Whistling in the Dark

Bloomberg has a headline this morning that about says it all when it comes to the Eurozone’s political leadership – “Euro Leaders Aim to Buy Time to Save Currency.” More time?

For the past 18 months there has been dithering and inconclusive summits and failure at every turn to get out ahead of the crisis. Solutions promised and offered have failed to convince the markets and investors that a bottom has been put in to save the currency from collapse and the Eurozone from fracture.

With a new year we are where we were before: no viable political solution.

According to Bloomberg, European leaders are “seeking to buy time for the Spanish and Italian governments to wrest control over their debt.” But that isn’t something that is going to happen overnight or even in a few weeks or months. And getting control of their debt is linked to how the markets feel about the Eurozone generally and the level of confidence investors have in it and not just in Italy and Spain.

Neither country has a solvency crisis – or rather they didn’t. Their initial challenge was over liquidity – and that has been allowed to turn into pending insolvency.

In her end-of-the-year comments, German Chancellor Angela Merkel said her government will do “everything” to bring the euro out of the slump. The only way that can happen is if the Germans agree financial transfers to their poorer neighbors. That has to be done quickly now and speed means Berlin accepting Euro-wide debt consolidation and the issuing of Eurobonds backed by all.

The details of closer financial integration with stricter rules on individual government’s public expenditure can come later.

In the next three months some 157 billion euros ($203 billion) in debt will mature in the 17-member Euro area. And something solid needs to emerge from the scheduled Jan. 9 meeting between Merkel and French President Nicolas Sarkozy or those three months could be even more torrid that what we witnessed last year.

Dollar or Pound?

A relative wrote me to ask whether she should change pounds for dollars on the grounds that the dollar has weakened during the debt ceiling showdown and would likely increase in value once a compromise had been struck in Washington DC. This is what I replied:

“I am glad you are so confident that a last-minute deal will avert a technical default. I think a lot could go wrong before then. And if a deal is struck, it will be the two-part Reid-Boehner compromise that in effect will kick the can down the road and will merely delay the reckoning. In other words, this failure of mature government is to be repeated in a few months time.

On the macro-level, I agree with Mohamed el-Erian (PIMCO’s CEO) that long-term damage has already been caused to the U.S. and that international investor confidence has been shaken by what has been taking place in the past few weeks. It is quite likely that the rating agencies will downgrade the U.S., even if the Reid-Boehner compromise is agreed. That will knock the value of the dollar.

Despite the awfully slow economic growth in the UK the last quarter, I still believe that the Coalition is basically on the right track – UK debt reduction is essential and more necessary than debt reduction in the U.S.. For example, the U.S. deficit could disappear with an increase in government revenue, i.e. tax increases. That is off-the-table, alas, at present because of the economic illiterates in the GOP House caucus, who believe incorrectly that any tax increase will restrain economic growth.

In other words, I think the pound is a better bet than the dollar in the medium term. Could you make a small profit by buying dollars now and maybe in a few days time, if a deal is struck, see a dollar value rise and be able to exchange back to pounds beneficially? Maybe you could, but it is a risk and I am not sure that you should be risking your capital.”

And what happens if a deal is not done, even the Reid-Boehner plan? I know there is a temptation to risk but I myself would avoid it.”


Thoughts on a Great Society

I recall my first Fleet Street Editor, the inestimable Peregrine Worsthorne, warning the re-elected Thatcher Conservatives in the mid-1980s against “bourgeois triumphalism.” For Perry there was a major risk that buoyed by their third victory over Labour, the Conservatives would be excessive and go far beyond common sense and what was acceptable to the country.

They didn’t heed his caution and the result was Tony Blair and a long period of New Labour rule.

Later in 2005, Perry argued that Thatcher’s “ideological excesses left such a bad taste in the mouth of the English people as to make Conservatism henceforth unpalatable, except as a last resort in the absence of a less dire alternative”.

There are parallels today on this side of the Atlantic.

Since last November’s congressional elections, American conservatives, and particularly those on the libertarian wing of the GOP, have adopted a swagger and a triumphalism that’s likely to swell support for Barack Obama.

Buoyed by the Tea Party presence in the GOP caucus on Capitol Hill, and by a belief that their time has come, they are offering policy solutions for the federal debt and deficit that are increasingly at odds with majority American opinion.

Paul Ryan’s budget is a case in point. To argue for tax reductions for the super-rich while at the same time advocating the end of Medicare is just a vote loser, plain and simple. The claque surrounding Ryan can’t hear the noise of disapproval coming from ordinary Americans because of the noise they’re generating.

But a Wall Street Journal poll this week illustrates what the GOP risks by following Ryan’s policy prescriptions. Eighty per cent of Americans want Medicare and Medicaid left untouched.

Listening to Rep. Ron Paul the other night on Fox’s Hannity Show one realizes how far American libertarians are moving away from the European classical liberalism they invoke as their parent. Paul maintained that he would “shrink government big enough so we don’t have to have an income tax.”

Asked by an approving Sean Hannity how infrastructure and defense would be paid for, Paul responded: “Let it be through user fees, you know, gasoline taxes for your highways.”

I am not sure how that would work for the Pentagon. Would the defense secretary be able to bill the White House? How would the Pentagon maintain military readiness in the weeks and months the White House didn’t call on the military? Or maybe the way forward for Paul – and I don’t want to put words in his mouth – is not to have a standing army at all but be able to call up state militias when the nation needs to be defended.

And I am not sure I am so wrong about how Paul would respond. Ultimately what is being argued for is a turning of the clock back to the buggy and pony days of the Founding Fathers.

That is just unrealistic and anti-progress.

What Paul and fellow American libertarians at, say, the Cato Institute, appear now to advocate is not limited government but virtually no government. And that is not what their intellectual heroes wanted at all. It is a distortion of classical liberalism.

Take Adam Smith, for example. It is not the case that he was arguing for no government. Nor is it even the case that he thought government should just limit itself to defending the realm, protecting private property, maintaining law and order and administering the courts.

He saw a much wider role for government.

As retired economics professor Gavin Kennedy has pointed out, Smith was not a laissez-faire ideologue.

“There were hundreds of miles of inter-city roads in need of construction and repair; scores of harbours that needed to be built and dredged; thousands of bridges in need of construction; hundreds of towns that need to be paved and have street lighting in place; thousands of ‘little school’ constructed and staffed with state-registered teachers; scores of palliative care hospitals established for those afflicted with ‘loathsome diseases’; scores of depots for stamping clothes with government quality marks; a network of post-offices established and organised; and likewise for all the other activities that Smith envisaged should be funded and managed by the state,” he writes.

Kennedy in his excellent blog of March 4th 2010, lists government intervention and actions Smith approves of in his main work, Wealth Of Nations:

“• the Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’ (WN464);

• Sterling marks on plate and stamps on linen and woollen cloth (WN138–9);

• enforcement of contracts by a system of justice (WN720);

• wages to be paid in money, not goods;

• regulations of paper money in banking (WN437);

• obligations to build party walls to prevent the spread of fire (WN324);

• rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’) (WN539);

• ‘Premiums and other encouragements to advance the linen and woollen industries’ (TMS185);

• ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;

• ensuring the ‘cheapness or plenty [of provisions]’ (LJ6; 331);

• patrols by town guards and fire fighters to watch for hazardous accidents (LJ331–2);

• erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours) (WN723);

• coinage and the mint (WN478; 1724);

• post office (WN724);

• regulation of institutions, such as company structures (joint- stock companies, co-partneries, regulated companies and so on) (WN731–58);

• temporary monopolies, including copyright and patents, of fixed duration (WN754);

• education of youth (‘village schools’, curriculum design and so on) (WN758–89);

• education of people of all ages (tythes or land tax) (WN788);

• encouragement of ‘the frequency and gaiety of publick diversions’(WN796);

• the prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population (WN787–88);

• encouragement of martial exercises (WN786);

• registration of mortgages for land, houses and boats over two tons (WN861, 863);

• government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’ (WN356–7);

• laws against banks issuing low-denomination promissory notes (WN324);

• natural liberty may be breached if individuals ‘endanger the security of the whole society’ (WN324);

• limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’) (WN539); and

• moderate export taxes on wool exports for government revenue (WN879).

Yes, Smith quite clearly would have agreed with government regulation of the banks and hedge funds and mutual funds, etc to protect ordinary investors.

Medicare? Medicaid? How about “the prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population.”

Or how about the federal government being involved in education – something Cato and Paul have argued against. Well, yes, there it is — “education of people of all ages.”

It isn’t just Gavin Kennedy who dismissed the idea that Smith was a doctrinaire advocate of laissez-faire. Jacob Viner, one of the founding economists of the Chicago School, a mentor of Milton Friedman, makes the same points.

He notes among other things Smith’s support for “erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”

A great society – that is what Americans want.



Congress Gets Paid But the Military Won’t!

So if the government shuts down the military won’t get paid but members of Congress will! There is apparently a constitutional reason for this: Section 6. Clause 1. “The Senators and Representatives shall receive a Compensation for their Services, to be ascertained by Law, and paid out of the Treasury of the United States.”

It is automatic.

Even so this can’t play well outside the Beltway – especially with the 800,000 government workers who won’t be paid. Nor with the military and their families for that matter.

What is also shocking is that the House Speaker John Boehner was unaware that members of Congress will continue to receive their pay.

On ABC’s Good Morning America” he said: “Members of Congress are elected by their constituents. If there is a government shutdown, not only will Congress not be paid, but federal employees will not be paid.” Later he had to correct himself, saying that members of Congress should not be paid.

One lawmaker said they could not afford not to be paid. California Democrat Linda Sanchez said she had financial obligations. Hmm, tell that to military families.

Neither side of the aisle come out of this confrontation well. What we are witnessing is a lack of leadership from both the Hill and the White House. Shouldn’t they be able to debate the debt and the deficit without shutting down the government and causing massive disruption for ordinary Americans? And all this hoopla over cutting a tiny amount from the budget? What a lot of posturing!