"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, September 20, 2010

European Lessons ( Part II )

In a previous post http://enriquefleischmann.blogspot.com/2010/09/european-lessons-for-middle-east-part-i.html) I´ve tried to present an historical perspective for Mid East Peace Process, a lesson that the peoples and their leaders could learn from the European history while dealing with the “Peace Process” . Very briefly, the main message was that Mid East peoples should learn how try to avoid the European bloody path to Peace: Europe and its people managed to achieve a relatively calm and prosper era (since 1945) after waisting millions of human lives during hundred of years of wars and conflicts which devoured an infinite amount of economic resources. For us, the younger generations a peaceful Europe sounds a banality but remember that the last 60 years are an exceptional long period with no serious violent confrontations in the Continent . For the record, the last 300 years yielded wars in 1939-45,1914-18, 1919, 1870, 1866, 1805-1815, 1763, 1711, .. just to name a few).Middle East people should understand that the way to prosperity is 180 grades opposed to war , while the alternative is paying the expensive REBBE GUELT ( “Teacher´s Salary” in Yiddish) with their own blood.

Being conscious that the former analysis might sound discouraging ( which is not the case !!) I decided to make use of the same “Raw Material” in order to develop a somewhat more encouraging and hopeful conclusions.

The first step would be to arrange history in a more accurate perspective in three aspects : Casualties, Time and Space.

Casualties : The Mid East conflict has yielded app. 101-115 thousands casualties ( Wikipedia) , WWII 60 Millions, WWI 20 millions ….the death toll table (http://en.wikipedia.org/wiki/War) is a sad reminder of our dubious humanity . Before proceeding , I would like to stress that each and every casualty is a terrible loss, and any statistical “comparison” is misleading from a human point of view. But if the depth of hatred is highly influenced from the level of collective suffering, than a rough comparison can give a ray of hope. As I said before, the comparison is aimed to show that even after terrible bloodsheds human beings are able to understand that an ongoing and endless cycle of vengeance is useless. History teaches us that victims do not necessarily turn into the eternal combustible that feed the flame of hatred .

Time : Our high speed era can hardly cope with an historical perspective, since events are not viewed in a wider context abd so they loose their meaning within a very short period of time. Instead of eternity we became used to think in “short time eternities” . However, if we just maintain a bit longer run perspective, time becomes another dimension that should be considered in our "European" lesson : France and England maintained a 100 years war, the border line between Germany and France was a main focus of hostilities for centuries, the 30 years war was a devastating experience of Europe, let alone the long run Reconquista in Spain.... so the Mid East few dozens years struggle is undoubtedly too long but not extraordinarily long in historical terms. Our generations were condemned to spend their entire lives surrounded by the “Conflict” , an experience which brings some of us to sad conclusions of NO HOPE. History tells us that a different coexistence is possible, and history provides strong evidences that even the longest conflicts eventually end .

Space or Clash of Civilizations : The last last point is less related to Europe and more to “enmity” between Jews and Arabs/ Muslims. The Conflict is sometimes described as part of an unavoidable “Clash of Civilizations” ( Why that “clash” occurs now? Why it did not take place before? ), so as a “byproduct” of that “clash” the conflict can be solved, if at all, only as part of a wider global arrangement ( or after an Armageddon style battle) . That perspective leaves very little place for any solution : the more complicated and confused an issue becomes, its solution becomes further ( in economic parlor : additional imposed constraints just remove further an optimal solution) . However, from historical perspective Jews and Arabs got along much better than European and Jews, so the Conflict can hardly be considered as a mere product of a phenomenon that hardly existed before the foundation of Israel (Note : Zionism never saw itself as a colonization movement in a European sense). Therefore if the KISS principle ( Keep It Simple , Stupid) is applied and the conflict is confined to a strict political , national and territorial arena, expelling external “noises” both sides might be able to find a practical solution , a “second best” solution much faster .

As I said in the beginning, there is still hope that both people are able to advance with the process before it gets too late. History shows that it is possible, but we should not forget that “Time is money” especially in its special local meaning ( in Hebrew the word DAM or DAMIM means “Blood” but also “Money”).

Wednesday, September 15, 2010

The Economics of the Schnitzel*

Everyone can surely remember from his/her own past those unique moments in which a phrase, sight or a comment turned a complicated set of ideas into a simple, clear, concept (“How I did Not Think About It Before?” moment…). That personal Eureka experience may be the outcome of an individual “masterstroke” but it is more commonplace to find the origin of such experiences in our immediate environment.

I had many Eureka moments in my life, one of them dates to my early days as an Economics student. During a Micro Economics class , Prof. U.R. tried to explain what “Revealed Preference” is all about ( Note : R.P. is a method to analyze the consumers´ wants and needs from her actual behavior). A student suddenly asked the lecturer why to bother with complicated calculations as it is much easier to ask the consumer directly about her preferences. The Prof. replied with a simple example: A smart grandmother ( in my case the typical Jewish Grandmother, guess it is the same in other cultures) will never ask her grandchildren if they like the Schnitzel she bothered to prepare. She would prefer to know the “real” answer by having a look at the empty/not empty plates when the meal is over….. That is the essence of Revealed Preference, the understanding that even with kids actual behavior can be a better signal than words as people are prone to answer according to prior strategies and interests, ( in less polite words, to manipulate) That lesson remained in my head as “The Schnitzel Theory”.

Back to the present, I´ve got the feeling that the actual economic conjecture is a perfect candidate to apply the old “Schnitzel Theory”. Listen to what Governments, Central Bankers, the Media (with rare exceptions) and other interested parts have to say about the economy and you will hear an optimistic and sweet melody. Does the economic real “plate” ( i.e. actual decisions ) fit with these calm messages?

Lets have a look on the following graph (Evolution of Interest Rates and Inflation in US)

Source : Treasury Yields in Perspective Doug Short August 16, 2010

What does the graph tell us? First of all the official interest rate is being maintained at record low levels (the red line), practically zero. The market rates (Blue Line) which is heavily influenced by the monetary policy and market expectations is also very low. On real terms (the difference between inflation and interest rates) the official short term rate is in negative territory, i.e. Central Banks are running an ultra expansionary policy (app. negative 2-3%). The last time we had a similar experiment, (2001 -2005) the party eventually ended in tears including the prick of a major real estate bubble and a major economic crisis. That is not a secret, even to policy makers.

The most convincing explanation for such unorthodox and risky policy (with possible assets bubbles or inflation) is that reality is still very unpleasant and the economy requires high doses of cheap money in order to maintain asset prices and employment. In other words, the real and concrete policy measures tell us a different story from the official narrative.

To whom should we believe? My answer to that question as an adept of the "Schnitzel Theory" is that we are still far away from a real and sustainable recovery and a lot of problems lie ahead. Policy makers can say whatever they want, but as long as facts tell us a different story I prefer to believe to the later.

In that context I will ask you a favor : Please let me know when the facts fit with words or when you see a clear return to normal macroeconomic policies. That day it will be possible to say that the plate is empty and the time for the sweet dessert arrived… as Granma taught me : Dessert only for those who emptied their plates ... ( Or "The Wall" version : If you don´t eat your meat, you can´t have any pudding ....")



*Schnitzel : Typical Centre European , a thin meat cutlet (usually breaded and fried), Milanesa in Italy

Wednesday, September 8, 2010

European Lessons for the Middle East ( Part I)

The following images does not require any excessive imagination: Take 1 : An American President appears from his office surrounded by Middle East leaders. Take 2 : The President announces a new set of initiatives/steps/programs/etc aimed to revive the “Peace Process” … sounds familiar? Déjà vu? That was more or less the way the ceremony in Washington DC looked a week ago, a sort of show which became an obligatory ritual for the last 20 year. The irony is that the spectacle itself is the clearest evidence of its own futility, or better put a sad recognition that the last 20 years have yielded much more “Process” than “Peace”.

Palestinians and Israelis don´t need confirmations from Washington DC, reality talks for itself . First of all the “Process” failed to prevent the loss of thousands of human lives . Secondly the irresolution, the tactical and astute maneuvers only derived into a generalized frustration and despair that catalyzed an augmented “Entrenchment” mood at both sides : Among the Palestinians an Islamic (and radical) discourse is eclipsing the former secular dominant sector of the Palestinian national movement: The takeover of the Gaza strip , the results of last elections are the clearest evidence of that process. From the other side, Israeli secular Jews became more receptive of a “Two States Solution”, a softer talk that turned to be the ultimate perfect alibi for a rather hard line policy : The Israeli Jewish society ( 75% of the population) is nowadays more supportive of collective punishments (such as the Gaza blockade), a general indifference of collateral damages, support the inclusion of preconditions to the Palestinian , etc. . Not exactly the best recipe for a good neighborhood. On the top of it the actual government is dominated by right wing parties that are against any real concession.

The historical narratives of both sides apparently support the intransigent strategies: Arabs are sure that their ancestors´ power of will as the main motive for the expulsion of the Crusades invaders from Palestine some 800 years. And they want to repeat it. In a similar fashion, Israelis are convinced that Israel owes its existence mainly to the determination and sacrifice of its founders. Since the debate “Resistance vs. Compromise” is too wide for a modest blog I will only comment that any serious strategy, even the most intransigent must weigh the consequences of the worst case scenario. Reminder: Some 2000 years ago Jews tried to defy the Roman Empire twice ( 66 and 132 AD)and in both cases the messianic hard line strategy ended in a colossal catastrophe, 2,000 years exile included. Palestinians don’t need to go so back: The intransigent position toward Zionism combined with a lack of political astuteness brought upon them the Nakbah, the loss of Palestine and the expulsion of hundreds of thousands of people from their home.

History has plenty of human collectives that learnt the lesson of blind inflexibility on their own (literal) flesh , and generally a bit late. Take the example of Europe: The peaceful and prosperous continent was during hundred of years the stage of the cruelest wars. Even the XX Century bloodsheds of Sedan and Verdun were not more than a prelude for the 1918 vengeance, the seeds of the next disaster. “Civilized” Europe needed the “lesson” of Auschwitz, Dresden, the Blitz, Hiroshima, Stalingrad, and more than 50 millions casualties to engage in a serious alternative path in order to end with the vicious cycle of violence . The EU, the Euro,common market etc. are not economic or political enterprises but a mechanism to prevent future catastrophes. For the time being the lesson is present.

So, after wandering to Europe and XX century history, what is the punch line in relation to the “Peace Process”? Well, I guess that Bismarck´s quote says it all: “Fools learn from experience. I prefer to learn from the experience of others." Since there is more than enough experience of others, the moment for a smart attitude (and Bismarck was VERY smart) has come to the Middle East. Since everybody knows what is the merchandise, what is the price, and what is the deal , the possible gains of hard line strategies or astute tactical maneuvers are insignificant when compared to the risk of possible REALLY bad experiences . In other words, more “Peace” and less “Process” is needed , as the Middle East and its peoples don´t have another 20 years to spend in empty speeches.

Saturday, September 4, 2010

Free Markets and ( free ) Immigration

The phrase “There is no such thing as a free lunch” ( M.Friedman) is for economists an equivalent to the Law of Gravity. However, the first phase of the current economic crisis with its massive injection of public money seemed to defy Friedman´s rules. Policy makers were seduced by the idea that generous outflows are capable to relieve any social pain and even cure the economic malaises without real pain FOR NO ONE. Unluckily, as the dust sets it becomes clearer that Alchemy is unable to replace good Economics.

The prolongation of the crisis is evident or better put, it´s becoming dear experience for some of us. Let’s analyze some of the last week news : The Financial Times website admitted that “US banking sector picked up pace in the second quarter with lenders’ profits rebounding to pre-crisis levels amid falling loan losses”, whilst on Friday August unemployment figures are close to record levels ( August 2010 Jobs report announcing the loss of 54 k jobs in the US was considered as a “ good news …) . Another title from the FT says : ” Former Chancellor of the Exchequer Alistair Darling said the UK's supertax on bankers bonuses he introduced last year amid outcry over bankers' pay failed to correct the industry ….. Well as far as I know HM government is very efficient when it comes to realize deep cuts in social rights. Perhaps M. Friedman´s phrase should be modified to“ There is such a thing as a free lunch as long as you get someone to pay for it”.

As the failure of the “recovery” measures become evident, the task of maintaining the delicate balance between social pressures while maintaining the existing economic power structure becomes an even harder mission than before. It is becoming evident that someone must pay …..

The question who is going to pay is already generating a few interesting answers : One of them is the call to restore the dominance of market forces in the economy, since the only instrument capable to restore the path of sustainable growth and employment is the market . The free marketers offer a menu that includes for “Entree” delicacies as tax cuts, reduction of public expenses, flexibilization of labor markets, surplus budgets etc. True, there is some debate about the tastiness of such menu, though the question whether, how and who will manage to reach dessert is “blowing in the wind”. In any case, the burden will fall on those who benefited less from the pre crisis prosperity, the lower classes.

The second position to be noticed is the resurrection of xenophobic discourse, not as a marginal topic but as another component of mainstream policies of “respected” institutions . The xenophobia is linked to the economic crisis ( for example “to fight unemployment”) : France has already deported thousands of Romanian Gypsies, Italian authorities established anti immigration policies, Arizona´s immigration laws are still debated, Spain hardened its policy on immigration etc. In that case the bill is served to the foreign workers and immigrants (at first phase.... others will come later)

The irony is that both lines are generally held by the same people. Why irony? Because the two lines contradict each other . In the case of market fundamentalism , the economic models that justify them assume a free and unrestricted flow of ALL production factors (Capital, labor, and raw materials), products and services. If the flow of labor is constrained (as the xenophobes want) , the whole intellectual edifice of free markets becomes irrelevant or becomes not more than another ideological instrument applied in accordance to the particular interests.

A few examples should explain the last point : Under a genuine global free market it would be inconceivable that a Brazilian from Sao Paolo is “allowed” to make use (and pay ) for Telefonica´s privatized services ( held by Spanish Capital ) but not allowed to work freely in Barcelona… or an East European working at car making industry , generating profits for American funds but not allowed to offer his work in the US without a Green Card… or an Israeli government which approves generous grants to major enterprises in the name of the free markets but decides to expel Israeli kids just because they were born to illegal foreigners.

The intellectual coherence demands that whoever support free markets should also favor free and unlimited flow of people as well. If the incoherence is explained by the need to impose certain restrictions on markets ( to preserve social cohesion etc...) , than why only limit immigration? Why not to question privatization? Shouldn´t market forces be restrained when social equity or other common values are under threat ? If the challenge presented in these simple questions is accepted, than market economy will be hopefully expelled from its quasi sainthood status and exposed to social scrutiny as it should have been from the very beginning.