Normative Narratives


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The Greek Bailout Deal Is A Failure of Leadership in Both Greece and Germany

Kick-The-Can2

The terms of the 3rd bailout deal between Greece and its creditors brought a lot of issues to the forefront.

Silly me for thinking negotiations had to with economics–modernizing the Greek economy by enacting needed structural reforms, while providing the Greek government with the fiscal space needed to promote growth and address it’s pressing humanitarian crisis (which said structural reforms would only exacerbate in the short run). Instead, the defining elements of the deal were related to personality and politics.

The Germans were mad at the Greeks, so much so that German finance minister Wolfgang Schäuble said perhaps Greece might be better off leaving the Euro–this short-sighted self interest is not suitable behavior for Europe’s de facto leader. Tsipras’s government, for it’s part, apparently did not have a backup plan in case it’s creditors failed to offer a reasonable deal. I know Syriza is new to politics, but you don’t have to be a master negotiator to know that going into negotiations without a backup plan is a flawed strategy.

I was a fan of Tsipras’s government because of the interim agreement it secured in February–the potential for trading structural reforms for fiscal space. But since that point it terribly misplayed its hand. It went into negotiations without a backup plan. It held a referendum at least a month too late–the overwhelming “no” vote would have been a strong bargaining chip had Greece been able to take it back to the negotiating table while still covered under the terms of its prior bailout.

But once those terms expired, and Greek banks closed, the only choices for Greece were Grexit or capitulation. Since there was no plan in place for a Grexit, Greece ended up with the terrible deal it got. That deal–as it currently stands–fails in all regards: financial sustainability, growth prospects, and short term humanitarian concerns.

Not Financially Viable:

The International Monetary Fund threatened to withdraw support for Greece’s bailout on Tuesday unless European leaders agree to substantial debt relief, an immediate challenge to the region’s plan to rescue the country.

A new rescue program for Greece “would have to meet our criteria,” a senior I.M.F. official told reporters on Tuesday, speaking on the condition of anonymity. “One of those criteria is debt sustainability.”

The I.M.F. is now firmly siding with Greece on the issue. In a reportreleased publicly on Tuesday, the fund proposed that creditors let Athens write off part of its huge eurozone debt or at least make no payments for 30 years.

The I.M.F. said in its report that a write-down could be avoided, but only if creditors extended the schedule for Greece to repay its debt. The only other alternative to a haircut would be for the eurozone countries to give Greece the money it needs to repay them.

“The choice between the various options is for Greece and its European partners to decide,” the I.M.F. report said.

Greece would need to spend a sum equal to more than 15 percent of G.D.P. annually to pay interest and principal on its debt, according to the latest I.M.F. report.

Does Not Fulfill Greek’s Human Rights:

The implementation of new austerity measures in Greece amid the country’s deteriorating economic crisis must not come at a cost to human rights, a United Nations expert warned today as he urged international institutions and the Greek Government to make “fully informed decisions” before adopting additional reforms.

“I am seriously concerned about voices saying that Greece is in a humanitarian crisis with shortages in medicines and food,” Juan Pablo Bohoslavsky, the UN Independent Expert on foreign debt and human rights, stressed in a press statement today. “Priority should be to ensure that everybody in Greece has access to core minimum levels of economic, social and cultural rights, including the right to health care, food and social security.”

“A debt service burden that may be sustainable from a narrow financial perspective may not be viable at all if one considers the comprehensive concept of sustainable development, which includes the protection of the environment, human rights and social development,” he added.

And of course, as the IMF report highlights, the deal is not even “sustainable from a narrow financial perspective”.

Kicking the Can or Letting Heads Cool?

If Greece’s creditors, led by Germany, ultimately want to see Greece stay in the Eurozone (for the long run), a friendlier deal is needed. If a “Grexit”, with its short term pain but long term possibilities to return Greece to economic health, is indeed in Greece’s best option given what it’s creditors are willing to offer, why not take that tough medicine and let the healing start? The current deal represents the worst of both worlds–economic pain now and a likely Grexit in the future.

The one positive of this deal is that it did buy time, which should not be undervalued as “Grexit” would be permanent and have terrible geopolitical consequences. But  without stimulus (there are talks of a 35 billion euro stimulus fund by 2020 if reforms are fully implemented, but this may be too little too late) and debt restructuring (which cannot be ruled out, but also cannot be counted on), the deal is little more than kicking the can down the road–all while the Greek people continue to suffer.

Greece’s creditors cannot keep dangling future carrots while imposing fiscal restraints which hurt Greece’s already beleaguered citizenry in the here and now. Aid must be synced with structural reforms, or else the Greeks will see their situation go from terrible to worse and reject the terms of this 3rd bailout. 

Doing the same thing and expecting different results is the definition of insanity. Greece has tried to implement reforms in order to unlock future aid before, and we see where that got it--a severely contracted economy, depression level unemployment rates, and costly political instability. 

This is not the time for more business as usual; this is the time for bold action and trust between Greece and it’s creditors. Unfortunately nothing about the past few months of negotiations suggest this is outcome will be realized.

 

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Conflict Watch: The Situation in Egypt is Spiraling Out of (Into?) Control

http://s1.reutersmedia.net/resources/r/?m=02&d=20130725&t=2&i=754029036&w=&fh=&fw=&ll=700&pl=300&r=CBRE96O0O7I00

A little more than a week before the Egyptian coup that resulted in the ouster of Egypt’s first democratically elected leader Mohamed Morsi, I went on the record as being critical of any non-democratic means of removing Morsi from office. At the time, and still today, defending Morsi certainly puts one on the less popular side of the debate:

(recap)

I have written many times about the democratic experiment in Egypt here at NN. Egypt is an interesting country, it is the most populous country in the Middle-East, and has a long history of cooperation with Western powers (the U.S. funds the Egyptian military). Egypt’s armed forces will play a crucial role in preventing the Syrian Civil War from turning into a regional conflict (and in maintaining regional security in general). While Turkey is another example of an Islamic state attempting to reconcile democracy and traditional Islamic values, there is something about Egypt’s geographical position that makes it seem like a more robust test of the compatibility of the two ideologies (perhaps Turkey seems European-ized–it is actually seeking EU membership–which may isolate it from more conservative Muslim’s, whereas Egypt is in Africa, which could be more agreeable to those same factions).

For these reasons, alongside the human rights and modernization implications of effective democratic governance, I have been cheering Morsi on in his attempt to bring democracy to Egypt. Sometimes I have been too understanding; Morsi has made mistakes along the way, including targeted violations of the civil rights of his opponents in the name of national security / democracy. President Morsi has owned up to these mistakes, and now seems to have learned what it takes to lead an effective democracy.

Transparency, rule of law, accountability / anti-corruption, personal and societal security, an inclusive and participatory governing process, and the indiscriminate protection of human rights are among the most important aspects of an effective democracy. Morsi has (hopefully) learned that seeking to strengthen the legitimacy of his regime by violating these aspects of democracy, even in the name of national security, is counter-productive. Self-defense is fine, but short of that the opposition must be allowed to assemble. In a religious dictatorship the opposition are terrorists / saboteurs / infidels; in an effective democracy they are simply the opposing political party (again, so long as they use political and not military means to advance their goals).

President Morsi has proposed national reconciliation efforts, including making amendments to the constitution (which was open for vote to begin with, the opposition simply refused to participate). He has also proposed the opposition take part in parliamentary elections. Judicial independence has been tricky, as many of the judges in Egypt were assigned under former dictator Hosni Mubarak (packing the courts with his own judges would not ease concerns of a Morsi power-grab either; anyone he appoints, regardless of his background, would be seen by his opponents only as a “Morsi appointee”. Nevertheless, Morsi has offered basically every legitimate democratic avenue available to address the concerns of his opposition.

The opposition, on the other hand, has refused to take part in the democratic process. It will be satisfied with nothing short of Morsi’s removal from office, calling for early presidential elections. Is that any way to establish the credibility of a brand new democratic process, by tossing that process aside instead of trying to work within it? Early elections would undermine the future of democracy in Egypt by setting a bad precedent.

A week after that blog, the Egyptian military gave Morsi a 48 hour deadline before they would step in and remove him from power–and then made good on that threat

I had this to say in reaction to the coup:

General Asis, by giving Morsi a 48 hour period to negotiate, had already made up its mind about overthrowing Egypt’s first democratically elected leader. 48 hours is not enough time to make meaningful progress on negotiations— all such an unrealistic time frame did was further entrench the opposition’s position to refuse to come to the negotiating table.

Give Morsi 6 months, or a year; an amount of time that allow the opposition to prove its legitimacy, and do something other than stand on its head and watch fireworks and light shows. So far all the opposition has shown is extreme, borderline irrational hatred for Morsi (and the Brotherhood, a hatred that has included decades or persecution under the Mubarak regime) and the inability to participate in the democratic process. Why should we believe that now democracy will work in Egypt?

The Military missed a golden opportunity to play arbiter between Morsi and the opposition, upholding both the principles of democratic institutions while also ensuring an inclusive agenda setting and policy making process consistent with international human rights norms. Instead the coup undermines the very ability of democracy to take root in Egypt, and creates far more questions than provides answers.

It was encouraging to see diverse interests standing alongside General Abdel Fattah el-Sisi. However, the shutting down of Muslim Brotherhood news stations and arrests / killings of Morsi supporters paints a grim picture for the future of the Muslim Brotherhood in Egypt. What bothers me is what will happen to those not in the meetings mapping out Egypt’s future–namely the Muslim Brotherhood. Suspensions of freedoms of expression and media independence are also alarming, and make for an unstable basis on which to build a new democracy.

How the new government and the Muslim Brotherhood interacts will determine the ability of Egypt to move forward as a cohesive and peaceful democratic society. If the Brotherhood reacts violently, Egypt may be mired in civil violence for years to come. Only if the Muslim Brotherhood and opposition embrace one-another (admittedly a long shot, at least right away, and one that would require significant political and diplomatic maneuvering) can the new government truly represent all factions of Egyptian society. A modernized Egypt that treats Muslims Brotherhood members as second class citizens can never be a true democracy.

I think the coup came down to Egyptians needing a scapegoat, and Morsi’s regime being in the right place at the right time. Nobody in Egypt wants to admit there are structural economic issues; popular fuel subsidies are unsustainable and large investments need to be made in Egypt’s infrastructure and public services. High unemployment, inflation, and insecurity depress economic output and create a basis for anti-establishment behavior. Egyptians want a President who will tell them they can have their cake and eat it too; perhaps this new coalition government will be able to deliver if they are able to secure a loan from an alternative source without IMF preconditions. I for one do not see where that funding could come from.

Sooner or later difficult fiscal decisions are going to have to be made in Egypt, and not everyone is going to be happy. Are they going to overthrow the next president too? I just do not like the precedent that was set–perhaps I am being idealistic instead of pragmatic. It may be that a stronger democracy comes from this military coup, we will have to wait and find out.

Since these events took place, many of the questions that arose from the Egyptian military coup have answered themselves (an excellent analysis of the events leading up to and since Morsi’s ouster was compiled compliments of Reuters). The Brotherhood has not embraced the armies calls for an inclusive road-map to an effective and pluralistic democracy. Instead, they have elected to continue mostly non-violent protests against the Egypt’s interim government which they refuse to recognize as legitimate.

The interim government’s Cabinet was established without a single Brotherhood member, but it did include military head General Sisi as first deputy Prime Minister. Media outlets that appear to be understanding of the Brotherhood’s dismay have been shut down, including Al-Jazeera’s Cairo branch. Fifty plus Morsi supporters were massacred during prayer where Morsi is believed to be held–ensuing investigations have been not into military conduct (of course not–in Egypt the military is above the law), but against Brotherhood leaders for inciting protests.

Throwing salt on the Bortherhood’s wounds (and fuel on the protester fire), Morsi was recently charged with espionage and murder in connection to his escape from jail in 2011. Morsi was a prisoner of former dictator Hosni Mubarak–charging him for a crime against a popularly disposed dictator seems to run against the armies stated goals.

The U.S. government will continue to provide military aid to Egypt, exonerating itself from taking a stand on exactly what happened in Egypt (although it has rightfully called for Egypt’s new leaders to release Morsi from jail):

The senior official did not describe the legal reasoning behind the finding, saying only, “The law does not require us to make a formal determination as to whether a coup took place, and it is not in our national interest to make such a determination.”

“We will not say it was a coup, we will not say it was not a coup, we will just not say,” the official said.

The alternative source of funding I could not foresee came through from Kuwait, Saudi Arabia, and the United Arab Emirates to the tune of $12 billion in oil products, foreign reserves, and loans / grants. All three of these countries are monarchies, making interesting bedfellows for a country attempting to establish effective and pluralistic democracy. This will allow the Egyptian government to delay cuts to popular subsidies, a precondition for an IMF loan:

“The interim cabinet, chosen this week after the military ousted Islamist President Mohamed Mursi, will probably avoid politically risky reforms of the budget such as cutting the subsidies on which Egypt’s millions of poor depend.

Instead the new cabinet which includes many technocrats and experienced administrators will try to buy social peace with billions of dollars of foreign aid, offered largely by wealthy Gulf Arab states.”

“If the strategy to boost growth fails, the next elected government could take office facing an even bigger cash crunch, forcing it into unpopular decisions early on.

“The concern is that once there is some more permanent government, it will inherit an even bigger economic mess than the one the Mursi administration had,” said Said Hirsh, an economist with London-based consulting firm Volterra Partners.”

Is Egypt spiraling into or out of control? I suppose the answer you receive to that question would depend on who you ask. Ask a Morsi opponent, and he will tell you that the Morsi regime was little more than an illegitimate power-grab. Ask a Morsi supporter and they will tell you Morsi’s failures were due to the “deep state” (military, police, judiciary) and a refusal of his opponents to embrace the democratic process, undermining his rule.

So instead lets look at the indisputable facts. Sectarian divides are stronger now than they were when Mubarak fell–did the coup avert a civil war, or lay the foundation for civil conflict? Human rights are not being upheld in an indiscriminate way, as anybody that supports Morsi may be silenced with impunity by the military (either by having media outlets shut down / being arrested / or killed). A larger budget deficit is all but certain for Egypt’s next democratically elected government.

In Egypt, as long as the army has a popular mandate (or what it deems a popular mandate), it can act with impunity. Human rights violations, unsustainable fiscal policy and government deficits, media censorship, and lack of accountability from the military are week pillars to build democracy on.

Having said all this, there does seem to be a legitimacy with the new Egyptian coalition government; it has said all the right things and seems to back the will of Egypt’s pluralistic civil society. But actions speak louder than words, and the actions of Egypt’s military and interim government–combined with The Muslim Brotherhoods determination to play spoiler in Egypt’s second attempt at democratization–does not bode well for the implementation of Egypts “road-map to democracy”.

If the strategy to boost growth fails, the next elected government could take office facing an even bigger cash crunch, forcing it into unpopular decisions early on.

“The concern is that once there is some more permanent government, it will inherit an even bigger economic mess than the one the Mursi administration had,” said Said Hirsh, an economist with London-based consulting firm Volterra Partners.

Update
Oh boy, it’s looking bad for the Brotherhood and Egyptian democracy:

“The Egyptian authorities unleashed a ferocious attack on Islamist protesters early Saturday, killing at least 65 people in the second mass killing of demonstrators in three weeks and the deadliest attack by the security services since Egypt’s uprising in early 2011.

The attack provided further evidence that Egypt’s security establishment was reasserting its dominance after President Mohamed Morsi’s ouster three weeks ago, and widening its crackdown on his allies in the Muslim Brotherhood. The tactics — some victims were killed with single gunshot wounds to the head — suggested that Egypt’s security services felt no need to show any restraint.”

“In a televised news conference hours after the clash, Interior Minister Mohamed Ibrahim absolved his men of any responsibility and made no mention of the high death toll. His officers, he said, ‘have never and will never shoot a bullet on any Egyptian.'”

In Egypt, it appears the military is the judge, jury, and executioner, as well as the President, PM, Cabinet….

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Economic Outlook: “Financialization”, “Commoditization” and the Real Economy

In a recent Economix blog, Bruce Bartlett explores the role “financialization” has played in American (and global) economic stagnation:

“Economists are still searching for answers to the slow growth of the United States economy. Some are now focusing on the issue of “financialization,” the growth of the financial sector as a share of gross domestic product.”

“According to a new article in the Journal of Economic Perspectives by the Harvard Business School professors Robin Greenwood and David Scharfstein, financial services rose as a share of G.D.P. to 8.3 percent in 2006 from 2.8 percent in 1950 and 4.9 percent in 1980. The following table is taken from their article.”

Data from the National Income and Product Accounts (1947-2009) and the National Economic Accounts (1929-47) are used to compute added value as a percentage of gross domestic product in the United States.

They cite research by Thomas Philippon of New York University and Ariell Reshef of the University of Virginia that compensation in the financial services industry was comparable to that in other industries until 1980. But since then, it has increased sharply and those working in financial services now make 70 percent more on average.”

“While all economists agree that the financial sector contributes significantly to economic growth, some now question whether that is still the case. According to Stephen G. Cecchetti and Enisse Kharroubi of the Bank for International Settlements, the impact of finance on economic growth is very positive in the early stages of development. But beyond a certain point it becomes negative, because the financial sector competes with other sectors for scarce resources.”

“Ozgur Orhangazi of Roosevelt University has found that investment in the real sector of the economy falls when financialization rises. Moreover, rising fees paid by nonfinancial corporations to financial markets have reduced internal funds available for investment, shortened their planning horizon and increased uncertainty.”

“Adair Turner, formerly Britain’s top financial regulator, has said, “There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability.”

He suggests, rather, that the financial sector’s gains have been more in the form of economic rents — basically something for nothing — than the return to greater economic value.

Another way that the financial sector leeches growth from other sectors is by attracting a rising share of the nation’s “best and brightest” workers, depriving other sectors like manufacturing of their skills.”

“The rising share of income going to financial assets also contributes to labor’s falling share. As illustrated in the following chart from the Federal Reserve Bank of St. Louis, that share has fallen 12 percentage points since its recent peak in early 2001 and even more from its historical level from the 1950s through the 1970s.

Labor Share of Nonfarm Business Sector

Bureau of Labor Statistics, Department of Labor

The falling labor share results from various factors, including globalization, technology and institutional factors like declining unionization. But according to a new report from the International Labor Organization, a United Nations agency, financialization is by far the largest contributor in developed economies (see Page 52).

The report estimates that 46 percent of labor’s falling share resulted from financialization, 19 percent from globalization, 10 percent from technological change and 25 percent from institutional factors.

This phenomenon is a major cause of rising income inequality, which itself is an important reason for inadequate growth. As the entrepreneur Nick Hanauer pointed out at a Senate Banking, Housing and Urban Affairs Committee hearing on June 6, the income of the middle class is critical to economic growth because of its buying power. Mr. Hanauer believes consumption is really what drives growth; business people like him invest and create jobs to take advantage of middle-class demands for goods and services, which must be supported by good-paying jobs and rising incomes.”

“According to research by the economists Jon Bakija, Adam Cole and Bradley T. Heim, financialization is a principal driver of the rising share of income going to the ultrawealthy – the top 0.1 percent of the income distribution.”

“Among those pointing their fingers at financialization is David Stockman, former director of the Office of Management and Budget, who followed his government service with a long career in finance at Salomon Brothers and elsewhere. Writing in The New York Times, he recently said financialization was “corrosive” and had turned the economy into “a giant casino” where banks skim an oversize share of profits.

It’s not yet clear what public policies are appropriate to deal with the phenomenon of financialization. The important thing at this point is to be aware of it, which does not yet appear to be the case in Washington.”

A complementary practice that has accompanied “financialization” is the practice of “commoditization“:

“Commoditization” has led to food price volatility and food insecurity in the developing world. It also perpetuated the housing bubble–while it is true that mortgages were always financial products, the way the mortgage backed securities grouped mortgages together turned a practice that was once a means of saving into an opportunity for people to use the equity in their homes like credit cards. When the housing bubble burst, many people found their mortgages “under water”. While there is certainly an element of personal responsibility, the scope of the housing crisis was certainly deepened due to “financialization” and “commoditization”.

Financialization attracts the best and brightest away from other non-financial fields. When all these talented people are working in a saturated market (such as more traditional investments), a natural effect will be the creation of “innovative” financial products–“commoditization”. While commoditization creates short run value by making products more liquid, in the long run it leads to price volatility and bubbles. 

Financialization has led to greater income inequality (as the vast majority of capital gains go to the ultra-wealthy), and diverts resources and man-power away from non-financial industries (the “real economy) due to higher fees paid to financial services (these resources could go to, say, MORE HIRING). It has also perpetuated destabilizing, high-speed, arbitrage-seeking investment. 

It is interesting that Mr. Bartlett says that it is unclear what public policies should be used to correct for this misalignment of resources. The answers are there (and Bruce himself has mentioned some in previous posts), the problem is implementation, as the proper policy responses require transparency and international cooperation and coordination (due to the global nature of capital in the digital age in order to prevent “capital flight”). Therefore, these commitments are rife with incentives to cheat (“prisoner’s dilemma”) which makes it much harder to come to binding agreements. 

One appropriate response is a financial transaction tax (FTT). Such a tax would deter short-run destabilizing trades that have accompanied “financialization” and “commoditization” and direct investments into more long-run wealth creating endeavors (think venture capitalism as opposed to high-speed trading). This would also temper the price volatility effect of “commoditization”.

Another appropriate response would be to have a global standard tax rate for short-run capital gains. By setting such a rate higher than regular income taxation, resources would be diverted away the financial sector and back into the real sector (are you seeing a theme here?). Financial bubbles would be less prevalent, as people would be more likely to hold their income in safer assets / reinvest it in non-financial assets. Due to the relative ease of making short-term capital gains, and differences in national income tax rates, a global short-term capital gains tax rate of 50% seems like a good baseline to start from. Long-term capital gains should be taxed like ordinary income, not at lower preferential rates.

“Financialization” and “commoditization” have had adverse effects on our real economy. The brightest people and an increasing share of national output have been diverted towards (generally) unproductive activities  In the short run this leads to economic growth. But this growth in unsustainable; in the long run crises occur when these bubbles burst, which  have adverse effects that  reach far beyond the financial sector (due in part to “commoditization”). 

Because public policies have allowed financial institutions to grow so powerful, the were able to become “too big to fail“, necessitating tax-payer backed bailouts.

It is a good sign that economists are scrutinizing these practices. If it can be proved that not only do these practices lead to crises, but also have adverse effects on growth, employment, consumption and equality during “good” times, then it will be much harder for politicians around the world to resist the call for greater financial industry accountability via higher taxation (despite the threats from vested interests; if global standards are established, the 0.1% are welcome to setup the Mars Stock Exchange is they so desire).