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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Transparency Report: Republicans Oppose U.S. Law Targeting Offshore Tax Dodgers

Original Article:

At its winter meeting in Washington, the RNC approved by voice vote a resolution in favor of abolishing the 2010 Foreign Account Tax Compliance Act (FATCA), set to take effect in July, marking the party’s first explicit attack on the law.

FATCA will require most foreign banks and investment funds to report to the U.S. Internal Revenue Service information about U.S. customers’ accounts worth $50,000 or more. The law was enacted after a scandal involving Americans hiding assets in Swiss bank accounts to dodge U.S. taxes.

Critics have blasted the law as an unfair government overreach and invasion of financial privacy.

“The Republican National Committee … urges the U.S. Congress to repeal FATCA,” said the measure, staking out a campaign position ahead of 2014’s mid-term elections.

Tax watchdog groups that support FATCA slammed the Republican vote. “It is mind-boggling that a major political party would even consider endorsing a resolution to facilitate tax evasion,” said Heather Lowe, director of government affairs at anti-graft watchdog group Global Financial Integrity.

“Repealing the law would cripple the U.S. and global efforts to fight offshore tax evasion,” she said in a statement.

The Center for Freedom and Prosperity, a group that advocates for lower taxes and financial privacy, praised the RNC vote. “The GOP’s adoption of FATCA repeal to its platform is a major victory for taxpayer privacy rights,” said the center’s Director of Government Affairs Brian Garst.

Repeal is unlikely and the issue was not expected to resonate with average U.S. voters, said lobbyists on both ends of the political spectrum. But they said Republican opposition to the law could help the party raise campaign funds.

It is certainly mind-boggling that a major political party would endorse such a view. And even if a repeal is unlikely, this issue should “resonate with the average U.S. voter”. In an era of constant budget-battling and debt-ceiling standoffs (the next one is right around the corner), where stimulus spending is unthinkable and welfare programs are constantly coming under attack (even though both are extremely important during an economic recovery), it is important for Americans to understand the main drivers of U.S. government debt. Once you understand these main drivers, it is obvious why this G.O.P. position on FATCA is unconscionable.

A quick simplified lesson: There are two sides to government debt, receipts (tax revenue) and outlays (spending). While there are certain drivers of long-term spending which must be reformed (social security, and medicaid, and defense spending specifically), these long term issues have little to do with economic recovery fiscal policies (government stimulus spending and “automatic stabilizers“).

A few historic graphs from the White House Office of Management and Budget (full tables from 1938-2012 can be downloaded: reciepts_endpenditure_historyreciepts_by_source) tell the story of U.S. government debt.

RECEIPTS, OUTLAYS, SURPLUS/DEFICIT(–)% GDP | PERCENTAGE COMPOSITION——————————————————————|  OF RECEIPTS BY SOURCE
Year GDP (in billions of dollars) Total Individual Income Taxes Corporation Income Taxes
Receipts Outlays Surplus or Deficit (-)
1992 6,242.0 17.5 22.1 -4.7 43.6 9.2
1993 6,587.3 17.5 21.4 -3.9 44.2 10.2
1994 6,976.6 18.0 21.0 -2.9 43.1 11.2
1995 7,341.1 18.4 20.6 -2.2 43.7 11.6
1996 7,718.3 18.8 20.2 -1.4 45.2 11.8
1997 8,211.7 19.2 19.5 -0.3 46.7 11.5
1998 8,663.0 19.9 19.1 0.8 48.1 11.0
1999 9,208.4 19.8 18.5 1.4 48.1 10.1
2000 9,821.0 20.6 18.2 2.4 49.6 10.2
2001 10,225.3 19.5 18.2 1.3 49.9 7.6
2002 10,543.9 17.6 19.1 -1.5 46.3 8.0
2003 10,980.2 16.2 19.7 -3.4 44.5 7.4
2004 11,676.0 16.1 19.6 -3.5 43.0 10.1
2005 12,428.6 17.3 19.9 -2.6 43.1 12.9
2006 13,206.5 18.2 20.1 -1.9 43.4 14.7
2007 13,861.4 18.5 19.7 -1.2 45.3 14.4
2008 14,334.4 17.6 20.8 -3.2 45.4 12.1
2009 13,960.7 15.1 25.2 -10.1 43.5 6.6
2010 14,348.4 15.1 24.1 -9.0 41.5 8.9
2011 14,929.4 15.4 24.1 -8.7 47.4 7.9
2012 15,547.4 15.8 22.8 -7.0 46.2 9.9
2013 estimate 16,202.7 16.7 22.7 -6.0 45.5 10.6

Government expenditures will go down when we experience full economic recovery (and not just a recovery for the top 1%)–that’s why welfare programs are known as “automatic stabilizers”. What will not automatically change are tax receipts, which are at their lowest levels since 1950. The American public has been paying a fairly constant portion of total federal taxes over the past 6 decades through income taxes–between 40-50%. Corporate taxes have fluctuated wildly; between 1940 and 1967 they made up 20-30% of federal tax revenue, since 1980 they have hovered around 10%.

The American public continues to pay its fair share, while corporations get a pass (and actually get huge bailouts and subsidies). America, in reality, has a regressive tax system. This low effective corporate tax rate stems largely from tax loopholes; a difficult problem to address rooted in corporate lobbying (money buys influence buys loopholes). Overcoming this problem will take an overhaul of the government tax code and a change in the current lobbying system, neither of which is an easy task.

Much less contentious should be targeting offshore cash holdings. While loopholes at least (allegedly) contribute to job creation, offshore tax evasion is a crime which robs the U.S. of vital tax revenues with no benefit to society. But even this “slam-dunk” reform is being challenged by the G.O.P.

Privacy Narrative:

I thought it was interesting that the Center for Freedom and Prosperity, a conservative think-tank, used the privacy narrative to justify the G.O.P. stance on FACTA. This reminded me how Matt Taibbi, in his book “Griftopia”, explains how the wealthy sell financial sector deregulation to the lay-man.

According to Taibbi, financial regulation is equated to local / state level government regulation–the average person, who experiences government overreach in their day-to-day lives, feels for the “poor banker trying to earn a buck”. Of course this equation is false; however, many people do not know enough about our political system to understand this fallacy, especially when their favorite news outlets are driving this false narrative home.

It seems that something similar is being attempted with this privacy narrative. One of the main issues of the day is NSA “spying”. Perhaps conservatives are trying to latch onto this privacy narrative to drum up popular support for repealing FACTA. I think this is a tougher sell, although financial deregulation sounded like an impossible sell until pundits begin selling it. It is therefore important to expose this fallacy to the general public before the narrative hits the newsroom.

Next time you hear an argument about “fiscal responsibility”, remember the G.O.P is the party of offshore tax evasion. Social spending programs and the tax code need to be overhauled; these issues will take time to remedy and must be addressed with care, they cannot be attached to short term issues like economic recovery or the debt ceiling.

Enabling offshore tax evasion by repealing FACTA benefits nobody except those who engage in offshore tax evasion–this should not be a contentious issue. Those who engage in such activities do not deserve our understanding or support, regardless of your stance on NSA surveillance.


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Economic Outlook: China’s Local Debt Solution–Financial Liberalization or Debt Monetization?

Original Article:

The total debt of local governments in China has soared to nearly $3 trillion as the country’s addiction to credit-fueled growth has deepened in recent years, according to the findings of a long-awaited report released on Monday by the central auditing agency.

The June figure also represented a sharp increase of 67 percent from the end of 2010, when an earlier report by the Audit Office estimated local government debt at 10.71 trillion renminbi.

In the five years since the onset of the global financial crisis, local governments at the provincial, municipal, county and township levels across China have gone on a spending spree, loading up on debt to finance a surge of investment in infrastructure, real estate and other projects.

The structure of much of this borrowing has also raised concerns. With a few exceptions for pilot programs, local governments in China are prohibited from directly taking on loans or issuing bonds. Instead, they have set up thousands of special-purpose financing vehicles that borrow on the government’s behalf to pay for a given project.

Such financing vehicles had confirmed probable and potential debt obligations totaling 6.96 trillion renminbi as of June, according to the Audit Office’s report, accounting for nearly 40 percent of all local government debt.

Analysts had for months been anticipating the results of the audit office’s survey. As part of an investigation that began in July, the agency said, it deployed 54,000 auditors across the country, who combed through the books of more than 62,000 government departments and institutions and examined 3.4 million debt instruments related to more than 700,000 projects.

Based on findings of the new report, Lu Ting, a China economist at Bank of America’s Merrill Lynch unit, estimated that China’s total public debt stood at 53 percent of gross domestic product. Adding corporate and household obligations lifts the total debt ratio to as much as 190 percent of G.D.P., he estimated.

China’s overall debt ratio “is neither exceptionally high nor low,” Mr. Lu wrote on Monday in a research note. Still, he said he was concerned that for the last two years China has been adding debt faster than its economy has been growing.

Financial Liberalization:

According to analysis by Reuter’s economists, China’s plan to reign in debt via municipal bond markets relies on “the one thing its officials are most afraid of: transparency”:

By letting local governments sell bonds for cash, China wants to rely on nimble markets rather than inflexible regulations to keep spendthrift units in check.

The stakes are high. A bond market is the centerpiece in China’s blueprint to mop up fiscal troubles and keep its economy growing at an even pace, giving it needed room to start other bold financial reforms.

But analysts say China’s dreams of a municipal bond market are so far just that, as building one has been impeded by a lack of disclosure from local governments on how much money and assets they have, and how much they owe.

“If you want to lend to a specific government, you need to have a clue as to what the financial conditions are like,” said Tan Kim Eng, a senior director of sovereign ratings at Standard & Poor’s in Singapore.

“There’s still a lot of work to be done on the fiscal transparency front.”

“Any improvement to fiscal transparency will be limited unless the central government regularly publishes similar audit reports,” Standard & Poor’s said separately in a note on Tuesday. “It’s also unclear whether China will disclose the debts of individual local and regional governments.”

To be sure, China is mulling other options for cleaning up its debt mess, including allowing private investors to pay for public works, and letting the central government absorb more spending responsibilities.

But no plan resonates better with reform-minded officials than that for a municipal bond market, partly because it fits perfectly with China’s goal of reducing central planning to let financial markets work their magic.

Facing savvy local officials quick to change financing strategies to evade rules, Chinese experts have championed creation of a municipal bond market. Such vehicles, they say, will decide which governments deserve funding, and spendthrift ones will be punished with higher borrowing costs.

Beijing appears to like the idea, and is testing the ground for such a bond market in six prosperous cities including Shanghai and Guangdong.

But short of full disclosure of just how much governments take in and borrow, analysts doubt China’s experiments with its local bond market will go far.

“Banks and rating agencies do not have easy access to local governments’ overall fiscal position, which includes not only budgeted revenue and expenditure but also extra-budgetary revenue and expenditure,” the International Monetary Fund said in October.

“This lack of transparency prevents banks and rating agencies from pricing credit risk properly and prevents local governments from managing related risks prudently,” it said.

Debt Monetization:

Another option to reign in local debt is “debt monetization”. In such a scenario, China’s central bank (The People’s Bank of China) would print money, and use that money to buy up outstanding debt (taking it out of the public’s hands). China’s central government could then cancel the debt it just purchased, on the condition certain policies it desires are enacted (financial transparency / fiscal responsibility / greater future role for the central government in local budgetary decisions for example).

The downside of “debt monetization” is that it increases the money supply, which can have inflationary consequences.

Which policy (or mix of policies) will China pursue to reign in local government debt? It depends if you believe in China’s economic blueprint rhetoric or not.

In recent months, China has revealed an ambitious plan that will allow markets to play a bigger role in the economy, beginning a shift from a primarily export based economy to one based more on personal consumption. In line with this plan would be a financial transparency / market based approach to the local debt problem. Increasing budgetary transparency would make local governments more accountable to financial markets and (secondarily) their electorates.

However, the debt monetization approach creates winners as well (who happen to be the usual winner in China–the political elite). It would provide a greater role for the Communist Party in local economic decisions. It would also reduce the value of China’s currency (monetary expansion), which while reducing disposable income (consumption spending) would likely make exports more attractive (which has been the traditional engine of Chinese growth). If you think the Chinese government is just blowing smoke with its economic “blueprint”, and cares more about aggregate growth rates than personal well-being, the debt-monetization approach makes more sense.

It remains to be seen what actions the Chinese government takes, and actions speak louder than words. “Pilot” market liberalization projects have begun in large “international” cities like Shanghai and Hong Kong, will they reach smaller municipalities as well? Can China’s blueprint for economic liberalization fit in with the  determination of the Communist Party to keep a strong grip on political power? Is the Chinese government trying to say the right thing, while further entrenching the role of the central government in everyday life?

The policy response to the local debt crises will provide some rare insight into the true intentions of the Chinese Communist Party.


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Transparency Thursday: Helping the Poor Help Themselves

Lots of attention is paid, rightfully so, to those in extreme poverty in the developing world. However, those living in relative poverty in wealthier countries face similar problems as those living in extreme poverty (albeit generally to a lesser degree) : malnourishment, an underestimation of the value of education, and poor financial choices due to a very high “discount rate” (a little pleasure now is worth more than a lot of pleasure in the future, possibly because of a pessimistic view of the future driven by living in poverty).

Another important similarity is that financial shocks always affect poorer people more than wealthier people; with less income to go around, an unexpected strain causes a poorer family to have to make difficult financial decisions with potentially serious ramifications. This problem is compounded by the fact that poorer people tend have worse credit ratings, further hurting their ability to utilize the financial tools available to them and deal with unexpected financial shocks.

“When there is no cushion, one small mistake can be catastrophic — if you rely on a car to get to work, for example, missing a car payment can result in the loss of a job.”

A major difference is that in the developed world, the institutions, organizations, and infrastructure already exist to help these people. In the developing world, projects often have to be built from the ground up, financing is harder to find, and projects are more susceptible to corruption and general volatility/insecurity that could threaten its success. In the developed world, it is not so much about building a financial system, (and a strong government / judicial system to oversee that financial system) as it is teaching people how to use systems already in place to their advantage. This simplifies the job of poverty reduction in the developed world immensely.

The social “safety net” is a good system, however providing welfare services does not address the root cause of of poverty, it simply mitigates the human suffering being poor can cause. By doing more to prevent people from having to rely on entitlement spending, and helping people avoid entitlement spending by being more financially responsible, the sustainability and integrity of the social safety net is preserved.

“Ideally, the coach can help clients set up systems that keep them on track: automatic savings, automatic bill payment, automatic reminders by text. ‘Distress is an economic state but also a psychological state,’ said Mullainathan. ‘The remedies have to address both.’”

A large part of this process is helping people overcome the fear associated with handling financial problems. This process will depend on experts simplifying ones budget and teaching them about simple financial tools that will help their problems more accessible (and then signing them up for those programs).

People often feel overwhelmed by financial troubles and ignore the situation, which only compounds the problem. By addressing the fear behind getting finances in order, poor people are empowered to take control of their finances. By setting up simple automatic measures, one’s financial position can change drastically.

“Jaimes said that most of his clients come to their first meeting with a stack of collection letters — unopened. ‘Can I open these envelopes for you? We have to deal with them,’ Jaimes tells them.”

 “Lisser begins by addressing clients’ stress, step by step: ‘You will feel relieved after you settle the first one,’ she says. She leads them through opening the debt notices, calling the collections agencies and beginning negotiations. When the client takes over making the calls, she will coach by scribbling notes.”

The process is appealing because it is not “giving” in the sense of a traditional welfare program, but is “empowering”. This empowerment should build confidence when handling financial issues and help build optimism towards the future (and therefore better decision making skills), increasing social mobility while breaking the root causes of “poverty traps”.

This program is currently being championed by, guess who, Michael Bloomberg (you knew it had to be either Bloomberg, Gates, or Buffet right?):
“Currently there are more than 30 centers lodged in neighborhood organizations around the city, offering counseling in multiple languages. Bloomberg Philanthropies, the mayor’s personal charity, is now providing grants to Living Cities’ Cities for Financial Empowerment Fund to replicate and customize the model in Philadelphia, Nashville, Denver, San Antonio and Lansing, Mich., — places that won out over 45 others for these grants. The first centers will open in March.”

It will be interesting to see how successful this program is when tried in different locations. If it is successful, the U.S. government should seriously consider further investing in this empowering model of poverty and debt reduction.  

(Note: debt reduction and poverty reduction are not the same thing, but they are very closely related)