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eclectic mix of michael's musings

The devilish dilemma which is the Euro zone.

It seems to be going from bad to worse in Europe, not necessarily in the economic conditions, but with the political impasse which is accompanying them. The EU basically has two options as a way out of this self imposed mess: the breaking up of the Eurozone and a return to individual currencies, or further and complete economic and political union.

The first is really not an option at all. Just to give you one example of what this would cause. In Greece, as a microcosm of the breakup, individuals and firms are taking their money out of banks and either putting then abroad, or literally hiding their euro notes under their beds. They would be doing this for rational economic reasons. If Greece left the Euro zone, the country would convert back to the drachma , with an almost certain immediate devaluation of at least 50%.  For those who had left their wealth in euros this means a doubling of their wealth in equivalence in drachmas.  But what about those who cannot do that: those on social security, those who own property in Greece, those who own businesses. They will all suffer a substantial, perhaps fatal, loss when compared to the rest of the world. Let alone the rash of writs which undoubtably will occur as people and firms seek to cover their losses in the courts.

These effects would be multiplied 100 times if the break up occurs all over Europe, leading to a worldwide depression even worse than that in the 1930s.

The second alternative is futher economic and political union. The problem with this is that voters are simply not buying it. In all democratic tests of this throughout the euro zone over the last two years, the voters in all countries are living in denial. The economic and political medicine they need to take for their survival simply is unacceptable.

God help us all if there does not emerge a sense of reality very soon, because everyone will be affected, even in prosperous, “bullet-proof “Australia.

Filed under: Economics, European Poltics, Politics, Uncategorized

The Curiosity that is the US

I must have been to the US I suppose 20 or 30 times in my life. It is somewhere I intellectually should like, but I don’t somehow. I much prefer secular Europe and dynamic Asia. I know that many will say it is ridiculous to catagorize so negatively nearly 400m people. No doubt it is, but you can make certain observations, and as far as the US’s future is concerned, none of them are very flattering.

First though, I should say, that if we had to have a global superpower, the US is about as benign as they come. It has been the global policeman for 75 years now, and has presided over a period of unprecedented global growth, prosperity, and largely without war (at least world war). Sadly though I fear this is all about to come to an end.
Interestingly, there was recently conducted a study by Stanford University about the attitudes of senior American military officers past and present. Surprisingly, for a group you would normally expect to be strongly pro Republican, and pro miltary spending, nearly eighty percent of them came out strongly for deeply cutting defence expenditures and spending the money on rebuilding America, especially educational institutions, healthcare, infrastructure, and investing in innovation. What drove such a surprising result? Well one thing the US military is, it is not stupid. These officers fully realised, and articulated very forcibly, their long term future depends on a strong economy. Without economic strength, military might disappears viz; the Roman Empire; the British Empire; the Soviet Empire; the Ottoman Empire. Pity they do not influence their conservative political masters likewise, which of course may be just another indication as to how the Tea Partiers have high-jacked the agenda, and sidelined the GOP’s traditional, more conciliatory conservative base.
One of the most consistent things about America throughout its history is its ability to re-invent itself when all seems lost: slavery; the Civil War; Pearl Habour; the Cold War; Russians putting the first man into space; Vietnam. Unfortunately, now almost every statistic, financial and no- financial, shows the US in decline. And its political system is so badly broken, in spite of Barrack Obama’s best efforts. There is simply an inability to do anything about it.
Let’s take four examples:

1. US Social Indicators are going in the wrong direction.
The Table below from the OECD shows just how badly the US is doing as a society. Nearly all its social indicators are in the bottom half of the OECD league tables . What this table shows is the distribution of social indicators across all OECD countries, and breaks them up into countries in the top two deciles, in the bottom two deciles, and in- between. The measures include:
a. Household income (PPP)
b. Ratio of employment to population 15-64
c. Unemployment rate population 15-64
d. Reading literacy scales
e. Poverty rates
f. Percentage finding it difficult or very difficult to manage on current income
g. Percentage of average gross wage to meet poverty threshold
h. Life3 expectancy at birth
i. Infant mortality rate
j. Rate of positive experience
k. Percentage of persons satisfied with water quality
l. Percentage of people expressing a high level of trust in others
m. Corruption index
n. Pro-social behaviour
o. Voting rates
p. Tolerance of Diversity

Net Score of top decile minus bottom decile scores by OECD countries
Countries              Top Decile      Bottom decile    Net Score Net Ranking
Australia                  8                              0                          8                   3
Austria                      4                              0                          4                  10
Belgium                     1                              0                          1                   17
Canada                       4                              1                          3                  12
Chile                            2                              8                        -6                 27
Czech Republic       2                              6                        -4                 24
Denmark                  10                             0                       10                    1
Estonia                        0                             9                        -9                 32
Finland                       7                             0                         7                     5
France                         1                             0                         1                   17
Germany                    2                             0                         2                  15
Greece                         0                            5                        -5                  25
Hungry                        1                            9                        -8                  30
Iceland                        9                            0                         9                     2
Ireland                        5                            1                          4                  10
Israel                           0                            9                        -9                  31
Italy                             1                             3                        -2                  21
Japan                          5                             2                          3                  12
Korea                           2                             5                       -3                  22
Luxemberg                5                            2                         3                   12
Mexico                        1                            11                    -10                  33
Netherlands              8                              0                       8                     3
New Zealand             6                              0                        6                    9
Norway                       7                              0                       7                     5
Poland                         0                             7                      -7                   29
Portugal                      0                            5                       -5                   25
Slovak Republic       2                            8                       -6                   27
Slovenia                       2                            1                         1                  17
Spain                             2                            2                        0                  20
Sweden                        7                            0                        7                     5
Switzerland                8                             1                       7                      5
Turkey                         1                           14                    -13                  34
United Kingdom       3                             1                        2                  15
United States             2                             5                       -3                 22
Source: Compilation from OECD Social Indicators in Society at a Glance 2011

There are many highlights in this information, but the most worrying from the US’s perspective is that it comes 22 out of 34, behind such advanced economies as Italy, Spain, Slovenia and equal with Korea. To be fair, it is likely that many of the European countries have gone backwards since the GFC and the Euro crisis(s), but so will have the US. It is likely that countries such as Korea and Israel will have gone ahead of the US since then given neither was greatly affected by either the GFC nor the Euro crisis. This probably puts the US about 25th, a disgrace given it is the wealthiest country on earth, and is the most advanced technologically, militarily, and academically.
2. US Obsession with Religion:
If you look at the measures outlined above, many of the social indicators where the US scores badly is what could broadly be called “social tolerance”. Much of this stems from the blind adherence to religious doctrines for much of the population, and much of its politics. The US is about the only country in advanced economies where it would be impossible for a non-believer to be elected to public office. Over 80% of the population goes to church on Sundays, where in the rest of the anglo world it is less than 10%. Even in the so called Catholic countries of Europe, such as Italy and Ireland, church attendances are less than 20%.
As a direct result of this social intolerance in the US, social measures are well below advanced countries norms. Take teenage pregnancies. With the exception of Russia (practices there are distorted by the championing of abortion as the preferred form of birth control under communism, and these practices continue today), the US has the worst record of teenage pregnancies in the OECD. Why? Primarily the opposition of the religious right, and the Catholic church to both birth control and comprehensive sex education in schools (see table below);
Birth, Abortion and Pregnancy Rates for Developed Countries Ages 15-19
Countries                     Births                     Abortions                   Pregnancies
Russian Federation 45.6                               56.1                          101.7
United States              54.4                              29.2                            83.6
New Zealand                34.0                            20.0                            54.0
England and Wales    28.4                             18.6                            47.0
Canada                            24.2                            21.2                             45.4
Australia                        19.8                            23.8                             43.6
Sweden                             7.7                            17.2                             24.9
Denmark                          8.3                             14.4                             22.7
Germany                        12.5                              3.6                              16.1
Netherlands                    8.2                              4.0                              12.2
Italy                                   6.9                               5.1                              12.0
Japan                                 3.9                              6.3                              10.2
*Note: pregnancies exclude miscarriages; data from mid-1990′s. SOURCE: The Alan Guttmacher Institute report on Teenage Sexuality and Reproductive Behavior in Developed Countries

Related to this, is the increasing trend in the US of children not been vaccinated for preventable diseases, mostly because of opposition from the religious right, who regard it as “ungodly”. The result, eminently preventable diseases such as hooping cough, measles and polio are on the rise there, when even in the developing world, partly as a result of the great work by that great American Bill Gates, and his Gates Foundation, rates are rapidly decreasing. In most of the developed world, these diseases are virtually eliminated by almost universal inoculations of the young.
3. The Paralysis of the American political system.
The US is not a Westminster style parliamentary democracy. Although difficult to believe in the current state of play, the US is not an adversarial system in the sense that Westminster democracies like Australia, the UK and Canada are. The way the US system has worked for 400 years is through compromise and consensus, with much of the power residing with the President. It depends on the legislature reaching compromises in order that the business of government gets done. Now, however, one side, The Republicans, have allowed their party to be high-jacked by extremists (the Tea Partyists), and not very bright ones at that, who regard compromise as a sin (a word used advisedly). Much of their ideology comes from the extreme right parties of Europe (Le Pen in France, the National Front in Britain, the successors to the Nazis in Germany, and One Nation in Australia). These parties generally are made up of disaffected working class voters, often extremely racist, and often under-educated. They carry with them an under-lying hatred of the way things are, and a frustration that they feel they are not getting their “fair share”. Usually, when prosperity continues these people remain in a small minority, but after the economic dislocation in Europe and the US in the last 5 years it has created an environment for extreme views to flourish, in much the same way that the consequences of the Treaty of Versailles and the Great Depression was directly responsible for the rise of Hitler and the Nazis. This time, however, the greatest victim is the US itself, where they have managed to successfully press the self destruct button.
Post the GFC, with the election of Barrack Obama, US society has managed to combine the ideology of extreme right Christian groups, with disaffected poor and ill-educated, which has been championed by extreme right billionaires like Rupert Murdoch with his heinous Fox News. For the first time, these people have got a platform, and amazingly are being taken seriously by a major political party. Previously unimaginable lunacies like: never increasing taxes; like dismantling the federal government; like undoing Rowe vs Wade abortion laws; like undoing the historic separation of Church and State; like making science, rather than be the solution to many of their problems, be its cause; and like saying no to everything, however worthy, put up by the Democrats, and not pre-selecting republican candidates who dare to seek a solution to this mess.
The result of all this is that the US has almost become ungovernable. No matter how competent the individual is in the White House, and how much his/her heart is in the right place, there seems to be no way by which will emerge a means to bring in the desperately needed reforms which will reverse the poor social outcomes listed above, and restore the United States reputation, previously assumed by the rest of the world, as being the beacon for progressive thinking, social innovation, and sound economic management.
4. The mad US health system
Nothing exemplifies the parlous state of American politics and economics as much as the US health system. The US spend almost twice as much as equivalent economies in the OECD as a proportion of GDP, yet they achieve substantially worse health outcomes. Currently they rank about 15th in the table of health indocators in the OECD. Nothing illustrates the parlous state of debate in the US as the political intransigence about Health Care, and nothing is so clear-cut in its dis-function. Yet nothing also creates such heat amongst the tea partiers.
It is indeed a sick society.

Filed under: American Politics, Economics, Politics, , , , , ,

At last, the Great Drug Debate has begun….

I’m glad to see the spirit of my post of 22 February, 2012  http://mikes2014.com/category/politics/drug-decriminalisation/ has started to take root. With the report recently out of an eminent persons group lead by Dr. Alex Wodak and which includes the Foreign Minister and ex-ALP NSW State Premier Bob Carr, it is safe to say the Great Drug Debate has started. Let’s hope it is filled with reason and common sense, unlike the several attempts in the past to get reason into this incredibly emotive subject.

Let the Debate begin….

Filed under: Drug decriminalisation, Economics, Politics

Why the changes we are seeing in the world order no flash in the pan…..

The changes in the world order we have seen in the last 5 to 10 years are not only extremely profound, they are also permanent, however much that is possible. The power of the world is rapidly shifting eastwards, returning it to where it was before and during the middle ages and before the industrial revolution. The power the European states, and after that, the Americas,  acquired on the back of rapid industrialisation , was in many ways a historical accident.

Interesting academic research recently undertaken in the US looked at historical patterns of economic measures: trade flows, per capita income, population levels, capital flows, government expenditures, GDP per head – everything basically which makes the world economy function. And what were their conclusions? In 1970, the centre of the world economy was in the mid Atlantic; in year 2000, the centre had shifted to Israel; by 2020, it will shift to Tibet – the inevitable force eastwards.

The shift of power to Asia, and more particularly to India and China, returns the world to the natural order of things, driven inextricably by large populations, strong cultures, and strong commitment to education and development. Industrialization is being pushed along by a final realisation that this can only occur under free markets and open trade, and once started, and once the benefits are felt by the populations, the electorates will not allow a return to the “bad old days”.

In this, it is interesting to observe the handover of power currently underway in China. Early indications are that the progressive faction of the communist party lead by Wen Jiabao has won the ideological battle between the old ultra conservative Mao sympathisers, lead by the charismatic but ideological Bo Xilai, and those who want to uphold the rule of law and move gradually to some level of democratization.  A similar struggle is currently being played out in India, although possibly with a different outcome. The pace of reform there has slowed over the past three or four years, and there is not a clear indication of the political outcome. However, India being a democracy, a slow down in economic growth and development will inevitably cause an electoral backlash, which will eventually lead to further reforms. It is just in India everything seems to take so much longer.

Where does this leave Australia? As the only advanced Western economy (including NZ of course) at the centre of the world action. Even our current set of mediocre politicians couldn’t stuff that up. Could they?????

Filed under: Asian Politics, Economics, European Poltics, Politics

Why the EU doesn’t work, and other Federations do

Amongst all the angst about the so called EU melt-down, it is worth considering why the federation of Euro Countries is in such trouble and other federations (eg Canada, Australia, the US) generally are not.

The problem with the Europe project is that it is “half pregnant” ie there is a common currency, but not common fiscal and monetary policies. This means all member states accept the market price for the European currency, but they can basically do as they like with the other leavers  of economic management. This means that Greece can pay its population way above what the country can afford, and far more than most countries in the EU, and the others cannot do anything about it. Economic imbalances are inevitable in these circumstances.

Before the Euro, when each country had their own currencies, countries would be judged by the international market, and their currencies would be adjusted by that market based on their economic health. In the current circumstances, some economists are estimating the a free floating Drachma would be less than half its equivalent in Euros. This means amongst other things that Greek exports (eg tourism, shipping, olive oil) would be 50% cheaper to the rest of the world and imports would be twice es expensive, thus the Greek economy would be relatively more competitive. In the absence of this adjustment mechanism, internal adjustments have to be made: cutting pension levels, reducing real wages across the boards, recapitalising Greek Banks, substantially reducing government expenditures at all levels, in order to make Greek goods more competitive with the rest of the world. It is a hard, possibly impossible process. In fact, in my view, a Greek exit from the euro zone is even now inevitable, and they will be better off for it. If you want proof, just look what Iceland has done in the last 18 months. It is now almost back to health.

Contrast with other federations. In Australia for instance, the federal government has taxing powers and distributes monies to the states based on certain criteria. The objective of this is to even out the different growth rates in each state. At the moment, in the middle of mineral boom, the mineral states of Western Australia and Queensland are growing at over 6% per annum. The rest of the country is below 1%. The distributions of money are therefore adjusted down for those two states and increased for the others. This has the affect of smoothing out the imbalances across the country.. In this way government expenditures across Australia are controlled in the interests of responsible economic management. By the way, this is the opposite of what has happened for the first hundred years of Federation – the outlying states consistently were subsidized by Sydney and Melbourne taxpayers. Interest rates are also set by the Central bank, as are inflation and money supply targets, both of which are administered by the independent Reserve Bank of Australia.

The EU euro zone has two choices: full economic union, or break up the currency union. Until a decision is made on this, I’m afraid the euro zone will be condemned to year on year recession (like Japan has been since the mid 1990′s)

Filed under: Economics, European Poltics, , , , ,

The historic Telco reform…

The announcement this morning of the formalisation of the separation of the wholesale and retail arms of Telstra is a momentious and very admirable micro-economic reform. After the government hands over the $12 billion in compensation to Telstra shareholders, we will have for the first time, all telcos in this country competing on a level playing field. This ranks with the tearing down of the tariff walls in the 1980′s, the deregulation of the banks, the reform of the labour and financial markets, as major economic reforms. Indeed, it may rank in the next 30 years as more important than any of them, but has been a government reform which has been unbelievably badly sold.

The fully connected NBN network has the potential to have as great an effect on the Australian economy and Australian society as the coming of the internet in the 1990′s. Once the society is fully connected to super-fast internet (only certain Scandinavian countries and South Korea has this now), it will produce a flowering of innovation not only in current enterprises but also will see totally new business models emerge. How about an Australia Google, Amazon or Ebay? They will not be the same – no-one knows what they will be – but we have the potential for this to happen because we will have the infrastructure which very few in the OECD will have (partly because they can not now afford it).

This is an historic opportunity. With Australia’s record as being one of the most technology savvy populations in the world, this is an unprecedented opportunity. The government needs to explain this, and get people excited about it. With our productivity performance going backwards over the last five years, this is an unparralled opportunity to reverse this.

Filed under: Australian Federal Politics, Economics, Politics, , , , , ,

Marginal Revolutionaries

Comment on the Economist article (31 December, 2011) “Marginal Revolutionaries”

I think it is very significant that “the Economist” has bothered to give these new emerging theories on economics serious consideration, particularly Scott Sumner’s work around NGDP. In fact, I think Sumner’s work is so significant that he will be viewed in future as a visionary, for which he could even win the Nobel Prize. Now that would really be revolutionary – a Nobel Prize winner coming not from pure academia, but from the “Blogsphere”.

It is also heartening to see original thinking emerging to tackle the extraordinary economic circumstances the world finds itself in at the moment. The Keynesians, Monetarists, or even the Austrian school do not seem to have the answers to the world’s current predicaments. Maybe Sumner has?

Filed under: Economics, , , ,

Bad Trade Deficits Typically Indicate Insufficient Saving

Comment on Economist article by Scott Sumner (January 2, 2012) “Bad Trade Deficits Typically Indicate Insufficient Saving”

It is important to realize the impact of policies relating to savings in Australia. Since the late 1980s Australia has had a national superannuation scheme in which every employee is required to put 9% (soon to go to 12%) into a tax protected savings pool. These are then invested (under specific guidelines) into a variety of income generating investments, about one-third of which are offshore. The size of this fund far exceeds the Singaporean model, and its investments are market driven, rather than government directed as in Singapore. In Australia also because there is so little government debt, financing of external deficits are largely done through private banks and are generally “income related” as opposed to financing recurrent expenditures.

The effect of this is that through enforced lifetime savings Australian retirement incomes are substantially funded, and the Australian economy has access to a multi trillion investment pool which it would not otherwise have. It is interesting to note that Australia is one of the few places in the world where retirement benefits for federal public servants past and present are fully funded via a future fund.

The superannuation pool also turns “the man in the street” into shareholders as much of this savings pool is invested in the stock market. It is not an accident that all mainstream media in Australia is obsessed with the performance of shares, in my view more than anywhere in the world.

There are many reasons for the Australian economic success story, but amongst the raft of economic reforms carried out in the last 30 years, the Australian superannuation model is one of the most important.

Filed under: Economics, , ,

Zapatero’s Cuts

Comment on the Economist article (31 May 2010) “Zapatero’s Cuts”

There is a slow reality beginning to creep into the EuroZone. After years of bagging English speaking markets for their free market practices (which caused the GFC!!), and patronising them for their uncaring welfare free states, they have been forced down that track to survive as individual states, and as a Union.

Hopefully the crisis upon Europe will force long sought after reforms of labour markets, fiscal policies, and trade which will allow the world as a whole to operate much more efficiently and prosperously. Gone will be the days when a relatively few French and Belgium farmers can hold the whole world to ransom via the common agriculture policy ensuring (heaven forbid) that the world may at last get realism into the World Trade Talks.

Or am I living in a dream-world? Is this just another false start in Europe, and when a modicum of prosperity returns so will the same shonky practices? I very much hope not.

Filed under: Economics, , , ,

Flowering Friendliness

Comment in response to Economist article “Flowering Friendliness”

China is playing a game when it comes to growth rates. All the independent think tanks I have seen recently have them above 10% growth pa over the next five years. Indeed only at the weekend, Australian numbers compiled by the private sector, particularly the resources sector, has demands for raw materials returned to pre GFC number by mid year and thereafter exceeding them by 10% or more per annum.

IS China playing these numbers down to justify their misleading projection on military spend, and/or to frighten their population into lessening the demands for social and economic reforms?

Filed under: Asian Politics, Economics, Politics,

Michael Liley

 

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