The Heart of the US Election

The American Dream is getting out of middle class reach

By Raghuram Rajan

A real debate is emerging in America’s presidential election campaign. It is superficially about health care and taxes. More fundamentally, it is about democracy and free enterprise.

Democracy and free enterprise appear to be mutually reinforcing – it is hard to think of any flourishing democracy that is not a market economy. Moreover, while a number of nominally socialist economies have embraced free enterprise (or “socialism with Chinese characteristics,” as the Chinese Communist Party would say), it seems to be only a matter of time before they are forced to become more democratic.

Yet it is not clear a priori why democracy and free enterprise should be mutually supportive. After all, democracy implies regarding individuals as equal and treating them as such, with every adult getting an equal vote, whereas free enterprise empowers individuals based on how much economic value they create and how much property they own.

How Draghi Opened The Door To Hyperinflation

... And Denied The Fed An Exit Strategy

by Martin Sibileau

We finally heard the intentions of Mr. Draghi, President of the European Central Bank (“ECB”). We only need to know the conditions Germany’s Verfassungsgericht will impose on September 12th. We believe they will be relevant.

On Thursday, Draghi told us he intends (1) to purchase sovereign debt in the secondary market, (2) that before he does so, the issuing country must submit to certain conditions within a fiscal adjustment program, (3) that when he finally buys the debt, he will buy any debt (new or outstanding) with a maturity lower than three years, (4) that after buying it, he will sterilize the transaction, (5) that the collateral pledged so far for liquidity lines will not be subject to minimum credit ratings any longer, (6) that the ECB will accept to rank pari-passu with other creditors going forward, and (7) that the Securities Market Programme will be terminated, with the purchased debt held until maturity. According to Mr. Draghi (but not toGermany), buying debt with a tenor lower than three years does not constitute government financing. The number three, it seems, is a magical number.

We will mince no words: Mr. Draghi has opened the door to hyperinflation. There will probably not be hyperinflation because Germany would leave the Euro zone first, but the door is open and we will explain why. To avoid this outcome, assuming that in this context the Eurozone will continue to show fiscal deficits, we will also show that it is critical that the Fed does not raise interest rates. 

There Must Be Some Way Out Of Here

Debunking Some Myths

By Mark J. Grant

First let me state , with a certain calmness, that there is a Transfer Union underway in Europe. This is the subject, you may recall, that Germany has tried to avoid at all costs which is why Eurobonds and other similar schemes have not been implemented. Europe, however, has found a clever way of implementing such a program and keeping it under the radar from the German citizens. I will explain: 

In Greece, Spain, Portugal and Italy the ECB has implemented a program where the sovereign guarantees some bank’s bonds. The bank then pledges them as collateral at the ECB and gets cash. The bank then turns around and lends the money back to the sovereign nationand provides liquidity and economic sustenance. The Transfer Union is completed as Germany guarantees 22% of the ECB and the European Central Bank is nothing more than a conduit to lend money to the various nations. This contrivance is also not sterilized so that the ECB is, in fact, printing money which is another part of this subterfuge that no one in Europe wants you to know anything about. This strategy is what has kept all of these various countries alive while the political entity, the European Union, tries to decide what to do about the future of the troubled nations. In a very real sense the ECB is the only fully operational part of the European construct at present as the European Union does not have the “political will” to carry out its mandate.

    “The tears I have cried over Germany have dried. I have washed my face.”                      -Marlene Dietrich

The costs of sovereign default

Theory and reality

By Ugo Panizza, Eduardo Borensztein

Sovereign debt is different. Private debt contracts can be enforced in court and court rulings enforced by asset seizures. By contrast, public-debt creditors:

·        Lack procedures for enforcing sovereign debt contracts – partly due to the principle of sovereign immunity.

·        Have ill-defined claims on the sovereign's assets as they cannot attach assets located within the sovereign’s borders, and typically have limited success in going after sovereign assets located abroad.

Since contracts cannot be enforced, why do sovereigns repay and why do lenders lend?

The economist's natural answer is that it must be the case that repaying is cheaper than defaulting (Dooley 2000). But what are the costs of default? In a seminal paper that kick-started the sovereign debt literature, Eaton and Gersovitz (1981) focused on reputational costs and showed that, under certain conditions, the threat of permanent exclusion from financial markets is a sufficient condition for repaying. Successive work by Bulow and Rogoff (1989) emphasised the possibility of trade sanctions. Cole and Kehoe (1998) showed that positive lending can be sustained even if creditors cannot punish defaulting countries. In this class of theoretical models incentives to pay come from the fact that a default would reveal negative information about the government to other parties that are engaging in transactions with the defaulting government (for a detailed discussion, see Panizza et al. 2009).

Measuring the costs of default

In a recent paper (Borensztein and Panizza 2009), we look at four possible costs of default: loss of reputation, reductions in trade, costs to the domestic economy, and political costs (Inter-American Development Bank 2006 provides a detailed description of default episodes over the last two hundred years).

General Motors Co sold a record number of Chevrolet Volt sedans in August

But that probably isn't a good thing for the automaker's bottom line

by Paul Lienert, Bernie Woodall and Ben Klayman

Nearly two years after the introduction of the path-breaking plug-in hybrid, GM is still losing as much as $49,000 on each Volt it builds, according to estimates provided to Reuters by industry analysts and manufacturing experts.

Cheap Volt lease offers meant to drive more customers to Chevy showrooms this summer may have pushed that loss even higher. There are some Americans paying just $5,050 to drive around for two years in a vehicle that cost as much as $89,000 to produce.

And while the loss per vehicle will shrink as more are built and sold, GM is still years away from making money on the Volt, which will soon face new competitors from Ford, Honda and others.

GM's basic problem is that "the Volt is over-engineered and over-priced," said Dennis Virag, president of the Michigan-based Automotive Consulting Group.

And in a sign that there may be a wider market problem, Nissan, Honda and Mitsubishi have been struggling to sell their electric and hybrid vehicles, though Toyota's Prius models have been in increasing demand.

GM's quandary is how to increase sales volume so that it can spread its estimated $1.2-billion investment in the Volt over more vehicles while reducing manufacturing and component costs - which will be difficult to bring down until sales increase.

But the Volt's steep $39,995 base price and its complex technology — the car uses expensive lithium-polymer batteries, sophisticated electronics and an electric motor combined with a gasoline engine — have kept many prospective buyers away from Chevy showrooms.

Why early sovereign default could save the euro

By forestalling timely sovereign default, the ECB is digging the euro's grave

By Harald Hau

The crisis in the Eurozone is primarily a debt crisis. Debt overhang, whether public or private (as it originally was in Ireland and Spain), impedes investment and growth (Reinhart and Rogoff 2010). And it diminishes incentives for fiscal rigor if the benefits accrue mainly to creditors, and aggravates the macroeconomic effects of austerity if much of the additional saving that deleveraging requires is transferred to creditors abroad. Low growth and capital flight reinforce the debt problem and create a downward spiral, from which belated budgetary austerity provides no exit.

Any strategy of dealing with the Eurozone crisis therefore must be evaluated in light of its effectiveness in dealing with the debt overhang problem. Two solutions are possible.

·        Inflation reduces the real value of nominal debt, lowering the debt burden both on the sovereign and all other debtors.

An unanticipated inflation increase of three percentage points amounts to a 34% (compounded) debt relief on a ten-year bond; little of the government debt in question is inflation-indexed (less than 8% in Italy and none in Spain). But such relief hits all investors alike, independent of the solvency of their respective debtors.

·        Or sovereign default writedowns of the face value and interest payments or reprofiling of such payments. These can take various forms.

For example, exchanges of short-run debt for long-run debt and adjustments of the interest payments can help restore sustainability to debt dynamics.

Scandals Show California Is Broken, Not Broke

The gaming of the system is an art form

By Steven Greenhut

Voters are accustomed to the scare tactics of tax-hungry politicians who warn of looming cuts in schools and public safety.

But nothing gets people’s attention like closing parks. And in California, where the state beaches and mountain refuges are as beloved as the politicians are cynical, the strategy has exposed practices that border on the corrupt.

It started in May 2011 when Governor Jerry Brown announced that “turbulent times” required the “unthinkable” -- the shuttering of 70 parks to deal with the state’s enduring fiscal problems. Brown’s critics sensed that he found the proposed cuts to be quite “thinkable” -- at least as a ploy to encourage Californians to loosen the grip on their wallets.

Brown has staked his governorship on the idea that Californians need to pay higher taxes to help plug a budget gap estimated at almost $16 billion -- specifically a proposition on the state ballot in November that would boost the sales tax by a quarter cent for four years and impose supposedly temporary income-tax increases on residents who earn more than $250,000 a year.

Brown and his fellow Democrats didn’t count on two things. First, nonprofit groups and local governments came up with the money to keep most of the targeted parks up and running, thus illustrating the effectiveness of nongovernment or local solutions in the face of state-government failure.

Employee Payouts

Second, it turned out that the state parks department, rather than being strapped, was soawash in cash that it handed out huge payouts to employees and hid millions of dollars in special accounts. (Some private groups backed away from their promises to finance individual parks when they learned about the hidden funds.)

Οur "lying eyes"

Are Chinese Banks Hiding “The Mother of All Debt Bombs”?

By Minxin Pei

China's massive bank financed stimulus was intended to keep the economy moving. It may instead lead to economic disaster.

Financial collapses may have different immediate triggers, but they all originate from the same cause: an explosion of credit.  This iron law of financial calamity should make us very worried about the consequences of easy credit in China in recent years.  From the beginning of 2009 to the end of June this year, Chinese banks have issued roughly 35 trillion yuan ($5.4 trillion) in new loans, equal to 73 percent of China's GDP in 2011. About two-thirds of these loans were made in 2009 and 2010, as part of Beijing's stimulus package.  Unlike deficit-financed stimulus packages in the West, China's colossal stimulus package of 2009 was funded mainly by bank credit (at least 60 percent, to be exact), not government borrowing.

Flooding the economy with trillions of yuan in new loans did accomplish the principal objective of the Chinese government — maintaining high economic growth in the midst of a global recession.  While Beijing earned plaudits around the world for its decisiveness and economic success, excessive loose credit was fueling a property bubble, funding the profligacy of state-owned enterprises, and underwriting ill-conceived infrastructure investments by local governments.  The result was predictable: years of painstaking efforts to strengthen the Chinese banking system were undone by a spate of careless lending as new bad loans began to build up inside the financial sector.

When the Chinese Central Bank (the People's Bank of China) and banking regulators sounded the alarm in late 2010, it was already too late.  By that time, local governments had taken advantage of loose credit to amass a mountain of debt, most of it squandered on prestige projects or economically wasteful investments.  The National Audit Office of China acknowledged in June 2011 that local government debt totaled 10.7 trillion yuan (U.S. $1.7 trillion) at the end of 2010.  However, Professor Victor Shih of Northwestern University has estimated that the real amount of local government debt was between 15.4 and 20.1 trillion yuan, or between 40 and 50% of China’s GDP.  Of this amount, he further estimated, the local government financing vehicles (LGFVs), which are financial entities established by local governments to invest in infrastructure and other projects, owed between 9.7 and 14.4 trillion yuan at the end of 2010.

A kinder, gentler empire

Dumb and dumber

By John Feffer

US President Barack Obama is a smart guy. So why has he spent the past four years executing such a dumb foreign policy? True, his reliance on "smart power" - a euphemism for giving the Pentagon a stake in all things global - has been a smart move politically at home. It has largely prevented the Republicans from playing the national-security card in this election year. But "smart power" has been a disaster for the world at large and, ultimately, for the United States itself.

Power was not always Obama's strong suit. When he ran for president in 2008, he appeared to friend and foe alike as Mr Softy. He wanted out of the war in Iraq. He was no fan of nuclear weapons. He favored carrots over sticks when approaching America's adversaries. 

His opponent in the Democratic primaries, Hillary Rodham Clinton, tried to turn this hesitation to use hard power into a sign of a man too inexperienced to be entrusted with the presidency. In 2007, when Obama offered to meet without preconditions with the leaders of Cuba, North Korea and Iran, Clinton fired back that such a policy was "irresponsible and frankly naive". In February 2008, she went further with a TV ad that asked voters who should answer the White House phone at 3am. Obama, she implied, lacked the requisite body parts - muscle, backbone, cojones - to make the hard presidential decisions in a crisis. 

Obama didn't take the bait. "When that call gets answered, shouldn't the president be the one - the only one - who had judgment and courage to oppose the Iraq war from the start?" his response ad intoned. "Who understood the real threat to America was al-Qaeda, in Afghanistan, not Iraq. Who led the effort to secure loose nuclear weapons around the globe." 

Like most successful politicians, Barack Obama could be all things to all people. His opposition to the Iraq war made him the darling of the peace movement. But he was no peace candidate, for he always promised, as in his response to that phone-call ad, to shift US military power toward the "right war" in Afghanistan. As president, he quickly and effectively drove a stake through the heart of Mr Softy with his pro-military, pro-war speech at, of all places, the ceremony awarding him the Nobel Peace Prize.

Place and Space

The Space Between

by ERIC JACOBSEN

Place and Space

Place, in contrast to space, is a context-specific, meaning-rich concept. Although many use the two words interchangeably, a fairly clean distinction can be made between them. Space is more abstract and undifferentiated than place. Space often is used to express a freedom from or a potential for something—“give me some space” or “we need space for this relationship to develop.” Place, by way of contrast, describes a realm where something significant has happened or is happening; “there’s no place like home.”

Walter Brueggemann identifies place as “storied.” One way to easily visualize the relationship between space and place is to think of a college dorm room. Before a student moves in, the dorm room has everything that is needed for college life, but it’s generic, undifferentiated space. Typically, there is a desk, a bed, a closet, a mirror, and a light. Within a week or two after the student moves in, this space is transformed into a place. There are pictures on the mirror, a cover on the bed, posters on the walls, and bric-a-brac on the desk. The story of that particular semester of college in that student’s life has already begun to be inscribed on the walls.

There is a dynamic relationship between space and place. Place is good, but we sometimes need a break from it. As a person lives life, one’s narrative begins to etch meanings on a particular space, causing it to become a place. As the meanings and memories crowd a place, a person may express a desire for more space. This is why we go on vacations to be restored or sometimes long to start over.

Space can be good in and of itself as well. Space is sometimes necessary for personal growth or identity formation within a group. Often we go on retreats not to disengage, but to reconnect with God, with ourselves, or with others. Often, however, new spaces are lonely and disorienting. Strangers finding themselves in this kind of situation long to find a place that they can call home.

A Doomed Marriage

Britain and Europe

BY THEODORE DALRYMPLE

There is nothing quite like self-interest for blinding people to the obvious, and it is the genius of the European Union to have placed an entire cadre of powerful but blind beneficiaries—unable and unwilling to see writing on the wall, even if inscribed in flashing blue neon lights—in strategic political and economic positions in every European country. And so the continent limps toward the abyss, its “ever closer union” resuscitating old national stereotypes and antagonisms and increasing the likelihood of real conflict.

Daniel Hannan is a British Member of the European Parliament who first came to wide notice with his brief but devastating (because entirely accurate) attack in that body on Britain’s then–prime minister, Gordon Brown, who responded to it with all the wit of a hanged sheep. Hannan has now written a short and brilliant book setting forth with inexorable logic and a fine command of the salient historical and economic facts the deficiencies of the so-called European Project, from its premises to its practices—all of which are not only wrong, but obviously wrong.

Like all people with bad habits, politicians and bureaucrats are infinitely inventive when it comes to rationalizing the European Project, though they’re inventive in nothing else. Without the Union, they say, there would be no peace; when it’s pointed out that the Union is the consequence of peace, not its cause, they say that no small country can survive on its own. When it is pointed out that Singapore, Switzerland, and Norway seem to have no difficulties in that regard, they say that pan-European regulations create economies of scale that promote productive efficiency. When it is pointed out that European productivity lags behind the rest of the world’s, they say that European social protections are more generous than anywhere else. If it is then noted that long-term unemployment rates in Europe are higher than elsewhere, another apology follows. The fact is that for European politicians and bureaucrats, the European Project is like God—good by definition, which means that they have subsequently to work out a theodicy to explain, or explain away, its manifest and manifold deficiencies.

Geography Strikes Back

To understand today's global conflicts, take a hard look at a map

By ROBERT D. KAPLAN

If you want to know what Russia, China or Iran will do next, don't read their newspapers or ask what our spies have dug up—consult a map. Geography can reveal as much about a government's aims as its secret councils. More than ideology or domestic politics, what fundamentally defines a state is its place on the globe. Maps capture the key facts of history, culture and natural resources. With upheaval in the Middle East and a tumultuous political transition in China, look to geography to make sense of it all.

As a way of explaining world politics, geography has supposedly been eclipsed by economics, globalization and electronic communications. It has a decidedly musty aura, like a one-room schoolhouse. Indeed, those who think of foreign policy as an opportunity to transform the world for the better tend to equate any consideration of geography with fatalism, a failure of imagination.

But this is nonsense. Elite molders of public opinion may be able to dash across oceans and continents in hours, allowing them to talk glibly of the "flat" world below. But while cyberspace and financial markets know no boundaries, the Carpathian Mountains still separate Central Europe from the Balkans, helping to create two vastly different patterns of development, and the Himalayas still stand between India and China, a towering reminder of two vastly different civilizations.

Technology has collapsed distance, but it has hardly negated geography. Rather, it has increased the preciousness of disputed territory. As the Yale scholar Paul Bracken observes, the "finite size of the earth" is now itself a force for instability: The Eurasian land mass has become a string of overlapping missile ranges, with crowds in megacities inflamed by mass media about patches of ground in Palestine and Kashmir. Counterintuitive though it may seem, the way to grasp what is happening in this world of instantaneous news is to rediscover something basic: the spatial representation of humanity's divisions, possibilities and—most important—constraints. The map leads us to the right sorts of questions.

Dirtier Lives May Be Just the Medicine We Need

An Epidemic of Absence

By Matt Ridley

Your great-grandparents faced infectious diseases that hardly threaten you today: tuberculosis, polio, cholera, malaria, yellow fever, measles, mumps, rubella, smallpox, typhoid, typhus, tapeworm, hookworm…. But there's also a long list of modern illnesses that your great-grandparents barely knew: asthma, eczema, hay fever, food allergies, Crohn's disease, diabetes, multiple sclerosis, rheumatoid arthritis. The coincidence of the rise in these "inflammation" diseases, characterized by an overactive immune system, with the decline of infection is almost certainly not a coincidence.

Natural experiments in recent decades support the idea that while modern hygiene defeats infection, it also promotes allergy and autoimmunity. Finns isolated in an impoverished Soviet province had more parasites and fewer allergies than Finns in Finland. Swedes in clean Stockholm had three times as much asthma as Estonians in smoky Estonia. Ethiopians and Gambians got allergies when they lost their intestinal worms. Growing up on a farm greatly cuts allergy risk.

In a remarkable new book, "An Epidemic of Absence," Moises Velasquez-Manoff draws together hundreds of such studies to craft a powerful narrative carrying a fascinating argument. Infection with parasites prevents or ameliorates many diseases of inflammation. The author briefly cured his own hay fever and eczema by infecting himself with hookworms—before concluding that the price in terms of diarrhea and headaches was too high.

I've touched on the "hygiene hypothesis" in these pages before. In its cartoon form the argument—that in a clean world our immune system gets bored and turns on itself or on harmless pollen—isn't very convincing. But Mr. Velasquez-Manoff makes a far subtler, more persuasive case. Parasites have evolved to damp our immune responses so that they can stay in our bodies. Our immune system evolved to expect parasites to damp it. So in a world with no parasites, it behaves like a person leaning into the wind when it drops: The system falls over.

The Socialist Counter-revolution Begins

France's Richest Man Seeks Belgian Citizenship

A few months ago when the new French socialist president gave details of his particular version of the "fairness doctrine" and said he would tax millionaires at 75%, we said that "we are rotating our secular long thesis away from Belgian caterers and into tax offshoring advisors, now that nobody in the 1% will pay any taxes ever again." While there was an element of hyperbole in the above statement, the implication was clear: France's richest will actively seek tax havens which don't seek to extract three quarters of their earnings, in the process depriving France (and other countries who adopt comparable surtaxes on the rich) of critical tax revenues. It took three months for this to be confirmed, and with a bang at that. The WSJ reports that Bernard Arnault, the CEO of LVMH, and the richest man in France, has decided to forego hollow Buffetian rhetoric that paying extra tax is one's sworn duty, and has sought Belgian citizenship.

From the WSJ:

Bernard Arnault, France's richest man and chairman and chief executive of LVMH Moët Hennessy Louis Vuitton, is seeking Belgian citizenship, a move that comes as President François Hollande prepares to press ahead with a controversial tax on the country's wealthiest citizens.

Georges Dallemagne, president of Belgium's naturalization commission, said Mr. Arnault's case was filed at the end of August and will be "treated like others." Mr. Dallemagne said the process would take until "early next year, at best."

Though the LVMH titan denies his move is fiscally motivated, the timing of Mr. Arnault's request is sure to intensify the debate about whether Mr. Hollande's tax policies are sparking an exodus of the country's rich.

As a reminder, it took Monsieur Hollande four months to reneg on his promise to never bailout evil banks, when just last week he bailed out the second largest French home loan specialist, in the process pledging tens of billions in taxpayer funds. Precisely what he said he would not do. We expect Hollande will also reneg on his populist promises of exorbitant taxation of the wealthy once the Arnault backlash spreads among the remainder of the French "1%", who just happen to pay the bulk of French taxes.

Suddenly, Nobody In Europe Wants The ECB Bailout

Bailout or Trap ?

By Tyler Durden

It took the ECB a year of endless behind the scenes Machiavellian scheming to restart the SMP program (which was conceived by Jean-Claude Trichet in May 2010, concurrent with the first Greek bailout). The markets soared with euphoria that this time will be different, and that the program which is a masterclass in central planning paradox, as it is "unlimited" yet "sterilized", while based on "conditions" none of which have been disclosed, and will somehow be pari passu for new bond purchases while it retains seniority for previous purchases of Greek and other PIGS bonds, will work - it won't, and the third time will not be the charm as we showed before. Yet it has been just 48 hours since the "bailout" announcement and already Europe is being Europe: namely, it turns out that nobody wants the bailout.

On one hand there's Germany for obvious reasons - not only are they footing the cost, but it is for them that the threat of an inflationary spike as a result of "unlimited" bond buys is most acute. But on the other, just as we predicted all along, are Spain and France, the biggest beneficiaries of the bailout, and whose bonds soared on expectations the ECB may buy them, who overnight have had a change of heart and say they never actually needed the bailout. Why? Because its politicians have suddenly had a change of heart and realize they will be sacked the second they hand over sovereignty over to the Troika or whatever supernational entity is in charge of the country following the submission of the bailout request.

More importantly, and as explained before, as long as the yield on the bonds of insolvent European countries is sub 8%, not one country will demand a bailout. And as long as these countries reap the benefits of cheap rates, the policies of pseudo austerity will continue (as a reminder, nobody in Europe has actually implemented austerity), where nothing changes, where budget deficits continue to pile on, where sovereign debt continues to soar, where politicians continue making the same flawed policy choices, and where the European slow-motion trainwreck continues, only with a brief delay in the final inevitable outcome.

By now everyone knows about the ECB party that sent US stocks to 4 year highs. Now comes the aftermath. From the NYT:

Greeted with initial fanfare by investors and economic officials, the unlimited bond-buying plan that the European Central Bank president, Mario Draghi, announced Thursday ran into immediate political problems in the crucial countries of Germany, Spain and Italy.

Guess Who’s Bailing Out Bankrupt Western Governments Now...

From rags-to-riches

 by Tim Staermose

Fourteen years ago during the Asian financial crisis, Indonesia endured a currency collapse, a severe 2-year recession, and an embarrassing IMF bailout.

Western bureaucrats wagged their fingers incessantly at Indonesia, lecturing the country about the dangers of excess and fiscal irresponsibility.

How sweet the irony is. In a stunning rags-to-riches story, Indonesia contributed US$1 billion to the IMF last week in order to help bail out bankrupt Western nations.

As I’ve written before, unlike Japan, the US, and Europe — which all seem to think the answer to an economic bust brought on by a debt-binge is to borrow and spend even more money– Indonesia took its medicine when its economy collapsed back in 1998.

The government cut spending. The economy was de-regulated and thrown open to more foreign investment.

The banking system was restructured, and after a difficult and admittedly very painful two years, the foundation was laid for new economic expansion, which continues to this day.

To be sure, the 1998 collapse of the Indonesian economy cost the incumbent political elite here their cushy positions. President Suharto’s three-decade long iron-grip came to an ignominious end. There were riots in the streets, and he was literally turfed out of office.

But so what? That’s EXACTLY what was needed. Part of the renewal process should always be to ship out the dead wood.

The Bill Clinton Myth

In government the worst rise to the top

by James E. Miller

Earlier this week, former U.S. president Bill Clinton gave the keynote address to the Democractic National Convention in an effort to lend some of his popularity to Barack Obama.  With the unemployment rate still stubbornly high at 8.1%, Obama has lost many of the enthused voters who put him into the Oval Office in 2008.  Clinton was tapped to deliver the speech not only because of his image of a wonkish pragmatist but because of his presiding over the booming economy of the late 1990s.  Like a prized mule, Clinton was dragged out to give Democrats someone to point to and say that his policies were the hallmark of smart governance.

What attracts the left, both politicians and media, to Slick Willy is the fact that he presided over a thriving economy even while raising taxes.  This coincidence was championed as a justification for higher tax rates by Obama in his own speech before the DNC.

I want to reform the tax code so that it’s simple, fair, and asks the wealthiest households to pay higher taxes on incomes over $250,000 – the same rate we had when Bill Clinton was president; the same rate we had when our economy created nearly 23 million new jobs, the biggest surplus in history, and a lot of millionaires to boot.

The Clinton-era tax hikes, it is alleged, provided the federal government the means to create a healthy middle class.  Or at least that’s the only casual connection that can be gathered from such a philosophy.  The left claims that economic growth is driven primarily by middle class spending.  This spending needs to be subsidized in turn by government initiatives.  As Nobel Prize winning economist and class warrior Joseph Stiglitz puts it:

Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education, and technology, impeding the engines of growth.

Stiglitz’s thinking rests on the Keynesian theory that economies are reliant on strong levels of consumption and demand.  And with the right people in office, the state is the most capable institution of spending a nation into prosperity.

How Globalization Created And Destroyed Venice

Benefits of an open society Vs political power

By Max Nisen

The story of Venice from 800 to 1350 is of incredible political and institutional change of a remarkably modern sort, sparked by international trade.

Egalitarian institutions and economic mobility threatened the power of Venice's elites, and they used their wealth and power to choke off competition, ending Venice's dominance.

A new NBER working paper from Diego Puga and Daniel Trefler takes a deep look at the data and history of how it happened.

Venice likely would not have become a center of trade if a series of events had not conspired to make it uniquely independent. It was at first the most Western outpost of Byzantium. After helping defeat Charlemagne in battle, it was granted de facto independence in 814, then full independence in 992.

As a result, it was uniquely free from the political and military pressures of the rest of Europe. Venice was also in the perfect geographic position to benefit from international trade. Midway between Constantinople (the gateway to the East) and Western Europe, it was right on the the route to Europe's population centers

ECB Head Draghi Backs Up Pledge to Save Euro

Unlimited Bond Purchases

By Spiegel

The European Central Bank has resembled a sieve this week. Ahead of Thursday's much anticipated press conference, financial websites and business papers were full of reports detailing ECB President Mario Draghi's plan for holding down the borrowing costs of debt-plagued euro-zone member states. Discretion was in short supply.

When Draghi did finally step in front of the microphone on Thursday, he confirmed what most already knew. The ECB is to launch a new bond-buying program to hold interest rates on euro-zone sovereign bonds in check. The program, called Outright Monetary Transactions (OMTs), allows for unlimited ECB purchases of sovereign bonds on the secondary market. The program is to focus on bonds with a period of three years and less.

"OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro," Draghi said in a statement. "Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios."

The decision to essentially restart the ECB's bond-buying program, which saw the bank amass over €210 billion euros worth of sovereign bonds from heavily indebted euro-zone member states in 2010 and 2011, was not uncontroversial.Particularly Jens Weidmann, head of the German central bank, the Bundesbank, and a prominent member of the ECB Governing Council, has been vocally opposed to such a move.