What to do about Syrian refugees?

When frightened most people take or support steps to reduce risks to their security even at the expense of their liberties or other normally valued principles. Failure to do so might even be considered foolish if such steps might actually increase their safety. On the other hand, we regularly accept small risks in exchange for more interesting lives. The fact that 92 people died every day on average in the U.S. in traffic accidents in 2012 (about the same number who died from falling) has not kept most of us home, where we would have faced the risk that an average of 7 people per day died of from home fires.

I am prompted to return to this subject (for an earlier blog see: https://wcoats.wordpress.com/2013/08/06/are-we-becoming-a-nation-of-cowards/) by a recent Bloomberg poll in which the majority of adult American’s surveyed (53%) following the recent terrorist attacks in Paris that killed 129 people said that “the nation should not continue a program to resettle up to 10,000 Syrian refugees.” Leaving aside that this is an almost unnoticeable share of the more than 3 million Syrians who have fled their country and the 6.5 million displaced within Syria, and leaving aside the causes of the horrors from which they are fleeing, are we justified in refusing to accept refugees if it makes us safer? But before taking that on, we should have a clear understanding of whether it is likely to make us safer.

The concern, of course is that among these poor desperate souls, terrorist might pose as refugees in order to gain entry to the U.S. (or Europe) in order to wreak havoc. Despite best efforts this possibility cannot be ruled out any more that we can rule out dying by fire if we lock ourselves in our homes. But the recent Paris attacks were carried out by French and Belgian citizens, not refugees. “Then there was the curious case of the Syrian passport found near the body of a suicide bomber. Who takes a passport to a terrorist operation? Someone who wants it to be found.” (Frida Ghitis, CNN, November 18, 2015: http://www.cnn.com/2015/11/18/opinions/ghitis-isis-self-destructive/index.html)

Gaining entry to the U.S. as a political refugee is a time consuming and difficult process. I have written a number of letters in support of applications by Iraqis and Afghans I have worked with and that is a very small part of what is required. Ms. Ghitis’ very interesting article continues: “The Paris operation had multiple objectives. The passport was a way of provoking the West to turn against refugees. The attack sought to provoke France, NATO and Europe to fight ISIS and the public to turn against the Muslim population and against refugees. ISIS wants a war between Islam and the rest of the world, with Muslims on its side, as a way of creating and expanding its so-called ‘caliphate.’ ISIS wants the world’s Muslims to feel they are at war with the modern world. It also wants to stop the flow of Syrians to the West, because it’s more than a little embarrassing that Muslims are fleeing its utopian Islamic ‘state.’”

In short, the risks of terrorist attacks (or attacks by deranged students at schools, etc.) in the U.S. come almost totally from our own citizens, just as do virtually all other crimes, violent or otherwise, in the U.S.  We call their perpetrators criminals and have vast and expensive programs to minimize such acts and to protect us to the extent compatible with our values from the crimes that nonetheless still take place. Aspects of these programs are the promotion of respect for the rights of others and for law and order and addressing and minimizing injustices toward individuals or groups that might provide the basis for grievances and hostility. For the rest we rely on the police to maintain order and arrest those who persist in crime (violent or otherwise). Crime and its perpetuators have always been and always will be with us. Some approaches to containing them have worked better than others and we should continuously strive to find the most effective balance between our freedom and our security.

So will ending the already negligible immigration of Syrians or Muslims improve our safety? If anything at all, it will worsen it by alienating and angering some of the almost 3 million Muslim’s already living here. The cry by some Governors and Presidential candidates and others to close the door to Muslims is much more likely to turn an American Muslim into a terrorist than to prevent one from entering the country from abroad. Thus these ugly cries by understandably frightened people fail on all counts (the promotion of American values and the promotion of security).

We need champions of the “Land of the free, home of the brave.” We have been the “Home of the free because of the brave;” not the brave young men and women sent off as cannon fodder to fight wars all over the place by deranged neocons but those brave enough to stand tall for the values of human respect and freedom that have (and hopefully still will) define America.


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What is wrong with PC?

Almost five years ago I wrote about political correctness (PC, politeness and caondor): https://wcoats.wordpress.com/2011/01/11/pc-politeness-and-candor/. In short, I said that what would normally be considered “good manners,” — values and behavior of free individuals– was becoming a stifling imposition of expected behavior by various authorities, another manifestation of the nanny state. Given our laudable propensity to generally rebalance excesses in one direction or another, I assumed that PC would be fading by now.

In 1964 at the University of California at Berkeley, I participated with other students from the far left to the right (University Conservatives and Young Republicans– we didn’t have far right students at Berkeley) in demonstrations AGAINST the University administration’s efforts to limit our freedom of speech. This was the famous Free Speech Movement. Thus I am shocked to read that today’s students are demanding restrictions on speech by the authorities. What is going on here?

On November 9 the WSJ reported that: “On Oct. 28 Yale Dean Burgwell Howard and Yale’s Intercultural Affairs Committee blasted out an email advising students against ‘culturally unaware’ Halloween costumes, with self-help questions such as: ‘If this costume is meant to be historical, does it further misinformation or historical and cultural inaccuracies?’ Watch out for insensitivity toward ‘religious beliefs, Native American/Indigenous people, Socio-economic strata, Asians, Hispanic/Latino, Women, Muslims, etc.’ In short, everyone.

“Who knew Yale still employed anyone willing to doubt the costume wardens? But in response to the dean’s email, lecturer in early childhood education Erika Christakis mused to the student residential community she oversees with her husband, Nicholas, a Yale sociologist and physician: ‘I don’t wish to trivialize genuine concerns,’ but she wondered if colleges had morphed into ‘places of censure and prohibition.’

“And: Nicholas says, ‘if you don’t like a costume someone is wearing, look away, or tell them you are offended. Talk to each other. Free speech and the ability to tolerate offence are the hallmarks of a free and open society.’

“Some 750 Yale students, faculty, alumni and others signed a letter saying Ms. Christakis’s ‘jarring’ email served to ‘further degrade marginalized people,’ as though someone with a Yale degree could be marginalized in America” Read the whole sickening story: http://www.wsj.com/articles/yales-little-robespierres-1447115476

It is hard for me to grasp that some Universities now carve out limited spaces within which students may freely express their opinions on controversial issues. Charles Murray’s reaction resonates with me: “Safe space. That’s the POINT of a university. To be a safe space for intellectual freedom in a world largely hostile to that concept.” FACEBOOK, Nov 10, 2015.

It is a good thing that today’s students are more sensitive to bad behavior among their peers and hopefully better behaved themselves. However, the swing from students demonstrating to defend free speech to students demonstrating to restrict it represents, in my view (as correctly noted by the brave Mr. Christakis in the above article) a swing from each or our personal responsibilities to exhibit, defend and promote good manners to a wide ranging state—big brother—to oversee and enforce all that in its wisdom we should believe and do. We will be a weaker and more subservient country as a result.

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Keystone XL pipeline madness

By his own admission President Obama’s rejection of the Keystone XL pipeline project is political rather than scientific.

Two environmental concerns have been raised. The first is that the emissions of greenhouse gases are about 17% higher for oil from oil sands compared to conventional sources. However, the rejection of the pipeline proposal will not materially change the production and consumption of Canada’s oil shale crude, which will now be transported to market by more expensive means. “Rail transport has expanded to carry oil sands to the United States, soaring from just 16,000 barrels in 2010 to 51.2 million barrels in 2014 before dropping somewhat this year. But rail transport is more expensive than pipeline transport…. Royal Dutch Shell’s chief executive, Ben van Beurden, said last year that the company had bid for space on another pipeline to move its oil-sands crude to Canada’s east coast and from there to world markets, including Gulf Coast refiners. ‘We’re covered. I’m good,’ he said in an interview. He said that ‘the argument that Keystone is a bad idea because it will somehow enable development of resources in Canada is to some extent flawed,’ adding that other alternatives would emerge.” (This and other quotes are from today’s Washington Post in the article linked below)

The second environmental concern arises from the possibility of oil spills from breaks in the pipeline. This possibility needs to be compared with the possibility of spills from rail accidents or breaks in alternative pipelines.

Because the pipeline would cross international boundaries it must be approved by the State Department. As the application was being reviewed, then Secretary of State Hillary Clinton stated on October 15, 2010 that the department was “inclined” to approve project. “We’re either going to be dependent on dirty oil from the Gulf or dirty oil from Canada,” she said. On August 26, 2011 the State Department issued its final environmental impact statement determining “there would be no significant impacts to most resources along the proposed project corridor.” And again on March 1, 2013 the State Department issued another environmental review that raised no major objections to the Keystone XL oil pipeline saying that other options to get the oil from Canada to Gulf Coast refineries were worse for climate change.

Canada’s new liberal Prime Minister, Justin Trudeau, supported the project. “TransCanada’s president and chief executive, Russ Girling, issued a statement saying his company was ‘disappointed. Today, misplaced symbolism was chosen over merit and science — rhetoric won out over reason,’ Girling said…. Terry O’Sullivan, general president of the Laborers’ International Union of North America, said Friday that ‘Obama has also solidified a legacy as a pompous, pandering job killer.’” (same Post article).

“As Obama rode from the White House to the campus [Georgetown on June 25, 2013, he], said he would approve Keystone XL only ‘if it does not significantly exacerbate the climate problem.’” But his own State Department found that it does not. So what is going on?

“By late 2013, Obama and Kerry had concluded that the pipeline failed their climate test — not because blocking it would guarantee that Canada’s fossil fuels would remain in the ground, but because denying the permit would strengthen America’s position in international climate negotiations…. ‘The reality is that this decision could not be made solely on the numbers — jobs that would be created, dirty fuel that would be transported here, or carbon pollution that would ultimately be unleashed,’ Kerry said in a statement. ‘The United States cannot ask other nations to make tough choices to address climate change if we are unwilling to make them ourselves.’”

In short the President lied (not an uncommon practice among politicians, but we might hope for a higher standard from American Presidents). But apparently not. The Obama administration has authorized the selling of coal owned by the U.S. government that would not meet our C02 emission standards to third world countries, which helps our emission record but not the world’s. https://www.washingtonpost.com/world/us-exports-its-greenhouse-gas-emissions–as-coal-profitable-coal/2015/10/08/05711c92-65fc-11e5-bdb6-6861f4521205_story.html

“The Washington Post’s editorial on the pipeline today began: “President Obama rejected the Keystone XL oil pipeline on Friday, ending an unseemly political dispute marked by activist hysteria, GOP hyperbole, presidential weakness and a general incapability of various sides to see the policy question for what it was: a mundane infrastructure approval that didn’t pose a high threat to the environment but also didn’t promise much economic development. The politicization of this regulatory decision, and the consequent warping of the issue to the point that it was described in existential terms, was a national embarrassment, reflecting poorly on the United States’ capability to treat parties equitably under law and regulation.”



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Two approaches to American governance–The case of higher education financing

Hillary Clinton deserves credit for setting out her positions on individual policy issues so that we can have an intelligent discussion of their pros and cons. She is nothing if not a tireless policy wonk. Think of her exhaustive but failed effort to “fix the provision of health care in America” during her husband’s presidency. While the Clinton’s are Democratic Party centrist, they still embrace a top down government/regulatory approach to dealing with many of societies challenges/problems. Mrs. Clinton’s plans to make college affordable provide a recent example of this approach. It is thoughtful and balanced from a left of center, regulatory approach perspective. I prefer a difference, right of center, more market oriented approach.

I have not read Mrs. Clinton’s detailed proposal and rely completely on the following Washington Post summary: http://www.washingtonpost.com/news/wonkblog/wp/2015/08/10/clinton-proposes-a-350-billion-plan-to-make-college-affordable/


Americans believe in equality of opportunity rather than equality of outcomes. We are not egalitarians. There is nothing we can do about the fact that each person is born with different predispositions and capabilities. But it has been a long-standing, broadly shared principle that everyone should have access to the education she is capable of. We have lived up to this goal very imperfectly. Tuition vouchers and school choice are moving us closer to this goal for K-12 by making the state’s financial contribution to education more equal for each student and subjecting schools to greater competition in producing good results. Unlike primary and secondary education, however, which in the United States is financed by the states (generally by municipalities), college is not for everyone. An important public policy issue is who should pay for higher education for those who do go.

When the government began to supplement private universities and colleges with state run, public ones, it generally funded the cost from tax payers charging only nominal tuitions, if any, to those attending. Milton Friedman and others pointed out that this resulted in a perverse redistribution of income from lower to higher income people. University graduates enjoy incomes two or three times the average of non-college graduates. In response to this criticism, state colleges and universities in recent decades have raised their tuitions in order to finance more of the cost of the education by its beneficiaries.

It is desirable for those from low-income families with the intelligence and desire to pursue careers requiring a college education to have that opportunity. This accords with our belief in providing an equal opportunity to all and increases our individual and national wealth by facilitating the maximum productivity of every citizen. But how can we best accomplish this goal without perversely redistributing taxpayers’ money to the better off? Along with higher tuitions, many universities offer financial assistance to such students in order to attract and graduate the best students. Having the best graduates enhances their reputations. A number of private organizations provide fellowship to promising low-income students. America is renowned for its extensive private charities. Many companies do the same, generally for the children of their employees. These have the substantial advantage over government bureaucrats of being closer to the beneficiaries of their largesse and thus better able to determine who in their communities will benefit the most from such assistance.

Determined students often work while studying and/or borrow from their families and friends (this was my approach). In business, future benefits from current investments are normally financed with borrowed money or by giving investors a stake in the outcome (selling shares in the hoped for profits). Unless they are family or friends, lending to someone with potential future human capital as collateral (i.e. lending to a student based on the expectation that she can repay out of higher future income) is a riskier proposition than, say lending to someone with a job to buy a car or a house (both of which can be use as collateral). So bank lending to college students was rather limited and expensive (interest rates high enough to cover the higher risks to the lender) until the government began to guarantee such loans.


To address this problem, and building on the experience with financing college for veterans of World War II in the “GI Bill” of 1944, Congress adopted what became known as Pell Grants, financial aid to low-income students in undergraduate college programs, in the Higher Education Act of 1965. This Act also provided limited government loans, which over time expanded in various ways to include students from middle-income families (Middle Income Student Assistance Act of 1978) and studies at graduate and professional schools. Over time the scope and terms of government assistance continued to expand. Grad PLUS was added by that spend thrift George W Bush in 2006 to help finance graduate education. “For the first time, it gave professional and graduate-school students unlimited access to below-market-rate loans from the government, which, of course, borrows the money to begin with.”[1]

This has enabled more American’s to go to college– a potentially good thing. The increased demand for places in colleges is likely to increase the cost of supplying more (higher salaries for college professors in order to attract more into teaching), but hardly justifies what has happened. According to The Economist “Tuition fees have doubled in real terms in the past 20 years. Student debt has trebled in the past decade, to $1.2 trillion.” Seventeen percent of these loans are now in default or seriously delinquent. Many of these students have dropped out of school or not found the jobs they were trained for.

The government (Secretary of Education Arne Duncan) has established a number of programs to help and Hilary Clinton “proposes capping the repayment of college loans at a maximum of 10% of income over 20 years. If a loan is not paid off by then the government will pick up the tab. The estimated bill for her scheme…, comes to $350 billion over ten years.”[2] This may be sensible within the context of government aid. But this top down government approach suffers from a number of weaknesses. One is the propensity for such programs to grow as different special interests succeed in getting added to the list: “Despite all the talk about the government’s $1.1 trillion student loan portfolio, and the burden it represents for college students, some 40 percent of the money is owed by graduate and professional school students — who make up only 16 percent of all student-loan borrowers.”[3] Another is the inferior ability of government bureaucrats, with no financial stake in the outcome, to evaluate the appropriateness of each individual loan or grant. A third is the limited incentive for government to find new innovative ways to deal with the problems that invariably arise.

The policy challenge in my view is to bring more effective competitive pressure on colleges and universities to deliver more for less, to facilitate more careful and better informed decisions by potential students of what education they need and will benefit from and the best place for them to get it, and insuring at the same time that initial poverty does not prevent them from getting it.

Leaving the GI Bill aside as a special case, the arrangements for financing college and advanced degrees that existed prior to the Federal government’s involvement worked pretty well. Those of us needing financial assistance paid a great deal of attention to the cost and value of the educations we sought. We were also more careful about whether and what sort of higher education would benefit us. I have no doubt that the incipient revolution of on-line courses, perhaps supplemented with class room discussions, will dramatically reduce the cost of higher education without significantly sacrificing its quality. Everyone’s professors can be the best that exist. Universities will be forced by such competition to exploit these new technological tools to dramatically reduce the costs of their offerings. The very best students will still pay the premium to attend the University of Chicago’s of the world (pardon my bias). Hopefully they will be the best and not just the wealthiest.

Market based financing innovations are also more likely to come from basically private funding of education. The suggestion made by Milton Friedman in 1955[4] and repeated in Capitalism and Freedom in 1962 for sharing the risk of investing in higher education between the borrowing student and the lender is now being explored in the private sector. “Enter income-share agreements ( ISAs ), which are essentially equity instruments for human capital. Investors finance a student’s college education in return for a percentage of their future income over a fixed period. ISAs are not loans and there is no outstanding balance. If students earn more than expected, they will pay more, but they also will pay less—or nothing—if their earnings do not materialize.”[5] Sharing the risk in this way insures a financial interest by both borrowers and lenders that collage choices maximize the expected return to both. A lender, (especially loans made or guaranteed by the government) is not well placed to determine the career intentions of the borrower leading to what economists call adverse selection. Income sharing agreements overcome this problem because the student being financed has a large stake in making the best choices.

Government always has an important role to play. This issue is what the nature of that role should be. Private contracts such as loans or the ISAs described above require a legal framework of enforcement. Such framework for ISAs is currently rather unclear. Sen. Marco Rubio (R., Fla.) and Rep. Tom Petri (R., Wis.) recently introduced the Investing in Student Success Act, which would set basic standards for ISA contracts. In addition their bill would provide for the collection and publishing of information on the cost and average earnings of graduates of different colleges and fields, which would help students choose where and how to invest in their futures.

Clinton’s and Rubio’s approaches represent very different concepts of how government can most constructively contribute to our flourishing. I prefer the approach of a more limited, legal framework role for government.

[1] Charles Lane, Washington Post Aug 26, 2015 https://www.washingtonpost.com/opinions/how-student-loans-help-keep-expensive-schools-in-business/2015/08/26/e7d7f83a-4c11-11e5-902f-39e9219e574b_story.html

[2] The Economist, August 22, 2015.

[3] Charles Lane op. cit.

[4] Milton Friedman, “The Role of Government

in Education,” in Economics and the Public Interest ,

  1. Robert Solo, (Rutgers: Rutgers University

Press, 1955).

[5]   Miguel Palacios And Andrew P. Kelly, “A Better Way to Finance That College Degree” WSJ April 13, 2015, http://www.wsj.com/news/articles/SB10001424052702303456104579485801253355622

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Cayman Financial Review, Q3 2015

Dear Friends,

The Third Quarter issue of the Cayman Financial Review is now available on the web: http://www.compasscayman.com/cfr/. I am on the Editorial Board and have two articles in this issue that might interest you. The first discusses the continued decline of U.S. world leadership exemplified in the case of the new Asian Infrastructure Investment Bank located in China: http://www.compasscayman.com/cfr/2015/08/19/US-leadership-and-the-Asian-Infrastructure-Investment-Bank/

The second is the final installment of my series on the Kabul Bank scandal. The failure of Kabul Bank in Afghanistan was probably the biggest bank failure and fraud in history on a per capital basis.  As this final article looks at some of the legal issues and developments in recovering stolen assets held abroad and Afghanistan’s uneven struggle to strengthen its criminal justice system, Gary Gegenheimer, a lawyer who also worked in Afghanistan, joined me to write this third installment: http://www.compasscayman.com/cfr/2015/08/19/The-Kabulbank-scandal–Part-III/

I hope that you enjoy them.

Best wishes,


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Greece: What should its creditors do now?

Following Sunday’s NO vote in Greece, what ever that might have meant, it is tempting to tell Greece to get lost and be done with them. Aside from the unseemly lack of compassion for our suffering fellow man, the further collapse of the Greek economy and society that would likely follow Grexit (the Greek exit from the Euro and introduction of its own currency) would open unknown and potentially very dangerous risks to the rest of Europe from its southern periphery. However, any new deal between Greece and its creditors should be mutually beneficial for Greece and the EU in the long run and achievable and practical in the short run. What are the key elements needed for such an agreement?

Greece’s second bailout program with its creditors (the EU, ECB, and IMF) expired June 30 after a four-month extension without disbursing the final installment of around $8 billion dollars. It cannot be resurrected. Thus any further discussions between Greece and its creditors will concern a third bailout program.

Greece’s recently replaced and unmissed Finance Minister, Yanis Varoufakis’, stock speech said basically that Greece does not need or want more loans because it is bankrupt rather than illiquid. In short, it wants debt forgiveness. In fact, many European officials have acknowledged the possible need to write off (reduce the present value one way or another of) existing Greek debt but insisted that any such consideration be put off for a new program. Discussion of a new program has now arrived.

The foundation of any financial assistance program with the IMF is its assessment that the borrowing country can repay the loan. This assessment is contained in the IMF’s “Debt Sustainability Analysis.” This analysis imbeds the agreed (or assumed) level of government spending and estimated tax and other government revenue and of the level of economic activity (GDP growth) upon which it depends in a forecasting model of the deficit and debt/GDP ratios expected from implementation of the agreed policies. The IMF was badly embarrassed by its acceptance of overly optimistic assumptions about income growth government revenue in its first bailout program in 2010 with the EU and ECB. Under political pressure from the EU and ECB, these assumptions allowed the IMF to conclude that Greece’s debt would be sustainable thus avoiding the need for some debt write off favored by the IMF but opposed by Germany and France, whose banks held large amounts of that debt. The second bailout program included a write off of about 70% of the privately held Greek debt. However, this came too late and the adjustment in the Greek government’s annual deficits required by the first program proved too severe causing a much larger and longer lasting contraction in the Greek economy than expected and assumed in the IMF Debt Sustainability Analysis at that time.

On June 26, 2015 (i.e. prior to Greece’s default on its $1.7 billion payment to the IMF and to the July 5 referendum) the IMF released a draft Debt Sustainability Analysis based on the information available at that time. It concluded that “If the program had been implemented as assumed, no further debt relief would have been needed under the agreed November 2012 framework…. At the last review in May 2014, Greece’s public debt was assessed to be getting back on a path toward sustainability, though it remained highly vulnerable to shocks. By late summer 2014, with interest rates having declined further, it appeared that no further debt relief would have been needed under the November 2012 framework, if the program were to have been implemented as agreed. But significant changes in policies since then—not least, lower primary surpluses and a weak reform effort that will weigh on growth and privatization—are leading to substantial new financing needs. Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable…. But if the package of reforms under consideration is weakened further—in particular, through a further lowering of primary surplus targets and even weaker structural reforms—haircuts on debt will become necessary.”

In short, the Greek economy was finally beginning to recover by the end of 2014 but the reversals by the new Syriza government of some of the policies contributing to that gain and the loss of market confidence in the muddled and amateurish behavior of the new government reversed the recovery and further increased Greek deficits. In addition, increasing capital flight has been financed by short-term emergency liquidity loans from the ECB, thus adding to Greece’s over all indebtedness. Capital flight per se should not reduce banks’ capital, as they lose the same amount of assets and liabilities, as long as they are able to liquidate sufficient assets by selling them or by using them as collateral for loans from the ECB or other banks. These loans and the process of transferring Euros abroad are described in the paper I presented in Athens May 19 at the Emergency Economic Summit for Greece: http://works.bepress.com/warren_coats/32/.

Under these circumstances it would be desirable (i.e. consistent with and/or required by a European desire to keep Greece in the Euro Zone while returning it to fiscal balance and sustainability over a reasonable, if somewhat longer, period of time) for Greece’s creditors to forgive some of the debt held by the ECB and IMF and to lower the structural fiscal surpluses initially required in a follow on program for the next few years (this latter element had already been offered by the creditors before the referendum). In short, by reducing Greece’s debt service payments and lowering its primary fiscal surplus, it would endure less “austerity.” Former Finance Minister Varoufakis actually proposed a sensible risk sharing form of refinanced Greek debt indexed to the economy’s economic performance. Creditors would do better than expected on their concessional loans if the economy performed better than forecast and would suffer losses if it did worse. This would give both sides a financial incentive to get the pace and balance of fiscal adjustment right (growth maximizing). While Europe’s political leaders sort out the details, the ECB should continue to provide liquidity credit to the extent that, and as long as, Greek banks can provide realistically valued collateral.

The purpose of these adjustments by the creditors should not and must not be to throw more good money after bad allowing a continuation of decades of corruption, rent seeking and government inefficiency. Long before it joined the Euro Zone, Greece suffered poor government services by a bureaucracy overstaffed by friends and supporters of the government in power at the time. Not receiving expected government services, many Greeks have decided not to pay for what they are not getting. Hence tax evasion and a large underground economy added to Greece’s deficits. Quoting from Bret Stephens’ July 6 column: “Greeks retire earlier and live longer than most of their eurozone peers, which means they spend close to 18% of GDP on public pensions, compared with about 7% in Ireland and 5% in the U.S…. As of 2010, Greek labor costs were 25% higher than in Germany. [As a result of internal devaluation since then, this is no longer true.] A liter of milk in Greece costs 30% more than elsewhere in Europe, thanks to regulations that allow it to remain on the shelf for no more than a week. Pharmaceuticals are also more expensive, thanks to the cartelization of the economy…. Greece wanted to be prosperous without being competitive. It wanted to run a five-star welfare state with a two-star economy. It wanted modernity without efficiency or transparency, and wealth without work. It wanted control over its own destiny—while someone else picked up the check.”

Changing this behavior by Greek governments and the Greek public will not be easy if it is possible at all. The still very strong support by the Greek public for keeping the Euro suggests a strong awareness of the need for some restraints and discipline of its government’s spending. But is the desire for a truly better deal (from their own government) strong enough to overcome the resistance of the entrenched and favored interests, who would lose from liberalizing the economy and cleaning up the patronage mess and tax non compliance, etc.? The best hope is the formation of a unity government that strongly endorses a well balance program of gradual further fiscal adjustment and the continuation of the structural reforms so badly needed. Close monitoring by the creditors of Greek compliance with its promises and the phasing of financial assistance tied to such performance benchmarks, is the IMF’s standard approach to enforcing compliance with the measures the government agrees to. There are risks in agreeing to a third program and risks in not doing so and thus Grexit.

Grexit, even with total default on all external debt, will surely force more austerity on Greece than would any program now contemplated, even before taking account of the almost certain collapse of all of Greece’s already “temporarily” closed banks. The Greek government will hardly be in a position to bailout its banks suffering a surge of non-performing loans. Depositor bail-ins will need to cut all the way into “insured” deposits. The pain will be largely felt only in Greece, and unfortunately mostly by the ordinary Greek citizen.

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Greece—how could they?

Today Greece is voting whether its government should accept the conditions required by the “Institutions” (EU/ECB/IMF) for the final installment of its second “bailout” package—a yes vote, or to reject them—a no vote. No one is quite sure what it all means. The program to which these conditions and the final installment of $8 billion applied expired on June 30 and those funds are no longer on offer. A yes vote would presumably indicate support by the majority of Greek voters for accepting the conditions (a modest primary budget surplus by the Greek government in coming years and structural reforms to improve the quality of government services and the productivity of Greece’s economy) likely to be offered for a third bailout program. The alternative—no more financial assistance from the Institutions—would force even greater “austerity” on the Greek government even after repudiating all of its external debt and thus saving the funds that it would otherwise needed to pay to service it. If Greek tax payers won’t cover the cost of the government’s promises and the market will no longer lend the shortfall, the government is likely to resort to augmenting its Euro tax income with IOU claims on Euros, i.e. introducing and inflating its own currency.

What were the Greek government and the Greek people thinking when they borrowed all that money in the first place, and it must be added, enjoyed spending it on an inflated, unsustainable lifestyle rather than investing it in a more productive future? But Greek politicians (and public) are hardly the only ones in the world to ignore future costs when making current promises they have no way to keep.

Take the United States, for example. For decades, the U.S. Congressional Budget Office has forecast ever-increasing deficits from American entitlement programs (Medicare, Medicaid, and Social Security) as expenditures increasingly outstripped revenue. This reflects both the growth in the generosity of these programs and demographics (increasing life expectancy and the baby boomer bulge in retired people relative to those working to pay for them—anyone who still thinks that the retired are receiving what they paid in while working just hasn’t been paying attention). I have written about this from time to time such as four years ago in: https://wcoats.wordpress.com/2011/04/23/thinking-about-the-public-debt/

The future unsustainability of Social Security promises has been the subject of public debate for at least fifty years. The “future” retirement of the WWII baby boomers and their pension expectations has been known since the end of WWII. But one congress after the other has kicked the ball down the road. Seven years ago I outlined the issues and the relatively simple solutions to Social Security deficits in: https://wcoats.wordpress.com/2008/08/28/saving-social-security/ Since then Medicare and Medicaid promises have only increased.

President Obama established the National Commission on Fiscal Responsibility and Reform (the so called Simpson-Bowles Commission) in early 2010 to develop bipartisan proposals for reducing future entitlement driven deficits. He ignored their modest proposals made in the Commission’s final report on December 1, 2010.

The Economist magazine last week reported that the assets available to cover U.S. public sector pensions covered only 75% of their obligations. In fact, the short fall is much greater than that because they are computed assuming a 7.6% return on their assets, which greatly overstates the actual experience of recent years. Private pensions are in much better shape. “But if public plans used the same discount rate as private ones, the deficit would increase to $3.9 trillion and the funding ratio fall to 45%.”

So what are our elected representatives thinking? “Deficits have eventually to be closed. That means lower benefits for the retired, bigger contributions from existing employees (a pay cut) or higher contributions from the employer—which means tax increases for state or city residents, or cuts to other services.

Why is it that our political representatives have such shorter policy horizons than does the public in general? The Economist provides a reasonable summary for the U.S..

“No wonder that no one is getting to grips with the problem. Unions do not like to draw attention to the deficits, for fear benefits will be cut. Politicians do not want to pick a fight with the unions, or increase taxes and annoy voters. Instead, states and cities tend to hope that rising markets will make the problem disappear.”


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