Sunday, September 30, 2012

And Our Cities?

The public is presumably aware that virtually all western economies are drowning in sovereign debt -- a problem that grows worse as the clock ticks.  Nothing going on in Europe or the US (count Japan in there too, though they are not thought of as 'western') changes the dynamic of spiraling out-of-control debt and sluggish, if not collapsing, economies.

States within the US have their own problems.  There is no way for California or Illinois to avoid bankruptcy and several other states are right behind them.

But, in all of this, we have forgotten about our cities.  Almost without exception, American cities are headed down the road to bankruptcy.  Their problems are similar to the problems of the states -- public pension and health care promises that have never been properly funded.  We are already seeing policemen and teachers being laid off so that comfortable public employees can retire at twice the national average income or more.  Expect more of that until the the schools and public safety concerns shift the debate.

Eventually, these lopsided obligations will drown city financing.  The cities will look to the states. The states will look to the federal government.   The federal government will look to the Federal Reserve.  The Federal Reserve is busy printing money to bail out our national deficit.  Soon, the Fed will be asked to print far more money to bail out our states and cities.

Why are we in this situation?  Because politicians of both parties have mislead the public about the true cost of the public pension funds and health care programs enacted by state and local government.  At the national level, politicians have consistently lied about the funding status of social security and medicare.  So, where does this end?

The unwillingness to tell the truth about the funding status of the various entitlements that exist at all levels of government paves the road to Greece.  The future can be observed daily on the streets of Athens and Madrid.

Saturday, September 29, 2012

Feeding the Beast -- Who Are The Victims?

Higher education claims a higher and higher percentage of the nation's resources.  No longer the land of the underpaid, it is routine for administrators to make high six figure incomes and many university presidents make well over seven figures.  Sounds like Wall Street, only better.  The work hours typically include six months vacation every year.  Not a bad deal.

But not good enough, apparently, as colleges and universities demand more and more with higher tuitions and higher expenditures from government at all levels.

One of the more insidious parts of this disgraceful situation is the expansion of student loans by the Obama Administration.  The main thrust of this is to increase the tuition levels at all schools to take advantage of this new source of funding.  Knowing that students can borrow, schools have created internal departments that are designed to educate and encourage students to take on debt so that the schools can further boost their own tuition charges.  Keep increasing the availability of student loans and the colleges and universities will continue to escalate tuition.

The results of all of this government largesse is the creation of a huge underclass in America -- young people strangled by student loan debt that they are increasingly unable to pay.  Check out the Wall Street Journal story today on the rising default levels by young people on their student debt.  This problem will soon rival the mortgage crisis.

This is the ultimate squeeze play.  Strangle the economy so that job opportunities for young people disappear and jack up tuition to absurd levels and force students to take on debt that they have no real chance of paying off.  This is the compassion of modern politics.

No one asks:  why are college costs rising faster than any other cost in the economy.  Are colleges doing something that involves increasing costs?  If so, what?  The colleges and universities have very successfully kept this question under wraps while they demand more and more resources to fund an elite group of employees who have huge incomes and net wealth and work less and less.

Not only are our youth saddled with massive debts to cover current recipients of social security and medicare, but now, as if that weren't enough, we are pushing them into massive indebtedness and an economy that provides no way out for them. 

These kind of cruel policies often are cloaked by phrases like: "investing in education" or "investing in the future."  But, what is really going on is a transfer of resources from our young people to elite, protected, typically tenured people who see themselves as entitled to massive income, benefits, and an ever-declining work load.

Friday, September 28, 2012

Assume That We Have A Can Opener

There is an old joke about the doctor, lawyer and the economist, all three, stranded on a desert island with nothing to eat.  They stumble upon a tin can of vegetables.  How do you open the tin can?  The doctor proposes to give it aspirin, the lawyer says 'file a brief.'  The economist?  The economist says: "assume that we have a can opener."

Economists have a well deserved reputation for assuming away difficulties.  Simon Johnson's article in today's NY Times is a good example.  Johnson correctly points to the US National debt as very serious problem that needs a solution and needs it now.  His article suggests that there is an easy solution.  In Johnson's own words:

"And American politicians could find other ways to restore federal government revenue to where it was in the late 1990s while also bringing health care spending under control."

Sure, just bring me that can opener.  How does one "bring health care under control."  Johnson doesn't tell us how to do that and that, sports fans, is the biggest single problem that the US faces in getting its national debt under control.  Maybe, Obamacare's unelected panel that determines who lives and who dies in the brave new world of the future can accomplish that task.  A simple law providing euthanasia for all citizens over 50 years of age might be the Obama secret plan to reign in health care.  Why knows?  Simon doesn't tell us.

As for restoring federal government revenue to where it was in the late 1990s, one assumes that a tech bubble, similar to that of the late 1990s, will be available to fuel the tax revenues necessary to temporarily produce that result. How does one do that with no economic growth?  Ah, the Obama dilemma.  Killing off the economy, which the Obama Administration has managed to do so well, conflicts with their other agenda -- maximizing tax revenues.  You can't have it both ways.

The Johnson article gives a window into the answer to the question:  why aren't economists facing the real economic issues of our time -- out of control national debt and economies mired in stagnation.  Why aren't economists interested in these issues?  So, what are they interested in? 

Read Uwe Reinhardt's absurd article in today's NY Times and you will see what topics occupy the time of our federally-subsized economists these days.  Redistribution.  Ah, there's a real topic of interest.  How do we slice up the declining pie?  Guess what he concludes? Give more money to higher education!  That sounds like an objective solution.  I wonder why a Princeton academic thinks that the number one issue of our times is how to increase the salaries of Ivy League professors.  Does this guy have a conflict of interest?

Economists are no different than other people.  They are self-seeking folks trying to line their own pocket.  Since their employer is the government, they speak up for expanding the interests of their employer, which translates into the interests of themselves.

So, don't expect economists to shed any serious light on the major economic issues of our times.  They aren't interested.

Wednesday, September 26, 2012

Civil Disorder and Chaos on the Rise in Greece and Spain

Riots are now turning violent in Greece and Spain.  Police surrounding the parliament building in Madrid last night were seen on videos beating demonstrators.  The Merkel-Sarcozy-Hollande-Geithner-Bernanke-Draghi policy is bearing fruit.  Civil society is breaking down in Greece and Spain.  The NY Times has a lengthy, front-page story yesterday about formerly middle class Spaniards foraging for food from garbage trucks.  That this is becoming a common scene in Spain was the thrust of the article.

This will only get worse.  Unemployment and starvation is the ultimate outcome of the modern welfare state and it is now on display in the Eurozone with more yet to come.  Spain is still dithering about whether to alter 'early retirements' under their social security schemes.  This would be funny, if it weren't tragic.  Who is going to fund those who are already retired?  One might ask a similar question in Greece.  Are American and German taxpayers going to provide the money?  Obama suggests that this is a lively possibility.  Long run, even the US and Germany do not have the resources to bail out these countries.  The US and Germany suffer from the same disease that has lead to the current turmoil in Spain and Greece.  They are just at a different place on the timeline.  The ultimate destination is the same.

You can't solve debt problems by increasing the amount of the debt.  That obvious truism is responsible for the current debacle, which will only get worse.

Monday, September 24, 2012

Merkel is a Failed Leader

Angela Merkel says the right things and does the wrong things.  As a conservative leader, she and her conservative sidekick Nicolas Sarcozy, led the Eurozone down the bailout track while loudly proclaiming that responsibility for foolish behavior would not be rewarded.  But rewards were soon forthcoming from Merkel and Sarcozy.  Merkel still strikes the pose of frugal leader while steamrolling Germany toward the largest bailout in world history.

Merkel talks about saving the Euro.  The issues in the Eurozone have little or nothing to do with saving the Euro.  The Euro is doing fine.  What is not doing fine is the fiscal situation of the Euro member states.  They are all going bankrupt, including Germany.  What currency is in place is of little importance if you cannot pay your debts and the Eurozone cannot pay their debts.  What they have is a temporary reprieve and a lot of conversation.  The endgame in this is all too obvious.  But, it won't include Chancellor Merkel.  She will be long gone by the time we get to the endgame.  She will join her pal Sarcozy in the losers bracket.

Meanwhile, the left takes the podium -- Francois Hollande of France.  His absurd policies will simply hasten the economic collapse of France.  Somehow, all of the Eurozone seems obsessed with the idea that rhetoric is a substitute for policy.  The conversation continues as the Eurozone slides into economic collapse.  What once was a shining example of the fruits of capitalism has now become a monument to socialism and poor policy.  All socialist experiments end in the same economic junk pile.

The cconomic end to all of this is obvious -- the collapse of the economies in the Eurozone.  What will not happen is that Germany will emerge a strong economy while Greek collapses.  Germany will be swept along with Greece.  Germany's economic policies differ only in degree from the policies that are currently driving Greece into the economic ditch -- there is no difference in kind.

The more interesting question is:  will democracy survive in the Eurozone?  Based upon history, it is unlikely that democracy will survive.  Demagogues thrive when democracy fails to deliver economic prosperity.  Polls show that extremist political groups are benefitting from the chaos in the Eurozone.  The first country to fall to the extremists will be Greece, but they won't be the last.  The ultimate end to the welfare state is economic collapse and political chaos.  We are at the earliest stages of that process.

Merkel and Sarcozy won election in their respective countries running as conservatives.  Their policies are a tribute to the fact that conservatives are just as likely to support the welfare state as liberals.  While there may be minor and insignificant differences between Merkel and Sarcozy and their liberal opponents, their policies are essentially the same -- extend and pretend.  Misleading the public about the cost of the welfare state is common practice for all the major political parties in the western world, including the US.

Sunday, September 23, 2012

The Joy of Giving Other People's Money Away

We've all heard about the joy of giving, but what if the money that we are giving away is someone else's money?  Wow! What a thrill.  That's the attitude of the Charlottesville City Council as they parcel out taxpayer money with little or no thought.  After all, they reason, these are only small amounts of money.  There is, of course, no concern by the City Council that the money that they are giving away so blithely is not their money, but taxpayer money.  Here is the URL for this amazing story:

The attitude expressed by City Council members in Charlottesville is typical of liberal attitudes everywhere towards taxpayer money.  Dole it out to your friends with reckless abandon.  Just multiply all the numbers in the article by 10 million and you have the US government, the government of California, Illinois, Greece, Spain, Italy, etc.  It is easy to be charitable and caring when you are spending other people's money.  It is far less easy to be charitable when spending your own.  That is why Romney's tax return shows that he gives four times as much of his money to charity as do the Obamas.  Charity to Obama is spending the hard earned dollars of people who don't agree with him.  Romney's idea of charity is to give his own money, not the money of others.

Herein is the great divide in America:  Does charity begin at home or is charity the looting of your neighbor's pocket to give money to those that you favor?

Saturday, September 22, 2012

The Media and the Issues

You would think that the US economy was booming and all was right in the world if you are a regular listener to the major TV and radio outlets in America.  Recently, I was in Eastern Europe and was pleasantly surprised to read in foreign newspapers the issues that Americans face in the upcoming election -- the economy, foreign policy, the deficit, etc.  Back home, these issues don't seem to be of any interest to the media.  Such issues are of interest to voters, but they rarely see them discussed on NBC, ABC, public TV and the like.

The big issues, according to US media, is whether or not a presidential candidate is willing to release their tax returns from decades ago or sidebar comments the candidates may have made before they were candidates that have absolutely nothing to do with any of the important issues.  The media is in the "gotcha" business.  It isn't just that they favor one party or another, it is more that the media doesn't really seem interested in mundane things like unemployment, the deficit, burning embassies, dying ambassadors, war between Isreal and Iran.  Instead it is more important, according to the media stars to worry about cosmetic issues.  "Does Romney connect with the average guy?"  "Is Obama no longer cool?"  These kinds of nonsensical discussions dominate the news coverage of the American presidential election.

No wonder the public knows so little about the issues of our day.  Anyone who spends their time watching the major news media or 'public television' or listening to 'public radio' is likely to become an expert on what dress size Michele Obama wears but is likely to have no idea what goes on in the Middle East or how the American economy is faring, since the latter topics are rarely if ever discussed in the major media.  There are, fortunately, media outlets that do address the major issues of the day.  The "City Journal," for example, published by the Manhattan Institute is a serious publication that addresses issues faced by the American citizenry in a thoughtful, serious way.  They are not the only good source of information.  One issue of City Journal will provide the thoughtful American with more real news and information than a decade of the NY Times and Washington Post.

An uninformed electorate is likely to make some serious mistakes.  That seems to be what the media is counting on.

Friday, September 21, 2012


Jerry Brown's $ 28 billionbudget gap in California turns out to be a mirage.  Brown considered the $ 28 billion number a crisis for California, when he strode into the Governor's mansion.  A blue ribbon committee founded by Democrat and Obama advisor Paul Volcker has studied the budget gap in California and come up with a different number, or should I say, a range.  The outcome of that study is discussed in today's New York Times in an article by Mary Williams Walsh.  The actual California budget gap, according to the Volcker committee is somewhere between $ 167 billion and $ 335 billion.  Ooops!

Even this is a dramatic understatement of California's plight since the combined unfunded liability of CALPERS, CALSTERS, and the nine largest county pension funds in California is well in excess of $ 1 Trillion, which is a multiple of the assumption being used by California's state government in assessing the budget gap.  So, the committee is trying to be California-friendly.  But, heck.  A trillion here, a trillion there.  After a while, you're talking about real money.

Meanwhile, Brown and the California legislature have tacked on many new job-killing legislative initiatives that keep California in the economic doldrums.  California is currently in a race with New York to see who can lose the most wealthy citizens, fleeing exhorbitant tax rates.

So, what is the future for California?  How's Greece doing these days?

Thursday, September 20, 2012

BofA Shrinks; Goldman Sheds New Hires

Wherever you look, the American financial service sector is retreating.  The decline of US pre-eminence in world finance began with the regulatory overkill of Sarbanes-Oxley legislation in 2002, but the real death blow was the Dodd-Frank Act of 2009.  The future will be in Hong Kong, Shanghai, Singapore.  London may survive this, but that remains to be seen, but New York is definitely fading.  Basically, American financial strength is being legislated into weakness.

You wonder why?  Have stocks done poorly.  On April 24th,1995, a scant 17 years ago, the Dow Jones Industrial Average closed at 4,303.  Yesterday, the DJIA closed at 13,577, about 3 1/2 times as high as the 1995 level.  (This result includes the 2008 financial crash).  Is that bad?  Has the average investor been screwed?  Is this why pension funds are in trouble?  The market hasn't delivered enough?  How much is enough?

Why this rush to destroy American financial pre-eminence?   You wonder how folks will like the slow growth and tepid stock returns of the future thanks to the regulatory overkill that is strangling our financial sector.

Chicago Teachers Pension Plan is Broke

Like almost every public pension plan in America, the Chicago teachers' public pension plan is not going to survive.  Mary Williams Walsh's article in today's New York Times lays out the numbers.  With just over $ 10 billion in assets the fund is paying out more than $ 1 billion more than they take in every year.  The end is clear.

Why is this the case?  Because it is very easy for politicians to make promises of things that they will do in the future, while providing benefits right now.  Social Security operates on this premise.  Give the benefits now, pay for them later.  But, of course, they never pay later.  That part is simply kicked down the road.

We have already witnessed pension funds cutting the benefit payments for folks that have already retired.  We are about to see a wave of such actions.  The Chicago teachers fund is in much better shape than the Illinois state employee fund.  So, guess where that one is headed.

The crime is that politicians pretend that nothing is wrong.  They castigate those, like Paul Ryan, who propose ways of providing funding for programs that everyone already knows will go broke if nothing is done.  So, the programs go broke. 

This means the future for the elderly of the future is bleak.  Medicare and social security will not be there for people who, today, are in their middle working years.  They will have almost nothing when they reach retirement age.  The situation is worse than that for public employees in many states where even folks in their fifties will have no retirement income in another decade.

Those who are currently retired are at risk as well, but their situation is not nearly so dire as those in the generation to follow.

Instead of pretending that these systems will be available in the future, the public should be made aware now that their retirement dreams are dreams that will not be fulfilled.  Then these folks can begin saving for their old age.  Pretending that what is clearly not going to be there is going to be there is a cruel policy that will produce untold misery for the future elderly when they realize, too late, that what was promised is not going to be delivered.

Wednesday, September 19, 2012

A Glimpse into the Future

Liz Alderman's article in the New York Times today, "Euro or No, Economics of Everyday Greek Life is Eroding" provides a glimpse into the future of the western economies.  Economic and civil order has broken down in Greece.  The rising popularity of the neo-nazi party (now at 18 percent of the electorate) is gathering in the fruits of the collapse of the Greek welfare state.  In time, democratic government will collapse in Greece to be replaced by one of the extremes.  The so-called centrist governments cannot deliver and will not survive.

Greeks expect the promises of past governments to be honored.  That is an expectation that has no hope of reality.  Their frustrations are spilling over into everyday economic and political life.  The beginnings of a similar breakdown are evident in Spain, Portugal and Italy.  No government can survive by imposing a program of austerity.  Their citizenry still believes the lies that they have been told for generations.  It is too late to convince them that all of these benefits they have come to expect cannot be afforded.

Gradually, this collapse will extend across the plains of Europe and eventually engulf even France and Germany.   The UK, not a member of the Eurozone, is not immune.  Their fiscal path is a road to disaster as well.  As for the US, the opening bell of the slide to disaster will be heard soon from California and Illinois.

The truth is that no society can survive as an entitlement society except at virtual poverty levels -- the old Soviet Union, modern day Cuba.  The prosperity in the US and Europe that was built on free markets, self reliance, and limited government is being sabatogued by a growing state control of all aspects of economic life and a sense of entitlement by the bulk of their populations.  This is the path to Greece.

Printing dollars and printing Euros -- the current policy of the Fed and ECB -- will only provide a brief breathing space as the western economies weaken.  Fortunately, Asia is not marching down this path and the future is bright for Asia.  But the lights are dimming in the West.  Alderman's article today in the NY Times is one of many recent articles chronicling the slow slide of Greece into anarchy.

Tuesday, September 18, 2012

Why you borrow matters

Borrowing for investment may be a good idea.  Debt is not a bad thing.  It can be a good thing.  It depends upon what you are borrowing for.

Borrowing to finance a new business or to expand an old one is a good idea.  Borrowing for investment purposes is generally a good idea.

Borrowing is generally a bad idea if you simply borrow to finance consumption that you cannot otherwise afford.  Eventually 'consumption borrowing' will lead to disaster since nothing is taking place that can pay off the debt that is being created.  This is the type of borrowing that is taking place in western economies today.

As much as politicians talk about 'investing in our future,' what they invariably mean in practice is financing consumption for a favored part of the electorate.  Rarely if ever is modern government spending intended to finance investment of any kind.  Paying more money to your favorite public employee, including teachers, is not a form of investment -- it is a form of consumption for your favorite public employee unless they choose to save some part of it.  Transferring wealth from rich to poor and supplementing that with more debt is simply an expansion of debt and consumption.

Borrowing to consume at the expense of private and public investment activity is a ticket to disaster.  We see that disaster unfolding in the western economies today.  In short order, the current euphoria in the US and in Europe over the virtues of printing money as a substitute for capitalism will turn to despair as their economies are crushed with the weight of too much debt. and too little economic activity.

You can only live off false promises for a limited period of time.  Sooner or later, crushing the private economy, expanding the government sector, letting sovereign debt increase without limit only results in disaster.

Friday, September 14, 2012

More Bad Policy from Bernanke

Ben Bernanke is printing money once more.  Not content with the current historic expansion in the money supply, Bernanke is headed off to new records.  Somehow pumping more liquidity in the system is going to offset the negatives that face employers.  How?

If paying an employee $ 35,000 per year means a cost of $ 70,000 per year because of health care mandates, employee payroll costs and litigation risks, how does additional liquidity matter?  With Dodd-Frank and the regulators forcing the banks out of the lending business for middle Americans, what difference does additional liquidity and lower mortgage rates make?  What is Bernanke thinking?

Bernanke's policies are not without cost, though they seem clearly without benefit.  The cost will come when inflation rears its ugly head.  Bernanke assumes that can't happen unless the economy is near full employment.  He's wrong.  We can have inflation and unemployment and they can both grow at the same time.  The Democrats were able to accomplish this in the late 1970s which was a prelude to the Age of Reagan.

Perhaps it is time to rethink whether or not we need a Fed.  America's fastest growth in GDP was the period from 1865 to 1913.  America had no central bank during that period.  No Central Bank may be a better solution than what Bernanke is providing.

Friday, September 7, 2012

Winners and Losers

It is not as if some folks aren't winning.  Politicians are winning.  They are well paid, have juicy retirement benefits and if, perchance, they lose an election, there are more than enough PACs around who will hire them as consultants to live out life in luxury.  Look at Newt Gingrich for example.  He made himself millions of dollars after 'retiring' from public office by consulting, not only for PACs, but for beta noires like FNMA.

Who else is winning?  Academics with tenure are winning.  They have protected jobs with high income and rich benefits.  Public employees and teachers, who haven't lost their jobs.  They are winning.  Upper income folks collecting social security and medicare.  They are winning.  Middle income Americans on food stamps -- they are winning.  Rich folks.  They are winning.  They know that the coming tax increases won't effect them, because they don't have to show income.  Warren Buffett, if he wishes, can reduce his taxable income to zero and pay no taxes.  So, what does he care what the tax rates are?  Raise them, he says.  Why not?  He won't be paying them.

So there are winners!  That helps explain how in an economy with no job creation, the current Administration still commands the support of half of the electorate.  The losers are ordinary citizens -- mostly middle and lower income -- who hope to provide education and a future for their children.  They and future generations are the losers.  Opportunities for ordinary citizens without political connections or who don't fall into a politically connected or protected class are disappearing in the Obama USA.  The losers are the poor who are denied a leg-up in the economy by minimum wage laws, litigation threats built into law and employer mandates on employees.  The war on poor people engaged in by the Obama Administration has born fruit.  Poor and minorities in the US are in the worst economic condition in three decades.

So while the rich, the movie stars, the public employees, the tenure-protected world, and the politicians comfortably enjoy the fruits of the Obama economy, everyone else better find some way to survive.  It certainly won't happen in the job market as long as the Obama folks are in office.

Thursday, September 6, 2012

When The Cheering Stops

The ECB's bond buying program is essentially equivalent to printing Euros and buying bonds of countries whose finances are failing.  This shifts the burden of debt toward France and Germany, all but engulfing them into the same cauldron as Greece, Spain, Italy, Portugal and Ireland.  That all of these countries continue to run large fiscal deficits seems not to concern anyone.  Nothing has changed in regard to the dramatic debt buildup that continues to run apace throughout the Eurozone.

Now to add to their other woes, all of the Eurozone countries are now headed into recession.  Germany had been an exception, but no longer.   Greece and Spain live with daily street riots and unemployment in excess of 25 percent.  It is hard not to see France and Germany headed that way.

Monetary expansion will not solve Europe's problems.  It actually make them worse, because it weakens each country's resolve to get their fiscal house in order.  Rising yields on sovereign debt forces countries to face facts.  An explosion of printed Euros does the opposite.  Now Greece and Spain will think there is no reason to reform their economies.  After all, Germany has ridden to the rescue.

Don't laugh America.  This is coming to your shores sooner than you think.   California and Illinois will soon be pressing Washington for a similar bailout of their fiscal catastrophes.  This would mean that Texas and Virginia, states with much better fiscal discipline, would essentially begin underwriting the nonsense that goes on in California and Illinois.

No one seems to want to face reality.  The welfare state is failing throughout the Eurozone and in the US.  There simply are not enough resources, no matter who you tax or what other spending you cut, to fund the grand plans of the welfare state.  The jig is up.  What the ECB is doing is burying their head in the sand, hoping and praying that the problem will go away.  It won't.

Wednesday, September 5, 2012

The ECB Buys Bonds

Today, Mario Draghi is scheduled to announce that the ECB will buy the bonds of Greece, Portugal and Ireland (this gives holders of Spanish and Italian bonds the near certainty that they will be next if line if only their countries request it).  Somehow this cheers financial markets.  You have to wonder why.  A similar pattern occurs when bad economic news hits the US economy.  The market pundits then rush to the microphones to announce gleefully that the Fed will act and all will be well.  Is all well?

The idea that the ECB purchases of bonds will have any impact on the collapsing economies in the Eurozone and their spiraling debt is ridiculous.  The welfare state is no longer affordable in Europe or the US and that reality cannot be offset by temporary gyrations of the central banks.  It is just a question of numbers.  Taxing rich folks won't help either.  Eliminating defense spending in the US and everywhere in the world won't matter either.  The only thing that matters is reigning in the entitlements.  Absent that, the debt crisis and economic crisis will simply get worse.

There are micro-economic things that could help: eliminate minimum wages, curtail employer mandates, roll back employee litigation rights.  These things would make employees more attractive to employers and spur hiring.

What is happening in Greece is instructive.  The black market economy is thriving.  Greek workers can get jobs in the black market and they are taking these jobs.  There are no employer mandates, minimum wages, free health care, guaranteed vacations or guaranteed retirements in the black market economy.  Much of this goes on in the US as well, of course.  New Yorkers who have nannys are well aware of how the black market works even in the good old USA.  Perhaps the black market is the only real hope for those struggling to find jobs.  The legal market has too many "protections" for employees that make employees toxic to employers.

But, meanwhile at the aggregate level, countries have run out of funds.  The sleight of hand at the ECB will work only so long as the markets have not really understood what is actually going on.  Then it will cease to work and the reality of "no money" will once again set in.  Both Europe and the US are broke.  Nothing but cutting entitlements will have any impact on their current plight.

Monday, September 3, 2012

Reflections on Eastern Europe

For those wondering....I have been traveling through Eastern Europe for the past three weeks, spending time mostly in countries that emerged from Soviet dominance in 1989-91.  I visited some of these countries before the Soviet breakup and the difference is breathtaking.  Freedom is breathed on every street corner.  Gone are the gray and dismal lines of people shuffling along the streets with their eyes on the pavement.  While there may be issues here and there -- there always are issues when people are free -- there is no question that all of these countries are in a better situation.

Putin is, of course, not happy about this.  Gone is the Soviet empire.  Eliminating discord by imposing totalitarian dictatorships is out of style in this part of the world.  These folks appreciate freedom in a way that the western world cannot appreciate, as the western world gradually gives up the freedoms that took centuries to put in place.

I am now in Prague in the Czech Republic, where the dismantling of the Soviet Empire received its first expression in the "Prague Spring" of 1968 and later in the "Velvet Revolution" of 1989.  The President of the Czech Republic, Vaclav Klaus, is a Ph.d economist and is the most conservative leader of any country in the world.  He is chairing the Mont Pelerin Society meetings here in Prague, which is a varied collection of libertarians and conservatives from all over the world.

This Euro is a hot topic here.  None of the countries that I have visited use the Euro but they are all, but one (the Ukraine), members of the European Union.  There is widespread agreement here that the Eurozone will not survive the current crisis.  The numbers provide no prospect of survival.  It is possible to 'extend and pretend' by having the ECB buy Spanish, Italian and Greek bonds.  But, that strategy only puts off, briefly, the ultimate outcome.  The Eurozone cannot pay its bills.   It's that simple.

It is well known here that the US situation is no better.  Besides the well known entitlement fiasco (a $ 70 trillion problem), individual states in the US (Illinois and California) are careening toward bankruptcy at a fast clip.

The Eurozone and the US have essentially the same problem.  As societies get wealthier they decide that their governments need to do things, more things.  But, since these things cost money, these societies simply borrow it -- on the open market -- pledging the resources of unborn generations.  For a while, this seems to work.  But it doesn't work any more.  There is no set of taxes, spending cuts or anything else that can make it work.  The only mystery is when and how it collapses.

Most of the problems in the western world are bi-partisan in nature.  This isn't a situation of Republican vs Democrat.  Both political parties endorse and have supported the growth in entitlements and the growth in the regulatory and tax environment.  The same is true in Europe.  It seems democracy is ultimately a ticket to big government, improperly financed.

But those countries not in the Eurozone are generally in a much better position.  Countries in Asia are sitting well also.  Many of these countries have not shackled themselves to massive entitlement programs and most of them have high domestic savings rates.  As the western world tries to find its way out of an impossible dilemma, the Asia nations and the non-Euro nations of Europe face a much brighter future, even if the present road is a bit murky.