An interesting quote from Keynes's "The Economic Consequences of the Peace":
"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. – As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
Though I encountered this (apparently well-known to the economists) quote in no connection to the current economic crisis, the context is very relevant. In his book "The Economic Consequences of the Peace" Keynes analyses the likely consequences of the peace treaty, imposed on Germany in the aftermath of the World War 1, and correctly predicts the rise of the extremist forces. The extreme inflation that followed the War indeed had contributed to the coming of Nazis to power. The knowledge of the impoverishing caused by the inflation and of its the disastrous political consequences is the the underlying basis for the anti-inflation stance so popular today in Germany.
Saturday, December 3, 2011
Friday, December 2, 2011
Why Europe matters for America
Interestingly, the economic developments in Europe might have serious consequences for the American politics:
"If I understand the news coming out of Europe correctly, the new head of the European Central Bank is offering a simple deal: If fiscal policy becomes hawkish, monetary policy will be dovish. In other words, as government spending is cut to put European governments on a sounder financial footing, monetary policy will do its best to ensure that any adverse impact on aggregate demand is kept to a minimum."
In simpler American English: Europe votes Republican. If this European policy succeeds, the American voters will have a reasonable question to Obama, as to why he advocates more stimulus spending. If, however, the policy fails - Obama's insistence on more spending will be effectively vindicated.
"If I understand the news coming out of Europe correctly, the new head of the European Central Bank is offering a simple deal: If fiscal policy becomes hawkish, monetary policy will be dovish. In other words, as government spending is cut to put European governments on a sounder financial footing, monetary policy will do its best to ensure that any adverse impact on aggregate demand is kept to a minimum."
In simpler American English: Europe votes Republican. If this European policy succeeds, the American voters will have a reasonable question to Obama, as to why he advocates more stimulus spending. If, however, the policy fails - Obama's insistence on more spending will be effectively vindicated.
United States of Europe
In their recent speeches by Angela Merkel and Nicholas Sarkozy indicated that the only way to solving European debt crisis is deeper mutual integration of the European states - both economically and politically:
"German Chancellor Angela Merkel on Friday made an urgent appeal for decisive political action—including quick changes to the European treaty—to fix the root causes of the euro-zone debt crisis that threatens to unravel Europe's single currency and plunge the global economy into recession.
...
Ms. Merkel's much anticipated speech follows a landmark address by Mr. Sarkozy on Thursday evening in the southern French city of Toulon. Echoing positions long advocated by Ms. Merkel, Mr. Sarkozy said euro-zone countries should allow European review of national budgets, and introduce "more automatic and more severe sanctions" on budget sinners.
"There cannot be a single currency without economic convergence," Mr. Sarkozy said in the one-hour address. "Or the euro zone will explode."
The French president declared France's willingness to side with Germany and sacrifice a degree of national sovereignty in order to better align economic policies. Ms. Merkel continued on this theme, saying the aim of the European Union summit next week is to change the European treaty to allow fiscal policy coordination.
"We are going to Brussels with the intention to change the EU treaty," Ms. Merkel said. "The goal is a fiscal union that enforces both fiscal discipline in its members and has the necessary instruments to effectively handle a crisis.""
This supports the idea that the European crisis may have deeper roots than merely the mismanagement fo the economy by "deceptive politicians and greedy bankers": Indeed, the situation resembles the one that the United States experienced a century and a half ago, when dozens of politically autonomous states could not agree on a common economic policy, which put at risk the integrity of the Union. The result was the American Civil War. Yet, the centralization of the power to the extent that we see today, took a few more decades, and was completed perhaps only during the Great Depression.
This analogy gives us a hint that the European economic problems may be the inevitable consequence of the yet incomplete European integration. One may reasonably expect that they will be partially alleviated, if the European leaders undertake serious steps towards giving up part of their political and economic sovereignty. Yet, as full European integration cannot be achieved within a period of a few days, or a few years, the problems are likely to reappear for the following decades, till European Union becoms a single centralized state... or collapses. Hopefully, we will not see cataclisms comparable with the American Civil War and teh Great Depression.
"German Chancellor Angela Merkel on Friday made an urgent appeal for decisive political action—including quick changes to the European treaty—to fix the root causes of the euro-zone debt crisis that threatens to unravel Europe's single currency and plunge the global economy into recession.
...
Ms. Merkel's much anticipated speech follows a landmark address by Mr. Sarkozy on Thursday evening in the southern French city of Toulon. Echoing positions long advocated by Ms. Merkel, Mr. Sarkozy said euro-zone countries should allow European review of national budgets, and introduce "more automatic and more severe sanctions" on budget sinners.
"There cannot be a single currency without economic convergence," Mr. Sarkozy said in the one-hour address. "Or the euro zone will explode."
The French president declared France's willingness to side with Germany and sacrifice a degree of national sovereignty in order to better align economic policies. Ms. Merkel continued on this theme, saying the aim of the European Union summit next week is to change the European treaty to allow fiscal policy coordination.
"We are going to Brussels with the intention to change the EU treaty," Ms. Merkel said. "The goal is a fiscal union that enforces both fiscal discipline in its members and has the necessary instruments to effectively handle a crisis.""
This supports the idea that the European crisis may have deeper roots than merely the mismanagement fo the economy by "deceptive politicians and greedy bankers": Indeed, the situation resembles the one that the United States experienced a century and a half ago, when dozens of politically autonomous states could not agree on a common economic policy, which put at risk the integrity of the Union. The result was the American Civil War. Yet, the centralization of the power to the extent that we see today, took a few more decades, and was completed perhaps only during the Great Depression.
This analogy gives us a hint that the European economic problems may be the inevitable consequence of the yet incomplete European integration. One may reasonably expect that they will be partially alleviated, if the European leaders undertake serious steps towards giving up part of their political and economic sovereignty. Yet, as full European integration cannot be achieved within a period of a few days, or a few years, the problems are likely to reappear for the following decades, till European Union becoms a single centralized state... or collapses. Hopefully, we will not see cataclisms comparable with the American Civil War and teh Great Depression.
What is totalitarianism?
There is a meaningful talk-back to the article mentioned in one of my recent posts, where I argued that in a democratic society the government has no right to make decisions regarding the utility of money for different groups of the population. If you are interested in this problem, I recommend reading the whole talk-back - it presents various points of view, and contains many grains of wisdom.
I would like to point out only the exchange regarding my definition of totalitarianism as a system, which suppresses the rights of an individual for the sake of the well-being of the nation (the corresponding decisions inevitably made by somebody in the government):
Me: "At best, taking someone's property against his/her will is simple robbery... at worst it defines the difference between a democratic society that protects the rights of an individual and a totalitarian one."
Someone called "Modicum":
"No. I think you'll find that the difference between a totalitarian state and democracy has to do with, you know, the absence of elections and independent courts, secret police, imprisonment without trial, torture chambers, genocide, etc. It has nothing whatsoever to do with the marginal tax rates paid by high earners or with providing healthcare to poor folk. The suggestion is frivilous and insulting to the memory of the victims of genuine oppression."
My reply to this:
"This is confusing the reason and the consequence. Totalitarianism puts the good of the nation above the rights of an individual. How far it will go in suppressing these rights is a matter of quantity, not quality.
Nazis, for example, started with merely restricting the rights of the Jews to own property and it took for them more than 10 years to arrive to gas chambers. On the other hand, communists in Russia began right away with exterminating those, whose "utility" for the future society they deemed too low. Yet, several decades later USSR had all the visible attributes of a democratic state - elections, courts, no imprisonment without trial etc."
I would like to point out only the exchange regarding my definition of totalitarianism as a system, which suppresses the rights of an individual for the sake of the well-being of the nation (the corresponding decisions inevitably made by somebody in the government):
Me: "At best, taking someone's property against his/her will is simple robbery... at worst it defines the difference between a democratic society that protects the rights of an individual and a totalitarian one."
Someone called "Modicum":
"No. I think you'll find that the difference between a totalitarian state and democracy has to do with, you know, the absence of elections and independent courts, secret police, imprisonment without trial, torture chambers, genocide, etc. It has nothing whatsoever to do with the marginal tax rates paid by high earners or with providing healthcare to poor folk. The suggestion is frivilous and insulting to the memory of the victims of genuine oppression."
My reply to this:
"This is confusing the reason and the consequence. Totalitarianism puts the good of the nation above the rights of an individual. How far it will go in suppressing these rights is a matter of quantity, not quality.
Nazis, for example, started with merely restricting the rights of the Jews to own property and it took for them more than 10 years to arrive to gas chambers. On the other hand, communists in Russia began right away with exterminating those, whose "utility" for the future society they deemed too low. Yet, several decades later USSR had all the visible attributes of a democratic state - elections, courts, no imprisonment without trial etc."
Thursday, December 1, 2011
Some food for thought regarding the race issues (if you dare to think about them)
An interesting article on the issues of race and the affirmative action. It is a touchy subject and many would prefer to ignore it or pretend that we live in a post-racial/post-sexist world. Yet, the reality remains as complicated as ever:
Here is the rationale for the affirmative action (since the author is right-wing, his language is not impartial - I don't quite share his sentiment in this case.):
"Preferences as recompense for past discrimination must eventually become implausible, but the diversity rationale for preferences never expires.
Liberals would never stoop to stereotyping, but they say minorities necessarily make distinctive — stereotypical? — contributions to viewpoint diversity, conferring benefits on campus culture forever. And minorities admitted to elite universities and professional schools supposedly serve the compelling goal of enlarging the minority component of the middle class and professions."
But here is the problem:
"“Academic mismatch” causes many students who are admitted under a substantial preference based on race, but who possess weaker academic skills, to fall behind. The consequences include especially high attrition rates from the sciences, and self-segregation in less-demanding classes, thereby reducing classroom diversity. Blacks are significantly more integrated across the University of California system than they were before the state eliminated racial preferences in 1996, thereby discouraging enrollment of underprepared minorities in the more elite institutions."
And this is an interesting paragraph regarding the situation in sciences:
"There are fewer minorities entering high-prestige careers than there would be if preferences were not placing many talented minority students in inappropriate, and discouraging, academic situations: “Many would be honor students elsewhere. But they are subtly being made to feel as if they are less talented than they really are.” This is particularly so regarding science and engineering, which are, as Heriot, Kirsanow and Gaziano say, “ruthlessly cumulative”: Students who struggle in entry-level classes will find their difficulties cascading as the academic ascent becomes steeper. Hence the high attrition rates."
Here is the rationale for the affirmative action (since the author is right-wing, his language is not impartial - I don't quite share his sentiment in this case.):
"Preferences as recompense for past discrimination must eventually become implausible, but the diversity rationale for preferences never expires.
Liberals would never stoop to stereotyping, but they say minorities necessarily make distinctive — stereotypical? — contributions to viewpoint diversity, conferring benefits on campus culture forever. And minorities admitted to elite universities and professional schools supposedly serve the compelling goal of enlarging the minority component of the middle class and professions."
But here is the problem:
"“Academic mismatch” causes many students who are admitted under a substantial preference based on race, but who possess weaker academic skills, to fall behind. The consequences include especially high attrition rates from the sciences, and self-segregation in less-demanding classes, thereby reducing classroom diversity. Blacks are significantly more integrated across the University of California system than they were before the state eliminated racial preferences in 1996, thereby discouraging enrollment of underprepared minorities in the more elite institutions."
And this is an interesting paragraph regarding the situation in sciences:
"There are fewer minorities entering high-prestige careers than there would be if preferences were not placing many talented minority students in inappropriate, and discouraging, academic situations: “Many would be honor students elsewhere. But they are subtly being made to feel as if they are less talented than they really are.” This is particularly so regarding science and engineering, which are, as Heriot, Kirsanow and Gaziano say, “ruthlessly cumulative”: Students who struggle in entry-level classes will find their difficulties cascading as the academic ascent becomes steeper. Hence the high attrition rates."
Wednesday, November 30, 2011
European debt crisis for dummies
This article tries to explain the European debt crisis on children's level. I recommend reading it - if not for new information than for useful insights. Of course, pointing the "bad guys" is something that belongs only to a story for children...
"But then deceptive politicians and greedy bankers created a fatal mess by borrowing too much money.
Politicians in places like Greece found they could stay in office by giving people public-sector jobs or by letting workers retire at 50 with hefty pensions, while not collecting enough taxes to pay for this. They spent lots more than they took in, borrowed the rest and lied about it. Government debt went through the roof without anyone knowing.
Meanwhile, Europe’s top bankers found they could get really rich if they ran their banks with as little “capital” as possible. That means that for every dollar they lent or bought in assets, they only put up a few pennies in hard cash themselves. The other 97 cents they borrowed. So if the value of the things they bought or the loans they made dropped even slightly, it would wipe out their investment, and the bank would go bust."
What the grown-up people reading this article probably realize is that there are no dragons and witches: the "greedy bankers" were merely maximizing profits of their banks - something that is natural to expect from a successful private business. Whereas "the deceptive politicians" were democratically elected by the very angry voters, who did not at all mind retiring at 50 and getting hefty pensions. And, certainly, the situation is not very different in America, who has its own "greedy bankers" and the elected politicians, eager to expand the entitlement programs.
"But then deceptive politicians and greedy bankers created a fatal mess by borrowing too much money.
Politicians in places like Greece found they could stay in office by giving people public-sector jobs or by letting workers retire at 50 with hefty pensions, while not collecting enough taxes to pay for this. They spent lots more than they took in, borrowed the rest and lied about it. Government debt went through the roof without anyone knowing.
Meanwhile, Europe’s top bankers found they could get really rich if they ran their banks with as little “capital” as possible. That means that for every dollar they lent or bought in assets, they only put up a few pennies in hard cash themselves. The other 97 cents they borrowed. So if the value of the things they bought or the loans they made dropped even slightly, it would wipe out their investment, and the bank would go bust."
What the grown-up people reading this article probably realize is that there are no dragons and witches: the "greedy bankers" were merely maximizing profits of their banks - something that is natural to expect from a successful private business. Whereas "the deceptive politicians" were democratically elected by the very angry voters, who did not at all mind retiring at 50 and getting hefty pensions. And, certainly, the situation is not very different in America, who has its own "greedy bankers" and the elected politicians, eager to expand the entitlement programs.
Sunday, November 27, 2011
Unsustainability of the socialist welfare
The model in the photo describes a progressive tax system, which has only two tax rates - the one applied to the richest group of the population (say, the richest 1%) and the one for everybody else (99%). I first show that a meaningful welfare system cannot exist without a progressive tax system - indeed, if the two tax rates are taken equal, the amount of the welfare benefits per person is given simply by the fraction of the average income taken by the taxation. This means that a person earning average income does not really need welfare system - one can simply get the same benefits by saving a fraction of the one's income. (And I ignore the expenses on the government bureaucrats, who take care of tax collecting and welfare distribution.)
To be fair, this would still work in a society without middle class - the society where the number of the individuals with the income around average is very small, compared to the number of those, whose income is much lower than the average. We know, however, that this is not the case in the Western democracies.
The conclusion: middle class wants a welfare system which gives us more than we pay in taxes! And this is exactly the welfare system that exists in most of the developed countries (Europe, Israel and likely even US.) In short, most of welfare that we enjoy in terms of pensions, healthcare benefits, unemployment payments etc. is already paid for by "the rich"!
I further re-write my very first equation in a slightly different form, in order to show that the increase in the welfare (the demand of the Occupy movement and other western social protest movements) can be achieved only through increasing the part of revenue coming from the rich - either by increasing the tax rates or by increasing the income of this group of people.
Pay attention that the increase in the welfare includes not only the increase in the size of the monthly/yearly payments per individual - it should also account for the increase in the population, receiving the welfare. Depending on how you count, the increasing longevity after the retirement should be included either as an increase of the individual welfare or the increase of the population (eligible for the certain pension and health benefits).
It seems that increasing the tax rates is what the popular demand is. This demand is however unsustainable, given that the tax rate cannot exceed 100%. In fact, regardless of whether one subscribes to the "supply-side economy" or not, one probably agrees that raising the tax rates will destroy the insensitive for high earners well before they reach 100%.
The other solution is allowing the share of the income of the highest earners to grow... but this means growing inequality gap! Thus, the social protest's simultaneous demands for reducing the inequality gap and greater state-provided benefits are incompatible! We really have to choose one of these!
In fact, the sad conclusion is that the growth of the demand for the benefits, due to the population increase and higher longevity, means that the welfare states will be eventually forced to reduce the amount of the benefits per person - either by the reducing the nominal size of the benefits, or by raising the retirement age and other benefit eligibility requirements.
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