"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Monday, June 28, 2010

Panem Et Circenses XXI Century

I read the news today “ G20 nations commit to halving budget deficits by 2013” , an headline that resumes the main agreement reached at the last weekend G20 summit. Any observer understands that under the “deficit reduction”
codename lies a whole structure of more budget cuts, less social rights and toughest auterity plans.

Coincidence or not, these days the world seems to be more busy with the World Cup in South Africa . Did anybody in the South hear the above headlines “Austerity for all”???. The level of salaries and bonuses paid and or promised to the national teams and managers indicates that the distance between "Austerity " Canada (G20 meeting) and South Africa is larger than ever. The following table details the annual salary of 32 national team managers that are disputing the World Cup (the data was gathered by the Argentine newspaper OLE) (in USD)

It should be noted that these figures are outflows from public institutions and they do not include the millions of USD destined as salaries and bonuses for the players. It is evident that these salaries are much higher than the average level in their respective countries, in many cases even above the salary of the Head of the State. If you go through the list, you will find that the countries which spend millions on salaries for a few suffer from a complete spectrum of social malaises : Countries with scandalous levels of HIV, other with huge absolute poverty levels, countries that poured billions into a bankrupted finance system, countries with huge unemployment rates and some on the brink of bankruptcy.

And yes, I am aware of the "theory" that the extravagant salaries are not financed from public coffin (i.e. there is no real loss for the country ) but paid indirectly by “sponsors” ,bonuses from FIFA or whatever obscure source ( as Spanish Secretary of Sports claimed). Sorry, but that´s a poor argument: Any NATIONAL football team is a public asset and players, coaches and any professional involved are mere representatives of a nation and as such should be paid a fair salary( let alone the enormous personal publicity they gain for free during such events). And if they refuse to reprsesnt the country, it´s OK , there will always be candidates willing to play football for a decent salary. From that perspective , any extraordinary income belongs to the owner of the asset, the public, and the decision how to make use of these funds is a matter of public choice.

However, the lack of an explicit debate on the issue doesn’t mean that the salaries´ level is not another implicit de facto political decision that sets social priorities in favor of the Football Circus. A reminder from history : During the heydays of Rome, the populace enjoyed the “Bread and Circus” free Combo, a tool used by the governing Elite as a mean to appease social tensions and gain poltical power. From that perspective we are in a worst situation than the average Roman : We are not only asked to pay to enjoy the “national” spectacle (through publicity, PPV …etc) but the modern equivalent of bread (i.e. social rights) is being scarified in the name of a selective austerity. “The Times, they are a changin´”?? Not so sure.

Wednesday, June 23, 2010

Beggar Thy Neighbor OUT, Beggar Thy Roommate IN

“Beggar thy Neighbor” is a term used to describe policy measures aimed to boost the economy of a country at others countries expense . That policy is supposed to improve the competiveness of country through different means , just to mention a few : The formation of economic barriers for foreign competitors, a forced devaluation the currency and so on.

True, such “Win-Loose” strategy can generate some limited economic impact. However, history tells us that things can turn into a ugly story: "A form of this policy, notably the tariff barrier, was attempted at the beginning of the Great Depression with almost no success. A beggar-thy-neighbor policy in the United States caused other countries to follow suit, resulting in a massive decrease in international trade. This made the Depression worse.” Financial Dictionary). Retaliation became the key word in that context.

Was the lesson learnt? Up to a certain point. The calls for protectionist measures heard lately were not ( still) able to bring about a policy change and governments declare their commitment to open trade . But that´s not the whole story: Fearing from the neighbors’ response, countries turned to beggar their own poorer roommates. After all someone should pay for the party ....

The Spanish case will illustrate the last point. Spain is suffering from a combination of deep recession, current account deficit, soaring public deficit and huge unemployment rate (app.20%). Before becoming a full EU member , Spain used to overcome similar episodes by literally beggaring its trade partners, especially devaluating its currency, the Peseta ( and other policy tools as well). It had some limited impact when combined with other policy tools.

Spain membership in the EU brought about the loss of independence of its economic policy. Thus ,as many “experts” claim, the only way open to the country is an “internal devaluation”, or in a less PC parlour , lower salaries. The logic goes like that: Spain should gain competitiveness so the prices of Spanish prices must be lowered. Since such arbitrary reduction cannot be forced, (and companies might ,G-D forbid, lose money), the burden should fall on the regular cannon fodder, the wage earner ( lower salaries = lower cost = lower prices ). Moreover, that theory holds a moral argument : Spanish wages have risen “too much” in the last years, and THAT distortion explains the uncompetitive position of the economy. This position (held by the Nobel Laureate P. Krugman), could sound reasonable…. as long as you don´t analyze the data.

Lets see the data. The following graph shows the relative weight of the salaries in the Spanish economy, in other words how much of what the country goes to the pockets of the wage earners. (until 2009 real 2010 onward Forecast)

Source : Eurostat Data Compensation of Employees percentage of GDP

What is the meaning of the descending line? It means that for each Euro produced by the economy (similar to the price of a product in a private company),the workers received a smaller slice than what they used to receive a few years ago. Even if we accept the “loss of competitiveness” thesis, it is hard to see how it is related to the “growth” of salaries. If Spain suffered from a higher inflation rate than its trade partners, it was probably related to the rising prices and profits of the companies and less to the salaries . Although other European workers suffered from the same problem, in comparison to the European wage earner, the Spanish worker has suffered more .

But governments are not confused by facts. The “Socialist” Government already embraced the narrative that reduced social rights and lower salaries is the key for Spain´s recovery. Under the blessing ( or pressure) of the IMF, EU, Obama…etc…. the Government already marked the path by a 5% cut of wages in the public sector. The next step was the adoption of a set of decrees which overturn essential social rights (some of them dated from the Franco era!) including a dismissal "easy track" and a planned assault on the system of collective negotiation and pensions.

Spain is just a model though the narrative is being noticed in other countries. So from now on say "Beggar your neighbor OUT, your worker IN...." . That is the newspeak we´ll hear from now on from policy makers and the financial media. I humbly dare to foresee that the "beggar" policy is deemed to fail as it failed 70 years ago: it will pres each and every country to a lower salaries policy which will eventually depress consumption and economic activity.

I wish policy makers understand, before it gets really too late, that "beggar" cannot replace genuine and progressive economic policy. Moreover, it is more than the beggary policy is the path toward higher levels of despair and anger.

Sunday, June 13, 2010

Green Shots , At Last

The influential “Financial Times” published a week ago an article titled “Time to Plan for a Post Keynesian era“ by the famous Economist Jeffrey Sachs. So what?
Let me skip a large and obscure introduction and go directly to one of the punch lines in that article:

“.....Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year...... …...Here are some suggested guidelines.....
….Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit…....

Just in case you are not familiar with the Sachs let me quote Wikipedia “.....One of the youngest economics professors in the history of Harvard University, Sachs became renowned for implementing economic shock therapy throughout the developing world and in Eastern Europe …...” So here we´ve got a mainstream, not only an Harvard Proffessor, but a “shock therapist “ in favour of “more income taxes” ? THAT is a real Green Shot!!

I do not know whether Sach is alone in his approach and what is exactly his diagnosis but Sach´s message is encouraging . I hope more economists would start to adopt a more critic perspective toward the ruling dogmas in order to provide enduring solutions.

A personal note : This blog has been asserting along the whole crisis for the last two years that the crisis should be analyzed from a distribution persepctive : In other words “bailouts” , “quantitative or “qualitative” easing are not more than a curtain of smoke that will eventually proved to be  useless.

This blog still thinks that the current economic crisis is the result of a a the skewed income and wealth distribution int he world ( you are invitd to read previous posts ) . Thus the only human and reasonable solution for the crisis is the construction of mechanism to redistribute income and wealth. Any alternative should be banned from the outset , not only on moral and social grounds, but rejected from a “pure” economic perspective. Sach´s article could be atoner sign that this persepective is being taken seriously .

For those with a bit of patience between the football games I attached the article .... .

Time to plan for post-Keynesian era
By Jeffrey Sachs
Published: June 7 2010 22:22 | Last updated: June 7 2010 22:22

Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crisis, we need to abandon short-term thinking in favour of the long-term investments needed for sustained recovery.

Keynesian stimulus was premised on four dubious propositions: that it was needed to prevent a global depression; that a short-run fiscal boost would jump-start the economy; that “shovel-ready projects” could combine short-term cyclical and long-term structural agendas; and, last, that the rapid rise of public debt occasioned by stimulus need not be a concern. That these ideas were so widely accepted was a testament to the perennial political attractiveness of tax cuts and spending increases. In fact, the ubiquitous references last year to the Great Depression were glib; the policymakers had panicked. Adroit central banking could and would prevent depression.
The hastily assembled stimulus packages were a throwback to naive Keynesianism. The relevant fact was that the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be accepted.

Certain counter-cyclical spending is vital on social grounds. But stimulus measures such as temporary tax cuts for households or car scrappage schemes were dispiriting wastes of scarce time and money. They reflected a hope that a temporary fiscal bridge would carry us back to consumption and housing-led growth – a dubious proposition since the old “normal” had been financially unsustainable.
The talk of a green recovery, in which the fall in consumer spending would be offset by investments in sustainable energy, made sense and still does. Yet it was quickly undermined by the politicians’ insistence on “shovel-ready” Projects. The shift to sustainable energy systems is a vital but long-term task. It could never be a short-term jobs
programme. Maybe in China there are shovel-ready projects of sufficient scale, but not in. the US.
Taking office in January 2009, President Barack Obama inherited the largest peacetime budget deficit in US history. By increasing it further, he made it his rather than his predecessor’s. He and his advisers ignored one of the key insights of modern macroeconomics: that the result of fiscal policy depends not only on current taxes and spending but also on their expected trajectories in the future.  The US was not in a credible position to raise an already enormous deficit “temporarily” because the prospect for future deficit cutting was and remains extremely clouded.
America has absolutely no consensus on how to restore budget balance, as it is trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises. One cannot build a credible long-term fiscal policy by starting off in the wrong direction, with larger rather than smaller deficits. Now we face a world economy with weak aggregate demand in the US and Europe, bulging budget deficits, sovereign debt downgrading and consumers unwilling to borrow. Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year. 
Here are some suggested guidelines.
First, governments should work within a medium-term budget framework of five years and within a
decade-long strategy on economic transformation. Deficit cutting should start now, not later, to achieve manageable debt-to-GDP ratios before 2015.
Second, governments should explain, and the public should learn, that there is little that economic policy can do to create high-quality jobs in the short term. Good jobs result from good education, cutting-edge technology, reliable infrastructure and adequate outlays of private capital, and thus are the outcome of years of sustained public and private investments. Governments need actively to promote post-secondary education.
 Third, governments must of course also ensure social safety nets: income support for the poor, universal access to basic healthcare and education, a scaling up of job training programmes and promotion of higher education
Fourth, governments should steer their economies towards needed long-term structural transformation. External-deficit countries such as the US and UK will need to promote exports over the next few years, while all countries must promote clean energy and new transport infrastructure.
Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit.
 We need, in sum, to reset our macroeconomic timetables. There are no short-term miracles, only the threat of more bubbles if we pursue economic illusions. To rebuild our economies, the watchword must be investment rather than stimulus.

The writer is director of The Earth Institute at Columbia University


Friday, June 11, 2010

Tell Me That It Isn´t True!

A volunteer or two are required to answer a few questions: The first one, not very serious. The second question a bit more serious. The third and last question , I do not expect any answer … we´ll leave it as food for thought.

First Question: What is the common denominator of the following items?

…Sage, Cardamom, Coriander, Ginger, Jam, Halva, Vinegar, Nutmeg, Chocolate, Fruit Preserves, Seeds And Nuts, Biscuits And Sweets, Potato Chips, Gas For Soft Drinks, Dried Fruit, Fresh Meats, Plaster, Tar, Wood, Cement, Iron, Glucose, Industrial Salt, Plastic/Glass/Metal, Containers, Industrial Margarine, Tarpaulin, Sheets, Fabric( For Clothing), Flavor And Smell Enhancers, Fishing Rods ,Fishing Nets ,Buoys, Ropes, Nylon, Netting For Greenhouses, Hatcheries And Spare Parts For Hatcheries, Spare Parts For Tractors, Dairies For Cowsheds, Irrigation Pipe Systems ,Planter,(For Saplings), Heaters, Musical Instruments ,Size A4 Paper,(Letter/Legal, Size), Writing Implements, Notebooks, Toys, Razors, Sewing Machines, Horses, Donkeys, Goats, Cattle, Chicks….

Shopping list? An annual control of inventories? Not even close ….It’s a partial list of the items Israel does not allow to enter into Gaza strip. Moreover, the list includes “just” products absolutely banned though we should bear in mind that rigorous quantitative restrictions are imposed on many other products as well (such as fuel for Energy Plants that limits the electricity supply to a few hours per day … etc). The objective of those restrictions is to prevent the rearmament of the Hamas militia ( Halva???) and a consequent possible threat on the wellbeing and security of Israeli citizens along the Southern border. Since Israel and Egypt control all the official accesses to the strip, the meaning of these restrictions is obvious (The list was prepared by Gisha organization)

Second question: Can anybody tell me that it isn’t´ true? (as far as I know the Israeli Army or Ministry of Defense did not confirm nor deny the list) . I am serious and would appreciate a elucidatory answer.

If the above list turns to be genuine, even partially, a Third question rises, a question that I don´t even dare to answer: Has someone gone mad out there in Israel?. Please tell me that it isn´t true.

For the time being I rest my case.

Wednesday, June 2, 2010

The Sea is not the same sea. The Arabs are not the same Arabs

“The sea is the same sea, the Arabs are the same Arabs “(Israel PM Y. Shamir)

The above phrase was coined by PM Shamir before leaving to the first direct negotiation between Israel and an official Palestinian delegation at Madrid (1991). That phrase elucidates one of the most important aspects of what I will call henceforward the “Shamir Doctrine “. I will try to resume what is the “Doctrine” about and how it relates ,after almost 20 years to the evolution of the last tragic episode in the Sea of Gaza ( the death of 9 and the injure of dozens). In other words, I claim that the Israeli Cabinet decisions during the last days are not casual ( altohugh the result were not intended) and are deeply rooted in the vision of its leaders.

The essence of the “Shamir Doctrine” is that the Arab hostility toward Israel is similar to “The sea” i.e. a natural phenomenon that nothing can be done to change it. The operational consequence from such vision is obvious: Whatever Israel does or says cannot modify the basic hostility toward the State, so the Jewish State should base its relationship with the Arab world from a power position. “Force”, whether public or subtle, military or demographic is a basic premise in that doctrine and .Any concession is discarded as a sign of weakness although it is permitted in certain circumstances for tactical purposes, mainly to “buy time” in order to get stronger.

It is not just a coincidence that the main Israeli decision makers owe some of their early meteoric career in the 80 to PM Shamir: App. 20 years ago young Netanyahu was promoted to the higher ranks of the Foreign Affairs Ministry while at the same time General Barak gained the appointment to IDF Head of Staff, both during Shamir´s period in office. Just for the record in the past both leaders expressed their strategic views in line with the Doctrine : Netanyahu wrote a book about Terrorism and Barak expressed his own view with the “the villa in the jungle” metaphor.

Coming back to the Fleet incidence: The decisions taken by the Cabinet along the last tragic episode in the Gaza Sea (let alone the blockade itself) perfectly fits with the “Force” perspective and its internal logic. It is reasonable to claim that the Israeli Cabinet dealt with the Fleet issue in such a manner that it was prone, from the outset, to a violent outcome (although I am sure that there was NO premeditated intention to kill civilians). However, there is no doubt that matters could be handled in other ways so the risk of a tragic bloodshed could be minimized, after all Tzahal has already demonstrated in many of occasions its ability to perform “delicate” military operations w/o human losses. Nevertheless, the Israeli Cabinet has chosen the most (eventually) risky way to deal with the Humanitarian Fleet: Direct assault. The clash between Tzahal commando (among the best in the world) and unarmed civilians yielded 9 dead people and tens of injured and a political and media disaster for Israel. So why to risk so much?

The logic behind the decision to assault the vessel fits with Shamir´s legacy. “Force” by itself is not enough if there is no a clear indication “determination” that it will be eventually utilized and demonstrated. In some cases, as in the case of the Fleet, the exhibition of force by bringing your rivals to their knees is part of the force equation and the deterrence logic. The same logic applies to the last massive attacks during the Gaza strip or Lebanon wars (“The boss has gone mad”). Thus, the decision to go for the riskier alternative should be seen as part of a wider attempt to show force for internal and external consumption. The proliferation of cameras and films among the forces are part of the game. At some point the gamble went wrong and the outcome is known.

The massive use of force does not take into account future retaliations from “Arabs” since they will make use of any real or imaginary pretext for hostilities against Israel. They are a lost case so they don´t even deserve an explanation (“Arabs understand only (the language) of power”). However, since Israel is a small country which cannot ignore completely its foreign relations, the “world” (i.e. the rest of the human race excluding Arabs or their captive supporters) is a different story which requires another treatment.

The complementary component of the “force talk” is the “Hasbarah” talk i.e. the public relation effort to explain Israel deeds against the “Arab propaganda”. Under that perspective Israel suddenly ceases to be a mighty power and a magic transformation process becomes the clumsy guy in the neighborhood constantly bullied by mean guys (with more than a clear hint to the traditional Jewish suffering). This is the moment when the camera shifts its focus from military ships, helicopters armed with guns and missiles to the image of a single soldier bullied by an angry mob. Did anybody think about Pogroms? That line is essential to maintain the internal cohesion of the Israeli secular Jewish society around the Government and its policy which implicitly accepts the Shamir Doctrine

The use of force has its own limits, a say relevant for a country that despite its military and economic might is relatively small in area and population as Israel is. It also very static in its premises since the “sea is the same sea….” i.e. there is nothing new under the sun, so the best way to deal with reality is adopting a very rigid perspective. The irony is that the very creation of the State of Israel is the best proof for the futility of the Shamir Doctrine and that history can change. History demonstrates that people change, cultures evolve and history is in constant motion as Heraclitus said “You cannot take a bath twice in the same river “. From such a perspective “the sea” is never the “same” sea and the “Arabs” have the capacity to change.

Least and not last, the most upsetting point of the Shamir Doctrine is its extremely pessimistic nature (disguised in a quasi positive “we shall overcome” mantra), which offers to the people of Israel a lasting (I would dare to say an eternal) struggle with its neighbors. Your modest servant believes that Israelis and Palestinians deserve a better horizon ahead.