Wednesday, December 26, 2012

Public Education is our Common Good

Profit is the motor of capitalism. Where there are business opportunities, private sector tends to step in. This principle also applies to the education  sector. The economic crisis and the dogma of austerity which prevails in Europe has as an immediate consequence a reduction of public expenditure in welfare policies such as education or health. Lower investment from the State opens the door to private capital. 

Risk capital has a long experience in investing in education, especially in anglo-saxon countries and northern Europe. In southern countries like Spain or Italy, private equity operations are not so developed, but there is growing interest from the business sector in a context where public investment in education is likely to fall significantly in coming years. The shortfall, which could be, for example in Spain , around 10-11 billion € will be only in part compensated by wealthier families. History tells us that when public investment falls private investment tends to crowd in and vice versa. In fact, one of the main arguments of protests against austerity is to combat privatization and the risk of dismantling public education to the benefit of private initiative. 

Available data on profitability of private colleges and universities do not compare well with other economic sectors. The fall of household income tends to shift students from the private to the public sector as families cut spending in education for their children. However, investment firms acknowledge that education is  particularly sensitive  because clients are the children and their parents. Risk capital firms will step in if it is a stable business based  on foreseeable cashflows over the schooling cycle of students and therefore can provide leveraging. Considering that the duration of private equity in a business varies between 4 and 10 years, the education sector offers a sufficient margin for for making investments profitable in the medium term. This means, that public-private partnerhips could develop as it has already happened in healthcare sector.  

While governments  ensure that budget cuts are essential to sustain the public education system in the medium to long term, opponents to austerity believe that they are taking advantage of the crisis to put more money for education in the private sector. Having exhausted the main sources of business and profit such as the construction and public works and industry remains unattractive because it needs large investments, private capital seeks new business opportunities or expands the existing ones. In that sense, basic services such as education or healthcare offer relatively safe profit opportunities. 

The real problem is that a too large involvement of the private sector may endanger the fundamental right to education as citizens will turn from owners of these rights in users of a private system that they will afford according to their economic possibilities. Some organizations support private investment in education but not for all ages. In the early stages of education where investment brings high social returns, public budgets should intervene in financing education.  

Investing in education increases well being and productivity but also yields positive  returns for the society. According to some empirical estimates by Angel de la Fuente (2011), the social returns to investment in human capital are higher than those on physical capital in most EU countries . Of course, outcomes vary across countries depending on both quantity and quality of human capital investment. However, there is no evidence that private education systems will be better performing. Nordic countries invest a much larger proportion of their GDP in public education with better results than the rest of EU countries. A better educated population means a more productive economic system, and therefore more able to compete globally. It's not a matter of  privatizing education systems. 

Sunday, November 11, 2012

One dollar, One vote

Henry Stern, the founder and president of New York civic writes on his website: "Elections are the best way to decide public issues in a democracy. The word 'democracy' means 'rule by the people' , which is a fair and determine which policies a government should follow, and who should be elected to lead that government. A basic principle is one man, one vote" which is meant to support the idea that each citizen's influence should be equal. In reality, some people's influence is greater than others, no matter what system of reckoning is used. The most obvious barometer of influence is money. A man who can give a million dollars to a candidate is much more likely to be listened to than a contributor of $1. It would be impossible to write a law under which every citizen’s views would receive equal attention and respect. But it remains a legitimate goal of reformers to minimize the disparity in resources between candidates.The major distinction between citizens and interest groups lies in their access to candidates. A substantial amount of public business is transacted at fund-raising events for the benefit of individual candidates. Clearly, these events provide contributors with an opportunity to meet with the candidates they support and to try to influence them".

In economics, 'dollar voting' means a process of capital allocation through consumer sovereignty. Ludwig von Mises wrote (in Socialism, an economic and social analysis (1922), tr. J Kahane (1931), p 428 ) : "The capitalist society is a democracy in which every penny represents a ballot paper. 

Obama has won the US elections with a moderate discourse. As the Economist points out, the American poor were hardly mentioned in his re-election campaign. In 2010, 15% of the American population live below the poverty line (around 44% of the median income), well above the OECD average of 6% (see chart below). 

Anti-poverty programmes have allievated the impact of the crisis for the poorest 20% and helped consumer spending. Redistribution is not popular in Almerica, especially among Republicans who want to cut food stamps in order to reduce federal spending. Who defend the poor? Well, they don't have many lobbysts unlike banks or other industries. 

The "one dollar, one vote" result provides an explanation for the increasing difference in the size of the welfare state in Europe and the US. The rise of the rich's income in the US has in fact allowed the rich to increase their political influence and get policy issues closer to their interests which is to limit redistribution to the poor and reduce the size of the welfare State. As a result , poverty has increased at a faster pace and redistribution lagged compared to Europe.

In the mid-50s, a plutocrat, H.L.Hunt had proposed a 'one dollar, one vote' system which would allocate votes based on the voter's wealth and 'contribution to society'. Nowadays, there are more sophisticated forms to increase political influence through money.  This contrasts sharply with equality of opportunity which was at the heart of the American identity. One dollar, one vote is the failure of democracy

Thursday, November 1, 2012

Hunger Mystification

According to the latest report of the  Food and Agriculture Organization (FAO), hunger has declined by some 132 million over the last decade. This is, apparently, good news, though the situation still remains problematic with almost a billion of human beings lacking food to survive. In his presentation, the director general, José Graziano, former minister under the first Lula government and author of the Fome Zero programme, he stressed that the goal to reduce global poverty by half could be achieved by the end of the decade.

We need to get the facts right. Poverty - as the main cause of hunger -has diminished in the developing world, especially China and Brazil as a result of appropriate policies. But this has not been the case in India, or to a much lesser extent while sub-Saharian Africa and South Asia remain  the most affected areas by hunger and malnutrition.In fact, no one really knows how many people suffer from hunger. The statistics produced by the UN organization refer to 'undernutrition'.  As the graph below shows, the number of hungry people has increased since 1995-97 due essentially to three factors:  1) neglect of agriculture relevant to very poor people by governments and international agencies; 2) the current global economic crisis, and 3) the significant increase of food prices in the last several years which has been devastating to those with only a few dollars a day to spend.  

                                          Source: FAO

The target set at the 1996 World Food Summit was to halve the number of undernourished people by 2015 from their number in 1990-92.   The (estimated) number of undernourished people in developing countries  was 824 million in 1990-92. In 2010, the number had climbed to 925 million people, i.e. one out of seven in the world population. Most visible victims of hunger are children, especially in Asia

Overall, there has not been progress in meeting the global goal, although there has been progress in Asia and Latin and Central America. Hunger is caused by poverty as well as conflicts and 'harmful economic systems' where typically military, political and economic power controls most resources and income. In rural areas of Africa and Asia, women are also discriminated in relation to under-nutrition.The uprising in Arab countries have deep and complex roots, but hunger, under-nutrition and insecurity in the face of rising food prices  have triggered the revolts.    

Despite the efforts of the UN organizations, hunger and poverty are likely to increase due to the world economic crisis. The World Bank announced in its 2009 annual report that the number of poor people  (living with less than 2 dollars a day) will increase by 120 million. These forecasts have been confirmed: these millions of victims have added to the victims of structural hunger. 

The world produces enough food to feed everyone. According to FAO estimates, the world agriculture produces 17 percent more calories per person today than it did 30 years ago, despite a 70 percent population increase. This is enough to provide everyone in the world with at least 2,720 kilocalories (kcal) per person per day.  The principal problem is that many people in the world do not have sufficient land to grow, or income to purchase, enough food. But this is not a fatality : the right to be nourished is denied to hundreds of millions of people, especially children. As explained in his latest book by Jean Ziegler, the UN rapporteur for the right to food,  food is a weapon of mass destruction in the hands of powerful agents and speculators in search of profits. The priority is to act immediately and to protect the rights of poor farmers to secure enough food for their subsistance. 

As F.Roosevelt said in a speech to the US Congress, just a few months before he died: "We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. Necessitous men are not free men. people who are hungry and out of a job are the stuff of which dictatorships are made. In our day these economic truths have become accepted as self evident. we have accepted (...) a second Bill of Rights under which a new basis of security and prosperity can be established for all - regardless of station, race or creed"

P.S: Here is one example how we can empower local comunities to make them sustainable by providing enough food for everyone .The article written by Carlo Petrini (in Italian), the promoter of the Slow Food movement, concludes: "Uganda made me know only a further minimal part of an extraordinary humanity, that scattered around the world, achieves little big things in their local communities. This deserves to be known beyond any consideration or view: in front of the children of Bunanimi or Mulono, I have seen the entire Mother Earth, and I have never felt so small"

Wednesday, October 17, 2012

A progressive agenda to tackle inequality

Rising inequality is a matter of common concern not only for policy makers, but for  citizens. Protests are proliferating against social injustice to get their fair share. The 'Occupy Wall street' initiative is against the domination of the 1% super-rich, which hold a growing fraction of US national income. 

The OECD warned against the danger of high inequality in western societies  which have to cope with mass unemployment and weak prospects of growth . Now the Economist relaunches the debate on how to tackle inequality. This is a summary of their analysis: 

"The twin forces of globalisation and technical innovation have actually narrowed inequality globally, as poorer countries catch up with richer ones. But within many countries income gaps have widened. More than two-thirds of the world’s people live in countries where income disparities have risen since 1980, often to a startling degree. In America the share of national income going to the top 0.01% (some 16,000 families) has risen from just over 1% in 1980 to almost 5% now—an even bigger slice than the top 0.01% got in the Gilded Age".


The issue is that too much inequality is inefficient as it reflects both market and government failures and reduces growth potential, as (human) resources are not utilized fully or in an optimal way. Therefore, it calls for a reform agenda to reduce income disparities, which is less about higher taxes than " attacking cronyism and investing in the young", in particular through rebalancing of government spending. This is what the Economist calls “True Progressivism”.

It is true that in most countries ((except the US) government spending is an important tool for combating inequality. The reason is that it ensures equality of opportunity for citizens, in the sense of Rawls' conception of equity which is based essentially on an equality of means, i.e. freedom, rights, income, wealth  and primary goods, rather than an equality of outcomes. As Stiglitz argues in his last book ("The price of inequality), the US is where income gaps are biggest and have increased fastest, putting in question the principle of equality of opportunity.  

Globalisation has reduced the space for redistribution and has put considerable   pressure on wages. Austerity policies have introduced further cuts in social spending, even in basic services. The result is that they create more inequality  as shown by recent experience in Greece, Spain, Portugal and Italy. 

Governments have the responsibility to promote to a large measure equality of opportunity (and possibly of outcomes). This can be done by attacking special privileges or vested interests but this is not enough. The main task is to  create  jobs for everyone as this is the main foundation of our democracies. Subsequently, a reform tax can be achieved to introduce more equity in the distribution of incomes. Higher taxes on the rich could be a way to finance income redistribution for lower income groups and help demand stimulation. In fine, effective redistribution policies  can be achieved by focusing on education, training and healthcare in order to make workers more productive and citizens more protected. There is no real justification to dismantle the welfare State; instead, there should be incentives to make it more equitable and efficient. 

So far, policy responses have been weak and timid. Last year in a speech at Osawatomie, Obama called inequality "the defining issue of our time". It is time to act urgently with bold initiatives. 

Tuesday, October 16, 2012

Call for EU solidarity

The European Union has been awarded the Peace Nobel prize as a recognition for its effort to preserve peace among its countries for more than sixty years. This is indeed a major achievement. But we should see in this award a call to overcome the crisis and current social tensions and to preserve the European social model by furthering solidarity among its citizens. 

The German philosopher, Jurgen Habermas wrote in an article published in La Repubblica: 

"At the moment, we Europeans persist in remaining quietly and calmly on the threshold of a two-speed EU. That is why I also see the decision to award the Nobel Peace Prize to the European Union as a call for solidarity among its citizens, who must say what kind of Europe they want. Only by deepening the institutions of "Kerneuropa" – core Europe – will we tame the capitalism that has grown wild and stop the process of the internal destruction of the Union."

P.S: J.Habermas has made a vigorous pledge for a European Constitution based on true democratic foundations as a way to overcome the crisis of Europe. 

Sunday, October 7, 2012

E. Hobsbawm: a tribute

One of the last interviews of Eric Howsbawm , the great British historian  in which he argues that capitalism as an economic system is incompatible with moral or social responsibility.

Friday, September 21, 2012

What Future of Europe?

There is a growing anti-European sentiment which takes the form of massive protests and demonstrations almost everywhere. Unemployment and poverty are spreading everywhere and create a favourable terrain for self defence reaction, giving rise to a rethoric of scapegoats against banks, immigrants or the euro as the cause of our problems. Nationalism and localism are becoming more evident from France to Catalonia. Beyond their diversity, they are all the expression of the rise of  'ethnic' identity. 

A political scientist of Yale university, N.Sambanis wrote (NyTimes, August 26)  : "As Europe’s status declines, the already shaky European identity will weaken further and the citizens of the richer European nations will be more likely to identify nationally — as Germans or French — rather than as Europeans. This will increase their reluctance to use their taxes for bailouts of the ethnically different Southern Europeans, especially the culturally distant Greeks; and it will diminish any prospect of fiscal integration that could help save the euro, The result is a vicious circle: as ethnic identities return, ethnic differences become more pronounced, and all sides fall back on stereotypes and the stigmatization of the adversary through language or actions intended to dehumanize, thereby justifying hostile actions. This is a common pattern in ethnic conflicts around the world, and it is also evident in Europe today".

Our politicians use the term  'populism' to qualify the rise of anti-European parties. This is a far too simple argument. We need a much deeper analysis of the causes of the rejection of Europe. It is not the European idea which is put in question. It is about what Europe proposes to tackle European citizens problems. The first cause of rejection stems from austerity policies which have produced poverty and recession. Instead of preserving the welfare State, the crisis becomes an opportunity to dismantle Beveridge's system, which is , despite its geographic differences ( in particular between the 'Scandinavian' model and  the 'southern' one) a model for the whole world. Let us be clear, this model has to be efficient, equitable and sustainable. We should not defend waste and inefficiency neither corruption or fraud. 

Second, Europe is not business as usual. The financial crisis has been dealt with essentially with existing rules. The only innovation was the set up of financial instruments to act as firewalls against market speculation but  they did not allow to stabilise financial markets. Spain and Italy are still on the frontline, although the 'unconventional' intervention of the European Central Bank has brought temporary relief  to these countries. But how does this  translate in permanent improvements in workers living conditions? We did not see any substantial  change in labour market situation in Spain and Italy despite reforms. 

Third, European leaders have failed to explain the reality of the crisis as if their people were not concerned. Poltical competition in a democracy has always been  a matter of education  of the voters and their maturity is the best defence against populism. Before it is too late, we must stop the tempest of the populist rethoric by putting in honour pragmatic, realistic checks. There are supra-national ideas for which it is  worth fighting and they can prevail if the European interest prevails over narrow, selfish  politics. European leaders should propend to what A.Hirschmann called 'self-subversion' meaning in this case a radical change of paradigm. Policies and doctrines have failed since they have created in Europe a divide between creditors and debtors and produced inequality and poverty.   

The struggle for a political Europe is not an abstract goal. It means giving to Europe a true Constitution drafted by the representatives of European people, not by the States. We need urgently large scale investment programmes to foster sustainable growth which cannly be promoted by a European government- with a consistent budget approved by the European Parliament, given national budget constraints. There would be substantial economies of scale and savings if resources and efforts are put in common.

In doing so, citizens could understand that those who command are not oligarchs, and that policies adopted can be subject to confutation as any policy in a democracy. The European Central bank, despite their unconventional weapons, remains a technocratic apparatus, with no political legitimacy because there is no common Treasury and no common government. Political leaders are wrong if they think that it is the solution to the crisis; they just abdicate their power, which is to seek alternatives, not the consensus of  markets. Populism is the product of this abdication.  

We should ask citizens what kind of Europe they want. Let's put it in three basic questions: Do they want a new Europe which could help building global partnerships and solidarity? Do they want a Europe governed by economic liberalism or a kind of 'liberal' socialism uniting the market economy with social equity and fight against inequality? Do they want a Europe where the general interest prevails over particular interests of groups and lobbies which prepend the present to the construction of the future?

Friday, August 31, 2012

An inspiring man of Church

Archbishop Card. Martini passed away today at 85 . After leaving  Milan, the largest archdiocese in Europe where he was archbishop during 23 years, he was living in retirement in his beloved Jerusalem.

He was one of the greatest biblic scholars and  he was well known for his sermons and his profound writings. In opposition to the conservatives, he defended 'liberal' ideas on contraception, the beginning of human life and the role of women in the church. 

But his fundamental battle was against social injustice. In particular, he expressed concerned and defended immigrants and social minorities against any form of discrimination.  Martini said  that the Church had to rekindle a "burning fire in the heart" of men and women today.

Cardinal Martini, then President of the Conference of the European Churches  addressed the European Parliament in 1997 in a symposium on 'Remembering the Origins of the Process of Integration' with these words: ""Europe is faced with a decisive crossroads in its history. On the one hand it opens the way for closer political integration involving the European peoples and their institutions. On the other hand there may be a stagnation of unification or a reduction by only a few economic aspects and limited to a few countries"

He was a man of culture and dialogue who listened to people. This is the Church prophetically inspiring that we need today. 

P.S: Card. Martini gave a last interview to a Jesuit priest, Georg Porschill - who interviewed him in "Nighjt conversations in Jerusalem"  - and which was published by  Corriere della Sera after his death.   " the Church is tired, in the Europe of wealth and in America. Our culture has aged, our churches are big, our religious houses empty, the Church bureaucracy is growing and our rites and vestments are pompous" . He also said that the "Church was 200 years out of date and needed faith, trust and courage to move on".

Monday, August 27, 2012

Beyond the European crisis

Despite their formal unity, EU governments think and act nationally looking first at their narrow, short term interest.  Above all, Germany lacks a vision for Europe which in turn nurtures a growing anti-European sentiment. At best, it tries to manage the crisis in a  context of high uncertainty but not to resolve it . The Greek debt crisis was originally set to cost 50 billion ; now it is out of control despite harsh austerity programmes. Germany's selfish attitude tends to create further divisions in Europe between the North (supposedly more virtuous) and the South (supposedly more laxist). Instead of creating a space of solidarity, it has widened the competitiveness gap (in terms of labour costs per outpur unit) making southern countries uncompetitive and therefore forcing them to implement deflationary policies by reducing wage costs and public spending.

The Euro is not just a symbol of the unity of Europe. It has been beneficial for Germany more than for any country. It would thus be logical that it pays for European economic recovery. In recent history, how many times has Europe paid for Germany? We should not forget that at the London conference (1953), the German external debt contracted between the two World wars was settled by writing down half of the overall German debt.

 In this context, there are three possible options. The first is to improve the existing sructures and instruments but it would be an illusion to think that this will lead to a durable solution to the crisis. The second option is the return to the old D-Mark - a thesis now supported by the liberals and the Bundesbank hawks- whose consequences are unthinkable. Finally, the third option is a common responsibility for debt with Eurobonds, common fiscal rules and harmonized social policies.

The issue is whether Europeans still want to take their destiny in their hands. The idea of a federal Europe has been mentioned by the German chancellor but its contours are still vague. Will it look like the United States of America? The first Treasury secretary, Alexander Hamilton who elaborated the 'voluntary compact' which gave rise to the creation of the Federal State is becoming popular in Berlin. In fact , he defended the idea that debts accumulated during the war of Independence. 
Is Ms Merkel thinking about a Philadelphia convention? 

Such a political project will be opposed by States not belonging to the euro area such as the United Kingdom and Poland but also by other States such as France which would resist any transfer of sovereignty. But it is clear that Europe needs to go beyond the tortuous mechanisms of the Funds put in place to rescue heavily indebted countries. The current agenda includes complex issues: the modalities of the ECB intervention on sovereign debt; the final 'harmonization' of the Treaty on fiscal compact depending on the German Court's judgement, which will raise difficult issues of interpretation and compatibility between different legislative acts (for example, the norm on debt reduction by 1/20 per annum laid down in the 'fiscal compact'); the banking Union and the set up a European regulatory authority; the political Union. 

We need to redesign the European institutions to a new reality. Let's imagine what these reforms inspired by great Europeans such as Altiero Spinelli could look like . First, a European parliament elected on a genuine European basis. Second, referenda on relevant European issues should concern all European citizens not single States. Why not ask citizens if they want to stay in the euro area and what kind of project they want for Europe? Third, the structure of the Federal union should be based on an elected president who appoints the federal government; a European Parliament which controls the federal government and approves the federal budget; a Constitutional Court which guarantees the respect of the federal constitution.

If a European State has the dimension of a continent in a global world, the democratic system has to ensure at the same time legitimacy but also effective decision making, political leadership and true participation of citizens. The foundation of such a federal system builds on the division of powers. As a matter of fact, these objectives will be achieved in the long term, but it is important to raise awareness among the public opinion in order to ensure an informed discussion and prepare their eventual realization.

Nicolas Boileau, a French poet and critic, also called the 'Législateur du Parnasse', wrote : "N'en déplaise à ces fous nommés sages de Grèce, En ce monde il n'est point de parfaite sagesse : Tous les hommes sont fous, et, malgré tous leurs soins, ne diffèrent entre eux que du plus ou du moins. "

Monday, August 20, 2012

Finance and the good society

Robert Shiller of Yale University talks  about his book, ‘Finance and the Good Society’, in which he argues that even after the crisis, rather than condemning finance, we need to reclaim it for the common good. He discusses financial innovation, personal morality, the importance of education, and the contribution that finance can make to our lives. The interview was recorded in Bristol in May 2012.

Finance and the good society | vox

Saturday, July 28, 2012

Vox Clamans

Draghi comments from London have risen high expectations from global markets. Basically, he said that ECB would do whatever it takes  to save the euro by any means. This needs to be interpreted since ECB powers are limited by the EU Treaty. Maybe we should understand that it would go beyond its remit by anticipating the June European Council decision, which gave the power to the ECB to purchase directly bonds in euro-zone members.

The reaction of markets was positive as Spanish and Italian bond yields were brought down, but still remain high. But just after the hawks of the Bundesbank warned against any intervention of the ECB, markets retrenched immediately. The German conservative newspaper, Die Welt, said that Mario Draghi, is the "Trojan horse of the indebted South, who wants to transfer resources from the rich and productive North to the continental South". 

Markets are not driven by moral sentiments. The finance world is neither a land of sudden and lasting miracles. The recent speculative attacks - concerted between the most powerful US and European banks - aimed to test the resilience of most exposed countries of the euro-zone and to bet on the inability of  EU institutions and national governments to set out an effective strategy to counteract them. Lately, Europe has given its worst image: after the announcement of unanimously agreed measures to tackle the euro crisis at the June council, some countries put in question the agreement with contradictory declarations with the sole consequence of feeding international speculation in a growing political decay. The perfect storm ! 

Under these conditions, the final assault to the crumbling fortress of the euro-zone was to be expected. In his statement, Mario Draghi has warned against the risk of disintegration and  explained that the ECB was ready to mobilize all the instruments at its disposal  to stop speculation. The (temporary) retrenchment does not mean that speculators will surrender, but they know that they will have to deal with a genuine federal institution which is determined to defend the euro-zone at any cost. But it cannot remain alone in this final battle and governments should,  without any ambiguity, play their role, for example by bringing additional resources into the European financial stability fund, and then into the European Stability Mechanism (ESM) which will enter into force in September 2012.

Progressively, the ECB will have to turn in a sort of Federal Reserve. Economists are divided over its performance on managing the crisis in the US economy. Some argue that its policy of 'quantitative easing' (easy credit) inflated the bubble while others believe that the Fed's interest rate cuts since the bubble burst have been a success as they prevented a much more severe recession. Others think that the Fed has merely postponed the day of reckoning. 

Ch. Kindleberger, a famous economist who wrote a history of financial crises, in "Manias, Panics and crashes " (1978)  believed that , in certain conditions, markets needed help from a lender of last resort. He understood both the danger of inaction by such a lender and the “moral hazard” that its mere existence can create, by encouraging investors to be reckless in the belief that they will be bailed out if all goes wrong. Thus, he argued, a “lender of last resort should exist, but its presence should be doubted.” It should always come to the rescue, but “always leave it uncertain whether the rescue will arrive in time or at all, so as to instil caution.” this is precisely what we need in Europe, not just a firefighter.

Friday, July 27, 2012

The price of offshore finance

Studies on inequality focused mainly on income and failed to capture the missing wealth due to tax evasion, which means that global inequality is much higher than accounted so far .  A recent research  on the" price of offshore" - carried out by James Henry, the former chief economist of Mc Kinsey based on data from the World Bank, IMF, central banks, UN and the Bank of International Settlements - has estimated for the first time the private financial wealth deposited in tax havens. In fact, there are very few studies on private wealth, despite the wealth of information. The report  estimates that the global super rich people have hidden at least 21 trillion dollars in tax havens, which is equivalent to the  combined GDP of the US and Japan. However, this estimation is conservative as it takes into account only private financial wealth and leaves aside real estate, yachts and other non-financial assets. 

The research was promoted by the British NGO, Tax Justice Network , which opposes tax havens since "they are heightening inequality and poverty, corroding democracy, distorting markets, undermining financial and other regulation and curbing economic growth, accelerating capital flight from poor countries, and promoting corruption and crime around the world". The existence of countries without any fiscal transparency is indeed one of the causes of global poverty and the growing inequality between the rich and the poor. These resources are diverted from productive use, investment and labour and therefore have a negative effect on the financing of public goods such as infrastructure and education, especially in times of recession. This vicious circle creates a sort of 'black hole in the world economy" with terrible consequences on the lives of billions of citizen

According to the report, the leading 50 banks - of which primarily Credit Suisse, Ubs and Goldman Sachs- have transferred, at the end of 2010,  mores than 12 trillion of cross border investments on behalf of individuals, large corporations or foundations controlled by the super rich. This network of financial intermediaries explains the rapid growth of off shore finance.  

If the deposits were taxed at 30% a minimum gain of 3%, governments could collect 180 billion dollars ( 280 billion on the basis of a higher estimation of 32 trillion), more or less what the OECD countries allocate to aid to developing countries. This is without any doubt a concrete way to help getting out from the Great Depression. 

Wednesday, July 25, 2012

Regulation is not enough

After the crash of 2008, governments had to bail out their banks for having taken excessive risks. Some were too big to fail, let aside the exception of Lehman Brothers, the fourth largest US bank.  But in the aftermath of the crisis, they continued their business as usual activity.  Nouriel Roubini points out that" the incentives of the banks are still to cheat or to do things that are immoral and the only way to avoid that is to break-up this financial supermarket " 

The Barclay's  case is just another example of immoral behavior. Together with other European and US banks, they manipulated the Libor - the average (estimated) interest rate which serves as a benchmark for inter-bank and private transactions which represent today around 500 trillion dollars- as well as the Euribor, the equivalent for the euro area. The financial impact is quite significant: billions of profits for the banks, additional charges for businesses and citizens. 

How could these crimes happen ? Regulators were distracted, or complacent but did not ignore the fact. Bankers have disregarded basic financial rules without any effective control and supervision. Now, investigations are under way in the US and Europe which could eventually lead to arrest bank managers and traders. 'Class actions' (collective judiciary actions) have been launched against the banks, but these legal battles will probably take years.

The issue is whether there is any effective regulation which could stop banks from cheating on interest rates, building 'ponzi schemes' or laundering dirty money. There are no limits to their criminal fantasy. Global rules are necessary but they have to be enforced vigorously with severe sanctions. Leading by example is one way forward: powerful bankers who committed criminal acts should go to jail. We need to create the right incentives to reform the international financial system and put an end to Adam Smith's 'vile maxim of the masters of mankind" - "all for ourselves and nothing for other people". 

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Sunday, July 8, 2012

Europe should fight the recession

The European summit (28-29 June 2012) - the 19th held in an attempt to resolve Europe's economic woes- has met its expectations on short term measures to fight speculation but has fallen short  on growth measures. As one commentator said, one more summit but "the crisis rolls on". 

The most concrete outcome is the possibility for the European Financial Stability Fund (and then the new European Stability Mechanism) to intervene directly in banks . This is meant to respond to Spain's concern about soaring spread. The significance of this measure should calm the markets since banks will be bailed out collectively by all members of the eurozone and that losses will be shared in proportion to the size of each country (which means in theory that even Greek tax payers could participate in the rescue of Spanish banks!). As part of the agreement, there will be a “single supervisory mechanism involving the ECB”. That means that the ECB may intervene eventually as lender of last resort if funds from the EFSF dry out to deal with future banking crises. The agreement will be finalized by the end of the year to sort details out, so no direct aid to banks will be granted by then. In the meantime, the Spanish debt will increase by EUR 100 billion as a result of the bailout of Spanish banks and put the country at risk of default .

The second important decision is the "compact for growth and jobs" to complement the 'fiscal compact".  If we think about a big plan for Europe's recovery', we are simply wrong. The Council has come up with a plan of EUR 120 billion (equivalent to around 1% of EU GNI)  for fast-acting growth measures. The only concrete measure is an increase of EIB"s capital of EUR 10 billion - which means that its overall lending capacity will increase by EUR 60 billion. Project bonds will be launched as a pilot phase, to bring "additional investments  of up to EUR 4.5 billion for pilot projects in key transport, energy and broadband infrastructure ". The remaining funds come from Structural Funds which have already been allocated to the member States and which should be redeployed to support growth and jobs especially in lagging regions. 

The issue is whether this package of measures which will enter into force this year is sufficient to combat the recession in Europe. The answer is clearly no. In fact, the reaction of markets has been vigorous and spreads of Italian and Spanish bonds are soaring again dangerously. It is understandable that one summit could not resolve all issues on the table and that time is needed to coordinate these measures with other international partners. 

In fact,  the main lesson drawn from this summit is that European leaders have a deep misunderstanding of the economic crisis and about the policies which are necessary to tackle it. Economic history has taught us about success and failures of policies to end the crisis between the two world wars. Maybe they should get more inspired.

But, just one note of optimism. The foundations for the creation of a nucleus of a European federal State have been laid down. this means a more collective leadership for Europe. The United Kingdom, the most virulent opponent of this project has proposed a referendum on which British people should decide whether to stay in the European Union or not. It would be wrong to say that Germany has surrendered: its natural destiny is linked to a federal government of Europe. This is part of the solution to the crisis, not the problem

P.S: today, the Eurogroup will meet to flesh out the political promises of the EU council. It will obviously focus on Spain which has offered more sacrifices to get better bailout conditions. Will this calm the wrath of the God market? Personally I doubt.

Saturday, July 7, 2012

We need a Federal Act

Europe has to choose between a federal Union or disintegration. The Spinelli group has proposed a Federal Act 30 years after the Single Act, which translates into 12 key elements including a banking union, a fiscal union, a social union and a political union. This has been explained by the Spinelli group during its shadow Council on the same day of the European Council of 28 June.

Inter-governmentalism has failed and led to an economic disaster  due to the absence of a vision and project for Europe.

Let's be inspired by the words of Altiero Spinelli: 
 “It will be the moment of new action and it will be the moment 
  for new men: the moment for a free and united Europe”

Sunday, July 1, 2012

The Krugman-Layard Manifesto

In their manifesto, Krugman and Layard (FT June 28) argue that when private spending falls short, government spending should sustain demand. Typically, partisans of austerity use two arguments: the first is the confidence argument insofar budget cuts keep interests low and help economic recovery; the second argument is is that output is constrained on the supply-side. If these arguments are wrong, it means that governments are imposing massive suffering to people  without addressing the real causes of the crisis. 

Critics would argue that the money to finance this plan is not available.  All peripheral countries need more than a trillion euro to repay their debt and cover current deficits, without counting bank recapitalization for Spanish banks (100 billion euro). Greece is probably an exception with a net borrowing of 10 per cent of its gross domestic product. For the other so-called peripheral countries, the net borrowing is more moderate (3% for Italy, 5% for Portugal). The market fundamentalist view is that high interest bonds signal a high risk of non repayment. But what about mutualizing European debt or creating safety nets to prevent even higher interest rates? The problem is not the debt of individual countries but European economic governance which is flawed.

The adoption of Keynesian measures by the New deal led to increases in wages, social benefits and public works programmes which materialized into lower unemployment and higher growth. The austerity measures introduced subsequently by Hoover caused a prolonged recession of the US economy as a result of wrong policies.The rise in output during 1940-42 was also due to higher spending, especially in defence. Of course, this is not desirable today, but the idea of boosting demand through  (civil) public programmes - provided that they are efficient economically and socially- remains valid. 

It is odd to consider Latvia as a super-model for the rest of the EU. The country suffered from overheating in 2008 as a result of credit expansion. The introduction of austerity measures, in the form of internal devaluation, which was deemed equitable (!) led to a dramatic fall in output and labour mobility. Is this efficient by any means? If Latvia - as well as the other two Baltic States- have lower deficits and higher growth rates does not indicate that they are undergoing economic recovery. One cannot judge economic performance by just one year and derive firm conclusions about the quality of economic policy. No country has recovered steadily as a result of austerity policies. 
This is just ideology, not economic sense. 

Tuesday, June 12, 2012

For those who still have not fully understood the Euro situation

From the Sole 24 Ore, an influential economic newspaper : "would it be even reasonable to affirm that Europe exists if we let the markets attack and unabashedly hit one country after another? The answer is no!"

Sunday, June 10, 2012

The Spanish Dilemma

A year and half ago, Krugman wrote in a NYT editorial that Spain's problem is the euro. What went wrong? This is his (perfectly right) explanation : " Spain experienced a huge property bubble, accompanied by a huge rise in private-sector debt. (...) Spain fell into recession when that bubble burst, and has experienced a surge in unemployment. (...) Spain has seen its budget deficit balloon thanks to plunging revenues and recession-related costs. (...) Spain is on the edge of a debt crisis. The U.S. government is having no trouble financing its deficit, with interest rates on long-term federal debt under 3 percent. Spain, by contrast, has seen its borrowing cost shoot up in recent weeks, reflecting growing fears of a possible future default. (...) At the end of 2007 Spain’s public debt, as a share of the economy, was only about half as high as Germany’s, and even now its banks are in nowhere near as bad shape as Ireland’s.

But problems were developing under the surface. During the boom, prices and wages rose more rapidly in Spain than in the rest of Europe, helping to feed a large trade deficit. And when the bubble burst, Spanish industry was left with costs that made it uncompetitive with other nations". (...) "What all this means for Spain is very poor economic prospects over the next few years".

Spain is now the fourth country to be bailed out by the European Stability Fund, after Greece, Ireland and Portugal. It seems that the assistance (up to 100 billion euros) will be limited to the banks instead of the sovereign debt. This was largely predictable given the continuing attacks of financial markets since last year. Is it really the euro's fault, as Krugman argues or are there any good options to pursue?

Would Spain have been better off if it had never adopted the euro? Interest rates would have been higher and the fiscal situation would have been much worse. EU funds flowed to Spain to finance large infrastructure programmes and stimulated private sector investment. The housing bubble is not directly related to the euro, but is due to speculation, excessive risks born by banks and poor regulation and supervision by public authorities. Now tax payers will have to pay the bill on top of the savage austerity measures already taken, particularly on wage and social spending cuts.

The intervention from the European Stability Fund will provide relief to the Spanish banks but will probably not put an end to speculation. Banks have among their assets billions in State bonds, which will lose in value and if yields remain at current levels, banks will suffer considerable losses. It would have been preferable that the ECB intervenes directly to purchase public debt, avoiding asset depreciation but this not allowed by the Treaties. In that situation, banks will remain vulnerable to speculative attacks as long as the ECB does not intervene as a lender of last resort. The strong opposition of Germany to any reform of the ECB - which has been very active in alleviating the effects of the crisis- could lead eventually to the destruction of the eurozone. There are legitimate concerns of 'moral hazard' but if no bold actions are taken immediately, the crisis may end up in a much more dangerous recession. Big plans for a closer political Union and eurobonds are not for the next ten years but should be realized now together with a credible strategy at the EU level to promote growth and jobs through investment programmes, not with haircuts or other suffering. This is the Spanish dilemma, which depends on decisions to be taken by the European Union for its survival.

Saturday, June 2, 2012

Debt is not immoral

European prevalent ideology is that debt is  evil and should be banned. This has to do with German culture shaped by history and traditions. In German, schuld means debt but is also used for fault or guilt. Max Weber wrote about absolute ethics and the ethics of conviction which neglects the consequences for the others. 

Debt is not necessarily bad. It's part of the functioning of an economy. Debts are normally contracted for consumption or investment, but not to repay other debts. The problem is that financiers' interests prevail over the economic interests of entire nations. Financial  orthodoxy is shaping economic policy as the only moral response to the crisis. In fact, Germany  is still defiant to any kind of debt. But this has dramatic consequences for people and businesses which continue suffering from austerity. Mass unemployment, high SMEs mortality, suicides, diseases...  Wise men would admit that this is immoral but they would also argue that we have surrendered to financial markets. 

Debt is not only a European problem. In the US, the total debt amounts to 15 trillion dollars almost equal to its GDP.  In his last book ('End this Depression'), P. Krugman argues that in the past, the US had even a much higher debt during the second World War; Great Britain had high debt levels for almost a century. Japan has a government debt higher than its GDP but does not have any financing problems with yields on bonds at only 0,9%! This shows that there are no thresholds to debt sustainability as claimed by austerity hawks. Furthermore, in times of depression, austerity policies are not a remedy to the crisis, but worsen recession, as tax revenues fall, so that with budget cuts debt continues to increase instead of decreasing. 

It is time to bring this debt ideology to an end. Robert Skidelsky, pledges for debt forgiveness as Keynes suggested for Germany after World War I the same principle can be applied to the eurozone and relieve much of the tension. We should not forget that banks caused the crisis and now want to be saved with tax payers money and the pain imposed to citizens. He writes: "Philosophically, the debt-forgiveness approach rests on the belief that creditors share culpability for defaults with debtors, since they made the bad loans in the first place. As long as the borrower has not misled the lender at the time of taking the loan, the lender bears at least some responsibility for the transactionKeynes had a prophetic word in 1923 that our political leaders should meditate carefully: “The absolutists of contract…are the real parents of revolution.” 

Thursday, May 24, 2012

Where Vultures Feast

In Greece, rising suicide rates, malaria and HIV are spreading in the middle of the crisis. These are tough challenges for hospitals that must make further cuts to meet demands from the IMF and the EU.  There are vultures circling to buy up Greek debt, and they have no interest in settling. On 15 May, Greece paid 400m Euros to Dart Management. While Europe can write down Greece’s debt, private investors have no incentive to do so.

How can we stop this? European leaders could force them to hold to the agreed 50% umbrella on debt restructuring. But they chose not to do so. Instead they allow the robbery to continue.

P.S: In the meantime, the OECD warns about the danger of additional austerity measures as the economy is receding further and unemployment rapidly soaring.

Europe must remain based on solidarity

Growing euro-scepticism across Europe must be countered by a radical
renewal of those values that created the European Community out of the
ashes of the Second World War.  The same ideal should prevail; instead
we have a cacophony about what needs to be done to tackle the financial crisis,
in particular for Greece.

In a recent interview, the German philosopher Jurgen Habermas asks whether
European citizens want to commit suicide (in the economic sense) given the
 recent results of elections in several countries where anti-European parties
have won a large share of the votes. Meanwhile, the economic understanding
that the monetary union cannot be stabilised in the long term without
political union has become prevalent.   

We cannot afford to become complacent or indifferent
to events that are now shaping public opinion. Europe needs to rediscover
its purpose or we will shift inexorably toward disintegration and disunity.

Wednesday, May 9, 2012

Those angry men who want to change the World

Austerity has caused massive anger in Europe as it has hit severely the weak and very little the rich. The recent political elections in France and Greece are a reflection of this phenomenon. We have to understand the causes and the objectives that these angry men pursue and see how to channel this energy into a creative process rather than destruction.

Where do they come from?  The angry men belong to the middle class which has sustained the functioning of our economies and societies during the post war period. However, the situation has dramatically changed since the 90s. Inequality has hugely increased  because there has been a significant redistribution from middle classes to the rich due to the development of financial markets. The pyramid of income distribution has a widening base, mostly people with low salaries (say less than 25.000€ a year) and very few people with high salaries (say above 300.000€). The bulk of the so-called middle class is made up of people living in precarious conditions; they owe debts and have very few assets. They include pensioners, unstable or low paid workers, young people without a job. This mass of people in most European countries fears the danger of austerity and insecurity.

They express their anger publicly. They want to be listened by the government at all levels. They don't have a clear representation, ranging from trade unions, social protest movements and some parties.They reject traditional democratic parties and vote increasingly for the far right (massively in France) or the radical left (in Greece), the two being of course different. But the mass of angry men can be an easy target for demagogic parties of any kind which use scapegoats like immigration or taxation. The danger lies in the instability that it generates in our democracies. 

We need therefore a radical change in the policy agenda toward more growth and equity, without which the depression will persist for many years and cause a social disruption. Remember the lessons from the 30s with the rise of fascist and nazi movements. We should instead draw inspiration from wise men like Albert Einstein who said: “learn from yesterday, live for today, hope for tomorrow

Tuesday, May 1, 2012

Austerity is Wrong

Austerity policies have proved to be wrong in Europe and efforts of the EU and the ECB to contain the crisis rather ineffective. L. Summers, a former US Treasury secretary wrote in FT (April 30): "Treating symptoms rather than, causes is usually a good way to make a patient worse". This is what is happening in Europe where the problem is growth, not excessive deficits. This is now becoming evident, even for the most orthodox defenders of fiscal rigour. Now that the ideological veil has dropped, more pragmatic solutions in favour of growth enhancing policies are being envisaged.

What went wrong in Europe? Increased austerity has not restored normal financial conditions, but has actually worsened access to financial markets. Public spending reduction reduces income, so the ability to repay debts. In fact, as happened in Greece, massive budget cuts have produced only limited reductions in deficits. This , in turn, reduces the growth potential if capital investments fall sharply and prospects to get the unemployed back to work are becoming more difficult. In Europe, due to economic integration, these effects are amplified. A recession in one country produces a fall in demand in others. Increase in savings and exports in one country have to be compensated by equal increase in spending and importing in others. Germany's performance has been achieved by becoming a huge net exporter but this would not have been possible without large scale borrowing and importing by Europe's peripheral countries. Peripheral countries will not be able to reduce their debt substantially if at the same time Germany pursues the same policies aiming at increasing its surplus.

Orthodox economists will argue that more spending in countries with large debt is pure madness. They are wrong: if demand falls and unemployment continues to raise, austerity measures will simply become ineffective and people will continue suffering. Obviously, savings can be achieved if they are undertaken wisely, for example to reduce waste of public money. But one thing is to reduce inefficiencies, another is to cut in basic services such as heath care and education which are vital for the well being of citizens.
Policies to increase public spending on investment would then make sense if they are coordinated at European level. The ECB is now pledging for a 'growth compact', being conscious that  its massive injection of liquidity at a very low interest for three years has not resolved the crisis. As the recession in the eurozone is likely to worsen, European leaders are determined to restore growth. But this can be pursued in different ways. Merkel and Draghi support growth initiatives through 'structural reforms',  an old euphemism which covers essentially wage cuts and less protection for workers.

F.Hollande, if he were elected president, has pledged for a large scale plan to finance trans-European infrastructure projects which will be financed through the emission of bonds by the European Investment Bank. This is a promising start, but may not be sufficient. We need certainly a common European commitment to growth based on efficiency measures to increase productivity but also on equity concerns to restore confidence and hope among the majority of men and women suffering from the dangerous spiral of recession nurtured by more austerity.