On the Role of Socialism in American Political Polarization

In a stunning upset in the 2012 Republican U.S. Senate primary in Indiana, Indiana's Treasurer, Richard Mourdock, beat incumbant veteran Richard Lugar by 22 percent (61-39%). Even though Lugar's 36 years of experience in the Senate had seasoned him into a statesman in foreign policy, the Tea-Party-backed Mourdock was able to portray the aged senator as out of touch and too willing to compromise with Democrats. Mourdock had no intention of extending any hand across the aisle. Is such polarization worth the loss of experience in international relations? Moreover, what is the role of socialism in the political polarization? 

"While Lugar advised in his concession speech . . . that Mourdock would need to work together with lawmakers in the Senate, the new nominee stuck to the belligerent tone he [had] maintained in the campaign, warning that Democrats and socialists were destroying the nation."[1]  Even if Democrats were for government ownership of the means of production (i.e., companies), which is socialism, it does not follow that those Democrats were also attempting to sabatage the U.S. in its foreign relations. Especially given Lugar's expertise in that area, working across the iasle would only make sense. Nevertheless, Mourdock saw a link. 
"Today," he said, "we see the Obama White House and we see a Senate chaired by Harry Reid that's doing everything it can -- though perhaps not intentionally -- to turn our dreams, to turn our great national hope and our dream into the nightmare of ever-growing government, to make us that … western European-style nation,’ Mourdock said. ‘Just yesterday, France elected a socialist,’ he continued. ‘There are those I'm sure in the administration and in the left side of the Democratic Party that were cheering for that. But we're not going to stand for that in Indiana because the supporters of Barack Obama are not going to win!”[2] In other words, Mourdock expected the Democrats to cheer on and perhaps even aid "socialist" governments around the world, the spread of which could isolate the U.S. and the related interests of private property. In 2019, for example, the World Trade Court ruled against the E.U. for having unduly (i.e., unfairly, in terms of free trade) subsidized Airbus. The government ownership of a company goes beyond such subsidization of a corporation like Airbus, which, as of 2019, was owned by EADS, which in turn was owned by a mix of private companies and a few E.U. states. 

What about those supposed socialist countries? To be sure, Francois Hollande ran under the Socialist Party banner. However, the “socialist” policies that he had campaigned on were redistributionist. He did not advocate that the state own more of the means of production. Hollande was redistributionist in that he suggested that la dette (government debt) that Sarkozy had doubled should not be cut only by austerity (i.e., budget-cuts), which hurt the poor disproportionately; rather, the rich should be taxed what they had been taxed before the top tax rate was lowered. 
In fact, Hollande was in a position fresh from his victory to push for federal (i.e., E.U.) economic stimulus spending to complement the federal austerity programs in debt-ridden states, including Greece, Spain, Portugal and Ireland. Using tax increases and budget cuts to reduce government debt is hardly socialism. 
So, Mourdock's lack of knowledge on socialism as an economic system as well as on European governments, combined with his refusal to reach across the aisle, were misplaced, and thus not worth the loss of Lugar's expertise in foreign policy. 

1, Michael McAuliff, “Dick LugarLoses to Tea Party’s Richard Mourdock in Indiana Republican Senate Primary,” The Huffington Post, May 9, 2012. 
2. Ibid.

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.

Structural Reform and Economic Sustenance in European Austerity

Speaking at the World Economic Forum in Davos, Switzerland on January 25, 2013, Mario Draghi, president of the European Central Bank(ECB), said the bank’s program to buy the bonds of heavily indebted E.U. states had been “very helpful” in reducing the perception that the euro was on the verge of collapse. He also pointed to the structural reforms that heavily indebted states had enacted as “now bearing fruit.”[1] He urged those governments to continue to implement structural reforms so those states could take advantage of the ECB’s low interest rates and easy credit to banks. In short, the strategy of the ECB was to use monetary policy as leverage for long-term-oriented structural reforms at the state level. Political risk analysts listening to the central bank official likely came away with a more optimistic stance on the long term prospects for the E.U. economy.

Even though the progress achieved already on the debt crisis provided “light at the end of the tunnel,” the matter of structural reforms at the state level was subject to politics and was thus more uncertain. Also, economic conditions could worsen, hence making it politically and economically more difficult to make the needed structural changes. Chancellor Angela Merkel of the state of Germany warned the governors of heavily-indebted states such as Greece and Spain against the impulse to reduce the pace of structural reform in the face of economic stagnation. She pointed to the record unemployment numbers announced in Spain on January 24, 2013 as fodder for the anti-austerity political forces there. She further observed that “experience tells us that often pressure is required to enable structural reform.” The obstacles could have come from political officials or bureaucrats at the state level, and even from the people, upset at the economic austerity cut-backs hitting themselves and even the poor who depend on funding for sustenance. Advocates for those people were doubtlessly contesting that survival in the short run should not be sacrificed for long-term structural reform. 
Interestingly, making a qualitative (i.e., difference in kind) distinction between government programs that keep people alive on a daily basis and all the other budget items could actually permit more budget cutting because so much would be found to be subject to cuts without risking lives. In the U.S. at least, the qualitative difference has typically been made between domestic and military spending. This dichotomy has enabled huge increases to military programs even as cuts to food assistance have been proposed. Of course, the unemployment caused by a cancelled defense contract could put people in danger of losing their house or going without food. However, such individuals would be covered by the continuance of the programs providing sustenance as long as they were held apart from the other spending categories. Having an indirect effect on sustenance, such as military contracts can, does not render a particular budget item itself in the category of vital programs for sustenance, such as building more halfway houses for the mentally ill who are homeless.  This reflects the American culture more, wherein much more is deemed conditional than in Europe, where the principle of solidarity has been and is still more salient politically.
In short, long-term fiscal reform need not be at the expense of people eating and having shelter as well as medical care. Based on the firm foundation of human rights, programs primarily geared to sustenance can be isolated and protected such that the structural reform can be implemented more smoothly. Buffering sustenance programs from the massive cuts everywhere else would significantly reduce the vehemence of the protests and soothe the path of structural reform by isolating the entrenched officials and bureaucrats as the only primary obstructionists. 

See also Essays on the E.U. Political Economy, available at Amazon.  

1. “Davos: ECB’s Draghi Says ‘Real’ Economy Still Stagnant,” Deutsche Welle, January 25, 2013.

Greek Austerity: Pressure on the Environment

“While patrolling on a recent cold night, environmentalist Grigoris Gourdomichalis caught a young man illegally chopping down a tree on public land in the mountains above Athens. When confronted, the man broke down in tears, saying he was unemployed and needed the wood to warm the home he shares with his wife and four small children, because he could no longer afford heating oil. ‘It was a tough choice, but I decided just to let him go’ with the wood, said Mr. Gourdomichalis, head of the locally financed Environmental Association of Municipalities of Athens, which works to protect forests around Egaleo, a western suburb of the capital.”[1] Tens of thousands of trees had disappeared from parks and forests in Greece during the first half of the winter of 2013 alone as unemployed Greeks had to contend with the loss of the home heating-oil subsidy as part of the austerity program demanded by the state’s creditors. As impoverished residents too broke to pay for electricity or fuel turned to fireplaces and wood stoves for heat, smog was just one of the manifestations—the potential loss of forests being another. On Christmas Day, for example, pollution over Maroussi was more than two times the E.U.’s standard. Furthermore, many schools, especially in the north part of Greece, had to face hard choices for lack of money to heat classrooms.

Greek forests were succumbing  in 2012 to the Greeks' need to heat their homes as austerity hit.   source: Getty Images

Essentially, austerity was bringing many people back to pre-modern living, perhaps including a resurgence in vegetable gardens during the preceding summer. At least in respect to the wood, the problem was that the population was too big—and too concentrated in Athens—for the primitive ways to return, given the environment's capacity. 
To be sure, even in the Middle Ages, England had lost forests as the population (and royal plans) grew. In December 1953, many Londoners decided to use their fireplaces to burn wood, resulting in pollution blanketing the city. As a result, thousands died and the city outlawed the use of fireplaces. No one probably thought to ask whether the city had gotten too big—and too dense. No policy was enacted that would result in a shift in population out of the region.
Generally speaking, human population levels made possible by modern technology and medical advances have become too large for a return to pre-modern ways of life. Because of the extraordinarily large sizes of the modern city, including Athens, suddenly removing modern technology, which includes government subsidies, it is especially problematic when many people are forced to fend for themselves to meet basic needs. The efficiency of modern technology, including in regard to utilities and food distribution, is often taken for granted, even by governments, so the impacts on the environment when masses of people “return to nature” can be surprising. Nature has become "used to" seven billion humans on the planet in large part because we have economized via technology so the full brunt of the population-size is not felt. Particularly in industrial countries, societies are reliant on modern technology because without it the bulging population is unsustainable. 
Put another way, we have distanced ourselves from nature, and our growth in numbers in the meantime has made it impossible for us to “get back to nature” in a jolt, especially by many people. It is in this sense that governmental austerity programs that cut back on sustenance are dangerous not only for society, but also the ecosystems in which humans live. Accordingly, by mid-January, 2013, the Greek government was considering proposals to restore heating-oil subsidies. It is incredible that the financial interests of institutional creditors, including other governments, were even allowed to put the subsidies at risk.
In ethical terms, the basic sustenance of a people takes priority ethically over a creditor’s “need” for interest. The sin of usury is sourced back to the origins of lending as an instance of charity rather than money-making either from the plight of the poor or profit-uses.[2] When a person in antiquity was in trouble financially, someone with a bit of cash would lend some with the expectation that only that sum would be returned. The demand for interest on top was viewed by the historical Church as adding insult to injury (i.e., the bastardization of charity into a money-making ruse). Then exceptions were made for commercial lending, wherein a creditor could legitimately demand a share of the profit made from the borrowed money in addition to the return of the principal. As commercial lending came increasingly to characterize lending, the demand for interest became the norm, even on consumption loans when no profit would ensue to pay off the loan with interest. The notion that interest is conditional on a borrower having enough funds was lost, causing much pain to many in the name of fidelity of contract, as if it or the creditor’s financial interest were an absolute. Put another way, the default has swung over from the borrowers to the lenders to such an extent that society may look the other way as people literally have to cut down trees to heat their homes because creditors have demanded and won austerity touching on sustenance programs.
Therefore, especially in Christian Europe, putting people out by pressure being applied to state governments in the E.U. to make payments even in the context of a financial crisis can be considered to be untenable, ethically speaking. I am not suggesting that states should be profligate with borrowed funds. Rather, just as Adam Smith’s Wealth of Nations is bracketed by his Theory of Moral Sentiments, so too an economy (and financial system) functions best within moral constraints. 

1. Nektaria Stamouli and Stelios Bouras, “Greeks Raid Forests in Search of Wood to Heat Homes,” The New York Times, January 11, 2013.
2. Skip Worden, God's Gold, available at Amazon. 

Investor Assessments of Political Events

Although the various investors in the financial markets doubtlessly pay great attention to important political events, such as were a state in the E.U. to default on its bonds, I suspect that market analysts overstate the importance of more commonplace political events. For example, the New York Times reported in late September 2012 that investors were shifting their portfolios to reduce risk out of uncertainty regarding the upcoming American elections and the ongoing negotiations in Congress to avoid the huge budget cuts and tax increases set to begin automatically at the beginning of 2013 and run for a decade. Additionally, fears that E.U. leaders might hesitate on moving forward with the bailout program oriented to indebted states were prompting investors to be more risk-averse. Generally speaking, analysts were “anticipating that politicians may not act until forced,” both in the U.S. and E.U., “setting the markets up for weeks of angst.” In my view, this account is overstated.

“Right now, we’re much more defensive than we were a few weeks ago,” Martin Leclerk of Barrack Yard Advisors said at the time. He had shifted 20 percent of his company’s assets to the safety of cash. More broadly, investors were cashing in their gains, according to the Times, “on riskier stocks and moving into bonds and safer stocks, like consumer discretionary companies that are not as susceptible to a downturn in the economy.” Rather than presume that all this stemmed from uncertainty regarding the American elections or even the anticipated budget sequestration of the U.S. Government and the E.U. bailout program, I submit that the investors were taking a general reading of the global economy to assess how much economic growth would be likely in 2013. In this regard, the announcement by the Chinese government of stimulus spending is more significant than who wins what offices in the U.S. or whether the E.U. officials are really hesitating on Greece and Spain. The minor presidential election drama fueled by an all-too-innocent media and even the manipulatory threats by E.U. leaders as if jockeys bending the whip to get Greece to pony up rather than lax off are both dwarfed in financial importance by assessments of how the world economy as a whole is likely to do. Specifically, the question is whether the lower growth in China will be tolerated by government officials, and if so, whether that growth would be enough to offset the sluggishness in the E.U. and U.S. The U.S. economy in 2013 would not likely hinge on which party wins the White House because the other party typically has a veto in the U.S. Senate thanks to the ubiquitous filibuster. In the E.U., hesitations should be read more as efforts to manipulate certain recalcitrant state governments than as serious attempts to scuttle the bailout program. Elections do matter and programs do change, but the trajectory based on the status quo has such tremendous gravitational pull that even mandates tend to get watered down by the time they get implemented.

 Does expertise on these make one an expert on politics?  

Therefore, I suspect that the market discounts political “news” that you and I are presented with as “important” and “vital.” Often times, the importance is magnified in order to sell ads. The world economy is remarkably steady-state, and wise investors undoubtedly take a long-term perspective rather than allowing themselves to become ensnared by the titillating excesses fomented by the media. To be sure, jolts such as the effect the financial credit-freeze in September 2008 had on world trade do matter in terms of contractions in the world economy, and investors are smart to become more risk-averse in anticipation of such periods. Even so, a near collapse of the global financial system can be distinguished from which corporate party wins the White House in a certain election cycle or how an internal tiff among E.U. leaders (or states) gets resolved. My point is simply that elections are not usually the beginning of major course changes (and I am not even sure those have such a bearing on the economy as a whole), and that squabbles in the E.U. do tend to get resolved somehow or other. Neither "event,"  therefore, is earth-shattering even if it makes for good television. I suspect that investors know this and discount the white noise accordingly.

Source:

Nathaniel Popper, “Fearing Fiscal Cliff, InvestorsCash In and Seek Safety,” The New York Times, September 28, 2012. 

CEOs in 2012: Avoid the “Fiscal Cliff”!

Reporting in November 2012 in anticipation of the across-the-board budget cuts and end of the Bush tax cuts, together expected to amount to around $500 million for 2013 alone, the Wall Street Journal observed that some large American corporations were “making plans to slow investments, lay off workers and pay less-generous dividends if Congress and the Obama administration don’t find a way to avert the so-called fiscal cliff.” Such plans could represent a self-fulfilling prophesy wherein a hit of just over a half trillion dollars in an economy of over $16 trillion is nonetheless depicted by the media as a cliff. In actuality, it could be more like taking a step down the stairs rather than falling off a cliff. Even if the federal budget cuts and end of the Bush tax breaks in 2013 would not in themselves drive the U.S. economy off the cliff into an economic abyss, the assumption of economic Armageddon could build-up downward momentum to something even far worse than a return to recession. The culprits are those in business, government and the media who were engaging in a series of steadily loud exaggerations. It could justifiably be asked, what’s the difference?

The difference is that a downturn from exaggerated rhetoric on the public airwaves would not inevitable, even were sequestration to occur. Even the sequestration alone was not in itself inevitable as 2012 was coming to an end, as Congress and the president had ample opportunity go beyond posturing to avert the $500 million hit by reaching a deal on budget-cuts and revenue increases. Making matters perhaps worse, the corporate executives who were discussing their plans publically in November 2012 may have been depicting their intentions overly pessimistically in order to manipulate the contours of an eventual deal between Congress and the White House, or just to press the federal officials to get to a deal—anything. In other words, as laudable as it is to pressure elected representatives to work together for the good of the entire economy, advertising exaggerated corporate plans to do it could play into the self-fulfilling prophesy.

Bank of America CEO Brian Moynihan said at an investor conference in New York in November that uncertainty about U.S. tax and spending policies had already prevented many clients from investing in 2012. At a meeting of CEOs hosted by the Wall Street Journal, Mark Bertonini of the health insurance company, Aetna, said, “The American people are going to suffer, because we’ll lay them off.” Besides the fact that stoking fears as a means to manipulate public opinion and federal lawmakers is ethically problematic, the CEO’s claim might be exaggerated, or at least overly simplistic even as it is in line with the financial interest of an insurance company that would be negatively affected by the budget cuts to hospitals.

The Journal itself provides a reality-check in making the following observation: “To be sure, there is a difference between CEOs issuing warnings to influence a policy debate and actually making cuts. Companies juggle a range of factors when deciding whether to hire, fire or invest, and many say privately they are more influenced by broader shifts in technology and demand than the fiscal cliff.” Merely in using the term cliff, however, the Journal is unwittingly complicit in the game. About a week later, the Journal would blatantly state that for investors, the stakes   were high.

Bertonini’s claim of eventual layoffs could have very little to do with Aetna’s actual contingency plans—the claim being primarily to manipulate rather than inform. Even defense contractors and hospitals, which would be directly impacted by the sequestration (but also by a Congressional agreement, albeit less so), had probably already factored the possibility into their operations in 2012 so any further downturns in 2013 from the sequestration would probably be more muted than the cliff rhetoric would suggest.

Already in 2012, the eurozone’s quarterly GDP numbers, including the third-quarter “slump” of -0.2 percent, was “weighing on” executives at American companies in terms of their cautiousness in investing and hiring at a time when consumer demand in the U.S. was running at its highest level since mid-2007. That is to say, world events prior to the anticipated “fiscal cliff”were also playing a role in the business outlook in America.

Warren Buffett, the founder of Berkshire Hathaway, said the U.S. has a "very resilient economy" and so going over the so-called cliff would not be permanently crippling. To be sure, the senior statesman of business could have been trying to manipulate Democratic leaders to push for higher tax revenue from the rich. However, Seifi Ghasemi, CEO of Rockwood Holdings, a specialty chemical manufacturer, said in late 2012 that preventing another war in the Middle East and bolstering Europe’s economy were bigger concerns” at the time than avoiding the sequestration of across-the-board budget cuts. With the exception of Newt Gingrich saying on ABC This Week that the U.S. economy was big enough to handle a $500 million hit, Buffett and Ghasemi were lone wolves in the wilderness in downplaying the "cliff" theatrics that the sky would fall should the budget ax fall early in 2013. At the conference of CEO’s hosted by the Wall Street Journal in November 2012, 73 percent of the executives said they were more concerned about sequestration than even the E.U.’s debt crisis—this in spite of the fact that the Economist had just come out with a major piece on the uncompetitiveness of France representing a new danger to the euro.

The involvement of CEOs in the chorus of “the sky is falling” rhetoric in order to manipulate public policy for financial gain should strike us as nothing new. It is crucial to note, however, that the topic here was systemic in nature, meaning that the U.S. economy as a whole and the fiscal viability of the U.S. Government itself were presumably at issue. The stakes are perhaps too large where the risk is systemic for CEO’s to “hyper-drive” the public discussion into hysteria just so profit won’t be as negatively affected by government cuts.

Whereas corporate public affairs offices are typically oriented to getting favorable regulations (i.e., strategic use of regulation) or deregulation oriented to a particular industry, the “fiscal cliff” would impact the entire economy—the question being how much. Using the sequestration “debate” to eke out more financial gain or avoid a loss for one’s company can be dangerous for the system as a whole if the manipulation distorts the problem. In my view, fiscal cliff is inherently distortive, and thus any public manipulation based on it is also problematic. To “join in”for financial gain is not exactly being socially responsible.

Whether in public or “behind closed doors,” corporate involvement in the public policy process has more legitimacy ethically speaking when the effort is to “save the ship” where the “ship” is the system as a whole, and thus far from narrower benefits, such as to the companies themselves. To be sure, companies have a financial interest in the general condition of the macro economy, but the more systemic the suggestion, the less immediate the financial benefit to a particular firm. The more immediate the benefit is to a company, the less credible are its managers’ efforts to manipulate public opinion and officials.

Rather than “fear mongering,” the CEOs at the meeting hosted by the Wall Street Journal in November 2012 could have suggested possible ways that sequestration could be obviated by an agreement by Republicans and Democrats leaders in the U.S. Government. Specifically, the executives could have oriented their comments to suggesting new ways that Congress could raise revenue and cut the federal budget in ways that are wiser than simply across the board. Optimally, the suggestions would be oriented to the problem at the systemic level and thus reflect such a perspective.

Implying that a corporation’s particular financial interest is never completely overcome by a societal perspective, the Wall Street Journal reported in November 2012, “Different business sectors are split over what policy makers should do. Some have called for Congress to extend all expiring tax cuts for at least another year. Others have said Congress should raise taxes as part of a broader deficit-reduction plan that cuts spending on Medicare and Social Security. . . . (S)ome say fears of the fiscal cliff are overblown.” The split by sector suggests that the prescriptions even at the macro, or societal level at the very least take into account an industry’s own financial interest. It is as if what is good for the part is presumed to be good for the whole. To be so inclined does not make a CEO or company look good in the public discourse.

A suggestion with even an indirect financial benefit to one’s firm can easily be discounted by public officials and even the general public as lacking sufficient credibility to be trusted. An executive’s venture into the public square can easily be for naught under such circumstances. It would be better to remain quiet than suffer the loss in reputational capital. The alternative to either one is for the CEO or public affairs director to limit the company’s particular benefit from a systemic-oriented suggestion to public relations, which is itself a valuable long-term intangible asset. That is to say, time and energy spent coming up with the most respectable (i.e., clever) suggestion can do much more for one’s own company than trying to profit more directly from manipulating public discourse in a self-interested way. The numbers will take care of themselves. Ever notice that when people recognize a clever suggestion made by someone, they don’t accuse the person of trying to manipulate things, but, rather, praise him or her for the insight? CEO’s wanting a share of the leadership podium at the societal level might keep this observation in mind.

Given the expertise and societal position, at least potentially, of CEO’s, contributing toward solving system-wide problems in the political economy can even be regarded as a part of corporate social responsibility, as long as the financial benefit implied by a given suggestion is not too direct or exclusive to the executive or his/her company. Financial self-interest exculpates the ethical merit that is inherent in the very notions of responsibility and duty that are salient in ethics. In public discourse, it is better to be oriented to mapping the general course of the ship (i.e., the political system and/or financial system as a whole) around icebergs rather than trying to reserve a deck chair with a better view. We expect people to wrangle for position, whereas we take notice when individuals take a stand in spite of themselves for the greater good of the system.

 J.P. Morgan led banks in bailing out Wall Street in 1907.  Source: Upsidetrader.com

Consider, for example, J.P. Morgan’s decision in 1907 to take the weight of the banking crisis on his own shoulders by leading banks to save Wall Street by infusing the needed capital into the system. Contrast this vaulting of business leadership to the societal level with the vaunted self-protective orientation of Wall Street bank CEOs in September 2008. Business leadership raised to the societal level is rare indeed, and thus particularly valuable—and yet countless CEO’s settle for strategic leadership of significantly less value.

It is not as though opportunities are rare. In November 2012, President Obama presented CEOs with just such a platform at the White House just as he was entering into negotiations with Congressional leaders on a possible deal that would avert the “sky from falling.”To have optimal credibility with the president, the CEOs would have had to treat the meeting as falling under “corporate social responsibility” in that they would have had to take the perspective of the U.S. as a whole, and thus be on the same page as the president, to be credible. Put another way, the president would hardly have been expecting this, so a CEO achieving such a height would have stood out above the crowd and thus have had the president’s ear.

As an example of a perspective oriented to the political system and at the same time justifying business leadership on the societal level, David Crane, CEO of NRG Energy, said in referring to members of Congress and the president,“I think everyone just has this fear that they just do as they’ve done the last four years and just lob grenades at each other. CEO’s, whether they’re Republicans or Democrats, they’re deeply pragmatic people and you just don’t play with craziness like our government is playing with right now.” This statement is more oriented to a systemic flaw—that of gridlock in the federal government—than to getting something for NRG. Furthermore, the pragmatism, and one could add experience, of CEO’s could come into play should executives feel like doing some “pro-bono” work for the American people.

In conclusion, distorting public discourse in order to gain financially can contribute toward the general sense that a cliff is just ahead. Such participation is not constructive. In contrast, being oriented to coming up with a clever suggestion geared to a societal problem even (and especially!) though one’s company would only rise or fall along with all the other boats (i.e., the benefit of which being systemic in nature), can raise a CEO from strategic leadership to societal leadership. Only at this level can duty be reconciled with benefit in terms of credibility and the related reputational capital. CEOs following JP Morgan’s example in 1907 in willing the leap to societal leadership wherein the focus is on saving the system could make all the difference on whether the U.S. survives its own accumulated icebergs. Regarding the question of survival and the related implicit call to CEOs to “step up to the plate” for the good of the “team” (or ballpark), the U.S. Government’s gigantic accumulated-debt of over $16 trillion and deficits of over $1 trillion stood out even in 2012 as huge red flags much more dire than any $500 million so-called “fiscal cliff.”

Sources:

Kate Linebaugh and Stobhan Hughes, “Companies Warn About Cutbacks,” The Wall Street Journal, November 14, 2012.

Damian Paletta and Sudeep Reddy, “Business Leaders Spooked by Fiscal Cliff,” The Wall Street Journal, November 14, 2012.

Brian Blankstone and William Horobin, “Euro-Zone Economy Shrinks Again,” The Wall Street Journal, November 16, 2012.

Maureen Farrell, "Buffett Not Worried About Fiscal Cliff," CNNMoney, November 16, 2012.

Jonathan Cheng, “Investors Show Optimism That Cliff Will Be Avoided,” The Wall Street Journal, November 20, 2012.

Contagion Beyond the Headlines in the E.U.

The E.U. states of Greece and Italy were grabbing headlines during the first two weeks of November 2011, given the dramatic resignations of Papandreou and Berlusconi. The only other state to get some attention was France. The Wall Street Journal noted on November 12^th that concerns had been quietly building about France. According to the paper,“French bond yields rose to four-month highs, one day after Standard & Poor's Ratings Services erroneously issued a message saying it had cut France's triple-A credit rating. The yield on France's benchmark 10-year bond climbed 0.02 percentage point to 3.46%. That was 1.66 percentage points over yields on comparable German government bonds. France now has the highest government bond yields among its triple-A-rated peers in the region.” However, it seems overly dramatic to say that a .02 percent increase evinces a climb. Moreover, 3.46% is well under 7 percent, which is the level that was presumed at the time to signify the need for a bailout. Relative to the changes in the Italian yield, those of the French bonds could be viewed as relatively moderate, The French yield was still closer to that of Germany. Although not a red herring, the concern over France masked some real sleepers that were poised to take a hit in 2012. 

Eclipsed by the headlines, Portugal’s expected GDP for 2012 was revised downward by the E.U.’s executive branch in November from the May estimates of around -1.8% to -3% with an expected unemployment rate of nearly 14 percent. The 2011 numbers were also revised downward, from about -1.9% to around -2.1 percent. Meanwhile, Portugal’s semi-sovereign 10-year bond yield was at just over 12 percent, well over Italy’s “point of no return” rate of 7.5 percent, which was hit for a day during the second week of November. With an expected contraction of 3% in 2012 and a 12% yield in November of 2011, Portugal could be expected to face stronger head-winds in being able to make its interest payments in 2012. I suspect that the press had become so captivated with the circus of personalities in Greece and Italy that the iceberg lying in front of Portugal was simply not seen.

Besides Portugal, some of the states in Eastern Europe faced icebergs of their own—though not necessarily of their own making. These too were receiving too little press coverage in November of 2011. Specifically, the state leaders of the “euro zone” had decided in October to give the “zone’s” major banks until the following summer to raise their capital reserves. With that amount of time, the banks could avoid issuing new stock (which would dilute the holdings of their existing stockholders) and get the added reserves together by cutting back on lending to Eastern E.U. state governments instead. Morgan Stanley figures that Poland, Romania, and Hungary are most vulnerable to a loss of “euro zone” bank lending. Roughly 1 trillion euros of “euro zone” bank assets were in Eastern Europe at the time of the change in governments in Greece and Italy. Hungary’s exposure was the largest, with loans held by the banks amounting to about 37% of GDP. According to the Wall Street Journal, any hit to the E.U.’s eastern states, whose economic growth had been powered the global recovery, would only worsen the E.U.’s economic outlook and its ability to service its debts. That is to say, enabling the “euro zone” banks to raise additional reserve capital by reducing lending rather than raising equity may have been in the banks’ interest, but choking the eastern states could already in November be expected to make it more difficult for Greece, Italy, and Portugal to service their respective debts from reduced economic output in 2012. 

It would have been wiser on the journalists’ part to put France in perspective and take a look at Portugal and Eastern Europe than to have fixated so much on the plights of Papandreou and Berlusconi as they struggled to maintain power only to ultimately lose it.

For more on this topic, see Essays on the E.U. Political Economy

Sources:

Matthew Dalton, “Europe Slashes Its Growth Forecast,” The Wall Street Journal, November 11, 2011. 

Kelly Evans, “Eastern Europe Vulnerable in Debt Crisis,” The Wall Street Journal, November 11, 2011. 

Neelabh Chaturvedi, Stelios Bouras, and Liam Moloney, “Europe Pulls Back From Brink,” The Wall Street Journal, November 12-13, 2011. 

Pressuring E.U. States: The Debt Crisis as Leverage

By mid 2012, the verdict was in on the German-led recipe for restoring states overwhelmed by public- or private-sector debt: Austerity is counter-productive in reducing government deficits. On June 6, 2012, the media reported: “Prolonged austerity is making it harder, not easier, for governments like Greece to become self-reliant again.”[1] Salaries and pensions in the private and the public sectors in the state had been cut by up to 50 percent, leaving Greece 495 million euros short of its revenue targets in the four months ending the previous April, according to the Greek Finance Ministry.[2] With less cash, consumers had to reduce spending, leading thousands of taxpaying businesses to fail. Income expected from a higher, 23 percent value-added tax required by the bailout agreement fell short by around 800 million euros in the first four months of 2012. That is partly because cash-short businesses that were once law-abiding started hiding money to stay afloat, tax officials said.

The complete essay is at Essays on Two Federal Empires.

1. Liz Alderman, “Greece Warns of Going Broke as Tax Proceeds Dry Up,” The New York Times, June 6, 2012.

2. Ibid.

Eurobonds for Stimulus Spending

Meeting on May 23, 2012, the E.U.’s European Council failed to come up with a plan to offset the recessionary aspect of Greece’s budget cuts. The pressure was on; the OECD had just warned that the E.U. go back into recession. Interest rates on state debt-namely that of Spain—had reached an unsustainable level the week before due to concern regarding banks based in the state. Besides the debt and banking vulnerabilities at the state level, the E.U. itself was struggling with its political weakness, which can be attributed to the states’ rights (or euro-skeptic) ideology that was not exactly going away in the context of the debt-contagion that had prompted the establishment of a permanent E.U. bailout fund for states in over their heads on debt. In this context, the European Council was at the intersection of debt, banking and political problems.

The full essay is at Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

Unions and States at a G-8 Meeting

At the G-8 summit at Camp David in May 2012, E.U. and U.S. leaders met with the leaders of four E.U. states (Italy, Germany, France and Britain). As this picture illustrates, the qualitative differences between looking after a union of states and a state can show up unintentionally in informal seating arrangements. In the context of the European debt crisis—in particular, whether to give one state (i.e., Greece) stimulus cash or just insist on the austerity programs already agreed to—the governors of the E.U. states have particular agendas (given the financial interests of the respective states) whereas the federal officials are oriented to the good of the whole (i.e., the E.U.). President Obama of the U.S. was by the time of the summit used to taking such a perspective over and above the interests of particular U.S. states. Such a commonality of federal, empire-level interests as distinct from the relatively particularized interests of E.U. (and U.S.) states could be reflected in the seating arrangement in the picture taken by the White House, wherein Obama, Barroso (sitting next to Obama), and Van Rompuy (in the sweater) seem to be facing the four governors. The seating arrangement could just as easily have been a circle. It probably was, originally, and I suspect that the federal v. states distinction operated unconsciously on the participants such that the three federal officials came to be as though a line facing the four governors of E.U. states.

The complete essay is at Essays on Two Federal Empires, available at Amazon.

Anti-Austerity in Greek Government

The Socialists and then the New Democracy Party told Greeks that sacrifices were necessary to avert default on the state’s debt. This position came at a high political cost on May 6, 2012, when both parties lost seats in the state’s legislative election. “The established parties collapsed — they had too much pressure from Berlin and Brussels and the I.M.F.,” said Nikos Xydakis, an newspaper editor and a political commentator, referring to Greece’s foreign lenders.[1] In other words, the leaders of the two mainstream Greek parties sold out their compatriots, having caved in to ultimatums from Merkel operating at the E.U. level. “In a meeting with President Karolos Papoulias, the leader of the leftist party, Alexis Tsipras, ridiculed the leaders of the two main parties whose coalition lost its majority in the parliamentary elections.”[2] Tsipras added that his party would not be forming a government with either party. The New Democracy Party had been unable to form a government in the wake of the election, so it was then Tsipras’ turn to try.

Alexis Tsipras  and Greek President Papoulias   NYT/Kostas Tsironis

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

1.. Rachel Donadio and Niki Kitsantonis, “Greek Leftists Rule Out Coalition with Incumbents,” The New York Times, May 8, 2012.
2. Ibid.

Merkel’s Fiscal Box in the E.U. Debt Crisis

Germany was ruling out any substantive shift in its approach to Europe's debt crisis despite a rising chorus of opposition to Berlin's austerity policies that reached a crescendo in the elections in Greece and France on May 6, 2012. On the following day, Merkel “rejected the notion that Europe was on the brink of a major policy shift after Socialist Francois Hollande defeated her fellow conservative Nicolas Sarkozy and Greek voters punished ruling parties who slashed spending to secure a foreign bailout. . . . Merkel herself made clear that, while there was scope to discuss tactics, the overall strategy EU leaders committed to by agreeing a compact on fiscal consolidation was ‘not negotiable.’”[1] That seems a bit presumptuous, considering that the “fiscal pact” had yet to be ratified in enough of the states to go into effect.

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

1. Noah Barkin and Stephen Brown, “Germany Austerity Policies: Berlin Unmoved by Votes in France, Germany,” The Huffington Post, May 7, 2012.

Europeans Vote against Austerity in 2012

On May 6, 2012, elections took place in six E.U. states. The most significant in terms of the debt crisis were those of France and Greece. In France, Francois Hollande narrowly beat Nicolas Sarkozy. Sarkozy “is the latest of a string of European incumbents, from both the left and the right, to lose in a larger popular revolt against budget-cutting and tax increased during a time of recession and high unemployment.”[1] Hollande said “he intends to give ‘a new direction to Europe,’ demanding that a European Union [amendment] limiting debt be expanded to include measures to produce economic growth.”[2] After midnight, Hollande spoke against austerity to a crowd gathered at the Bastille. To be sure, an anti-Sarkozy-arrogance vote doubtlessly benefitted Hollande. This makes it difficult to treat this (or any other) election as a mandate policywise. Even so, the center of gravity on austerity at the E.U. level had shifted, given the important role of state officials there.

                 François Hollande addressed supporters in Tulle, France.      Philippe Desmazes/Agence France-Presse

Meanwhile, voters in Greece were shifting the political landscape in that state, “bolstering the far left and neo-Nazi right in a wave of protest against the dominant political parties that they blame for the country’s economic collapse.”[3] In other words, the two main parties that had agreed to the austerity/bailout agreement lost ground to other parties—essentially splintering the vote. An exit poll “indicated that center-right New Democracy party was in first place with 19 to 20.5 percent of the vote, much less than the 34 percent it won in 2009. But in a major shift, the Socialists, who dominated for decades, won 44 percent of the vote in 2009 and were in power when Greece asked for foreign aid in 2010, appeared to have 13 to 14 percent of the vote, putting them behind the Coalition of the Radical Left, called Syriza, which opposes Greece’s agreement with its foreign lenders. Syriza appeared to be drawing 15.5 to 17 percent of the vote.”[4] New Democracy and the Socialist Party had agreed to the austerity, and they paid a price at the polls.

The shifts in both states undoubtedly provided federal officials (including state officials active at the federal level) with a message: more and more E.U. citizens were opposing the austerity-only approach. Lest it be concluded that Hollande and the Greek legislature trigger a change of E.U. policy, incumbents including Angela Merkel were still a force to be reckoned with. Generally speaking, actual political change occurs in graduate steps rather than all at once after an election. The status quo is never entirely defeated by a few replacements; it takes several elections for a sea-change to gain the upper hand in governmental channels.

Even so, May 6, 2012 suggests that the forces of such change were gaining.  Even if it would take more elections for the austerity-emphasis to be changed, it was already clear that a majority of the people were willing to vote as if they were opposed to the approach.  In relying so much on austerity in their agreement with Greece, state leaders making policy at the E.U. level had gone beyond the center of gravity. In a representative democracy, doing what is right or in the people’s best interest at the expense of popular anger or disapproval has value. However, this leash does not extend very long and it must be tailored to the amount of time until the next election. This is both a disadvantage and advantage of representative democracy: officials cannot get too far from their basis in the popular center of gravity, even if a crisis warrants a long-term solution that is generally unpopular at the grass-roots level.

1. Steve Erlanger and Nicola Clark, “Hollande Ousts Sarkozy in French Presidential Election,” The New York Times, May 6, 2012. 
2. Ibid.
3. Rachel Donadio and Nici Kitsantonis, “Greek Voters Punish 2 Main Parties for Economic Collapse,” The New York Times, May 6, 2012. 
4. Ibid.

The E.U.: The Growth Union

In relying only on austerity and cheap bailout loans, the German-led strategy has proffered a false sense of European integration in the E.U. Even as expanding the bailout funds to roughly 800 billion euros and strengthening the E.U.’s means of enforcing limits on state deficits and debt are along the line of continued incremental shifts of governmental sovereignty from the state governments to that of the E.U., the related austerity (and recession) sparked a populist backlash in several states. At the state level (and this level has a major role at the E.U. level—unlike in the U.S.), the state-rights (i.e., anti-E.U.) parties have been the beneficiaries even if they could not gain outright majorities. The National Front in the state of France is an obvious example, as it captured 18% of the vote in the run up to the general election in 2012.  Other things equal, such a spike translates into brakes on further European integration in the medium term.

Different takes on the E.U. and austerity: Sarkozy, Hollande, and Le Pen of France    NYT

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

The E.U. Bailout Fund: The IMF of Europe?

One of the benefits of being in a federation—as distinct from an international organization—is that states in fiscal trouble can benefit from redistribution through a federal center. In other words, federalism provides a safety buffer that is lacking at the international level. E.U. finance ministers agreed on March 30, 2012 to create a permanent bailout fund for states that have adopted the euro. The New York Times reports that questions persisted “about whether the fund, even at about $1 trillion, will be sufficient to deal with crises” in large states like Spain and Italy, which are comparable to Illinois and California in the U.S.[1] Mudding the water, the Times incorrectly refers to the bailout fund as the E.U.’s IMF: “(T)he “bailout mechanism . . .  is meant to be a European equivalent of the I.M.F.”[2] However, the term “bailout fund” itself comes from the TARP, which was not the U.S.’s IMF.

The complete essay is at Essays on Two Federal Empires, available in print and as an ebook at Amazon.

1. James Kanter, “Europe Agrees to Bailout Fund for Euro of Over $1 Trillion,” The New York Times, March 30, 2012. 

2. Ibid.

Spain’s Deficit: Violating E.U. Law

In early March, 2012, Spanish Prime Minister Mariano Rajoy announced that Spain’s budget-deficit target would not be the 4.4% that had been promised by his predecessor to the E.U. Commission in 2011. Instead, the anticipated deficit in 2012 would be 5.8 percent.[1] That announcement put the state of Spain on a collision course with the enhanced enforcement of deficit limits by the Commission and the ECJ. Even though Rajoy had signed onto the added-enforcement “pact” a month before, he said of the 5.8 percent, “This is a sovereign decision made by Spain.”[2] A few days after his announcement E.U. finance officials met and accepted a 5.3% target.[3] Although it comes with a “tough deficit target” for 2013, one wonders whether the proposed strengthening of the “fiscal pact” will ever be enforced—and in a way that is fair to all of the states.

The complete essay is at Essays on Two Federal Empires.

1. Stephen Fidler, “Spain’s Move Tests Europe’s Mettle on Deficits,” The Wall Street Journal, March 10-11, 2012.

2. Ibid.

3. Matthew Dalton, “Euro-Zone Ministers Press Spain for a Deal on Deficits,” The Wall Street Journal, March 13, 2012.