Raising Retirement Ages in the E.U.: The Case of Spain

The New York Times reported in 2012, “Spain has a stubbornly high budget deficit, its banks require tens of billions of euros in rescue loans and the government may soon have little choice but to request bailout funds” from the E.U.’s “TARP” program. Nevertheless, the state government’s “budget would actually increase pension payouts 1 percent [in 2013]. The money includes not only pensions for former public employees, but also the social security payments that go to all retired [residents].”[1] Pension expenditures represented nearly 40 percent of the state's budget and 9 percent of the state’s economic output, so one would think that line-item would have been first up on the chopping block. To be sure, cutting sustenance programs such as pensions could actually exacerbate a government's debt because if a resulting decline in demand adds to unemployment. In this case, the politics in the state seems to have gone along with the economics. I submit that Spain could have gone further economically were it not for entitlement politics interlarding the retirement-age issue.
Delaying the increase in the retirement age in Spain from 65 to 67 until 2027 could be seen as a case of politics operating at the expense of what was most needed economically. Given the advances in modern medicine and the universal health-care systems in the E.U., even 67 have been too low and too late. 
Firstly, in the 2010's, the E.U. would struggle with immigration even as more workers were needed. The failure of politics in the state of Spain to jack up the retirement age significantly as early as 2013 may therefore have been a contributing factor in shortchanging the local residents from satisfying the state's need for labor. 

Do the state governments have too much power at the federal level? If so, are Greece and Spain paying the price of the self-interest of more dominant states?  

The E.U. state of Greece demonstrates that going just from 65 to 67 can indeed be accomplished legislatively in a year, even with political protests. “For Greece, the longtime generosity of its pension system — in which large numbers were previously allowed to retire at 50 and younger — came to define the bankrupt condition of the Greek state. In the years before the crisis hit, pension payments in Greece totaled as much as 14 percent” of the state’s economic output.[2] Spain too could have used the decrease in pension costs that a relatively quick raise to 67 would have engendered. Raising the age is distinct from cutting pension amounts, yet the austerity-bred entitlement politics may have spilled onto the age issue. 
Raising the retirement age can be distinguished from the cuts in monthly entitlement programs, such as in the lender-imposed austerity program in Greece. If heath-related exceptions can be made to a higher retirement age based on a generally longer human lifespan, then cutting entitlement programs more than raising the retirement age puts lives at risk. This difference may have been lost in the politics of raising the retirement age in Spain.

1. Landon Thomas, “Pension Dilemma in Europe’s Debt Crisis,” The New York Times, September 30, 2012.
2. Ibid.

Stock Market Efficiency: Regulating Speed Trades

A flurry of international activity aimed at putting limitations on computer-based speed-trading was striking during the Fall of 2012 in the U.S. because regulators had been slow to act. Typically, the NYSE has been viewed by the world as the Mecca of efficient investment markets. Paradoxically, however, efficiency may be improved by restricting—meaning regulating—the masses of computer-enabled quick trades that take advantage of momentary microscopic arbitrage opportunities that are too quick for the human hand. The American conventional wisdom seems to be that regulation and market-efficiency are inversely related, rather than complementary. This assumption might be overly simplistic, coming from an inherited ideology. Fortunately, the rest of the world has not been following the SEC.

 A trader on the floor of the NYSE.   Getty Images

The broadest and fastest changes to unfettered speed-trading as of September 2012 were in Canada, where regulators had began increasing the fees charged to firms that flood the market with orders back in the spring of that year. According to the research and trading firm ITG, the change made trading more rather than less efficient because the crush of data burdening the market’s computer systems was reduced. Too much information coming all at once can be distinguished from perfect information, and can even overwhelm a market’s very infrastructure, eviscerating any possible gain from the additional information. For computer science folks, all this can be pretty sexy language; for the rest of us, the mundane fact of the matter is that more information does not always make a market more efficient. Exploiting small increments of arbitrage at a high volume so as to make a quick fortune may not actually improve a stock market’s efficiency because the market itself might crash. Regardless, any increase in the micro efficiency of the stock prices may not be significant, which is perhaps why such volume must be thrown at the problem to make enough money at the macro level.

Nevertheless, the SEC was proposing nothing to hamper the unfettered wild-west of computer trading. Meanwhile, Canadian trading desks were preparing for rules coming into effect on October 15, 2012 that would curtail the growth of the sophisticated trading venues known as dark pools, which the U.S. Government had allowed them to proliferate in the United States. To be sure, the Canadian rules had been hotly debated, but many Canadian bankers and investors determined that they did not want to go any further down the road that has taken the United States from having one major exchange in 2002 to having 13 official exchanges and dozens of dark pools in 2012. In the interim, trading firms and investors on Wall Street were hardest hit by a series of market disruptions, including the flash crash of 2010 and the runaway trading in August 2012 by Knight Capital that cost it $440 million in just hours.

What is striking about Canada is not so much that it was not following the SEC; rather, even the rules going into effect in mid-October were seen by some banks there as insufficient. “We don’t want to look like the U.S., but we have to do it better than we are now,” said Greg Mills, the head of stock trading at Canada’s largest bank, Royal Bank of Canada.[1] Major market participants urging the state to better protect the viability of the market itself through more regulation is a case of statesmanship, or a sort of enlightened self-interest that fuels principled leadership over opportunism in the short-run. To be sure, legislators and regulators should not depend on such “industry self-regulation,” but it is quite beneficial as a supplement. That is to say, the cart should not lead the horse, but it is nice when the cart voluntarily lessens the load.

In the “theory of regulation” literature, market participants urging more regulation are typically presumed to be invoking the comparative advantage of regulation. A bank that would benefit over its rivals if computer-trades were not allowed in such time-volume as they were in the U.S. as of 2012 is typically assumed to be the only player willing to advocate for more government. Admittedly, the strategic use of regulation is not lost on businesses invested in the profit-motive. Nevertheless, this motivation does not exclude the possibility that market participants may urge more regulation out of a realization that if the market freezes up or collapses even for a time, every participant suffers financially.

Perhaps business practitioners in the U.S. are missing not only the forest for the trees, but also the trees for the branches, and the legislators and regulators are following in suit—in part due to the shared perspective (as it is so subtle being everywhere) and in part due to the corporate campaign contributions and intense lobbying. That is to say, the limiting nature of a perspective, unknown to the holders, is as it were a common denominator that tacitly supports a corrosive plutocratic (i.e., rule by wealth) symbiotic relationship between business and government that undermines the system itself. That there are other systems, such as Canada, that are founded on a different set of assumptions can mean that the basic form of the American perspective, which would otherwise be invisible or taken as a given, can be seen, or at least finally glimpsed. From this transparency, the assumptions taken for granted can be put as a problem to be solved. 

1. Nathaniel Popper, “Beyond Wall St., Curbs on High Speed Trades Proceed,” The New York Times, September 28, 2012.