Τετάρτη, 22 Σεπτεμβρίου 2010

Theodoros Pangalos Is Speaking the Truth! But Is Not Following Up on Policy.

This blog is no fan of Theodoros Pangalos, currently the Deputy Premier - for reasons too disparate to be put down here at length. However, it does enjoy his sporadic outbursts of truth, like his statement, yesterday, that the whole political system is complicit in the creation of Greece's huge public debt, as administrations by both major parties hired too many people to work at the public sector. That admission was, moreover, a direct answer to the question "Where did all the money go?", which is brandished against the political establishment by populist morning-TV-show presenters - the implication in that question was that the money was pocketed by corrupt politicians. And while it seems that many politicians did indeed enrich themselves at the expense of the public purse, a calm look at previous years' budgets would reveal that that salaries and pensions for civil servants were approximately equal to the government's tax revenues (and anything in excess of that would constitute our high annual deficit). Let me rephrase this: government expenditures on salaries and wages for the public sector are so large, as to consume all the taxes we pay. Or, to put it otherwise, those of us in the private sector work almost exclusively for the sake of those in the public sector (the inefficiency of which is almost of legendary status in Greece).

So, we now know, and the administration admits that it knows too, where "all the money" went. It also knows that it must produce, pretty shortly no less, surpluses, in order to start repaying its foreign debt. There are two ways to turn a deficit into a surplus: reduce costs and increase revenue. Cutting costs, insomuch as it would entail redundancies in the public sector, is out of the question in a political culture like the one in Greece. The Deputy Premier has presented a plan for many public agencies to merge, but any redundant personnel will be transfered to other services - the cost of their wages will still be borne by the government (a notable exception is a public-sector corporation, supposedly created for the digitalization of farmland maps, which was manned by hairdressers, professors of Theology, and other unrelated specialties, although each one of the hires could be traced to parliamentary deputies affiliated with the previous administration of the New Democracy party). Moreover, public enterprises, typically publicly-held corporations, in which the government owns the shares, have their debts guaranteed by the government. They are also hugely overmanned. The government has announced that the employees of the state-owned enterprises made redundant by its purportedly cost-cutting measures will not lose their jobs, since they will be hired by the government. Thus far, the only actual cost-cutting has come through a drastic reduction in monthly salaries for civil servants across the board.

Things don't look so good in the field of increasing revenue, either. Diminished turnovers lead to diminished tax revenues, despite a significant increase in tax rates. Furthermore, the government has done nothing to make Greece attractive to investors (the increased tax rates only further discourage potential investors) and any money poured into the market comes from government (or E.U.) coffers. The government is all in favor of development and growth, but the path it has taken to reduce deficits is, in effect, stifling growth. It has become by now abundantly clear that the only way for the reduction of deficits, which would be consistent with any potential for growth, is actual redundancies in the public sector. To put it bluntly, the government needs to get rid of all redundant personnel - to get it out of its payroll. It has to reduce the bill it pays for salaries each month; not by across-the-board cuts, though (since there are civil servants who are compensated all too well for their services, while, at the same time, a number of them receive only meager wages), but by simply not paying for people, whose services it does not need. That goes for both the central government and for the local governments (municipalities, prefectures, areas, etc.). And, it goes without saying, to completely change the atmosphere for investments in Greece - but, more on that (and how Greece managed in in the '50s and the '60s), in a next post.

Κυριακή, 19 Σεπτεμβρίου 2010

To Hate or Not to Speak?

I just read in the New York Times this very thoughtful Op-ed by Nicholas Kristof. He is, in effect, condemning the ease, by which we attribute collective responsibility either to Muslims or to Christians for despicable deeds done in the name of the respective religion. He is also pointing out instances of generous and praiseworthy deeds done in the name of religions.

Although he does make a convincing case against this collective blame-game, he does allow the reader to infer that some forms of islamic culture do, indeed, call for women to be elevated to second-class status, leading them out of elementary education and, in many instances, even subjecting them to circumcision; not to mention fatwās issued against those who are deemed to have blasphemed against the Prophet. One could, indeed, note that some forms of Islam are in direct contravention to the very core of our western values, including some fundamental human rights. This discussion is ever more relevant to our societies, where many people of Muslim faith form their own communities and might, indeed, practice some of their worst breaches of human rights within the borders of our country. If we wish to protect the values that we have elected to codify into law and into human rights, it is obvious that we have to criticize such practices.

However, any such criticism might be out of bounds, if political correctness has its way in Greece. It is already a crime to express ideas that might potentially incite hatred towards a group of people based on their ethnicity, their ancestry, their religion. This law is, actually, in compliance with international conventions, which Greece has signed and ratified, allegedly for combatting discrimination in all its forms. What's more, similar legislation in other European countries has been held, directly or indirectly, to be consistent with the freedom of expression provisions of the European Treaty for the Protection of Human Rights and Fundamental Freedoms. Unfortunately, nothing like the First Amendment to the U.S. Constitution can guarantee actual free speech for us Europeans. 

It seems that political correctness is about to stifle it even more, as new legislation is currently being prepared, that will be even more protective of the alleged collective rights of religious or ethnic groups. That the individual rights of members of those groups can best be protected by the flow of free speech seems almost irrelevant; and that free speech, particularly that which might be repugnant or offensive to a majority at first, is what makes the exchange of ideas, necessary for a democracy to function, possible.

Reading Kristof's article once more, I believe that a Greek Prosecutor could make, even under the current statute, a case against him for potentially inciting hatred based on religion (after all, he did mention instances of people following the perceived tenets of their religion and violating the human rights of others). I hope that my linking to it will not be considered a felony as well.

Σάββατο, 18 Σεπτεμβρίου 2010

Oblivious to the Outside World

Bob Herbert, a columnist for the New York Times, wrote that he was oblivious to the terrible storm (or tornado) that hit Brooklyn, Queens and Staten Island a few days ago - he was in his Upper West Side apartment and only noticed some extra rain and thunder; and he drew an analogy of his own obliviousness to that of the government and, mostly, the Republicans, to the plights that many Americans face today. He accused the government of doing nothing for ordinary Americans and the Republicans for caring more about the rich people than the poor. He implied that an outpour of government money (which would come as a result of heavier taxation) would lessen the burdens faced by many a poor and, ever increasingly, a middle-income family. 

If anything, it seems that Herbert himself is oblivious to how the economy works and how sound economic decisions are made. He seems to think that a bunch of Department Secretaries can sit around a table and decide how to best order the economy to get back on track or where to pour money for that purpose. And, perhaps, governmental handouts may offer a temporary relief for many people who are under economic duress. However, this relief is artificial; and, if extended indefinitely, it might lead to a culture of dependency, so prevalent in the '70s, the '80s and the early '90s (Bill Clinton deserves some credit for reversing the welfare culture he inherited). And, as this blog will not tire of reminding, it borders on the criminal to give people false hopes. In the medium term only businesses that correspond to actual market demand are sustainable. This means that if a person's or a family's income is sustained mainly by welfare payments or by government-created jobs, there is a very high probability that, after some time, these sources of income will not be available any more - how long can a Center for the Research of Chimpanzee Mating Habits last? Then, the problem will be even more acute, because, in the meanwhile, the government's intervention will have kept private investment out of the market and the jobs available will be even less. By higher taxation the government will provide people with a counter-motive to invest - and by spending its own money in sectors of the economy, where private investment plays a significant role, many investors will face, in effect, unfair competition from the government. If, on the other hand, burdens to investment are removed and taxes are lowered, it is only a matter of time, before potential investors start creating new businesses and jobs along with them.

Cycles of boom and bust are something every economy can expect; one can debate the wisdom of the government ameliorating the hard consequences faced by the less well-off during the bust cycles; but that should not become an excuse for the government to take over too large a sector of the economy, as Democrats and Bob Herbert seem to propose, because that will lead to the private sector moving out. No shortcuts to Utopia are available, as Herbert would wish - and the answer is to basically let the market fix itself.

Παρασκευή, 17 Σεπτεμβρίου 2010

Why You'd Be a Fool to Invest in Greece

This letter is a warning to anyone who might even remotely consider the possibility of investing in Greece. Its actual intent is, of course, not to merely lambast to government for the things that are so wrong here, or to let everyone know how bad a country we are, but rather to start a discussion on the priorities the government should set in addressing these problems and on some potential solutions to them. So, here goes:

Dear Investor,

our Prime Minister is declaring that our country is going to enter in a glorious path of growth (sometimes qualified as "green growth") under his administration. So you might be entertaining the idea that you should be a part of this great growth and flourish yourself. Not so fast. As things stand today, you'd really be a fool to invest in Greece. Here are some of the reasons:

Red tape: lots of red tape. Permits, licenses, regulations, the omnipresent Archaeological Service, all these can take up at least 5-8 years of your time before you even started the investment. And, of course, you'll have a multitude of bureaucratic layers facing you (or springing out of nowhere) every step of the way.
Corruption: abiding by the regulations? This will probably be only for the bureaucrat involved to judge. You might have to do him some favors - monetary or others. You might get to see your competition solve their own problems miraculously and be tempted to imitate them.
Litigation: do you think you have been wronged by the government? Any dispute will take at least 8 years to resolve. In the meanwhile, you will be in limbo.
Litigation (2): concerned or "concerned" citizens will probably try to annul some or all of your permits, most likely on environmental grounds. The chances are that, even after you have proceeded with the investment, with the government's blessing, no less, the Council of State (the Supreme Administrative Court) will rule that the laws, in accordance to which your permits were granted, are harmful to the environment - so that everything you have spent so far will have been for nothing.
Taxes: be prepared to be taxed every step of the way. And, in the unlikely event that you turn out a profit, expect the government to impose an extraordinary taxation on profits.
State monopolies: energy, oil refineries, etc. - they are, for the most part, government monopolies. Do not be surprised if, one day, the prices charged for these services suddenly spike.
Labor costs: be prepared to spend for every employee you have at least 60% above their salary for employer's contributions to the Social Security System. Plus, it would be virtually impossible to readjust salaries, in the event of a downturn of your business.
Labor relations: you can hire, but you cannot fire. Union leaders cannot be fired. If you fire someone else, they may claim abuse of right and have the termination voided by a Court (two to three years after the dismissal); you will have to pay back salaries for the meantime.
Protective overregulation of several sectors of the economy: transfers, by ship or by road, for example. Most probably you will not even be able to obtain a permit in the first place.
No public order: it is very possible that a militant union might illegally block your factory or your yard or enter into your stores. Don't count on the Police to help - don't count on the Courts for any compensation.

Still want to invest? If so, I pity the fool.

Πέμπτη, 16 Σεπτεμβρίου 2010

Labeling the Tea Party

Following the latest results of Republican primary elections for various state-wide offices in the United States, where many hitherto unknowns, supported by the "Tea Party", upset established candidates, favored by the Republican Party's machine, another analysis of the "Tea Party's" connection to the Republican Party emerged. I am putting "Tea Party" in inverted commas, because of the fallacy that is being reported (mostly by liberal media), that the Tea Party is a coherent organization with a steady structure, elected officers, etc.; and that is the singular most important misunderstanding about it.

There is no one "Tea Party", in the sense that a Democratic or a Republican party exist. There are many, very loosely connected, grass-roots movements in various States and localities. These movements center around the main idea that the government is spending too much money and running huge deficits unwisely, granting favors to undeserving parties (the word "party", again!). One can understand that they consider the federal government to be oversized and wish to cut it down. They are against government subsidies and entitlements and they retain an individualistic streak: they believe that, by and large, each individual should reap the benefits of their own decisions and be held responsible for their own failures. They are seeing the dangers inherent in governmental intervention, they have been witnessing pork spending for many years and are disillusioned even with Republican administrations, to the extent that they led to a horrendous increase of government spending.

Liberal newspapers and columnists dismiss the notion that there may be people with that line of thought who are not millionaires - how, they ask, is it that middle-class people (as most of those present at Tea Party rallies seem to be) are acting or voting against their own self-interest? They must be either loonies (a "fringe" as they like to point out) or bought out by big corporations, who are sponsoring them. That the Tea Partiers' self-interest leads them to different conclusions than the ones liberal pundits would consider proper seems unfathomable to them. From reading what liberals have been writing all these years I have come to believe that they are genuinely at a loss on how a grass-roots movement such as the Tea Party could have developed and that their conspiracy theories are not carved out as part of some malicious scheme to discredit the Tea Partiers, but reflect the liberals' surprise as to the very existence of the movement. They cannot seem to grasp that there are many people out there, who do not believe in the benevolence of the government - they can only think of the "Tea Party" as one large, organized entity, founded by the super-rich who have every interest to keep tax rates low, in order to avoid their "patriotic" duty to pay taxes. And, since in liberals' minds it is an entity, the "Tea Party" must bear the responsibility even   for allegedly hate-speech coming out of its local events; I guess they expect the central Tea Party organization to expel the members, who are out of line. But this is the issue: Tea Party events are spontaneous, at least initially, affairs, which have led to the formation of loose organizations at a local level. These organizations may assist several primary candidates, but I have yet to see an official "endorsement" announcement by a central Tea Party authority. And, while it is not at all certain that one would agree with everything promulgated at Tea Party conventions (or the too-frequent presence of Sarah Palin or Newt Gingrich in many of them), their very existence is a very healthy sign for American democracy.

Τετάρτη, 15 Σεπτεμβρίου 2010

A Movement to Avoid Double Taxation

Check this blog out! It is part of a wider effort to reconsider various forms of taxation. I have not read all of it yet (I want to read all the research cited), so I am not prepared to endorse it just yet (I think it is just a matter of time). But I hope it will help change the discussion on taxation.

Liberals act as if taxation is a normal situation - as if part of any individual's or corporation's earnings should ipso facto belong to the government. They are talking of "tax cuts" as if they are a deviation from the norm. Most of the time, when people hear of "tax", they think of income tax - but, then, there are many more taxes, which are imposed on transactions or on inheritance. These taxes serve supposedly egalitarian purposes (e.g. inheritance tax) or are a form of the government wanting to impose a certain behavior (e.g. taxes on alcohol or tobacco) or are merely another way for the government to increase its revenues - but, whatever their particular form, they drain resources out of the market and put them into the hands of the bureaucrats. Moreover, they end up taxing the same money twice (in many combinations: e.g. money that has been taxed as revenue is also taxed when it is inherited).

This blog's position, stated time and again, is that money is best spent by those who earn it. Moreover, it supports a tax system based on a simplified sales tax, rather than a progressive income tax; and, of course, that smaller tax rates will probably lead to bigger revenues (not that I would be very interested in the government having big revenues, but, in a situation like the current one in both Greece and the United States, the governments' debts should be paid).

Τρίτη, 14 Σεπτεμβρίου 2010

When Did Deficit Spending Ever Lead to Actual Growth?

Paul Krugman once again defends an instance of deficit spending with the same excuse: it could have been worse. That's the same excuse used for FDR's policies, which failed to curb unemployment during the Great Depression - this time, it's Japan: almost twenty years of deficit spending have yet to produce any tangible results. But, then, it could have been worse, writes Krugman.

There is a reason deficit spending (which is not the same as a deficit produced solely by cutting taxes), combined with government intervention, does not work. In its extreme, socialism, a price system, as a mechanism for communicating information, does not exist, as Ludwig von Mises famously stated. Underlying this statement is the empirical observation that men (or women) manifest their wishes, needs, and priorities, through voluntary exchange. Centralized bureaucracies cannot substitute this information, much less the individuals' own prioritization of their desires. Stimulus spending, which supposedly covers needs that a market will not recognize, is bogus. Taxation (or borrowing, which will inevitably lead to taxation in the long run) drains the market of its resources and redistributes them against the wishes of the citizenry. This means that any initial appearance of growth cannot last, since the government-mandated products or services prove undesirable, cost-ineffective, and, eventually, unsustainable - and the business that produces these products or provides these services will have to fold, leaving its employees unemployed, its providers unable to recover their money, etc. In the meanwhile, many entitlements may have been established, burdening government finances for years to come. How can, then, sustainable growth come out of a planned (more or less) economy?

A New Wave of Greek Emigration? Not So, Really.

It is amazing how so many articles about Greece published in foreign papers or magazines are so off the mark - and this article in the New York Times is one of them. It purports to describe and explain a new wave of emigration from Greece to Europe or to the United States, which is completely different from the earlier waves of the '60s and the '70s (and earlier, yet, at the turn between the 19th and 20th century): this time it is mostly university-educated young people, rather than peasants or manual laborers, who go after the challenges, and the higher rewards, of mostly white-collar jobs abroad. There are fears of a brain drain in Greece, fears that its most talented and ambitious young people are leaving, never to return.

Indeed, a lot more people than in the past are considering the possibility of working and living abroad, but not so many, as to drastically alter the composition of the working force in Greece. Moreover, the article is completely wrong in presenting the causes of this surge in people's acceptance of the possibility of emigrating: it attributes this surge in the scandals that have plagued Greek political life the past three or four years and the sense that meritocracy is not to be found in Greece; moreover, the lack of private-sector jobs requiring college-level qualifications in Greece, meaning that most jobs are held by over-qualified employees; hence, if one wishes to fully realize one's potential, then emigration seems like the only solution.

These are only small parts of the explanation. An ever increasing number of Greek students has the opportunity, through the Erasmus student-exchange program, to study abroad, albeit for a semester only, prior to earning their university degree. They get to know first-hand how different life abroad is. Moreover, air travel has become relatively inexpensive - it is not unthinkable for a family of modest means to spend a week, or even a fortnight abroad in vacation. These changes are recent and result in many more young Greeks having travelled abroad and gotten to know how it is out there and even established some connections in foreign markets - coupled with Greeks' propensity to learn foreign languages (practically every university graduate speaks English and many speak at least one more foreign language) they would inevitably lead to more Greeks considering the prospect of spending a large part of their lives away from their homeland.

If there is a catalyst that might lead to spike in emigration, which the article does not mention, it is the consequences of the financial crisis: the possibility that the government might default on its debts and not be able to pay the public servants any more (except at a completely reduced rate) and the hiring freeze in the public sector. The article fails to grasp, much less present, the almost mythical status public service has in Greece - not because it is considered an honorable pursuit, but quite the contrary: because public servants, for all practical purposes, cannot be sacked. Getting a government job is a dream, on which more than one generation has been raised. College and graduate studies help, if anything, to increase the qualifications for applying for a government job and to ensure special salary bonuses. Most people think that they have "made it" by having been hired by the central government or by the local administrations or by any of a large number of smaller government bodies or corporations. Since this option has become unavailable, many more people are preparing for the possibility of finding a job abroad.

Needless to mention that these people are wanting in the qualities that would serve them well abroad: confidence, responsibility, ambition, drive to prove oneself. Many of them still live with their parents and feed on the bank accounts, that had bloated during the years, when the government could still borrow and distribute money at will. But these resources are finite - and, after they are drained, many a Weltanschauung might change.

Σάββατο, 11 Σεπτεμβρίου 2010

False Hopes from the New Development Minister

Following the cabinet reshuffle, Michalis Chrysochoidis, hitherto Minister for Citizens' Protection (i.e. Public Order) became the Minister for Regional Development and Competitiveness. He gave a speech [the link is to the speech in Greek] to the representatives of the various local chambers of commerce in Greece, were he claimed that we might yet surprise the international markets and achieve growth faster than anticipated - and I was anxious to see how the administration proposed to achieve that. I was hoping for the Minister to announce measures that would minimize bureaucracy; that would do away with the so-called closed professions, state-imposed oligopolies, that drive prices up; measures that would lead to flexibility in the job market; that would simplify the tax code and lower tax rates. There is a lot of capital in the world searching for investment opportunities - and many Greeks still have a lot of money in the banks. This money could be pumped into the economy and lead to growth and job creation, if only so many barriers were not in place. Another factor that dissuades people from investing is that many businesses are run on borrowed money, they are just a whisker away from bankruptcy; so entrepreneurs cannot trust one another, cannot extend credit, cannot count on being paid on time and having the money at hand to pay their own creditors. Moreover, it is unadvisable to hire, since it is very difficult to lay off employees (and very risky financially, since many of them are reinstated by court orders more than two or three years after their dismissal; and the employer has to pay back salaries) and practically impossible to adjust their working hours to match the company's needs.

What's more, investing in Greece is unrewarding: even if one, under all these circumstances, manages to make a profit (and I am not referring to supposed entrepreneurs who make their money out of government contracts or other shady deals), the state will take close to half (and in some instances more than half) of it away. Moreover, the red tape a potential investor has to go through means that, typically, a major new investment in Greece may take more than three years only to obtain the administrative permits required, at a great cost to the potential investor in planning, counseling, and, often enough, kickbacks.

I was hoping that the new Minister would find away to face these problems. Instead, he began by chiding (unnamed) multi-nationals for breaking the law (he also failed to mention which law) and proceeded to announce how the potential for growth would be realized: in essence, more European Union money, more government-guaranteed loans to small enterprises. Both the previous and the current Minister for Development act as if the only problem our economy faced was cash-flow shortage. Not a word about all these structural problems or on how real investments could be attracted to Greece.

The only way the present government is trying to get foreign capital invested in Greece is by agreements with foreign governments (China, Russia, Qatar, Libya, etc.) for their state-run companies to acquire special privileges when investing in Greece. It is not that Greece could not use large-scale infrastructure works - in fact, there are many possibilities for Greece, which is strategically located as the entrance to Eastern and Central Europe from the Middle East, to become truly a center of commerce and navigation, and there are many infrastructure works to be done (improved airports, ports, roads, large logistics centers, etc.) to that effect. Even better, such works can be self-financed, since they are typically used at a price, which means that their developer can charge for their use (concession contracts). This model has worked very well for the Eleftherios Venizelos Airport, the Attiki Odos motorway, the Rion - Antirrion Bridge. These works attract private investors from all over the world and have, so far, resulted in the works completed ahead of schedule; but, then, this means that the contractors have to do a good job, in order to get their reward, and cannot count on bureaucrats turning the other eye, as happens in the typical public contracts, where it is the state that directly pays the developer. This means that such works cannot be used by any administration as leverage against major contractors, in order to extract either bribes (as has been done on occasion) or other favors, like hiring people close to the ruling party. And, if such works are undertaken under the self-financing system, they will create a lot of healthy new jobs and infuse the market with much-needed capital.

So, I do believe that there exists the opportunity for Greece to make a recovery much faster than anticipated, if only the administration suddenly wakes up and sees the light. But following the Minister's speech, I am left rather pessimistic.

9/11: Personal

I believe in America. I believe in a land of opportunity, a land of promise. I believe in a nation, to which one can belong not only by birth, but also by worth. I believe in the idealism of the Pilgrims who set to build a "city upon a hill". I believe in a people that values individual liberty above everything else. I believe in a value system that equates human dignity with a person's freedom and treasures life, liberty and not least the pursuit of happiness.

This is not to say that I believe in the government of America; that I agree with its domestic or foreign policy choices all the time (all the more so recently) and particularly its interventionism (although it is America's interventionism saved my country from being a province of the Third Reich or an impoverished satellite of Moscow and me from being a hungry serf).

But the terrorists of September 11, 2001 were not after America's government. They were after everything I cherish in America. The terrorists targeted places, where people of various ages, colors, nationalities, religions, mother tongues co-existed and worked together - pursuing their happiness, providing for their families - many of them had left their homes with a kiss and a hug from their loved ones and were anticipating a kiss and a hug when they would go back. All these people were the intended victims of an act which was done in the name of God (Allah) and a distorted version of religion that had produced an awesome civilization in Mesopotamia and the Mediterranean sea, a civilization of science, wisdom, tolerance, and beauty. The proponents of this distorted version claim that God, through His Prophet, demands of them to be intolerant of the values of Western civilization or anything they do not accept as their own, for that matter. They do not see other human beings, they only see infidels and enemies - and they cannot stand the idea that the pursuit of happiness is anything less than a cardinal sin in our culture. This is exactly what the terrorists attacked: the notion that each person may pursue their happiness, rather than bow down to a regime run by  fanatic priests who claim to relay orders from God.

I am not related or acquainted with any of the 3,000 and more victims of the attacks; I cannot begin to imagine the pain of their loved ones. But, with the utmost respect for the grieving families of those murdered that day - the terrorists attacked almost every aspect of our civilization that I treasure. So, for me as well, it became personal.

Παρασκευή, 10 Σεπτεμβρίου 2010

Federalism or How the Same Words Mean Different Things to Different People

I was reading about New Jersey's and Colorado's failures to make it to the final round of the "Race to the Top". Would that be a reality show? Some sort of competition? No, it is in fact the federal government spending money collected from all Americans and allocated only to a select few States. Someone reading the U.S. Constitution and the powers enumerated in Article I, Section 8 would have a hard time finding any powers granted to the federal government, that would allow it to allot federal money among States with its own criteria for education; administering education all over the Nation is not one of the enumerated powers*(and, even if it were, it is highly disputable that such a contest would be a necessary and proper use of federal powers); never mind that the whole nation gets to subsidize the Department of Education's select few preferences.

For us, Europeans, it is difficult to grasp that federalism is a system, in which a central government has only limited powers. This is because, within the context of European integration, no official European government exists, at least not in name. Federalists in Europe are those who seek the transfer of powers from national governments to a supra-national government of a federal European state - since the European Union has not become, at least formally, a federation yet, federalists in Europe are those, who are in favor of an officially Federal European State. Conversely, the United States were founded as a federal country, as opposed to a single entity - and federalists are those who struggle to keep it that way, sensing that a usurpation of powers by the federal government is encroaching on States' rights and taking power away from the people and their more direct control, shifting it away to a central bureaucracy in Washington, D.C.

It is, then, a question of concentration and centralization of power vs. devolution and decentralization of power. This blog is definitely on the side of federalists in the American sense: local issues should remain in the realm of local governments, as close to the people as possible. Accountability for elected officials and direct participation of the citizenry are much easier at the local level. While one cannot overlook the need for some central coordination of fields such as foreign policy and defense, the more powers are taken away (even in a local sense) from the people, the more it is all the more probable that unelected officials or bureaucrats will substitute the people in taking decisions for themselves. In Europe they already do. European bureaucrats are already wielding significant power. A large number of them receives enormous salaries, higher than those of many elected Prime Ministers. And democratic control of the European Union institutions is lacking.

Following the Lisbon Treaty, the Treaty on the Functioning of the European Union enumerates (in Arts. 3 - 6), for the first time, the exclusive competences (powers) of the European Union, the shared ones (i.e. those that belong to the member-states as well) and supporting and complementary fields of competence. Unfortunately, the wording of this enumeration is too broad, i.e. almost anything can fall under social policy or economic, social, and territorial cohesion. Practically, this means that European bureaucrats can claim control on almost every aspect of our lives. Enumerating the competences may be a good first step, but they need to be clarified a lot more and (this blog wishes) very much reduced.

* Keeping in mind that, according to the Tenth Amendment to the U.S. Constitution, powers not expressly delegated to the federal government remain with the States or the people.

Πέμπτη, 9 Σεπτεμβρίου 2010

Cuba Is Changing Its Ways; America Isn't

Jeffrey Goldberg, an Atlantic Monthly correspondent, has a fascinating piece on a recent visit he made to Cuba and his meeting and talks with Fidel Castro, the retired leader of the Cuban Revolution. The erstwhile Cuban leader is seeking to become an elder statesman and is mostly preoccupied with international affairs and the Middle East, in particular; and he seems surprisingly candid in his reflections, which he shares with Goldberg. One such reflection is of particular note: "The Cuban model doesn't even work for us anymore". He is trying to leave some room for his brother, Raul, currently leading the country, to loosen the state's grip on the economy, at least partially. The article points out the irony that today foreign corporations can acquire land in Cuba; but not U.S. corporations, not because of any particular barriers set by the Cuban government, but because the ridiculous U.S. trade embargo is still in place.

The trade embargo, which purported to lead to the fall of the Cuban regime through the deprivation of its citizens, is probably one of the most nonsensical policies the U.S. have followed in years; and, just like stimulus spending, its proponents always claim that if we let it last a little more, it will finally bear fruits (the article I am linking to was written in 1994). The embargo has instilled a sense in the people of Cuba that someone else, i.e. America (and capitalist states, in general), are to blame for their financial mess, rather than socialism. They have thus an enemy to rally against and might even condone persecutions of dissidents, who they see as conspiring with the enemy, and the communist regime gains undeserved support. If only it had been the other way around: if the regime were left with no excuse for its failures; if Cubans could see the affluence of the visitors to the island, Americans or their own relatives who live in the States; and compare it with their own penury. Wouldn't that help to bring a 1989 effect to the Carribean?

Update: Castro now claims that, although the above quote was reported correctly, he was referring to the capitalist system, not socialism.

Τετάρτη, 8 Σεπτεμβρίου 2010

The Country Cannot Afford $700 Billion in Tax Breaks ...

... that benefit "millionaires and billionaires" - so said President Obama, as reported in a New York Times article. This statement somehow implies that the reason America is facing deficits is that the wealthiest among its citizens somehow have it easier than the rest of them; or, that, in the natural state of things, a large chunk of their earnings belongs ipso jure to the government - for how else can one understand that a decision not to tax part of their income in the first place should be considered a tax "break"? Of course, the Bush tax cuts are considered just that. Slashing the top tax rates was, at the time, politically expedient only when labeled a "break" and only because it was not permanent. Remember how the conversation went: making these changes permanent was not called amending the tax code or rewriting it, but making the tax "breaks" permanent.

Anyway, this statement of the President is called "sharply populist" in the story. Bordering on demagoguery would be a more accurate description, since it is pandering to a majority not as wealthy as the "beneficiaries" of the "tax breaks". The statement of the President to the voters reads, in essence, something like this: "You are the majority. Vote for my party this November and we will tax you less and tax the minority more. You deserve to benefit from the $700 million of the minority's money, so vote to get it". Or, more bluntly: "A Democrat-controlled Congress and I are here to see to it that you benefit from other people's earnings, as you deserve, on account of being more than them".

And let us not even get started with the President's "fear vs. hope" rhetoric: "Do not fear, because I am here to tax the rich and give you hope". The President invoked the surpluses of the Clinton years, compared them with the deficits of the Bush administration and went on to attribute the change to President Bush's tax breaks for the wealthy. Of course, the President distorted the picture (never mind that he failed to account how actual growth and prosperity were compatible with surpluses -Clinton years- and not with deficits - Bush years- despite his own position in favor of deficit spending), because he failed to put into the picture the horrendous government expenditures and the protectionist policies of the Bush years. This was, of course, no accident: downsizing the government or doing away with stimulus spending, in order to decrease spending, is out of the question, because it would lose the votes of those who get money to perform unnecessary tasks and it would decrease the government's ability to buy votes with the taxpayers' money, so he will not criticize his predecessor on the increased spending so easily.

I'll just take the opportunity to once again present two of this blog's major mottos, both of which apply in the context of opposing the President's economic policy:
1. Money is better spent by those who earn it. This means that the "natural state" of earnings is to remain in their proprietors' pockets and not go to the government.
2. Giving false hopes is almost criminal: The more the government taxes, the less there will be to tax next time. Therefore, if some form of prosperity is built around government spending, which is in its turn funded by deficits or taxation, such prosperity is of its very nature temporary, a bubble; and, when the time for the bubble to burst comes, people dependent on the government (and I am not referring to welfare recipients, but to people doing government or government-mandated work, which the market would reject as useless) will lose their jobs and have no training for the vocations which a market might require; plus, the government will no longer have the resources to provide these people with any sort of financial relief.

P.S. On a theme this blog has not touched yet, but is of some relevance in the present post, check in this post by Daniel Mitchell of the Cato Institute a chart by the New York Post on what kind of redistribution actually takes place through the stimulus program.

Τρίτη, 7 Σεπτεμβρίου 2010

The Greek Cabinet Reshuffle

An article in the Economist gives a pretty good picture of what has transpired. The Prime Minister (who had pledged to decrease the number of cabinet-level positions before the 2009 elections and actually did do so in his first cabinet) increased the size of his administration and forewent meritocracy in favor of bringing back politicians who are experienced at politicking, but are generally seen as incompetent. The article's author considers that this is done for the Prime Minister to avoid grudges in a period, in which significant structural reforms are to be brought about. That is a very large part of the truth, indeed.

One can notice that Papandreou has actually put competent ministers in two of the cabinet posts that will prove crucial for the reforms: the ministry for Development and ministry of Health. The former will be run by Michail Chrysochoidis, who did a good job at catching a terrorist group and displayed competence in this Summer's fires; his skills will be necessary for the formation of a new, less bureaucracy-ridden investment framework. The Health ministry is assigned to Andreas Loverdos, hitherto the Labor Minister, who managed to pass a bunch of necessary reforms in the fields of labor relations and social security. That the hapless Louka Katseli was moved from Development (where she failed to produce anything of actual significance, other than a new law favoring bank debtors, against advice to the contrary from the European Central Bank) to Labor is a sign that the Prime Minister feels that enough has probably been done by Loverdos already.

The main reason that old-guard politicians were placed on the cabinet is probably that the structural reforms which have to be passed will go against many vested interests, or rather privileges, which have grown under previous socialist administrations. Papandreou hopes that his freshly-appointed ministers will be able to appease public-sector unions (who have the most to lose from the reforms), mainly the most militant ones; to give but an example, the secretary general of the union of the employees at the Public Electricity Corporation went so far, as to threaten that blood will be spilled and the electric current will be shut down, if the administration dares to touch the corporation or the ridiculously high pensions of its employees, which are guaranteed by the government today. Any violent reactions threaten to completely derail the Greek economy, particularly in its current fragile state, and personal relations with the union leaders might play a role in preventing such reactions.

A Case for More Stimulus Spending. Again. Wrong. Again.

Once again, Nobel laureate Paul Krugman, in a New York Times Op-ed, makes the case for more stimulus spending and tries to draw historic analogies with the FDR administration and World War II. His case, in a nutshell:

Premise: 5 years of deficit spending (1933-1938) did not produce growth. Conclusion: 5 years of deficit spending is not enough and can show only few results; the government must borrow and spend even more.

Premise: World War II necessitated a very large amount of borrowing and, following its conclusion, the U.S. economy boomed. Conclusion: deficit spending of an enormous scale leads to prosperity.

That he fails to point out any causal connection between what he wants us to understand as cause and effect should be an initial indication that, perhaps, something is amiss in Krugman's reasoning. If what he proposes is correct and can be generalized, then it would apply equally to other economies - so, why don't we see the course of the economy of another victorious power of the Second World War, which also had to resort to massive borrowing to sustain the war effort: Great Britain.

1939-1945: great deficit spending to fund the war effort
1945-1950: post-war consensus, nationalizations, National Health Service
1954: end of all food rationing
1950s-1960s: growth rate smaller than that of most Western European countries; large debts still looming
1967: devaluation of the pound sterling
1976: $4 billion loan from the International Monetary Fund

This period ends with the election, in 1979, of the Conservatives under Margaret Thatcher, who completely reversed the policies followed up until then and turned the United Kingdom from the sick man of Europe to the strongest European economy. If Krugman's reasoning were correct, Great Britain would not have had to face such financial difficulties; all the more so, since the post-war consensus was very close the economic policies Krugman supports. Instead, it is the very debts Britain inherited from the war that proved to be a constant burden on its development. This means that either there was some other factor disqualifying deficit-spending Britain from growth (which I cannot imagine), or that it was not deficit spending (or, at least, not deficit spending per se) that led to the expansion of the U.S. economy following the war; and that Krugman's reasoning is flawed.

Let me finish by copying a quote by Ludwig von Mises from my friend, and excellent essayist, Tilemachos Chormovitis - according to von Mises, "War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest."

To that, let me add that a disease does not mean good business for a physician, if it is he or she who has it; the destruction of one's home by earthquake does not mean that that person will thrive, even if he or she is in the construction business. This is a hint as to the explanation I will try to offer for America's post-World War II economic boom in a subsequent post.

Δευτέρα, 6 Σεπτεμβρίου 2010

Jobs by the Government - the Joke's on You!

The communist or communist-tilted parties of Greece have proposed that the government can reduce unemployment by hiring more than 100,000 people in the public sector (Greece has a population of 11,000,000); this was dismissed by everyone here, including other left-wing parties and politicians, as a lame joke, a sign that, while many things are wrong, not all hope is lost yet for our Soviet-style economy to achieve a semblance of a functional, market economy. You can imagine, then, how taken aback I was when I found out that this kind of thinking resonates in the U.S.A. by reading this editorial in the New York Times, and particularly the following passage:

"... states and local governments shed 10,000 more employees in August, for a total of 282,000 lost jobs in the past two years. Rather than supporting the economy in time of trouble, states and localities are a drag on growth" (emphasis added).

So the editorial board of the New York Times considers that economic growth is spurred by the hiring of more civil servants: the government provides more "services", which the market has signaled (via the lack of demand) that it deems unnecessary; it has to increase taxation or borrow: that's a plan for economic growth! And suppose that demand is increased, and not just marginally (although I very much doubt that) and some growth appears to emerge - how will it be sustained? By the constant draining of the economy's financial resources through taxation, in order to keep up a useless bureaucracy?

Real, sustainable growth can only come through private enterprise. If this has not become obvious all through the years, I don't know what, if any, lessons we might have learned from economic history. Curbing entrepreneurship through high taxes or by giving out money, supposedly for jobs, but with the society getting nothing back in return, now that's a real drag on growth.

There are two things this blog will never tire of repeating:
a. Money is best spent by those who earn it, who assess their own needs and show their preference to goods and services offered - not by some wise, benevolent, or whatever, government.
b. It is bordering on the criminal to give people false hopes, particularly on something as crucial for their life and well-being as their jobs. Hiring by the government or with government money going to cover needs, that the market itself has rejected, is not sustainable in the long run. Even if the society, at large, were to decide that it would provide some form of welfare/ assistance to the unemployed or to the otherwise less fortunate of its members, as liberals apparently wish, it could not afford to ill-spend its resources on such glimmers of false hope. 

So, even a liberal or left-oriented approach is completely inconsistent with government hirings just for the sake of reducing unemployment: if you want the government to have money to hand out to those in need (something, which this blog does not subscribe to as a matter of principle, but can accept under some circumstances), then save the money.

And if you want increased tax revenues, then do away with all the counter-incentives to investment - high taxes, over-regulation and the rest. Ronald Reagan put the Laffer curve to the test - and, guess what, it worked - individual income tax revenues almost doubled during his Presidency, rising from $ 244 billion in 1980 to $ 446 billion in 1989!

Κυριακή, 5 Σεπτεμβρίου 2010

The Greek Economic Paradox: Austerity and Inflation

Greek inflation has economists worldwide scratching their heads: how can a country, in which public-sector salaries and pensions were cut drastically (almost 20%), and a contraction of 4% is predicted for 2010, have an inflation rate of 5.5%? With money supply that low, how can prices be rising (the paradox becomes even more intriguing, if one considers that Greece shares a currency with 15 other countries, where inflation is much lower - and even fears of a deflation have been expressed - and cannot print its own money)? And, on a political level, the Minister of Finance is criticized for not doing anything to fight inflation (I guess the critics favor the imposition of price controls). Well, really, things are not so strange from the viewpoint of someone living in Greece.

It is true that an initial spike in prices was the result of an increase in the rate of the VAT from 19% first to 21% and, a couple of months later, to 23%, in accordance to the commitments Greece undertook, along with other austerity measures, as a condition for its bail-out by the European Union, the European Central Bank and the International Monetary Fund. Taxes on alcohol, cigarettes and gasollne were also raised sharply (the latter increasing the cost of transport, leading thus to another across-the-board price increase for all products). But, then, again, surely diminished demand would lead to prices falling.

Well, yes and no. For starters, demand did not diminish as fast as one might have predicted: no noticeable shift in the consuming habits of Greeks has occurred, although they mostly refrain from making big buys (like cars or homes). Automobile prices have plummeted. The prices for low-income housing have taken a fall, as well. But, other than that, the prices for most goods and services have risen. This is not hard to explain, given that Greeks have historically had large bank deposits and had supported themselves or acquired goods or services through the informal economy. The deposits, actually, are so large, that even a significant relocation of deposits to banks outside Greece (mostly Switzerland and Cyprus) affecting around 9% of all bank deposits left a total of 216.5 billion euros in the banks. This means two things: first, that there are many consumers who can tap into their (or their parents') savings to keep on the same lifestyle they have had so far; and, second, that prospective sellers (for example, those in construction of residences for the well-to-do) are in no particular rush to sell and can afford to keep their asking prices high, in the hope that some prospective buyer meets them at those prices.

This seeming paradox, then, can be explained. However, the question on what the government could do to curb inflation remains. Unfortunately, the government has been very slow to bring about the structural reforms required for the opening of many sectors of the economy to competition, which would lead to lower prices. There are many strange oligopolies in the Greek economy (the so-called "closed professions"), which the government has undertaken to dismantle. For example, there is only a limited number of licenses for the operation of large vehicles, which undertake road transports. The government has yet to open this sector to open competition. Moreover, inflexible labor laws mean that employers cannot adjust salaries or working hours for their employees, so labor cost remains very high, in relation to the average employee's productivity. Another reason for the very high cost of labor in Greece is that it is saddled with ridiculously high social-security contributions (more than 30% on the salary) - more than half of which do not even go for the payment of pensions, but are administrative costs. There are a lot of things for the government to do, and it is too obvious that removing unnecessary regulation and cutting on its own costs is a vital first step.

Σάββατο, 4 Σεπτεμβρίου 2010

Illegal Immigration: Let's Face It, It Is a Serious Problem

A New York Times Op-ed once again provides the impetus for a discussion on an issue which, strangely enough, is a problem the United States and Greece share - illegal immigration. The op-ed is more focused on the gubernatorial elections in Arizona, but it does highlight the position taken on immigration by the incumbent Governor and deplores what the columnist sees as fear-mongering used to promote a strong policy against illegal immigrants. 

Greece has seen an influx of immigrants over the past two decades, initially from Albania (just out of a strict stalinist regime; Albania shares a lengthy land border with Greece and has a sizable Greek minority of its own), the former Soviet Union, and, as of late, from many Asian and African countries; most illegal immigrants come through Turkey, but many manage to cross the land borders of Greece and its northern neighbors. Following a number of mass legitimization of immigrants (mostly in the late '90s), there exists now a significant number of legal immigrants (many of them on their way to citizenship, after a recent law) alongside the illegal immigrants. Immigrants typically live either in the country, where they perform agrarian labor, or in the poorer neighborhoods of large cities.

The questions in the public discussion of immigration are the same in the States and in Greece: Do immigrants steal jobs from natives? Are they responsible for a rise in crime? Should we enforce more stringent border controls? Should we just kick them out of our country?

Well, you already know that conservatives usually answer "yes" to all these questions, while liberals say "no". Public order carries the day in the conservative camp; compassion and solidarity in the liberal camp. Unfortunately, usually neither side takes the time to seriously tackle these questions and to dispel their apparent simplicity. So, here's my take, based on the Greek experience:

Question 1. Do immigrants steal jobs from natives?
Immigrants, in Greece at least, typically are unskilled workers who, at the beginning at least, do not speak Greek. They can only provide manual labor in labor-intensive sectors of the economy, usually agriculture, construction, and light manufacture. There was shortage of hands in these industries, because Greeks themselves were avoiding them; most unemployed Greeks are secondary- or tertiary-education graduates who find it beneath them to perform manual labor. So, essentially, no competition exists between Greeks and foreigners for jobs. In fact, many proponents of a pay-as-you-go social security system (as is the case in Greece) welcome immigrants and push for their legalization, so that the social security system can benefit from the corresponding contributions, in order to better provide pensions for those already retired. I think conservatives in Greece are wrong on this one and that liberals are right.

Question 2. Do immigrants contribute to a rise in crime?
Definitely so. Illegal immigrants, that is. This is not because they carry "crime" genes in their DNA, but because their illegal entry into Greece (and, I guess, other countries) is facilitated by a criminal organization. This means that their first contacts, when coming to Greece, are the mafiosi who managed to get them here. And, of course, known criminals from abroad can be found only among illegal immigrants; they would be denied entry, if they sought to enter the country through the legal channels. But the single most important factor in their criminal activity is their illegal status. They have to live and work under the radar, for fear of deportation. This means that they work illegally (undeclared and not subject to social security contributions and benefits and, of course, taxation) and that they cannot resort to the state's authorities. Any disputes can only be dealt with extra-judicially, amongst themselves, because if they show up in a police department, they will be arrested and deported. This leads to the formation of gangs of illegal immigrants (often connected to the criminal organizations bringing them to the country in the first place). And, of course, this means that many illegal immigrants are denied their fundamental human rights, mostly women, and are treated as slaves within their own community, not having recourse to any authority to escape their situation. What's more, there is no reassurance that religious extremism is not practiced in these communities. I can't even bear to think that female circumcision might be practiced in the capital city of my own country. So, the conservatives seem to be right on this one, but they have to acknowledge the underlying causes of the surge in crime.

Question 3. Should we enforce more stringent border controls?
Absolutely. This is totally different than deciding on whether to accept immigrants or refugees and on what grounds. The law should always be observed and enforced. Failure to do so only reinforces our country's image as one of lawlessness. This attracts not only persons willing to work for a new beginning in their life (who, by and large, prove beneficial to the societies accepting them), but persons who want to establish criminal enterprises here. The signal such failure sends is that Greece is not serious about enforcing its own laws and that its security forces are lacking. This is not to say that excessive force should be used or that ships carrying immigrants should be sunk or that their lives should be endangered. I think that conservatives are more on the correct side of this one.

Question 4. What should we do with illegal immigrants?
Goodness. This is a very difficult and complicated question (and leads to other questions, e.g. should we allow access of illegal immigrants to public services - schools - hospitals?). I have yet to come up with a definitive answer. Should illegality be rewarded? Absolutely not. But should we close our eyes to people being mistreated, because they are afraid to so much as talk to a police officer? If we legalize everyone who is currently living in Greece illegally, then we will surely provoke an even larger wave of illegal immigration. If, on the other hand, we turn a blind eye to the situation within the immigrant communities, we do not have enough police power to prevent abuses and the rise in crime. And, of course, we cannot ensure that those we deport will not come back, particularly since we are not doing a good job of guarding our borders in the first place.

So, the final question remains open. Probably a mix of legalizing some immigrants and deporting others would be necessary - but, then, how do we choose whom to deport and whom to legalize; and what do we do in between? I guess this is a conversation I'll have to continue in subsequent posts.