”.

If America is to continue to shoulder the burdens of the world it must do what is right at home. If taxes do not rise then who will the world turn to lead it?

Reform or die


As part of the series on the 18th Chinese Communist Party Congress that has now concluded an article warns that the CCP must reform itself or risk collapsing and taking China with it.

He writes that “China’s incoming leaders are facing what might be the country’s greatest economic and political challenge. They must create a new growth model, with a very different financial system, a substantially modified state sector, and the political reforms necessary to accommodate both”. He goes on to say that if the seven men running China fail and “mismanage the adjustment, growth will evaporate, leaving China stuck in the notorious “middle-income trap” from which few developing countries have ever escaped”. He goes on to argue ” it is tempting to believe that Beijing has the talent, far-sightedness and determination to make the transition successfully. History, however, suggests otherwise”. If he is correct, China will remain at its current PPP rate and not only that fail to be able to deal with its massive demographic problem that is in the background and will become more prominent in the next decade, and beyond.

He give two pertinent examples, Brazil and what was then the Soviet Union, “Take the Soviet Union. By the 1960s, the USSR had generated nearly three decades of exceptional growth, leaving most analysts convinced that it would soon surpass the United States economically and technologically. It didn’t happen. Real productivity growth stalled by the late 1960s, and today, nearly 50 years later, Russia’s GDP is smaller in relative terms from its peak. Brazil saw extraordinary growth from the late 1950s to the late 1970s, but fell back during the “Lost Decade” of the 1980s and has still not achieved the economic successes many expected nearly a half century ago”.

The key, he argues, that allowed China to enjoy such growth, was its boom in credit. The very thing that is destroying the eurozone, as well as a shambolic currency and total mismanagement of the crisis. Yet at the same time he writes that “This allowed Beijing to keep growth rates high regardless of the circumstances and no matter how the leadership managed domestic problems. It was able to avoid a surge in unemployment when it restructured the hugely inefficient state-owned industries in the 1990s by sharply increasing infrastructure investment”.

This credit papered over inefficiencies due to its scale and at the same time kept a lid of social pressure. Yet this lid is now bursting and the bet that Hu made will soon prove the end for the CCP as it is unable promise growth at such high rates. He adds “Officially, government debt is under 25 percent of GDP, but it’s likely much higher. Investment has reached its limit, and now excess investment has itself become China’s greatest economic problem. Many years of high and often wasted investment in such baubles as empty airports, bridges to nowwhere, vacant office buildings, and underutilized steel factories have resulted in debt levels growing much faster than the ability to service that debt. And more ‘investment’ only worsens the problem”.

He ends his piece “Beijing knows it must sharply reduce investment rates. But doing so causes two problems. First, without the ability to increase investments at will, China’s economic volatility will increase sharply. Second, if China can no longer depend on investment growth to drive high levels of economic activity, it must increasingly rely on growth in household consumption, which, at 35 percent of GDP is the lowest seen anywhere in modern history”.

He advises China to redistribute wealth so as to boost spending by the wealthy, who spend only a small proportion of their money. He also argues that the government should slow investment rates. If it does not, he warns China could be swamped with debt. Yet does the CCP have the will to tackle all of these problems?

Looks like it’s time to die.

Too soon to tell?


As part of the 18th Chinese National Party Congress taking place in China  over these days which will handover power to a new head of the Communist Party a different view of outgoing Hu Jintao has emerged from one examined here previously.

Kerry Brown writes that “Hu’s dullness, however, stems from his immense self-control, and it is an integral part of a political personality one can only assume, in the highly strategic world of elite Chinese politics, was chosen very early on”. He goes on to write that “Hu has maintained rigid control over the nine members of the Politburo Standing Committee, the absolute summit of decision-making in China, which in turn maintained a strong grip on Chinese society. The disgrace of key leaders, like former Shanghai party secretary Chen Liangyu in 2006 and Chongqing party secretary Bo Xilai in March, led to no noticeable fissures or dissent. Hu has adroitly handled unpleasant surprises, like the Tibetan riots in 2008, albeit with vast influxes of central funding and security spending”. Yet this is easy when the state coffers are full, to buy people off and suppress dissent. Hu’s legacy will be almost wholly negative and perhaps even mark the beginning of the end of a “powerful” China as it is represented in the media.

Brown goes on to describe Hu’s strategic vision, that he “has made a massive gamble, the results of which will determine his legitimacy. Hu has bet that his half-decade-long strategy of pursuing economic growth instead of political or legal reform will be proven right. He hopes that China does not have to address its immense governance issues until it is wealthy enough to deal with them in a way that minimizes risk”. Brown however rather limply admits that “as Hu and his Standing Committee colleagues have focused nearly single-mindedly on growth, the hard and soft costs of policing an increasingly unbalanced China have been rising sharply”. While it would be a mistake to assume wealth brings democracy, the Chinese consumer is a strange beast. Hu’s gamble that more growth means more legitimacy will ultimately prove the downfall of the party, not only due to the virtually unchecked corruption but to the CCP’s inability to reform the economic system, giving the state owned businesses less control. Without these economic reforms the economy will slow even faster than otherwise but in order to make these reforms Xi Jinping will have to wrestle control from party cadres accustomed to the present system that Xi knows cannot survive.

Again Brown seems to lessen Hu’s abysmal record noting “From as early as the summer of 2004, apparatchiks began to speak of “putting people first” and creating a harmonious society”.Yet this reference to “the harmonious society” is rooted in Confucian culture and in reality means following the order of the CCP. Brown writes that “Hu’s original plans to lift taxes on farmers and focus on social welfare were quickly shelved as the party bet that, by keeping the economy humming above all else, it could stay a step ahead of the lower classes’ growing anxieties. Perhaps Hu had no choice but to make this gamble. Perhaps the only way to fend off the public’s rising expectations toward government and paper over growing imbalances between wealthy coastal regions and poorer western ones was to keep his foot on the gas”, yet this is the same pattern witnessed again and again, with the temptation to keep growth above all else, until the bubble pops and the magic growth turned out to be just a property bubble almost entirely reliant on export orders.

Brown goes on to mention the sheer scale of inequality “China may boast more than 96 dollar billionaires now, but 150 million Chinese still live in poverty. The country may have become the second richest in the world on aggregate, but per capita income hovers near 90th, similar to per capita income in Cuba and Namibia. Shanghainese enjoy a per capita income of more than $12,000 a year. Residents of Guizhou, China’s poorest province, earn a mere $2,500 a year”.

Brown concludes, “the bar for success is high: If China’s new leaders are seen as weak and illegitimate, then their ability to push through continuing economic and political reforms will be limited. After the succession itself, things get trickier. Chinese leaders no longer pretend the current system is optimal. Even Hu talks of the need for reform beyond just fixing the economy. This is, of course, reform with Chinese characteristics”.

He ends noting that if Xi and his associates “strengthen the rule of law and empower civil society while introducing greater accountability and transparency for the party” then the party may, he says, survive. Yet this is truly fanciful. The CCP will tear itself apart, taking the country with it,  before these concepts are actually implemented. The more likely alternative, as Brown writes ” the leadership splits, social conflict increases, and the party falls behind, Hu’s focus on breakneck economic growth at the expense of reform will seem shortsighted. The Chinese Communist Party could be consumed by its own internal battles, while society grows ever more imbalanced and unstable”.

This will be Hu’s real legacy, it may simply take some time to reveal itself.

“Not just dangerous but stupid, and incomprehensible”


In a piece written about the now infamous Paul Ryan (R-WI),  who “who likes to plan for the really long term is Paul Ryan, the Republican nominee for U.S. vice president. By 2050, Ryan’s budget plan would reduce federal spending outside health-care programs and Social Security to 3.75 percent of GDP, down from 12.5 percent last year, according to the nonpartisan Congressional Budget Office”. This is almost as ridicolous as Mitt Romney’s assertion at the recent debate in Denver, that government spending in America  is the same as government spending in Spain and his plea that “I don’t want to go down the path to Spain”. Despite the fact that America has is the richest nation on earth, is the world’s largest economy, that America has a population three times the size of Spain and that Spain is in the failed eurozone, while America is not.

He goes on to write “According to the World Bank, government spending minus health care was already lower in the United States than in all of the European Union, Japan, China, and India in 2009, the latest year with comprehensive figures. At just 3.75 percent of GDP, the United States would be one of the world’s lowest spenders. The only countries that spent less in 2009 were Equatorial Guinea, the Democratic Republic of the Congo”. He goes on to justify his assertion noting “The first of these three is a small West African country where per capita income is as high as in much of Europe, but life expectancy is just 51 years; a tiny elite monopolizes revenue from oil exports while the majority stays mired in poverty”, adding that the DRC is on the World Failed States index.

He goes on to argue, forcefully that “the United States isn’t going to turn into a war-torn sub-Saharan republic overnight because of budget cuts. But Ryan and his cohorts do want to replicate some aspects of life in Africa’s poorest countries. They prefer to replace public services paid for by taxes with programs run by charities; because the decision to fund the latter rests with the individual, no state power tells you how much of your income to surrender. They also want many of the services now paid for by the federal government to come under local control, as they are by default in failed states”.

Thus the notion of taking a lead from the poorest, most badly run countries is not just dangerous but stupid, and incomprehensible. He adds “The problem with this approach is that an economically efficient outcome is very unlikely. In principle, a government’s spending has three motivations: 1) it can provide something more efficiently than the private sector, 2) it can ensure quality in a way that the private sector can’t, or 3) the private sector alone doesn’t have an incentive to provide enough of the item in question”. Indeed, a similar argument has been noted here before, with the GOP comparing the private sector and the state sector as equal, when they are patently not, thankfully.

He ends his piece noting the sheer stupidity of Ryan’s plan when he takes it to its logical conclusion, “If we rely on charity to fund all these items, we may simply end up with too little of them. Imagine, for example, a United States with a stripped-down Justice Department, a bare-bones military, and only tiny agencies to deal with issues like highway safety, air traffic control, food safety, and the disposal of nuclear waste. All these would rely on individuals’ goodwill to continue providing services that protect the entire population”.

Government is there for a reason, to “drown it in the bathtub” as some have suggested is to be blinded by a totally failed and morally bankrupt set of ideas.

“Entirely different landscape”


The evidence for China’s downward economic spiral is mounting quickly. Now the government is trying to prop up the economy in China in the hope of a peaceful transition in the coming weeks.

Reports mention a massive stimulus, at least the second since 2008.  He writes “Caixin magazine reports – with disbelief – that the wish-list for industrial parks and mega-projects unveiled by all echelons of the Chinese system has reached 15 trillion yuan by some estimates. This is over $2.3 trillion or nearly four times the blitz of extra spending after the Lehman crisis in 2008, a policy that pushed investment to a world record 49pc of GDP and is now deemed to have been a mistake. But as Caixin also reports, the authorities are running out of easy money. Land transfer fees for the 300 largest cities have fallen 38pc over the last year”.

He goes on to mention “The central government’s tax revenues have grown 8pc, but spending has risen 37pc. ‘The good days of overflowing government coffers are over,’ it said. Mark Williams from Capital Economics said the fiscal blitz is a mirage. Most of the road and urban rail plans were already in the pipeline. Spending will be spread over years. ‘We can see no sign of a fresh stimulus. The project approvals are interesting solely because the government chose to publicise them,’ he said”.

This clearly the last thing the government wants and partly explains its belligerence to Japan, among others, in an effort to distract the people from the mess it has made of he economy. Crucially he writes “China may have to muddle through the downturn after all with less extra juice than hoped. This will be sobering. The country’s cost advantage over America – and others – has vanished”. The fact that so much of China’s economic growth relied on manufacturing means that manufacturers will now have real reasons to move back to the United States. This of course says nothing about the high profit Western banking and services sectors that will remain for now, but there presence too is under question as the tensions in the country are significant and it is doubtful that they will remain safe for much longer.

He goes on to mention “PwC said the US has clawed back a cost advantage of 2pc in steel output against China, at least for the North American market. Its “heat map” gives the US the edge in chemicals, primary metals, electrical products, machinery, paper, transport equipment, and wood, in that order”. He continues in a similar vein mentioning that “Boston Consulting Group has been banging on this homecoming drum for some time, arguing that wage inflation of 16pc annually for a decade has eroded China’s lead. The gap in ‘productivity-adjusted wages’ was 22pc of US levels in 2005. It will be 43pc (61pc for the US South) by 2015. It issued a fresh report last week — ‘The End of Easy Growth’ — warning that the profit margin of China’s leading companies has been slipping behind since 2009. It fell to 11pc last year compared to 18pc for global peers”.

He concludes his report arguing “There are degrees of bearishness on China. My own view as a ‘soft bear’ — based more on anthropology than economics — is that the country will ultimately pull through and reclaim its rightful place as a global superpower. The dynamism is unstoppable, much like the US in the Roaring Twenties”. This view however is mistaken, as demographically, if nothing else, China will wither in the coming decades.

He adds later “that is the sweep of history. The ups and downs of economic cycles are another matter. The Politburo clearly misjudged the difficulty of deflating a property bubble after letting loans grow by almost 100pc of GDP in five years (IMF data), almost double the rate in Japan over the five years before the Nikkei bubble burst or in US before the sub-prime peak”.

He ends “A President Xi Jinping — if it be he — will face an entirely different landscape”.

A lack of understanding?


Moody’s “said it would likely cut its ‘Aaa’ rating on U.S. government debt, probably by one notch, if federal budget negotiations fail. If the highly partisan Congress does not reach a budget deal, about $1.2 trillion in spending cuts and tax increases will automatically kick in starting Jan. 2, a scenario that’s been called the ‘fiscal cliff,’ because it is likely to send the economy back into recession and drive unemployment up”.

Meanwhile, James Traub argues that neither Republicans or Democrats do not either understand or help national security. He opens noting that with the close of the GOP and Democrat conventions “we now have a clear idea of the difference between the two parties on foreign policy: The Democrats want to talk about it, and the Republicans don’t. In fact, the Democrats even want to talk about the fact that the Republicans don’t want to talk about it”.

Traub goes on to to note “The American people don’t want to hear about the rest of the world. Polls find that no more than 5 percent of respondents consider ‘national security’ or ‘terrorism’ the most important issue; ‘war/peace’ clocks in at 2 percent. The dead giveaway was former President Bill Clinton’s 48-minute lollapalooza on Wednesday night, which included just one throwaway line on foreign policy. Clinton tends to have pretty good instincts on this stuff. It’s a dismaying prospect for those of us who had hoped to spend the next two months watching the cut-and-thrust over drone warfare and the New START treaty”.

Traub adds importantly that “as the economic analyst Matt Miller recently put it in the Financial Times, Obama had to ignore America’s creeping economic cancer in order to deal with the heart attack it was suffering when he took office. When the two sides argue over whether Americans are better off today than they were four years ago, they are debating the effectiveness of that emergency treatment. A fair answer would be that Americans are way worse off than they were before the economic crisis hit in President George W. Bush’s final year, and way better off than they would have been if Obama hadn’t intervened so dramatically with stimulus spending“.

He goes on to argue correctly that “theurgency of addressing the short-term problem not only distracted from the long-term one but exacerbated it. Obama added over $1 trillion to the budget deficit by pumping money into the economy and allowing all of the Bush tax cuts to run through the end of 2012. The combination of tax cuts, spending, and the long-term growth of entitlements has pushed the deficit to over $1 trillion”, the result of this, he says, means less money for education, R&D and infrastructure investment which will be of long term benefit to America. The only way to deal with this has been to raise taxes and cut Medicare benefits.

Traub presusaivily argues that “There’s a good argument that the combination of low tax revenue and high entitlement spending poses as grave a threat to American national security as climate change or nuclear proliferation”. Indeed, as the then chairman of the Joint Chiefs of Staff said that biggest threat to American national security is the debt. This warning has been added to by Sens. Pete Domenici and Sam Nunn. Traub re-enforces his point by noting “A recent study by the nonpartisan group Third Way found that entitlement spending has risen from 14 percent of the federal budget, excluding interest, in 1962, to 47 percent today. As entitlements have gone up, investments have gone down, from about a third of the budget 50 years ago to less than 15 percent today. Absent legislative action, that figure will sink to 5 percent by 2040. In effect, the United States will be spending all its money on debt service, the Pentagon, and entitlements”.

Traub concludes noting that both GOP and Democrats are to blame noting “Obama has hardly grasped the nettle either. He has presented himself as a champion of the middle class by embracing Bush’s tax cuts for all those earning under $250,000. That may have made sense during the economic crisis, and it certainly plays well politically, but it is simply not a sustainable policy at a time when the baby boom generation is advancing towards retirement. Federal taxes have averaged 18.5 percent of GDP since World War II; you cannot get back to that figure simply by restoring taxes on the rich to Clinton-era levels”.

For all the false talk of “American decline”, the United States will not decline, but collapse, if the issue with the debt is not met.

Rapid downturn


The news goes from bad to worse for China. The evidence keeps mounting that China’s “miracle” is hitting the rocks.

Firstly it has been reported that there is a credit crisis in the richest province, with the piece noting the arrest of Yu Zhongjiang, “his arrest, and the bankruptcy of Zhongjiang Group, had a lethal domino effect in Hangzhou, an affluent city of 9m residents on China’s east coast. Mr Yu had guaranteed the loans of several other companies, and the banks rushed to demand repayment”. It goes on to note that “One of China’s biggest lenders, Construction Bank (CCB), loaned a total of 3 billion yuan to companies tied to Zhongjiang, a source from the bank told Caixin, and is now facing its ‘largest ever loan crisis,’ according to a banking regulator. Between 2010 and this year, CCB’s loan book to Zhongjiang tripled in size, despite the company’s deteriorating financial position. Even when other banks started to recall their loans in panic, CCB kept lending”. Importantly it goes on to mention that “The collapse of Zhongjiang, and of another hapless property developer, Tianyu, has left some 62 companies in the mire. As the banks panicked, and cut off the flow of loans, more than 500 other firms, some of them allegedly among China’s biggest private companies, have written a letter to the local government asking for emergency relief funds. One of the biggest companies to issue a distress call is Hupai, one of China’s top 250 private firms, which said it had guaranteed around 1.35 billion yuan of loans to other companies, including the bankrupt Tianyu, and would face the wall if banks demanded repayment on those debts”.

A seperate piece mentions a stimulus on a vast scale,8 trillion yuan (£800bn), to try and prop up the ailing economy with an article saying “One Chinese province after another has stepped forward over the last fortnight to announce their plans, in what appears to be a propaganda effort to reassure the public that the economy is still on track. Meanwhile, Wen Jiabao, the Chinese premier, promised over the weekend that the Chinese government would intensify its efforts to boost the economy in the second half of the year”. Of course such co-ordinated action on the part of the local governments can only mean things are truly awful and getting worse. The piece adds that “Analysts said the government could now steer the value of the yuan lower, after a gain of 4.7pc last year against the dollar. Further export tax rebates could also be used to bail out manufacturers”.

Finally, an article brings further bad news for the Chinese leadership, “‘It just keeps getting worse,’ said Alistair Thornton and Xianfang Ren from IHS Global Insight. ‘The government has underestimated the pace of the slowdown and is behind the curve.’ The HSBC/Markit manufacturing index for China fell to 47.6 in August, the lowest since the onset of Great Recession in late 2008. Inventories are rising. The index for new export orders fell to the lowest since March 2009. ‘Beijing must step up policy easing to stabilise growth,’ said Hongbin Qu from HSBC. China’s official PMI manufacturing index – weighted to big companies – also fell through the contraction line of 50, though services are holding up better”.

As well as this the piece goes on to say “Evidence of a hard landing over the summer is becoming clearer. Rail volumes fell 8.2pc in July from a year before. The Japanese group Komatsu said its exports of hydraulic excavators to China – a proxy gauge for Chinese construction – fell 48pc in August from a year before”, adding later that “Local governments have $1.7 trillion (£1.07 trillion) in debts through 6,000 arms-length vehicles, described by Cheng Siwei from Beijing’s International Finance Forum as China’s “sub-prime” crisis”.

Lastly, others have written the China is the modern day internet tech bubble. Here today, gone tomorrow.

Where the country will go next is anyone’s guess.

Finally learning lessons


The UK Govenment is finally learning lessons. Philip Hammond, Secretary of State of Defence has given an interview with the left leaning, Independent on the topic of security at the Olympic Games in London.

The article mentions that “G4S’s failure to provide enough Olympic security guards has taught ministers that private firms are unsuited to providing many public services, the Defence Secretary has admitted”, the piece adds that “Hammond said the G4S saga had caused him to rethink his scepticism towards the public sector – and made him appreciate there were some things that only state organisations like the Army could be relied upon to do”.

The piece closes noting “‘I’m learning that the application of the lean commercial model does have relevance in areas of the MoD but, equally, you can’t look at a warship and say, ‘How can I bring a lean management model to this?’ – because it’s doing different things with different levels of resilience that are not generally required in the private sector.’ Mr Hammond said he is considering legislating to make it illegal for employers to ask whether a potential employee is a member of the reserves. The Government needs to find another 15,000 reservists by 2020 to fill the gap left by cuts in the Army and the Defence Secretary is concerned some employers might avoid taking people on if they knew they would be called away”.

Many on the Right and as guilty as those on the Left for taking extremes in this debate. In this particular instance, the Right have found that the private sector does not inherently mean efficiency and better delivery of services. Many on the Left also have similar predjuces. They mistakenly believe everything the State does is correct and private enterprise should have no role. The rule for whether the State should provide services, or not, is the common good. Will the weakest in society benefit, or not. Of course the most dangerous assumption is that the State/private sector is inherently better than the other.

Tip of the debt mountain


A piece from the most recent issue of Foreign Policy magazine notes that the previously reported Chinese housing bubble and subsequent meltdown has argued that the housing bubble has left a vast pile of debt.

It argues that in Tianjin, “China’s sixth-most populous city and perhaps its biggest property bubble. A half-hour train ride from Beijing, a 200-mile-an-hour straight shot through open farmland and industrial sprawl, Tianjin was long known as a shipping hub with uncommonly tasty steamed pork buns. It is now considered a ‘dual-core city.’ Its old quarter is quaint and tree-lined, sprinkled with European and American architecture built in the late 19th century, when the city first opened up to foreign trade. Its other ‘core’ is the Binhai New Area, an 876 square-mile swath of salt pan, wetlands, and old fishing villages now home to 2.48 million of the city’s 11 million inhabitants”.

He goes on to mention that in Binhai, a part of the city,  “officials have borrowed upwards of $64 billion to finance their vision, and their strategy seems to be working. Tianjin’s GDP officially grew by 16.4 percent in 2011, the highest in China (tied with the municipality of Chongqing) and faster than any country in the world except Qatar. Much of this growth was driven by Binhai. Tianjin’s per capita income is now close to Beijing’s”.

He gets to the nub of the issue when he says that “In 2008, the central government issued a $586 billion stimulus program to help China weather the global financial crisis, and local governments were suddenly awash in easy credit. They splurged on subways, airports, luxury condominiums, and five-star hotels — anything that would boost short-term GDP growth. According to China’s National Audit Office, local governments had amassed about $1.7 trillion of debt by the end of 2010, about 27 percent of the country’s GDP — but other estimates put the number at almost twice that”. As with most Chinese figures he writes that they should be taken with a huge dose of salt, he says that “Like other local governments, Tianjin officials typically borrow money through shady financing companies to skirt borrowing regulations, making the city’s balance sheets difficult to assess”. So, in truth the real debt figures could be three or four times the official estimates.

He goes on to mention that “China’s financial system might well weather an explosion of defaults, even as the country enters into its worst economic slowdown since 2008. Yet loads of bad debt could also result in inflation, a prolonged economic slump, or even a financial meltdown. ‘You don’t know where debt risk is going to rear its head,’ said Patrick Chovanec, a professor of economics at Tsinghua University”. He adds that Binhai officials “say that the area is poised for success. After all, it’s close to Beijing, it’s home to a thriving seaport, and it has strong support from the central government. They envision its highways choked with cars, its hotels booked to capacity, its office towers generating strong returns. Yet the city’s goals could be too big to achieve. The mammoth state-owned enterprise Tianjin Infrastructure Construction and Investment Group Co. recorded over $45 billion of debt in 2011, more than any other local government financing vehicle in China”.

However, it is entirely possible, even likley, that there are dozens, if not hundreds of cities all over China just like Tianjin. When these accounting pratices come to light, as they eventually will, the image of wise and all knowing Chinese will finally be shattered, if it has not already been. Then the unhealthy mix of vast, unaccounted monies and keynesianism will produce chaos that will shake Asia like nothing before, or since.

Defending the stimulus


In defence of the stimulus/ARRA against Ryan/GOP opposition.

Egypt’s tilt to Iran?


In a piece examining the presidency of Mohamed Morsi, people have argued that his election is giving the Saudis worries. He writes that Morsi in addition to dealing the SCAF “is also performing a less publicized high-wire act in trying to court vital benefactors in the Persian Gulf, particularly Saudi Arabia. How this endeavor plays out could prove just as consequential for his political survival”.

He adds that after Morsi “became president last month and resigned from the Muslim Brotherhood, he has worked hard to ease tensions with jittery Gulf countries. Dubai’s police chief has been warning Gulf leaders since March that local Brotherhood cells”want to stir the streets” against them, but Morsy’s real challenge is to reassure a visibly nervous Saudi Arabia”.

Interestingly, he mentions that Morsi also needs Saudi Arabia noting “In an effort to secure Saudi aid, Morsy has done all the right things: pledging not to export Egypt’s revolution, describing the Gulf countries’ security as a ‘red line’ that should not be crossed, and making the kingdom his first foreign destination as president”. He argues that “Morsy’s overtures appear to have placated the Saudis, who have continued sending Egypt financial support. But while there are similarities between the Brotherhood’s ideology and Saudi Arabia’s Wahhabi brand of Islam — both are Sunni, religiously zealous, and critical of Western influence in Muslim countries — it’s safe to say that the Saudis preferred Egypt’s old order”. Yet, although there is significant evidence to support this view of compatibility between Wahhabism and the Muslim Brotherhood it would be a mistake to say that the Brotherhood is a monolith with all members thinking the same.

He mentions that “last year, the Saudis doled out nearly $130 billion in aid packages to their citizens to assuage discontent. But they did not simply rely on cash to save themselves. The kingdom’s leaders also preempted planned “day of rage” protests in March 2011 by sending thousands of troops to Shiite-majority provinces, locking down the capital, and unleashing loyal clergy to threaten potential protesters with violence”. This paints the Saudi regime as being on a knife edge. This is untrue, with large numbers of still very conservative Saudi’s backing the regime. However, if anything is to upset the balance is that the reforming King Abdullah goes too far, too fast.  As evidence for this view he cites the news that “Violent protests erupted last week in the Eastern Province — home to the country’s oil and most of its Shiite population — after security forces shot and arrested prominent Shiite cleric Nimr al-Nimr for instigating ‘sedition.’ With restless Shiite citizens in the region already chafing at the state’s discrimination”. Yet, the vast majority of Sunni Saudi’s are taught to despise Shiite’s both theologically and politically, with constant claims that the Shiite’s are in league with Iran.

Again he overstates Iranian-Egyptian ties arguing that “Although Egypt and Iran severed diplomatic relations in 1980 because of Egypt’s close relationship with Shah Mohammad Reza Pahlavi and its signing of a peace treaty with Israel, the two countries have maintained economic ties. One example is the Misr Iran Development Bank, a joint venture that was founded in 1975″. China and Tiawan have close economic ties but that does not mean that if Tiawan declares independence China will not declare war on the island.

He mentions that in an attempt to move Morsi away from his supposed Iranian tilt that  “In response to these growing concerns, the kingdom is doing what it always does: throwing petrodollars at the problem. In June, the Saudis gave Cairo $1.5 billion toward the state budget (the Financial Times has reported that the Egyptian government expects a budget deficit this year of 7.6 percent). The kingdom, which currently funds more than 2,300 projects in Egypt and maintains investments there that are estimated to be worth anywhere from $12 billion to $27 billion, also provided Cairo with a $750 million credit for Saudi oil imports”.

He notes that “Since his election victory, Saudi and Saudi-owned pan-Arab news outlets have complained that challenger Ahmed Shafiq’s campaign was undermined by mistrust and intimidation, and that Iran may be able to manipulate Morsy. They have also questioned Morsy’s current affiliation with the Brotherhood, in light of his resignation from the group after assuming the presidency”.

He concludes that Morsi is basically a realist, like the Saudi’s and the new president “desperately needs Saudi money to repair Egypt’s economy and has virtually no choice but to accept the terms that come with it. Unlike Iran, the Saudis are free to sell their oil. And for now, they have Morsy exactly where they want him: over a barrel”.

Not so resilient


After some have mistakenly argued that China’s economy is sound, there is further evidence in addition to slowing growth and unsustainable inequality as well as a bursting housing bubble that the slowdown is continuing.

Some have argued that “Businesses are taking fewer loans. Manufacturing output has tanked. Interest rates have unexpectedly been cut. Imports are flat. GDP growth projections are down, with some arguing that China might already be in recession. In March, Premier Wen Jiabao put the 2012 growth target at 7.5 percent; then seen as conservative, it’s now viewed as prescient“.

He writes that “The $586 billion stimulus package that enabled China to sail through the 2009 global downturn only deferred the pain for local governments. Now they’re being asked to repay their debts, and that means some serious belt-tightening at City Hall”, adding that “Part of the headache for municipal governments is that land sales have dried up thanks to a central government initiative to cool China’s overheating property market, as well as a shortage of cash and confidence among potential buyers. In June, the average housing price for 100 major Chinese cities rose for the first time in nine months, but prices are still down 1.9 percent from last year”.

Crucially he mentions that “Senior government officials have warned for decades that economic slowdown could spell social unrest, and with few exceptions, China’s modern growth rate has been impressive enough to keep most people happy most of the time. But as GDP growth dips below 8 percent for the first time in years, China’s social fabric could come under strain, especially as thousands, if not millions, of migrant workers find their jobs under threat” yet worryingly he notes that “Exporters are going bust, and some factories that remain open have switched from three shifts to just one. Migrant workers have always supplied the elbow grease that enables China’s growth engine to purr. But it’s critical to China’s stability that those workers feel they are sharing in the rewards. Their disaffection has the potential to be China’s undoing”.

He goes on to note that “When the going gets tough, the rich head to the airport” and gives a whole slew of evidence to back this up. Indeed, this is s trend that began some time ago and was noted here. Lastly he notes falling energy consumption with “China’s ports are piled high with coal that should be roaring in the country’s power plants. Lower manufacturing output is also to blame. Only last year, Beijing talked about amassing an emergency coal stockpile to prevent the stuff from running out. Now it looks as if China has imported more fuel than it needs, as hard-pressed citizens, businesses, and factories cut their electricity consumption in order to reduce their bills” and that “demand for pork has dipped. The resultant oversupply has caused the all-important hog-to-corn price ratio to fall below the point where rearing pigs becomes profitable, and the Chinese government had to step in and buy up pork to stabilize prices. Even as the pork price has dropped, the price of eggs has shot up — so quickly that shoppers have started to use the term ‘rocket eggs.'”

In the face of such evidence it is hard to say the China is not going through difficult economic times. Further unstable political times are surely not far behind. America can then use this to reassert itself and protect the international order.



Recent news has noted that the slowdown of Chin’a economy has continued. The report mentions that “China’s manufacturing sector contracted at the fastest rate in seven months in June, raising the likelihood that the Government will do more to reverse the slowdown of the world’s second largest economy”.

 Meanwhile an article in The Economist describes China’s economy as “resilient”, a claim that should be highly disputed. It stresses China’s importance noting “When its industrial production, house building and electricity output slow sharply, as they did in the year to April, the news weighs on global stockmarkets and commodity prices. When its central bank eases monetary policy, as it did this month, it creates almost as big a stir as a decision by America’s Federal Reserve. And when China’s prime minister, Wen Jiabao, stresses the need to maintain growth, as he did last weekend, his words carry more weight with the markets than similar homages to growth from Europe’s leaders. No previous industrial revolution has been so widely watched”. It goes on to note that “outsiders’ principal concern—that its growth will collapse if it suffers a serious blow, such as the collapse of the euro—is not justified. For the moment, it is likely to prove more resilient than its detractors fear”.
The article mentions unsurprisingly that “investment spending on machinery, buildings and infrastructure accounted for over half of China’s growth last year; net exports contributed none of it. Too much of this investment is undertaken by state-owned enterprises (SOEs), which benefit from implicit subsidies, sheltered markets and politically encouraged loans. Examples of waste abound”. Yet they are maintained due to the fact that it is politically expedient for them to do so. They provide jobs for workers and mangerial jobs for Communist Party officials hoping to move up the cursus honorum. They remain inefficient because these two groups cannot be pleased at the same time, so the party tolerates these insufficiencies.
The piece mentions how “China’s economic model is also unfair on its people. Regulated interest rates enable banks to rip off savers, by underpaying them for their deposits. Barriers to competition allow the SOEs to overcharge consumers for their products. China’s household-registration system denies equal access to public services for rural migrants, who work in the cities but are registered in the villages. Arbitrary land laws allow local governments to cheat farmers, by underpaying them for the agricultural plots they buy off them for development. And many of the proceeds end up in the pockets of officials”. Of course, as long as the economy continues to grow and enough jobs are being created to keep unemployment low (not of course numerically speaking), then people acquiecse to this deal.
The writer notes “This cronyism and profligacy leads critics to liken China to other fast-growing economies that subsequently suffered a spectacular downfall. One recent comparison is with the Asian tigers before their financial comeuppance in 1997-98”, he adds that “China investing at a faster rate than the tigers ever did, but its banks and other lenders have also been on an astonishing lending binge, with credit jumping from 122% of GDP in 2008 to 171% in 2010, as the government engineered a bout of ‘stimulus lending'”. At some point in time the government will have to chose when to recapitalise the banks. Either way the vast corruption will again be laid bare, if not be the media itself, common knowledge tends to make the problem known anyway, sometimes, inflating figures as more and more people are told. It’s not called Chinese whispers for nothing.
The piece goes on to mention that “the very unfairness of China’s system gives it an unusual resilience. Unlike the tigers, China relies very little on foreign borrowing. Its growth is financed from resources extracted from its own population”. Yet what the writer fails to acknowledge is that this model is generally unsustainable. Firstly as there is no real state health care, people are going to have to draw on their savings to care for their elderly parents. Secondly, demographically China is witnessing a workers boom that will not last more than another decade or so. So savings will thus decline and the amount of people that will be able to save in sufficient quantities for the Chinese government to rely on its own population will vanish.
It adds that “China’s banks are highly liquid. Their deposit-taking more than matches their loan-making, and they keep a fifth of their deposits in reserve at the central bank. That gives the banks some scope to roll over troublesome loans that may be repaid at a later date, or written off at a more convenient time. But there is also the backstop of the central government, which has formal debts amounting to only about 25% of GDP”.  Agian their are significant flaws in this analysis with both the local banks and the central government far more indebted then the figures the writer states. He mentions that “China’s government spent a lot on infrastructure when the credit crunch struck its customers in the West. But there is no shortage of other things it could finance. It could redouble its efforts to expand rural health care, for example. China still has only one family doctor for every 22,000 people. If ordinary Chinese knew that their health would be looked after in their old age, they would save less and spend more. Household consumption accounts for little more than a third of the economy”. Again the demographic clock reduces the power of this argument.
As another related piece notes “China has greatly broadened its rural pension scheme, which collected contributions from 140m people in 2011, compared with under 80m a year before. But even now it reaches only about 30% of the eligible population”.
America is therefore in a better position, broadly, to take advantage of these weaknesses to its own benefit. However, it has significant problems of its own that it must address if it is to continue to provide global leadership that the world so desperately needs.
Despite all this how does anyone know China is telling the truth about any of this?

Give growth a chance


Following on from the election victory of Francois Hollande as president of France on a wave of anti austerity and therefore pro-growth it will be interesting to see how Hollande plans to but his theory into action.

Some are drawing comparisons with 2005, “the people of France and the Netherlands gave a stinging rebuke to the European Union by rejecting a new constitutional treaty. Seven years on, they are again causing alarm. To judge from the presidential race in France and the fall of the Dutch government this week, many are kicking against austerity”, yet it importantly adds that “France is big and protectionist by instinct; the Netherlands is a small, open trader. The French have long played fast and loose with public finances; the Dutch see themselves as models of fiscal discipline. France has a powerful presidency; the Netherlands muddles through with a kaleidoscopic parliamentary system”.

Adding weight to the theory that the EU is its own worst enemy the article adds that “If the flighty French and the dour Dutch are both disenchanted with the EU, the malaise is profound indeed. The euro zone’s debt crisis is polarising the politics of austerity and economic pain. The sense of resentment has been building for years: the no votes in 2005 were not a passing aberration. French voters may have objected to the arrival of Polish plumbers under liberalisation pushed by a Dutch commissioner, Frits Bolkestein. But these days it is a former devotee of Mr Bolkestein’s, Geert Wilders of the far-right Freedom Party, who runs a website for citizens to complain about Polish migrants”.

He paints a picture of kickback, writing “All this raises the question of whether Germany and the EU can hold the line on budget discipline. Germany’s predilection for all-round austerity is a mistake, with financial markets now worried as much about deep recession as about deficits. But political instability and indecision may be more alarming. If Germany has been able to impose its views on fiscal discipline, it is not just because others need its money, but because it has allies”. Now Germany is increasingly isolated and as the previous post noted Merkel could break Hollande, but equally, Hollande could break Merkel. The piece notes Dutch prime minister  “Rutte is a lame duck after resigning when the budget negotiations broke down. With his country officially in recession, he is struggling to meet an April 30th deadline for plans to bring the deficit down from 4.6% of GDP to the EU-mandated target of 3% next year. There is an irony in Mr Rutte’s predicament: his government was the most strident in demanding budget cuts and reforms elsewhere, and yet has fallen apart over a more modest adjustment than those imposed on Greece and Spain”.

Yet if Hollande does eventually get his way, and there is no guarantee of this, what policy will he implement? An article in Foreign Policy notes that “Yet for all his bluster, Hollande likely won’t be able to impose radical change on Europe’s core economics. The powerful German economy has kept the euro afloat as Greece, Italy, Spain, and other countries have drawn perilously close to the brink of collapse. Its manufacturing and exports businesses remain the engine of European prosperity. Under the fiscal treaty Merkel advanced this year, EU member states are required to ensure that their “deficits do not exceed 3 percent of their gross domestic product at market prices” and must maintain strict limits on government debt. The treaty goes to great lengths — with corrective measures and potential legal action against member states — to prevent a repeat of a Greek-style economic meltdown”.

Similarly, a piece notes the Mario Draghi, president of the ECB said that “We have had a fiscal compact. Right now what is in my mind is to have a growth compact”, yet how? People say that “In Brussels there is talk of a new Marshall Plan. Herman Van Rompuy, president of the European Council, is expected to summon European Union leaders to a dinner to discuss growth. With parts of the euro zone crushed by recession and mass unemployment, many now look to Mr Hollande for relief. Even Angela Merkel, the German chancellor, has changed tone. She now insists that Europe’s policy rests not only on budgetary discipline, but also on measures to promote jobs and growth”, yet it will be interesting to see if Merkel actually does something about this or is as implacable as ever, demanding austerity and therefore destroying the “project” that she supposedly wants to protect. The article brings readers down to earth saying, “nobody should get carried away by a hope that the euro zone is embarking on a radical new course. Calling for growth is like advocating world peace: everybody agrees that it is a good thing, but nobody agrees how to do it”.

The piece adds that some measures are relatively simple to enact, “Draghi’s ideas, as far as they can be divined, are to promote structural reforms to make labour markets more flexible and encourage entrepreneurship. Mrs Merkel echoes this, saying promoting growth need not cost billions. Liberals add that a key to higher growth is to remove barriers to the EU’s single market, particularly in services”, while “Hollande is against such ideas. His programme for France, which has one of the biggest public sectors in the world, is mainly about more spending and more taxes. In the EU he wants common European project bonds to finance infrastructure, a capital injection for the European Investment Bank (EIB) and a redirection of EU regional funds towards jobs. Much of this can be done so long as Mr Hollande does not try to reopen the actual text of the fiscal compact. Indeed, many of these ideas have already been proposed by the European Commission”.

The article goes on to note that instead of cutting the deficit and allowing business to take up the economic slack, as the UK government idealistically and naively planned, the cuts have only worsened the economic situation.

The article ends reasonably sensibly, that “The biggest boost to growth would be to remove uncertainty about the survival of the euro. This requires risk- and burden-sharing across the whole zone. The adjustment will be faster if countries like Germany boost domestic demand through higher spending or lower taxes. The Germans will also have to accept higher inflation to allow others to regain competitiveness without being pushed into deflation. The euro could also be strengthened by a European system to recapitalise banks and guarantee deposits to break the vicious cycle of weak banks and weak sovereigns”.

Does Germany like the EU enough for it to take these measures?

Wanting it both ways


So it rumbles on, interminably. Recent reports have said the Germany has raised fresh objections to the proposed increased bailout fund, which will come primarly from German taxpayers. The result of which is “the International Monetary Fund signalled it was considering stepping in”.

Amid the UK coalition’s disagreements  and yet more disagreements, over the policy toward the EU, “[EU] officials admitted last night that many of the details of any deal will not be resolved tonight and will have to wait for another meeting of EU finance ministers at the weekend”. The result of this, predicably enough was that the “FTSE 100 index closed down at 5525, and shares in Germany, France and the US all fell”.

The report notes the largest disagreement “centres on the role of the European Central Bank in bailing out struggling eurozone economies”. The result of this was that the “draft agreement circulated among leaders yesterday suggested that the ECB should go on buying the bonds of troubled members, effectively lending money to them directly. The ECB’s bond-buying programme is unpopular in Germany, where critics fear it will compromise the central bank’s independence and its ability to control inflation. Angela Merkel, the German chancellor who is facing fierce domestic opposition to the rescue deal, yesterday publicly rejected the draft as ‘not acceptable to Germany'”.

So yet again the EU is unable to act due to the lack of separation between domestic and EU politics. The result when times are economically good is disruption, and when times are bad, chaos. The German parliament has passed a vote that would increase the size of the euro zone rescue fund.

In a separate article the future of the EU is examined. The opinion piece opens with a quote from Nicholas Sarkozy saying “‘You don’t like the euro, so why do you want to be in our meetings?’ asked the French President of David Cameron at the weekend, adding for good measure that he had ‘had enough’ of British interference”. This obviously displays a short-sightedness that unmasks the hollow talk of all Europeans working together. The columnist notes that “Sarkozy did rather put his finger on the nub of the problem Britain faces in responding to the eurozone debt crisis”.

He adds that “the Coalition government has gone along with Europe’s pained march towards fiscal union, even though this runs counter to the eurosceptic instincts of its Conservative hierarchy”. He notes that the reason for this approch are that, “the apparent alternative of disorderly default and break-up would almost certainly plunge Europe, and very possibly the rest of the world too, into prolonged depression” in addition to “by supporting the eurozone in its dash towards fiscal integration, Britain may be able to negotiate a more advantageous, economically detached role for itself, whereby it enjoys many of the privileges of Europe’s single market but removes itself from some of its obligations”. This latter hope, the so called Swiss model, has been commented on here before.

He goes on to say that “both these objectives are starting to look at best questionable, and the second one positively fanciful”. Interestingly he adds that “the debt crisis is spiralling out of control and may already have moved beyond the capacity of Europe’s political elite to fix it by ramming home fiscal and economic union”. However it is hard to see what he means by thi. Surely the only way to solve the euro crisis is either for radical, violent and immediate integration, or the break up of the euro and the end of the EU itself. These are the only two options. Seeing as the latter option would have violent social, political and economic consequences, the former is the only option, despite what some seem to think.

The columnist argues that the current plan of bondholders taking more losses on Greek debt, increasing the EFSF, and recapitalising European banks, “risks provoking the very same disorderly outcome that everyone so much fears”. He argues the plan “seems to condemn much of Europe to years of economic decline. Reduced to penury by centrally imposed austerity programmes, most peripheral economies have no chance of bridging the competitive gap with Germany or Holland, let alone of working off their external indebtedness in a meaningful manner”. Yet he has little to say on what to do to fix the euro crisis.

Depressingly he adds that “only bit of the grand scheme that seems to be broadly in the bag is a proposed 100 billion-euro banking recapitalisation, and even that is thought inadequate by many market analysts”. With a sense of realism he mentions that ” Britain can salvage anything at all from this mayhem, let alone the new contract with Europe it aspires to, seems most unlikely”.

Germany has long been seen as the leader of the EU. How however when times are tough and decisions have to be made, they shirk any responsibility and refuse to act quickly. All this because the EU refused to accept a simple idea hadn’t gone away.

The IMF arrives


The only thing the Government managed to communicate in the course of the week was its own terrifying irrelevance“. Indeed.

End of the line


As Irish bond yields not only continue to rise seemingly inexporably towards either default or bailout, the cost of the financial crisis is still battering the Irish economy, partly thanks to an inept and incompentent government.

In a piece written recently Dr Morgan Kelly predicts that “Ireland is effectively insolvent – the next crisis will be mass home mortgage default”. He notes emotionless how “During September, the Irish Republic quietly ceased to exist as an autonomous fiscal entity, and became a ward of the European Central Bank.”

Dr Kelly remembers how “Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act. The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke”.

He argues how “The Government has admitted that Anglo [Irish Bank] is going to cost the taxpayer €29 to €34 billion. It has also invested €16 billion in the other banks, but expects to get some or all of that investment back eventually.” He argues how Ireland’s other major banks are eventually in for the same fate as Anglo with a similar amount of money needed between them in order to correct them, as he says “When you apply the same assumptions about lending losses to the other banks, you end up with a likely taxpayer bill of €16 billion for Bank of Ireland (deducting the €3 billion they have since received from investors) and €26 billion for AIB: nearly as bad as Anglo”.

Correctly but sadly he notes how “This €70 billion bill for the banks dwarfs the €15 billion in spending cuts now agonised over, and reduces the necessary cuts in Government spending to an exercise in futility. What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?”. Ireland is effectively dead with little or no hope of recovery. He adds that “What is driving our bond yields to record levels is not the Government deficit, but the bank bailout”. If this is true which in all probability it is, it is only a matter of time before Ireland is buried under a mountain of its own debt.

Mournfully he continues saying that “The next act of the crisis will rehearse the same themes of bad loans and foreign debt, only this time as tragedy rather than farce. This time the bad loans will be mortgages, and the foreign creditor who cannot be repaid is the ECB”. He argues that as many as 200,000 households will be unable to pay their mortgage and that the result will be that “The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War“. This will have the result he says of pitting those who have paid off their mortgages with those who have not and demand a taxpayer funded bailout.

Finally he adds that “With a sufficiently low interest rate on what we owe to Europe, a combination of economic growth and inflation will eventually erode away the debt, just as it did in the 1980s”, he continues however saying that “An interest rate beyond 2 per cent is likely to sink us.”.

He concludes saying that “My stating the simple fact that the Government has driven Ireland over the brink of insolvency should not be taken as a tacit endorsement of the Opposition. The stark lesson of the last 30 years is that, while Fianna Fáil’s record of economic management has been decidedly mixed, that of the various Fine Gael coalitions has been uniformly dismal”. He goes on to predict the collapse of the current Irish party system and the rise of the far right. However, the Irish political culture would need to be remade if this were to come true to any real extent, a tall order to say the least.

In a piece, Ireland is praised for “Ireland has done everything that could reasonably be expected to set its fiscal house in order, and, unlike others, it has done so ahead of time and voluntarily” yet at the same time it argues that “The reason the resolution mechanism is being reformed is to address the fury of German taxpayers at being asked to bail out the profligate fringe” and warns of an authoritian capitalism taking hold – Chinese style.

What is being seen increasingly however is The main opposition Fine Gael unveiled plans to bring Ireland back to the sunny uplands of solvency where peace is restored and everyone smiles. An election is due by 2012 but will probably be held early next year. If there is any justice it should be the dmise of the ruling Fianna Fáil party but two things should not be forgotten, people have short memories and the absolute supidity of the Irish electorate is renowned.

Midterm results


Below are some of the what are considered to be the most important midterm results, in what has been an interesting, to put it mildly election, in no particular order:

  • Democratic Joe Manchin won the Senate in West Virginia race beating Republican rival John Raese.
  • Tea party favourite Marco Rubio won a Senate seat in Florida beating Governor Charlie Crist, who ran as an independent.
  • As expected Rand Paul won a Senate seat in Kentucky. 
  • Russ Feingold lost in Wisconsin to Ron Johnson.
  • Mark Kirk won President Obama’s old Senate seat in Illinois. The loss by the Democrat Alexi Giannoulias is seen as an embarrassment to Obama and his party.
  • In Pennsylvania Pat Toomey beat Congressman Adm. Joe Sestak for a Senate seat.

    Republicans won a Senate seat with John Boozman defeating incumbent Democratic Senator Blanche Lincoln in the state of Arkansas.

  • In Nevada, Sharron Angle lost to Harry Reid. It is however at this time unknown if Reid will keep his job as Senate Majority Leader.
  • In South Carolina, GOP favourite Jim DeMint won against Democratic nobody Alvin Greene.
  • Across the country in California,  Barbara Boxer (D-CA) won re-election against former HP CEO Carly Fiorina. While the in the governor’s election Jerry Brown won the election to the governor’s mansion beating Meg Whitman, former CEO of Ebay.

Lastly, there is no word as of yet if Tea Party favourite Joe Miller won in Alakska, or if Obama favourite, Michael Bennet won in Colorado against Ken Buck. While in Rhode Island, former sentor Lincoln Chafee won his election to become the first independent governor of Rhode Island.

Lessons to be learnt


In an article on current economic ideas, John Quiggin,  explains how even after the near total collapse of “the market” which was only saved be having governments bail out a combination of reckless, incompentent and greedy banks, he argues that the  system of the ideas that led much of the Western world for decades is still being defended.

He notes how “theories, factual claims, and policy proposals that seemed dead and buried in the wake of the crisis are now clawing their way through the soft earth, ready to wreak havoc once again”. He continues saying how “banks and insurance companies bailed out on such a massive scale by governments (and ultimately the citizens who must pay higher taxes for reduced services) have returned, in zombie form”.

He argues that the period from 1985 called the “Great Moderation” as a time of stability is largely inaccurate due to the fact that “this idea depended on some dubious statistical arguments and a willingness to ignore the crises that afflicted many developing economies in the 1990s”. He rightly asks “If double-digit unemployment rates and the deepest recession since the 1930s don’t constitute an end to moderation, what does?”.  He notes, cuttingly how “central banks and policymakers are planning a return to business as usual as soon as the crisis is past”.

The second idea that he dismisses is that of the “efficient markets hypothesis”, the idea that “the idea that the prices generated by financial markets represent the best possible estimate of the value of any investment”. This idea is patently false and can only reach some validity with good solid regulation. This was seen most notably when rating agencies branded useless debt as AAA or even AA all under pressure from the market to keep the bubble going. Quiggin adds that “advocates developed elaborate theories to show that the billion-dollar values placed on companies delivering dog food over the Internet were actually rational. Others simply treated the dot-com bubble as the exception that proves the rule”.

He then discusses Dynamic Stochastic General Equilibrium which he definees as “the idea that macroeconomic analysis should not be concerned with observable realities like booms and slumps, but with the theoretical consequences of optimizing behavior by perfectly rational (or almost perfectly rational) consumers, firms, and workers”.

This idea can and should be easily dismissed along with the other idea he targets, the infamous, “trickle down theory”, which he defines as “the idea that policies that benefit the wealthy will ultimately help everybody”. This idea has recieved much praise particularly in America and has been praticsed since the last 1920s. It has spread to more neoliberal countries in Europe, including the UK over recent years.  He argues that ” Trickle-down economics was conclusively refuted by the experience of the postwar economic golden age”. He notes how the “idea gained more support during the triumphalist years of the 1990s, when, for the only time since the breakdown of Keynesianism in the 1970s, the benefits of growth were widely spread, and when stock-market booms promised to make everyone rich”. He concludes saying how “Median household income has actually declined in the United States over the last decade and has been stagnant since the 1970s”.  The final nail in the coffin for the absurd idea is that “the United States has less social mobility than any other developed country”.

Finally he deals with pivatisation, the argument that the private sector is better than the state at most things while returning a profit. This idea is generally good, however there are some cavets, it must be never enter the health systems, the armed forces (e.g. Blackwater) and should be used, if at all, with extreme caution in the education system.  He notes how “theoretical basis for privatization rested on the efficient markets hypothesis, according to which private markets would always yield better investment decisions and more efficient operations than public-sector planners”.  He argues that, when certain state industries that were rightly privatised, such as airlines, it lead to in increse in prices to comsumers and often the continuation of the monopoly albeit in private hands. 

However it should be reiterated here that privatisation is a good idea but that it must be applied very carefully and only in certain conditions.

Unrepentant, undeserving bankers


People are justifiably outraged at news that most of the bankers in the City of London will recieve bonuses worth £7bn. When the chairman of RBS, which is almost wholly owned by the UK government after a massive bailout, says something then you know things must be really bad.

The chairman, “Sir Philip, who has previously revealed that RBS paid more than 100 bankers in excess of £1m, told a conference that the bank was ‘paying a lot of people who aren’t worth it’ and suggested that the issue could only be tackled through regulation”.

This is proof, if proof were needed, that people cannot be trusted to do what is right. Therefore, they must be guided, or in some cases, ordered to take the correct course of action that is best for all of society and not merely the company or the shareholders. To think that bonuses should be paid out when the world economy is still on its knees is a worrying sign indeed. The British government could step in, and in the case of RBS, order that the bonuses not be paid, however that would worry “the markets” about government interference in business, nevermind that many of the biggest banks in the world came cap in hand to the world’s governments during the market meltdown in 2007-8.

The article notes that “Bankers, fund managers and other City staff are expected to take home around £3.8bn after paying income tax and national insurance contributions.But the taxman is set to receive around £4.1bn as a result of the bonuses”. As if this were some kind of justification for this despicable behaviour. The article seems to imply that the more the banks payout in bonuses the better off for the government!

Others would argue that they should recieve this money as it will benefit society as it will trickle down to everyone else. That is what many neoliberals/Reaganites have been saying for decades but in fact the vast majority of the monies remains in the hands of the very wealthy, it just gets moved around.

If this rampant individualism and greed is not checked by each individual government then society will have learnt nothing much faster than anyone could have imagined. There is a role for sensible regulation to be enforced by the State. The government’s of the world are on their own.

It’s hard to take the GOP seriously when…..


The GOP are always moaning about the deficit, yet things like this, kind of dull their message. They need a reality check, seeing as their favoured approach to de-regulation, with the help of Bill Clinton along the way, got us to where we are today.

Human rationality and the economic system


In a recent interview given by Dr Nouriel Roubini who despite the naysayers predicted the global collapse of capitalism that is continuing to happen around us.

In an interview given recently the the Daily Telegraph, Dr Roubini, says that there is more to come. He says quite accurately, that the next wave will be  that of governments. He told the paper that ” The crisis is not over; we are just at the next stage. This is where we move from a private to a public debt problem”.

He contiuned saying that “We socialised part of the private losses by bailing out financial institutions and providing fiscal stimulus to avoid the great recession from turning into a depression. But rising public debt is never a free lunch, eventually you have to pay for it”. So, all those critics that said that the banks were too big to fail and the whole financial system was based on them was well maybe just an understatment.  Now governments the world over are going to pay, both literally and figuratively for their (i.e. our) “generousity”.

Crucially, he believes Greece’s problems will see it, among others, leave the euro, as was mentioned on a post here recently. Roubini insists major reform is necessary, “We are still in the middle of this crisis and there is more trouble ahead of us, even if there is a recovery. During the great depression the economy contracted between 1929 and 1933, there was the beginning of a recovery, but then a second recession from 1937 to 1939. If you don’t address the issues, you risk having a double-dip recession and one which is at least as severe as the first one.”

Governments all over the world, but particularly in Europe and North America are going to have to make cuts that affect the way their very societies think about themselves. It will also be a huge challenge, perhaps the biggest challenge to democracy itself. Can governments get elected and stay in power when there are no tax cuts and spending increases every few years? What will happen when the extremes look increasingly effective, which over time they will? Worringly, what will happen when a country with a de facto one party state despite having many formal parties have to make tough choices? Where will the voters turn when they are faced with a real choice, will they be able to chose at all? 

Can democracy with its trust in the rationality and supremacy of the individual face the test that is fast approaching?

New UK government


There is, in case you hadn’t noticed, a coalition government in the UK, and believe it or not, the sky hasn’t fallen in!

Brown decided he had had enough so he just resigned and suddenly, well sort of, there was an agreement between the Tories and the Lib Dems that steers clear of any disagreements, more or less, and focuses on the items where there is commom ground, which there seems to be. The Cabinet announced, on Wednesday 12th is as follows:

*Prime Minister   The Rt Hon David Cameron MP
*Deputy Prime Minister & Lord President of the Council
(special responsibility for political & constitutional reform)
  The Rt Hon Nick Clegg MP
*Foreign Secretary & First Secretary of State   The Rt Hon William Hague MP
*Chancellor of the Exchequer   The Rt Hon George Osborne MP
*Lord Chancellor & Secretary of State for Justice   The Rt Hon Ken Clarke QC MP
*Home Secretary   The Rt Hon Theresa May MP
*Secretary of State for Defence   The Rt Hon Dr Liam Fox MP
*Secretary of State for Business, Innovation and Skills   The Rt Hon Dr Vince Cable MP
*Secretary of State for Work and Pensions   The Rt Hon Iain Duncan Smith MP
*Secretary of State for Energy and Climate Change   The Rt Hon Chris Huhne MP
*Secretary of State for Health   The Rt Hon Andrew Lansley CBE MP
*Secretary of State for Education   The Rt Hon Michael Gove MP
*Secretary of State for Communities and Local Government   The Rt Hon Eric Pickles MP
*Secretary of State for Transport   The Rt Hon Philip Hammond MP
*Secretary of State for Environment, Food and Rural Affairs   The Rt Hon Caroline Spelman MP
*Secretary of State for International Development   The Rt Hon Andrew Mitchell MP
*Secretary of State for Northern Ireland   The Rt Hon Owen Paterson MP
*Secretary of State for Scotland   The Rt Hon Danny Alexander MP
*Secretary of State for Wales   The Rt Hon Cheryl Gillan MP
*Secretary of State for Culture, Olympics, Media and Sport   The Rt Hon Jeremy Hunt MP
*Chief Secretary to the Treasury   The Rt Hon David Laws MP
*Leader of the House of Lords & Chancellor of the Duchy of Lancaster   The Rt Hon The Lord Strathclyde PC
*Minister without Portfolio (Minister of State)   The Rt Hon The Baroness Warsi PC

What should be clear is that from the Cabinet at least, the Tories are very much in charge, being in control of all of the Great Offices of State. The Lib Dems getting five seats at the big boys table. Former shadow Secretary of State for Justice,  Dominic Grieve had to be moved to allow Ken Clarke to take up the Justice job, who in turn was moved to allow Dr Vince Cable take up the BIS job. Talk of Cable getting a newly formed ministry quickly faded as did talk of him getting the Treasury job.

Obviously the Tories had to be compensated in some way, with those particularly on the Right of the party feeling snubbed, so IDS made his return to the Cabinet as DWP Secretary. In addition to that the coalition has laid out a plan that would allow an election to take place no earlier than the first Thursday of May 2015. In order to allow both parties to hang together and take the blame, and (hopefully?) some of the gain after taking what are expected to be some savage decisions.

Will it work? I hope so, with the Tories not budging on things like Trident, but rightly ditching their inhertiance tax cuts, and the Lib Dems getting some badly needed voting reform as well as some economic jobs in the Cabinet this could be an excellent coalition with some brilliantly sensible policies on both sides. It also leaves Labour who are searching for, David Miliband, as their new leader, to spend some well deserved time in oppostion.

If they can keep to their areas then it could work exceptionally well, however, there is bound to be tensions, especially over the health sckeptism that the Lib Dems have of the market, as opposed to some of the Tories still bottomless faith in it. With, Osborne, Hammond and Cable all going to be in each others pockets, due to co-ordination efforts, it will be a tremendous test of both Cameron and Clegg to reign in their respective parties extremes and prevent the collapse of the coalition.    

Here’s hoping.

UK general election


I suppose I should give some thoughts with less than an hour before the close of polls.

This has been an exciting and infurating election for some time. Exciting because there has been so much going on with the rise of Nick Clegg and the Lib Dems and at the same time the justified “implosion” of New Labour coupled with the highs of the Tories reached only a few months ago, only to have Labour claw back ground despite the deeply unpopular government and the economic mess they helped create. Not only that but there was every agonists dream, two or more parties, with truely different visions, dare I say it, ideologies, debating (more or less) their ideas in the forum of the public sphere – which is exactly what every election should aspire to, this one came the closest to this in the UK for some time.

Unfuriating because of people’s unwillingness to see that it is the first past the post system that is causing such problems, and will only continue to cause such problems in the future unless there is reform of the voting system that allows for some form, exactly which needs to be debated, of PR. As has been commented on before here, the UK is working on an electoral system designed for two parties but with at least three.

Some have said that the best option for the Conservatives would be to have a Labour/Lib Dem coalition which would take all the “tough” decisions and then collapse, leaving the Tories to bask in the glow of the electorate – this does ignore the fact that these decisions will have to be made anyway, and that to take the tough decisions is what real politics is about, the exact opposite of New Labour. 

Savage cuts are coming from whoever has the luck/misfortune to get in.

The only other thing that is clear is that by this time tomorrow there will be a 649 newly elected MPs – to say any more at this stage would be premature.

Ireland’s lost decade


In a piece written some time ago, Gary Joyce argues for a greater sense of cmmunity in Ireland, but the argument could be easily extended to the UK, America and much of Western Europe. She begins by commenting how proud she is to be Irish. However she then asks questions such as “Are we ashamed that our health and social services routinely fail those that they are charged to supports? Are we ashamed that the politicians we elect refuse to accept responsibility for their actions, yet we continue to reward them for doing it? Are we ashamed that our desire for easy riches has led to the near collapse of our banking system, the bankruptcy of our State and the indebtedness of our children, while we constantly seek to scapegoat and blame others?”

She quiet rightly asks “If how we used the money of the “boom years”  is an indication of what we truly value, then the desperate situation in which we find ourselves now is a wake-up call to recognise and question those values”
The money that was wasted by the Government, but also by some of the people of Ireland, shows the emptiness of these “values”, it also highlights the tremendous greed that many experienced and where told were good things. The greed was excused away and was in some cases seen as the reason behind Ireland’s wealth.

Where are these people now that the good times are over? They are getting away with their sinful greed and incompentence by bailouts and golden handshakes. These were the people that were saying that regulation is a bad thing and that it hinders the “creation” of wealth. They were the one’s calling for the “voodoo economics ” that still plauge America to this day. People were calling a halt to this madness but alas, they were ignored and told that they were pessimists and should see that things were going fine and would continue to go well and even, get better.

Money is a powerful drug, once people have it they need more and more to fuel thier lifestyle, however it was not all who gained from this hysteria. Joyce contiunes saying “we know from the UN Human Development Programme that Ireland, with the UK and the US, is one of the most unequal societies in the world: the income of the wealthiest 20 per cent of our population is six times greater than that of the poorest 20 per cent.” Only a small number of people gained vast wealth to the detriment of society as a whole and the common good.

Joyce carries on, justly lauding the Japanese and Nordic economies and at the suggesting a national maximum wage. Can you imagine it, interfering in the market like that, the market that for all its “invisible hand” self correction brought the world to the brink of collapse only a year ago. Market interference, market regulation – BRING IT ON!

She ends her piece, noting how “the appetite for strong leadership is palpable everywhere”. She rightly points out that the Church as well as the political parties, trade unions and indeed everyone in Ireland is to blame and is now experiencing a totally rudderless leaderless country where no one has trust in anyone else.

This begs the question how can any of the current political parties or indeed people lead the country out of this and drag ourselves, kicking and screaming if necessary into a better country where money is not the beginning and end, but merely a means to an end – good schools, hospitals, low crime and low poverty rates.

An Irish general election is not only needed, a whole new political class is needed.

The end of neoliberalism?


A link I saw from the American Conservative magazine oddly enough, about an article by Paul Krugman writing in the NY Times about the economic differences, both percieved and real between America and Europe.

Krugman’s key quote: “Europe is an economic success, and that success shows that social democracy works”.

He goes on to discuss how in reality a hard core of neoliberals, from both Republicans and Democrats seek to associate social democracy with communism and how, according to their narrative  the result is utter economic decay and then collapse. Krugman however notes that “Since 1980, per capita real G.D.P. — which is what matters for living standards — has risen at about the same rate in America and in the E.U. 15: 1.95 percent a year here; 1.83 percent there”

Crucially he doesn’t paint Europe as some economic heaven with both zero unemployment and plenty of tax cuts. He understands that no country is in perfect financial shape during these years but he appreciates that the social good that is gained from high taxes pay for hospitals and schools as well as other services that citizens have come to expect.

He ends saying that which comes from having a European style economy that actually, in the long run, ends up having a greater effect on the social good

“Europe is often held up as a cautionary tale, a demonstration that if you try to make the economy less brutal, to take better care of your fellow citizens when they’re down on their luck, you end up killing economic progress. But what European experience actually demonstrates is the opposite: social justice and progress can go hand in hand.”

It is exactly this model that we must use to our avantage now that the model of little or no regulation and unquestioned belief in “the market” to solve all problems all of the time has come to an end. The sooner we realise that we are all interlinked and every decision that is taken must be taken with the common good in mind the sooner we can end the rabid individualism that led us to where we are today.