Berlin: Then and Now

The first time I saw Berlin was in 1960, just 15 years after the end of World War II in Europe. I came for a week of exploring with the other participants in the International Christian Youth Exchange living in Germany for the school year of 1959 – 60, during which I lived with a German family in the small village of Rasdorf near the somewhat larger village of Hünfeld, near the small city of Fulda. Though Rasdorf was on the border between East and West Germany, we had to fly to Berlin, as it was an island of West Germany within the Deutsche Democratic Republic (DDR), commonly referred to as East Germany. While Berlin was technically divided into four zones (American, British, French and Russian), it was administratively divided into the Western Zone, which was part of the Federal Republic of Germany, and the Eastern Zone controlled by a puppet government installed by the Soviet Union. The wall that separated the two had not yet been built nor even thought of at the time.

By then I had lived for the better part of a year within walking distance of a ten meter wide strip of plowed earth that separated East and West Germany – the communist world from the free world – and our village from the next one to the east. The physical scars of the Great Patriotic War, as the Russians called it, were little in evidence in Germany’s villages such as Rasdorf. Berlin, however, was a very different matter.

According to Wikipedia: “Up to the end of March 1945 there had been a total of 314 air raids on Berlin, with 85 of those coming in the last twelve months. Half of all houses were damaged and around a third uninhabitable, as much as 16 km² of the city was simply rubble.” Estimates of the total number of dead in Berlin from air raids range from 20,000 to 30,000. To put it into perspective, the total U.S. causalities in Iraq from March 19, 2003 to May 26, 2015 were 4493.

By 1960 West Berlin had enjoyed considerable rebuilding. But vast areas remained flattened and uninhabitable, though generally cleared of rubble. The now thriving hot spot of Potsdamer Platz, just west of what was about to become the Berlin Wall, was a large vacant space. The Kurfürstendamm, on the other hand, was largely rebuilt and thriving with the steeple of the bombed out Kaiser Wilhelm memorial church still standing, as it is today, as a memorial to the horrors of war.

The 17 Juni strasse in the West becomes the Unter der Linden strasse as it passes through the Brandenburg Tor to the East. Its buildings also had been fully restored to their prewar appearance. But not more than one or two blocks on either side was nothing but gutted buildings and ruble. It was a shocking sight. Coming from America, I had never seen such massive devastation before in my life. Of course, today no evidence of the war exists anymore except in memorials and museums. And even the Berlin Wall, which existed from 1961 to 1989, is gone; a small portion of the Wall still remains as a historical reminder for visitors but mainly it has been broken up into inch-size fragments for sale to tourists or used as decorations in hotel lobbies, one of which sits on my office bookshelf.

The apartment building Ito and I are now staying in on Behrenstrasse is just one block south of Unter der Linden strasse and has replaced the gutted buildings I had seen 55 years earlier. As far as I can see in every direction now the area has been fully rebuilt, as very little was restorable. The exceptions are the grand buildings of Berlin’s original and once again city center (Humboldt University, several concert halls, Museums, the Berliner Dom and some other churches).

During our day trip to East Berlin during that first visit in 1960 our group went to the Opera House, which had survived the war, and saw a performance of a portion of opera. I remember the concert very well. They performed the Polovtsian Dances from Alexander Borodin’s Prince Igor. It was very familiar to me from the American musical Kismet. Being the naive and skeptical 18 year old that I was at the time, I complained to my companions that those damn Russian’s had stolen these songs. They will steal anything, I said. Learning that the reverse was true soon there after was eye opening.

I returned to Berlin, now divided by the Berlin Wall, in 1976 or so to visit my former wife’s sister Jean and her husband Tom, and then again for the Mont Pelerin Society meetings in 1982 with Milton Friedman and other economists in attendance. By then I was in my mid 30s. Reconstruction continued in the West but little had changed in the East. During the first of these two visits I saw, with Jean and Tom, my first ever full opera, this time in the Western Zone. The opera was Madam Butterfly, a nice introduction to the world of opera. I marveled at the music, of course, but also found it fascinating that I was watching an opera sung in Italian about a geisha who had fallen in love with an American Captain in Japan and I was watching it in Germany.

I returned to a reunited Berlin (and a reunited Germany) after the fall of the Berlin Wall in 1989 and the subsequent collapse of the USSR several times again for one reason or another. Once was to visit my German friend Moritz Schularick, with whom I will meet again here for dinner on Monday. The burst of construction and development in the newly freed Eastern Zone was amazing. The transformation with each of my subsequence visits was quite pronounced. Younger people no longer refer to the Eastern Zone. The hotel where we are now staying is in what was once part of the Eastern Zone, and is now called Mid Town (Mitte).

We are now vacationing in Berlin because Ito has been reading a lot about Winston Churchill and the Germans in the Nazi government such as Albert Speer, Joseph Goebbels, Rudolf Hess, and Hermann Göring, and WWII in general and he wanted to see the places he has read about. So here I am 55 years after my first visit in 1959 astonished at the city’s history of glory, infamy, courage and pain, destruction and eventual reconstruction and rebirth. Hitler’s famous bunker here where he ended his life together with his new wife Eva Braun and his dog Blondi has been filled in and covered over, but the Germans have gone out of their way not to cover up their treatment of the Jews in what came to be called the holocaust. Still, it feels a bid odd walking and riding around this historic city with its many Nazi ghosts. It is also the city in which brave Germans sought freedom in the West by jumping out of windows over the Wall, digging tunnels under it, and by risking their lives in order to escape the Eastern Zone to live in the West.

The story of Berlin, from then until now, is an example how a people can succumb to inhumane beliefs and behavior, recover their humanity and respect for freedom, and once again flourish. Germany’s long history includes both great and horrendous acts. Within my lifetime the Nazi’s rose to power and threatened the world in WWII, Berlin was completely and utterly destroyed by allied bombing near the end of that war, then occupied by the Red Army in 1945, the city butchered into four quadrants as part of the Allies’ Cold War with the USSR, the Berlin Wall was constructed in 1961 and torn down in 1989, and Germany was reunified in 1990, subsequently prospering as a free and democratic state. I am grateful to have been able to witness what seems to be a positive outcome to this complicated story.

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Baltimore—Saving a City

Few serious problems have a single explanation or cure. The decay of large parts of Baltimore is no exception. An interesting article in the Washington Post explores the diligent efforts of its former mayor, later the governor of Maryland, Martin O’Malley to fix it. The Baltimore mayor depicted in the TV series The Wire, Tommy Carcetti, was inspired by O’Malley. (I was surprised after watching five seasons of the Game of Thrones to learn that the actor who played Carcetti in The Wire, Aidan Gillen, is Littlefinger in the Game of Thrones. His O’Malley character in The Wire was much more interesting.)

O’Malley went after the usual suspects, improving transportation and other infrastructure, improving education, etc. – all of the things we look to government to provide in the name of equal opportunity for all. He also instituted tough policing inspired by the “Broken Windows” theory first expounded by James Q. Wilson and George L. Kelling in 1982. This introduced the intensive use of “stop, question, and frisk” of recent controversy in NYC. In retrospect, the approach alienated the police from the communities they were supposed to protect, and was much in the news when 25 year old African-American Freddie Gray died in April from injuries received while in police custody. His funeral in Baltimore was followed by riots that did much damage to the already impoverished neighborhood in which he lived.

What was almost totally missing from the Post article was the need for jobs. While the over all unemployment rate for metropolitan Baltimore is only slightly above the U.S. average (5.7% compared to 5.6%), black unemployment is dramatically higher. “For young black men between the ages of 20 and 24, the unemployment rate was an astounding 37% in 2013, according to the most recent data available from the U.S. Census Bureau. That’s compared with 10% for white men of the same age.” (CNN Money) Much of the city’s heavy industry and the jobs they provided (steel processing, shipping, auto manufacturing, and transportation) left Baltimore decades ago. Many workers moved with those jobs but some stayed. The increase in service economy jobs of recent years employs workers with different and generally higher level skills than did the lost manufacturing jobs. Johns Hopkins University and Johns Hopkins Hospital are now Baltimore’s largest employers. Baltimore’s population peaked at around 950,000 in 1950 and dropped to 622,000 in 2013. Improving Baltimore’s infrastructure for those who have stayed is pointless if they can’t find jobs.

It is not that infrastructure and education are not important. They are important both for the quality of life and for attracting enterprises that provide jobs. But they are only part of the package companies consider when deciding where to locate. The cost of providing and maintaining them relative to their quality is important as well, and education needs to be relevant for the jobs potentially attracted. Taxes, both state and local are an important port of the cost of doing business. When companies evaluate where to locate new facilities they will want the best bang for their buck. Maryland is an expensive state (35th from the top in CNBC’s list of the best states for doing business). During his term as governor of Maryland O’Malley:
• Raised the top personal income tax rate from 4.75 to 5.75 percent. With local taxes on top, Maryland’s top rate is 8.95 percent.
• Raised the corporate tax rate from 7.0 to 8.25 percent.
• Raised the sales tax rate from 5 to 6 percent and expanded the sales tax base.
• Raised the sales tax rate on beer, wine, and spirits by 50 percent.
• Raised the gas tax by 20 cents over four years, almost doubling the rate from 23.5 cents.
• Doubled the cigarette tax from $1 to $2 per pack.
• Imposed higher taxes on vehicle registration.
• Imposed a storm water mitigation fee on property owners, or a “rain tax.”
(Chris Edwards: Cato)

The quality of government services in Maryland, however, is also fairly high. Last year I incorporated my consulting business in Maryland as an LLC. It took me 30 minutes on line sitting in my office from start to finish, including the email delivery of the signed and sealed document of incorporation. In addition, the cost of property and labor in Baltimore is low. This is a natural market reaction to the loss of industry and residence. The city’s efforts to revive its poorer neighborhoods also need to focus on improving its competitive advantage as a place for businesses to locate.

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Crony capitalism and the Export Import Bank

An important and fundamental principle of the rule of law is that laws should have wide or universal applicability to everyone. This principle is generally violated when governments subsidize specific activities. These subsidize might take the form of tax breaks, loans at preferential interest rates or even grants to favored enterprises or activities. The Export Import Bank is a government program for granting such favors in the name of promoting exports.

If the EX-IM Bank only provided information to American firms that helped them satisfy foreign requirements for selling their products abroad or to connect with services available for marketing such produces—following the model of the Small Business Administration or the Agricultural Extension Services provided by many states—their continued existence might be defensible. However, like so many government intrusions into the private sector, it provides huge subsidize to a limited number of customers (about 30% of the total to Boeing to subsidize the sale of its planes to foreign carriers) at the expense of others. American carriers like Delta complain that EX-IM Bank subsidies to Boeing benefit their foreign competitors, who are able to buy Boeing planes more cheaply than they are. “The Airline Pilots Association of America estimates that the bank’s subsidizing of Boeing airline purchases abroad has forced our domestic airlines to cut about 7,500 jobs – decreasing the airline workforce by almost 2 percent.” (The Blaze, May 29, 2015)

While the cost of the EX-IM Bank to U.S. taxpayers is trivial, it is one more drop in the growing pond of crony capitalist connections to the government. Boeing moved its headquarters from Seattle, where most of its production was traditionally located, to Chicago and has diversified its production and suppliers around the country precisely to have more representatives in congress with an interest in its well being. Like many other large companies seeking government favors, it has hired key people from government such as Kevin Varney, former chief of staff at the Ex-Im during Obama’s first term. The stakes for Boeing are large so you can be sure it is spending a lot of money one way or another to protect its interests. This is the nature of crony capitalism, which gradually diminishes real market competition and chokes productivity.

Creating programs that grant favors also creates strong incentives for less subtle and more overt, traditional style corruption. “For example, Johnny Gutierrez, an Ex-Im Loan Specialist, pled guilty on April 22, 2015 of accepting up to $78,000 in bribes in return for recommending the approval of unqualified loan applications to the bank, among other misconduct. During this period, Ex-Im gave Gutierrez nearly a 20 percent pay hike and paid-out thousands in performance bonuses. “ (Adam Andrzejewski, Forbes, )

The Ex-Im Bank and dozens of programs like it are economically unsound and wasteful and politically corrupting. It and others like it should be killed when ever possible. Here is a rare case where congress can do good by doing nothing (i.e. by not renewing the Bank at the end of this month).

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Dennis Hastert and the law

Former congressman Dennis Hastert has been charged with failing to tell his bank why he was withdrawing his money (up to $3.5 million withdrawn in smaller amounts over a few years). It appears that he was being blackmailed by someone threatening to expose a sexual relationship long ago that Mr. Hastert does not want disclosed. Blackmail is a crime that I understand, but I have yet to read that the blackmailer has been charged with any crime. I assume that that is coming.

Mr. Hastert is being charged with violating our Anti Money Laundering (AML) laws.
These laws allow arresting and convicting people for moving money (as Mr. Hastert was doing) that the government thinks was the proceeds of crime (not the case with Mr. Hastert, his crime was failing to report what he planned to with his money), when they are not able to prove that there was a crime in the first place. As far as I know, paying a blackmailer (which is what Mr. Hastert apparently did) is not a crime, though demanding and receiving such money is. The United States has pushed such legislation and the new bureaucracies needed to enforce it all over the world at the cost of billions and billions of dollars (that could have been used for poverty reduction or other more pressing things) with very little if any benefit to show for it. Charging Dennis Hastert with AML violations is a rare exception. Wow, what a benefit for such intrusions into our private lives. I consider AML laws more than a costly waste of money. They are another expansion of the arbitrary power of governments that can be used for good or ill with limited oversight. They lower the standards required for convictions of the real crime, what ever it was, and to that extend diminish the rule of law as we have always understood it.

It is hard to grasp how far our government has evolved from the freedoms we were guaranteed in our constitution. Most of these incremental intrusions have been in the name of protecting us from ourselves and our neighbors. The unlawful (according to a recent court ruling) spying on its own citizens by the NSA exposed by Edward Snowden is now well known and tomorrow we will see what congress does about it. In another example, The Washington Post and others have exposed the shocking abuse of civil forfeiture laws (modern highway robbery by the police).

These are the tips of an alarming iceberg of regulations contained in tens of thousands of pages of laws and regulations from banking to buying cereal. Charles Murray, a very thoughtful and out of the box thinker and observer of our times, makes an intriguing proposal for fighting back. Like me, he is a student of the 60s when civil disobedience seemed the only weapon left to us against an abusive government:

Has our preference for security over freedom swung so far? What are some people smoking to think that government bureaucrats at homeland security, the IRS or the Veterans Administration can more efficiently meet our needs than we can arrange ourselves in the private sector? I have commented on these alarming developments many times before:

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Emergency Economic Summit for Greece

I just returned from a conference in Athens on the Greek economy. Yanis Varoufakis, Greece’s controversial Finance Minister, gave the (almost) final presentation to the 500 attendees making his usual point that Greece is insolvent not illiquid, meaning that its unsustainable debt should be written off (partially at least). While he is surely correct in that assessment, as usual he failed to discuss or even mention the structural reforms Greece needs to make to improve its productivity and thus lift its standard of living, which are also part of the conditions of the existing assistance program with the IMF/EU/ECB. He wants Greece’s creditors to forgive its debts first with reforms (which the new government says it wants to revers to some extent anyway) to come after. As past Greek behavior has destroyed any trust by its creditors and potential investors, the Troika (IMF/EU/ECB) is unlikely to agree to the Minister’s demands. The highlight of the conference was the critic of the Minister’s remarks by Nobel Prize economist Tom Sargent given immediately after and providing the actual concluding remarks for the day.

Here is an article on the conference that includes a short TV interview that I gave on the side.

A video of the full conference and my presentation with be on the Atlas Network website later.

The paper that I prepared for the conference can be found at:

All the best,

WarrenGreece EESG

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The Obama’s on race and poverty

Riots in near by Baltimore and elsewhere following killings of unarmed black men by police have reignited a public discussion of approaches to policing, causes and curse for poverty, and race relations in America. Good. We will never have final, definitive answers to these questions and it is good that we continue to discuss them and to search for better ways of addressing them.

Yesterday I posted a Washington Post op-ed by Richard Cohen addressing criticisms of the First Lady’s public statements on race and the “black experience.”

The evolutionary process has predisposed us to bond with and trust most easily our own families and tribes—to be most comfortable with what and who is most familiar to us. Traits that served us well as hunters-gatherers are often less useful or actual impediments to life in larger communities and cities. Civilization is, in part, the process of taming some of these primitive impulses.

At the dedication of a museum in NYC recently, the First Lady stated that: ““I guarantee you that right now, there are kids living less than a mile from here who would never in a million years dream that they would be welcome in this museum,” This surprised many of us, especially here in Washington DC, where the percent of blacks in the population has just recently slipped below 50%, and where it is hard to imagine any building in which blacks would not be welcomed. But though I have many black friends, and don’t give it a second thought, I can remember when I lived in Hyde Park, Chicago as a student at the University of Chicago, I was apprehensive about penetrating more than a block into Woodlawn, across the midway from my classes. This is the South Side Chicago almost all black neighborhood Michelle Obama grew up in. There was something about being the almost only white man in an all black neighborhood that was uncomfortable. Nonetheless, I was shocked a few months ago when the black friend of a houseguest expressed some nervousness at driving into my neighborhood (though a few black families are among our 61 home community).

While some of this is in our genes, some of it is fortified by experience. What can we do to remove baseless apprehensions between ourselves and our fellow man and more importantly what can we do to help left the likes of those living in West Baltimore from destructive cycles of poverty, crime, and other destructive behavior? There are no magic bullets. Many factors are at play and I admire the First Lady’s contributions to improving these lives.

I disagree with much of President Obama’s policy views, especially domestic policies, but I have admired his and his wife’s advise to African Americans. On several occasions the President has told young blacks to avoid thinking of themselves as victims and to focus on what they can and must do themselves to better their lives. Yesterday at Georgetown University he said: “The stereotype is that you’ve got folks on the left who just want to pour more money into social programs, and don’t care anything about culture or parenting or family structures. And then you’ve got cold-hearted, free market, capitalist types who are reading Ayn Rand and think everybody are moochers. And I think the truth is more complicated.” Indeed it is and I welcome his and the First Lady’s contributions to finding better ways to better lives.

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The Cayman Financial Review

I have three articles in the latest issue of the quarterly Cayman Financial Review, on whose editorial board I serve. The first is the Letter from the Editorial Board, which explores my thoughts on restoring more market discipline of bank risk taking rather than piling on more government regulations: The second is the second installment of The Kabul Bank Scandal series,–Part-II/   And the third is my review of Martin Wolf’s new book, “Shifts and Shocks.” If any of these topics interest you please click on its link.

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