The Ultimate Resource

Population Control Nonsense

by Walter E. Williams 

According to an American Dream article ^[1], “Al Gore, Agenda 21 and Population Control,” there are too many of us and it has a negative impact on the earth. Here’s what the United Nations Population Fund said in its annual State of the World Population Report for 2009, “Facing a Changing World: Women, Population and Climate”: “Each birth results not only in the emissions attributable to that person in his or her lifetime, but also the emissions of all his or her descendants. Hence, the emissions savings from intended or planned births multiply with time. . . . No human is genuinely ‘carbon neutral,’ especially when all greenhouse gases are figured into the equation. Therefore, everyone is part of the problem, so everyone must be part of the solution in some way. . . . Strong family planning programmes are in the interests of all countries for greenhouse-gas concerns as well as for broader welfare concerns.”

Thomas Friedman agrees in his New York Times column “The Earth is Full” (June 8, 2008), in which he says, “[P]opulation growth and global warming push up food prices, which leads to political instability, which leads to higher oil prices, which leads to higher food prices, and so on in a vicious circle.”

In his article “What Nobody Wants to Hear, But Everyone Needs to Know ^[2],” University of Texas at Austin biology professor Eric R. Pianka wrote, “I do not bear any ill will toward people. However, I am convinced that the world, including all humanity, WOULD clearly be much better off without so many of us.”

However, there is absolutely no relationship between high populations, disaster, and poverty. Population-control advocates might consider the Democratic Republic of Congo’s meager 75 people per square mile to be ideal while Hong Kong’s 6,500 people per square mile is problematic. Yet Hong Kong’s citizens enjoy a per capita income of $43,000 while the Democratic Republic of Congo, one of the world’s poorest countries, has a per capita income of $300. It’s no anomaly. Some of the world’s poorest countries have the lowest population densities.

Planet earth is loaded with room. We could put the world’s entire population into the United States, yielding a density of 1,713 people per square mile. That’s far lower than what now exists in all major U.S. cities. The entire U.S. population could move to Texas, and each family of four would enjoy more than 2.1 acres of land. Likewise, if the entire world’s population moved to Texas, California, Colorado, and Pennsylvania, each family of four would enjoy a bit over two acres. Nobody’s suggesting that the entire earth’s population be put in the United States or that the entire U.S. population move to Texas. I cite these figures to help put the matter into perspective.

Let’s look at some other population density evidence. Before the collapse of the Soviet Union, West Germany had a higher population density than East Germany. The same is true of South Korea versus North Korea; Taiwan, Hong Kong, and Singapore versus China; the United States versus the Soviet Union; and Japan versus India. Despite more crowding, West Germany, South Korea, Taiwan, Hong Kong, Singapore, the United States, and Japan experienced far greater economic growth, higher standards of living, and greater access to resources than their counterparts with lower population densities. By the way, Hong Kong has virtually no agriculture sector, but its citizens eat well.

One wonders why anyone listens to doomsayers who have been consistently wrong in their predictions—not a little off, but way off. Professor Paul Ehrlich, author of the 1968 bestseller The Population Bomb, predicted major food shortages in the United States and that by “the 1970s . . . hundreds of millions of people are going to starve to death.” Ehrlich forecasted the starvation of 65 million Americans between 1980 and 1989 and a decline in U.S. population to 22.6 million by 1999. He saw England in more desperate straits: “If I were a gambler, I would take even money that England will not exist in the year 2000.”

Expert Poverty

By a considerable measure, poverty in underdeveloped nations is directly attributable to their leaders heeding the advice of western “experts.” Nobel laureate and Swedish economist Gunnar Myrdal said (1956), “The special advisors to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem . . . all recommend central planning as the first condition of progress.” In 1957 Stanford University economist Paul A. Baran advised, “The establishment of a socialist planned economy is an essential, indeed indispensable, condition for the attainment of economic and social progress in underdeveloped countries.”

Topping off this bad advice, underdeveloped countries sent their brightest to the London School of Economics, Berkeley, Harvard, and Yale to be taught socialist nonsense about economic growth. Nobel laureate economist Paul Samuelson taught them that underdeveloped countries “cannot get their heads above water because their production is so low that they can spare nothing for capital formation by which the standard of living could be raised.” Economist Ranger Nurkse describes the “vicious circle of poverty” as the basic cause of the underdevelopment of poor countries. According to him, a country is poor because it is poor. On its face this theory is ludicrous. If it had validity, all mankind would still be cave dwellers because we all were poor at one time and poverty is inescapable.

Population controllers have a Malthusian vision of the world that sees population growth outpacing the means for people to care for themselves. Mankind’s ingenuity has proven the Malthusians dead wrong. As a result we can grow increasingly larger quantities of food on less and less land. The energy used to produce food, per dollar of GDP, has been in steep decline. We’re getting more with less, and that applies to most other inputs we use for goods and services.

Ponder the following question: Why is it that mankind today enjoys cell phones, computers, and airplanes but did not when King Louis XIV was alive? After all, the necessary physical resources to make cell phones, computers, and airplanes have always been around, even when cavemen walked the earth. There is only one reason we enjoy these goodies today but did not in past eras. It’s the growth in human knowledge, ingenuity, and specialization and trade—coupled with personal liberty and private property rights—that led to industrialization and betterment. In other words human beings are immensely valuable resources.

What are called overpopulation problems result from socialistic government practices that reduce the capacity of people to educate, clothe, house, and feed themselves. Underdeveloped nations are rife with farm controls, export and import restrictions, restrictive licensing, price controls, plus gross human rights violations that encourage their most productive people to emigrate and stifle the productivity of those who remain. The true antipoverty lesson for poor nations is that the most promising route out of poverty to greater wealth is personal liberty and its main ingredient, limited government.

A tale of two books

From 1944 to Nineteen Eighty-Four

By Sheldon Richman

I’m inclined to think of George Orwell and F. A. Hayek at the same time. Both showed great courage in writing the truth, undaunted by the consequences awaiting them. Both valued freedom, though they understood it differently.

Orwell, a man of the “left,” could not remain silent in the face of the horrors of Stalinism. Twice — during the Spanish Civil War and again at the dawn of the Cold War — he refused to permit his comrades to blind themselves to where their collectivism had led and could lead again. For his favor he was called a conscious tool of fascism, a stinging accusation considering he had gone to Spain to fight fascism. (But for a few inches, the bullet that penetrated Orwell’s neck in Spain would have denied us the latter warnings, Animal Farmand Nineteen Eighty-Four. We would have never known what the fascists had cost us.)

Hayek, a man of the “right,” risked ostracism and worse in 1944 by publishing The Road to Serfdom, in which this Austrian-turned-Briton, writing in England at the height of World War II, warned that central economic planning would, if pursued seriously, end in a totalitarianism indistinguishable from the Nazi enemy. That couldn’t have been easy to write at that time and place — central planning was much in vogue among the intelligentsia. While a good deal of the reception was serious and respectful, a good deal of it was not. Herbert Finer, in Road to Reaction, called Hayek’s book “the most sinister offensive against democracy to emerge from a democratic country for many decades”; it expressed “the thoroughly Hitlerian contempt for the democratic man.”

Orwell’s Review

Not surprisingly, it was The Road to Serfdom that brought Orwell and Hayek together in print. Orwell briefly reviewed the book along with Konni Zilliacus’s The Mirror of the Past in the April 9, 1944 issue of The Observer. The man who would publish Animal Farm a year later and Nineteen Eighty-Four five years later found much to agree with in Hayek’s work. He wrote:

Shortly, Professor Hayek’s thesis is that Socialism inevitably leads to despotism, and that in Germany the Nazis were able to succeed because the Socialists had already done most of their work for them, especially the intellectual work of weakening the desire for liberty. By bringing the whole of life under the control of the State, Socialism necessarily gives power to an inner ring of bureaucrats, who in almost every case will be men who want power for its own sake and will stick at nothing in order to retain it. Britain, he says, is now going the same road as Germany, with the left-wing intelligentsia in the van and the Tory Party a good second. The only salvation lies in returning to an unplanned economy, free competition, and emphasis on liberty rather than on security. In the negative part of Professor Hayek’s thesis there is a great deal of truth. It cannot be said too often — at any rate, it is not being said nearly often enough — that collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamed of.

This is a significant endorsement, for no one understood totalitarianism as well as Orwell. Indeed, in Why Orwell Matters, Christopher Hitchens points out that Nineteen Eighty-Four impressed Communist Party members behind the Iron Curtain. He quotes Czeslaw Milosz, the Polish poet and Nobel laureate, who before defecting to the West was a cultural attachéfor the Polish communist government: “Orwell fascinates them [members of the Inner Party] through his insight to the details they know well…. Even those who know Orwell only by hearsay are amazed that a writer who never lived in Russia should have so keen a perception into its life.” (An audio interview with Hitchens about Orwell is here. [UPDATE: Hitchens died December 15].)

But true to his left state-socialism, Orwell could not endorse Hayek’s positive program:

Professor Hayek is also probably right in saying that in this country the intellectuals are more totalitarian-minded than the common people. But he does not see, or will not admit, that a return to “free” competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State. The trouble with competitions is that somebody wins them. Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led, and since the vast majority of people would far rather have State regimentation than slumps and unemployment, the drift towards collectivism is bound to continue if popular opinion has any say in the matter.

…Capitalism leads to dole queues, the scramble for markets, and war. Collectivism leads to concentration camps, leader worship, and war. There is no way out of this unless a planned economy can somehow be combined with the freedom of the intellect, which can only happen if the concept of right and wrong is restored to politics.

Short Shrift

It’s disappointing to see Orwell give such short shrift to Hayek’s positive thesis. He is glib and dogmatic, which is unbecoming a serious intellectual such as Orwell. His ignorance of economics leaps from the page.

“[A] return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State.” It’s hard to believe that someone so familiar with Stalinism could have written that. Even without knowing much economics, could he really have thought that what goes on in market-oriented societies, even during depressions, could be worse than the famine Stalin inflicted on the Ukrainians, the show trials and executions, or the labor camps in Siberia?

“The trouble with competitions is that somebody wins them.” In a market producers compete to better serve consumers. The losers in that competition are not exiled or executed. They find other ways to serve consumers, just as producers are trying to serve them.

“Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led….” Where has monopoly arisen without the aid of the State? We find no market-generated monopoly in England or the United States. There, major business interests actively promoted protectionism and other interventions precisely to tamp down competition and protect their market shares. Of course, for many people, Orwell presumably among them, that is capitalism, a topic I return to below. (I should note that Hayek forswore laissez faire in his book, but that is a topic for another day.)

“[T]he vast majority of people would far rather have State regimentation than slumps and unemployment….” But that’s a false choice. Slumps and unemployment, as Hayek and his mentor Ludwig von Mises taught, are products of central-bank manipulation of money and interest rates, that is, of government not of the free market. The Great Depression, which must have been on Orwell’s mind, was no exception. The real choice is between freedom and security (including mutual aid) on the one hand, and State “regimentation,” slumps, and unemployment on the other.

I must pause here to focus on Orwell’s disgraceful use of the word “regimentation.” I say “disgraceful” because he committed the sin he himself so eloquently condemned in his justly famous essay “Politics and the English Language”: the sin of euphemism. In that great essay he wrote:

In our time, political speech and writing are largely the defence of the indefensible. Things like the continuance of British rule in India, the Russian purges and deportations, the dropping of the atom bombs on Japan, can indeed be defended, but only by arguments which are too brutal for most people to face, and which do not square with the professed aims of the political parties. Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness. Defenceless villages are bombarded from the air, the inhabitants driven out into the countryside, the cattle machine-gunned, the huts set on fire with incendiary bullets: this is called pacification. Millions of peasants are robbed of their farms and sent trudging along the roads with no more than they can carry: this is called transfer of population or rectification of frontiers. People are imprisoned for years without trial, or shot in the back of the neck or sent to die of scurvy in Arctic lumber camps: this is called elimination of unreliable elements. Such phraseology is needed if one wants to name things without calling up mental pictures of them. Consider for instance some comfortable English professor defending Russian totalitarianism. He cannot say outright, “I believe in killing off your opponents when you can get good results by doing so”. Probably, therefore, he will say something like this:

“While freely conceding that the Soviet regime exhibits certain features which the humanitarian may be inclined to deplore, we must, I think, agree that a certain curtailment of the right to political opposition is an unavoidable concomitant of transitional periods, and that the rigors which the Russian people have been called upon to undergo have been amply justified in the sphere of concrete achievement.”

Regimentation is the least of what goes on under a totalitarian regime.

Capitalism versus the Free Market

“Capitalism leads to dole queues, the scramble for markets, and war.” I think that part of the problem for Orwell is that a truly free market is not among the possible options. For him and many others, the choice is between a system run for employers and one run for workers. (The preferable alternative is not obvious.) In this view, the former is capitalism, sometimes dressed up as “the free market,” and the latter is socialism. We shouldn’t be too hard on Orwell for thinking this way, for many defenders of the market are just as careless when they write about mixed economies such as the one in the United States. Despite pervasive government intervention, we often hear business conduct defended because “under capitalism” consumers have the power to punish firms that ill-serve them. Tell that to consumers who chose not to buy GM and Chrysler cars. Tell that to people who lost land through eminent domain so that a big-box chain might prosper. Generations of business-inspired intervention to some extent must have rigged the market against consumers and workers. If not, what are the economists complaining about?

As for his inclusion of war in his list, let it be said that the scramble for markets and other economic objectives cannot be a sufficient condition for war. War requires the State, that is, the socialization of costs through taxation and conscription.

One wonders how Orwell avoided despair. He couldn’t accept (state) capitalism, and he saw the totalitarian tendencies of socialism up close. Yet he could write, “There is no way out of this unless a planned economy can somehow be combined with the freedom of the intellect, which can only happen if the concept of right and wrong is restored to politics.” (Emphasis added.)

Hadn’t he just read Hayek’s Chapter 11, “The End of Truth,” in which Hayek described how a serious commitment to central planning must produce “contempt for intellectual liberty”?

The word “truth” itself ceases to have its old meaning. It describes no longer something to be found, with the individual conscience as the sole arbiter of whether in any particular instance the evidence (or the standing of those proclaiming it) warrants a belief; it becomes something to be laid down by authority, which has to be believed in the interest of unity of the organized effort and which may have to be altered as the exigencies of this organized effort require it.

The general intellectual climate which this produces, the spirit of complete cynicism as regards truth which it engenders, the loss of the sense of even the meaning of truth, the disappearance of the spirit of independent inquiry and of the belief in the power of rational conviction, the way in which differences of opinion in every branch of knowledge become political issues to be decided by authority, are all things which one must personally experience — no short description can convey their extent.

But of course Orwell had experienced those things in Spain and knew how it was in Russia. He certainly put a heavy burden on that word “somehow.” How restoring the concept of right and wrong to politics would make central planning either decent or practical is a mystery no one has solved. (Of course, Mises had long before shown that socialism could not be practical because without prices arising out of the exchange of privately owned means of production, the socialist planner could not make rational calculations with respect to what should be produced, in what manner, and in what quantities.)

To end on a partly optimistic note, though Orwell presumably would not agree, central economic planning is not on the modern agenda. The threat today is not state socialism. It’s bureaucratic corporatism dressed up as progressive democracy.

Celebrate and weep

Bill Of Rights Day

By Jeff Harding

Today is Bill of Rights Day. That thin piece of paper is about the only thing that protects us from tyranny. In case you have forgotten, here is some commentary from Cato on their status:

Today is Bill of Rights Day. So it’s an appropriate time to consider the state of our constitutional safeguards.

Let’s consider each amendment in turn.

The First Amendment says that “Congress shall make no law… abridging the freedom of speech.” Government officials, however, have insisted that they can gag recipients of “national security letters” and censor broadcast ads in the name of campaign finance reform.

The Second Amendment says the people have the right “to keep and bear arms.” Government officials, however, make it difficult to keep a gun in the home and make it a crime for a citizen to carry a gun for self-protection.

The Third Amendment says soldiers may not be quartered in our homes without the consent of the owners.  This safeguard is one of the few that is in fine shape — so we can pause here for a laugh.

The Fourth Amendment says the people have the right to be secure against unreasonable searches and seizures. Government officials, however, insist that they can conduct commando-style raids on our homes and treat airline travelers like prison inmates by conducting virtual strip searches.

The Fifth Amendment says that private property shall not be taken “for public use without just compensation.” Government officials, however, insist that they can use eminent domain to take away our property and give it to other private parties who covet it.

The Sixth Amendment says that in criminal prosecutions, the person accused is guaranteed a right to trial by jury. Government officials, however, insist that they can punish people who want to have a trial—“throwing the book” at those who refuse to plead guilty—which explains why 95 percent of the criminal cases never go to trial.

The Seventh Amendment guarantees the right to a jury trial in civil cases where the controversy “shall exceed twenty dollars.” Government officials, however, insist that they can impose draconian fines on people without jury trials.

The Eighth Amendment prohibits cruel and unusual punishments. Government officials, however, insist that a life sentence for a nonviolent drug offense is not cruel.

The Ninth Amendment says that the enumeration in the Constitution of certain rights should not be construed to deny or disparage others “retained by the people.” Government officials, however, insist that they will decide for themselves what rights, if any, will be retained by the people.

The Tenth Amendment says that the powers not delegated to the federal government are reserved to the states, or to the people. Government officials, however, insist that they will decide for themselves what powers they possess, and have extended federal control over health care, crime, education, and other matters the Constitution reserves to the states and the people.

It’s a disturbing snapshot, to be sure, but not one the Framers of the Constitution would have found altogether surprising. They would sometimes refer to written constitutions as mere “parchment barriers,” or what we call “paper tigers.”  They nevertheless concluded that having a written constitution was better than having nothing at all.The key point is this: A free society does not just “happen.”  It has to be deliberately created and deliberately maintained.  Eternal vigilance is the price of liberty.  To remind our fellow citizens of their responsibility in that regard, the Cato Institute has distributed more than five million copies of our pocket Constitution.  At this time of year, it’ll make a great stocking stuffer. 

Poverty Cure once more

From Aid to Enterprise

A Union made of dreams

Europe in Purgatory

By Robert Samuelson

By now, it's obvious that adopting the euro was a colossal blunder. It may rank as Europe's worst policy mistake since World War II. The virtues of the common currency -- it reduced transaction costs and the uncertainty of fluctuating exchange rates among national monies -- were temporary. Its vices seem permanent or, at least, semi-permanent: the mounting economic costs of saving the euro; the growing nationalism from arguing over who's to blame.

Do not expect some magical "solution." Europe has entered an economic and political purgatory from which there is no early escape. On paper, the crisis countries (so far: Greece, Portugal, Ireland, Italy and Spain) might benefit from abandoning the euro and resurrecting national currencies. They could then devalue these currencies, spurring exports and tourism. But in practice, this choice is dangerous and maybe impossible.

Any hint that a country might dump the euro would trigger runs on banks, as depositors sought to withdraw their euros. Banks would collapse. Deprived of buyers for their debt, countries would default. This would impose further losses on banks inside and outside the defaulting country. Without viable banks, borrowers would be starved for credit. There would be capital controls restricting the shift of funds abroad. If one country (say, Greece) left the euro, it might precipitate runs and capital flights elsewhere. Writing in The Financial Times, Citigroup chief economist Willem Buiter sketched this grim outlook:

"Disorderly sovereign defaults and eurozone exits ... would drag down not just the European banking system but also the North Atlantic financial system. ... The resulting financial crisis would trigger a global depression that would last for years, with GDP likely falling by more than 10 percent and unemployment in the West reaching 20 percent or more. Emerging markets would be dragged down too."

Given these terrifying possibilities, hardly anyone is eager to tempt fate and see whether they might actually occur. Buiter himself rates the probability of this doomsday outcome at no more than 5 percent; the assumption is that European governments -- or someone -- will avoid it by continued bailouts (loans to weak governments). But this creates other problems. It imposes austerity on countries and removes control of their budgets to third parties: the European Union or the International Monetary Fund (IMF).

The logic is plain. If debtors need rescuing, then the rescuers ought to have some say over the policies that might cause trouble. Under the latest agreement among European leaders, member countries have to submit their budgets to Brussels to certify that any deficit does not breach a ceiling of 0.5 percent of national income. There would be some unspecified transition, because most budgets are now in violation.

The potential for intrusiveness -- and resentment -- is obvious. Brussels might order tax increases or spending cuts. National sovereignty over basic political choices is being outsourced. Too much power is being centralized away from nation states. A backlash against the idea of Europe is possible and probable.

So Europe is trapped in purgatory. What's economically sensible is politically treacherous, and what's politically sensible is economically treacherous. Moreover, the euro's promise has been turned on its head.

When introduced in 1999, its overriding goal was clear. As an engine of shared prosperity, it would strengthen a common European consciousness. Germany's power would be subordinated to the larger project of a united Europe. Now, everything is reversed: The euro is undermining Europe's economy, sowing conflict (Britain has rejected the latest package) and elevating Germany -- as the economically strongest state -- to set terms for dealing with the crisis.

Much of this was predictable and, indeed, was predicted. Here's a commentary of mine from 1997: "A single currency (the dollar) works in the United States because wages are flexible and workers are mobile. Workers move to find jobs. ... Europe lacks these advantages. ... One way countries can offset differences in competitiveness is through flexible exchange rates. ... A single currency would eliminate this possibility." Others, more eminent, issued similar warnings.

Because the euro's economic advantages were oversold, it was also doomed politically. "The great potential tragedy here is that ... (it) would spawn disunity." Europeans "would quarrel over who's to blame for the single currency's failing to meet its inflated (and unrealistic) expectations. There would be disillusion with the larger idea of Europe."

Perhaps Europe will overcome the present crisis through some combination of loans from the European Central Bank and the IMF along with policies to improve economic growth. This is the best imaginable outcome, and many others -- much worse -- are possible. But even the best result would not be very good for Europeans or for us. It would leave, as I noted back then, "a weakened, resentful Europe (that) would not make the partner America needs in the 21st century." 

Do as i say, not as i do

Economic Fairness

 By Walter Williams

            The most prevalent theme in President Barack Obama’s Dec. 6 Osawatomie, Kan., speech was the need for greater “fairness.” In fact, though the president never defined the term fair(ness), he used it 15 times. Explaining his new hero, Teddy Roosevelt, Obama said: “But Roosevelt also knew that the free market has never been a free license to take whatever you can from whomever you can. He understood the free market only works when there are rules of the road that ensure competition is fair and open and honest.” What’s fair competition is somewhat subjective, but let me suggest a few examples of what’s clearly unfair.

            Say a person wants to become a taxi owner. He has a driver’s license, a car and accident liability insurance. Is it fair that in New York City, he has to first purchase a taxi license (medallion) that as of October sold for $1 million? Taxi licenses in Chicago go for $56,000. In Boston, they are $285,000, and in Philadelphia, they run $75,000. Is that fair competition?

            In some cities, to own a taxi one must obtain a certificate of “public convenience and necessity.” At a Public Utility Commission hearing, incumbent taxi owners show up with their attorneys to protest that another taxi company is not needed, and the application is denied. I’d like to have Obama -- or anyone else -- tell us whether that’s fair competition.

            The Davis-Bacon Act of 1931 is a law with racist origins and broad congressional support. During the 1931 legislative debate over the Davis-Bacon Act, which mandates super-minimum (mostly union) wages on federally financed or assisted construction projects, racist intents were obvious. Rep. John Cochran, D-Mo., supported the bill, saying he had "received numerous complaints ... about Southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South." Rep. Clayton Allgood, D-Ala., complained: "Reference has been made to a contractor from Alabama who went to New York with bootleg labor. ... That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country." Rep. William Upshaw, D-Ga., spoke of the "superabundance or large aggregation of Negro labor." American Federation of Labor President William Green said, "Colored labor is being sought to demoralize wage rates." The Davis-Bacon Act remains law. Modern rhetoric in support of it has changed, but its effects haven’t. It continues to discriminate against nonunion construction labor. Most black construction workers are in the nonunion sector. Tragically, both President Obama and almost all black congressmen, doing the bidding of their labor union allies, vote against any measure that would modify or eliminate Davis-Bacon restrictions. Would Obama see the Davis-Bacon Act as fair competition?

            Probably the most unfair thing that happens to most blacks is the grossly rotten schools they attend. Often, fraudulent high-school diplomas are conferred that certify they can read, write and compute at the 12th-grade level when in fact they can’t perform at the seventh- or eighth-grade level. President Obama’s administration strongly opposes educational vouchers, even one as small as the D.C. Opportunity Scholarship Program, with his Office of Management and Budget saying: "Private school vouchers are not an effective way to improve student achievement. The administration strongly opposes expanding (the program) and opening it to new students.” The president is against school choice for low-income parents while his own children attend Sidwell Friends, one of the most prestigious private schools in D.C. Many members of Congress keep their own children out of D.C. public schools; 44 percent of senators and 36 percent of representatives do, and that includes 35 percent of Congressional Black Caucus members, who tend to vote against school choice. Their actions are dictated by what’s good for the National Education Association, not low-income black children. Do you think that’s fair? By the way, teachers at public schools are twice as likely as other parents to send their own children to private schools. That ought to tell us something

Media of Mass Destruction

Hitler Reacts to Ron Paul's Rise in Polls

How to escape the poverty trap

From Aid to Enterprise

VIDEO PLAYER ↓

“I have never heard of a country that developed on aid… I know about countries that developed on trade and innovation and business. I don’t know of any country that got so much aid that it suddenly became a first world country. I’ve never heard of such a country. So the, the track is wrong, that track ends to nowhere, it leads to nowhere.”

The Cheetah Generation

From Aid to Enterprise

“Every decade or so, the United Nations puts together a sort of a gathering and the whole gaggle of Western donors and African government and NGOs, they gather to announce grand initiatives to pull the world’s poorest continent out of its economic miasma. The pledges are made, delegates pat themselves on the back, you know, champagne glasses click, they go home, and then everybody forgets about it. Then another five years there is another conference and another summit.”

The state of things to come

The State Of The European Monetary Union

[This article was originally published by Deutsche Bank Group. It explores likely outcomes of the EMU.— Ed.]

Βυ Thomas Mayer

Although failing to meet the criteria for an optimal currency union EMU worked fairly smoothly during the first decade of its existence. In our view the reason for this was cheap credit, which substituted for fiscal transfers to economically weaker countries.

With the disappearance of cheap credit EMU 1.0 lacked an essential element compensating for its deficiencies as an optimal currency area. In principle, cheap credit from the markets could be replaced by government transfers from stronger to weaker EMU countries or ample central bank credit. However, we would consider a “transfer union” or an “inflation union” not as stable states of EMU.

This leaves in our view only two options for EMU 2.0: A hardening of EMU or a redrawing of the boundaries of EMU such that only countries meeting the real economy criteria for a currency union are members.

We expect EU governments and institution to do everything possible to retain an EMU with a large group of countries. This requires credible and irreversible adjustment in the countries in financial difficulties and an improved economic governance structure in EMU. Most likely, it also requires start-up funding from the EU level, including from the ECB as other facilities (e.g. IMF and EFSF) lack the necessary financial fire-power.

* * * * *

There is a technique in econoFailmics called comparative statics, where the change from one state of the economy to another in response to a change in some important exogenous parameters is analysed. We use this technique to derive scenarios of possible new states of EMU after the present crisis. We briefly sketch the state of EMU before the crisis, identify the change in exogenous parameters, and finally describe how EMU might look like in the future.

An EMU built on easy credit

Even if all countries did not even meet the nominal convergence requirements laid down in the Maastricht Treaty EMU was surprisingly stable during the first 10 years of existence. The reason for this was easy credit.

Robert Mundell argued in a path-breaking article in 1961 that fixed exchange rates among different economic areas require a high degree of labour market mobility (or, as was later pointed out, a high degree of real wage flexibility).¹ Subsequently, Peter Kenen in a 1969 article pointed out, that fiscal transfers to some extent can make up for deficiencies in the real economy criteria for a fixed exchange rate regime (to which Kenen added a diversified production structure in each economic area).²

Although EMU met neither the Mundell nor the Kenen criteria when it was launched it remained remarkably stable for the first decade of its existence. Some observers have taken the view that this was due to a too rigid formulation of optimum currency area theory. After all, so a common argument, not even the US fits all the criteria for a common currency. We are not convinced by this explanation. Rather, it seems to us that EMU was sustained during its first decade by the ample supply of credit at very low cost. Cheap credit was a substitute for the fiscal transfers that would otherwise have been needed to compensate for the insufficient fulfillment of the Mundell criteria. Weaker economies could easily borrow to counter country-specific adverse developments (such as falling export competitiveness) and raise private and public consumption beyond the economy’s production capacity (see Charts 1-2).³

With the burst of the global credit bubble the reason for the smooth functioning of EMU, easy credit, disappeared and the deficiencies of the euro area in meeting the requirements for an optimal currency area came to the fore. A number of countries (notably Greece, Ireland, Italy, Portugal and Spain) had relied on cheap credit to fund domestic demand and neglected their international competitiveness. As a result, their unit labour costs rose strongly during the 2000s while those of Germany stagnated, and their current accounts recorded large deficits while that of Germany moved to a large surplus. With growth prospects dim and debt loads high these countries found it ever more difficult to access capital markets. The smaller countries, Greece, Ireland, and Portugal, were cut off entirely and had to request stand-by arrangements from the IMF. In response to this exogenous change in the “credit parameter”, EMU is now on its way to a new state. How could this look like?

Possible new states of EMU

Without cheap credit from the capital markets there are four new states that EMU could assume next: First, the real economy (Mundell) criteria could be met in a euro area with (most of) the present members. Second, the real economy and fiscal (Kenen) criteria could be met. Third, cheap credit from capital markets could be replaced by generous credit from the central bank. Fourth, membership of EMU could be reduced to countries meeting the Mundell-Kenen criteria. Since arrival at any one of these new states depends on the dynamics of the adjustment process some are more likely than others, and not all are stable in the long-run.

1. Meeting the Mundell criteria: The hard EMU

EMU was originally designed as a “hard currency union” of sovereign states. To achieve this, mutual financial “bail- outs“ and monetization of government debt were forbidden. Recall that the budget constraint of a government in its broadest form is given as the sum of its capital market borrowing capacity and seigniorage from issuing non interest-bearing central bank money to the general public. Seigniorage rises when inflation accelerates. Hence, in a “hard currency regime” the government must refrain from adding to its borrowing capacity in the capital markets by boosting seigniorage through inflation. But this is only possible, when the economy is flexible enough to adjust to the government’s capital market borrowing capacity without default under all circumstances.

For the GIIPS [Note that this is the polite reference to PIIGS.—Ed.] countries to restore their capital market borrowing capacity in the new environment of tight credit comprehensive measures to reduce public debt levels and improve growth prospects are essential. Greece has tried to achieve this since early 2010 but may yet fail. Portugal’s response has been more convincing but success is still highly uncertain. By contrast, adjustment seems to progress in Ireland. Yet, the battle to save EMU is likely to be won or lost in Spain and Italy. In the former, where public debt levels are relatively low and only a part of the banking sector is in trouble, a new government seems to have a decent chance within the coming four years to make the country fit for a hard currency union by de-regulating the labour market, recapitalising the weak savings banks, and bringing government budget deficits down. In the latter, the new government’s job is harder as public debt is higher, past economic performance poorer, and the available time for the government much shorter (i.e., only a bit more than a year until the next elections in May 2013). Without a significant reduction in capital market rates, the government is unlikely to overcome recession while at the same time cutting government spending, reforming the social security, tax and education systems, de-regulating the labour market, and increasing competition in goods and services markets.

In the event, a “hard currency” union in which participating countries meet the real economy (Mundell) criteria would represent a stable future state of EMU without cheap credit. The problem is how to get there. Achieving the necessary flexibility in most of EMU may well take more than 5 years and not all countries may succeed. Hence, a concerted effort of economic policy at the national and EU level would seem necessary to promote adjustment and avoid transition to another state. To obtain assistance for adjustment, a government in need will have to give up part of its budget sovereignty. Sovereignty is regularly ceded under IMF programmes, but the cessation is temporary and reversible. A country can always decide to break the programme, although this may lead to default and, in a fixed exchange rate system, currency depreciation. At present, however, EMU is ill- equipped to manage adjustment and deal with adjustment failure. EU Treaties will have to be changed to build institutions enforcing a hard budget constraint, managing and funding adjustment when this constraint has been violated, and dealing with default and EMU exit when adjustment fails. Two years ago we suggested the creation of a European Monetary Fund capable of carrying out these tasks.⁴ The European authorities decided to create a European Stability Mechanism (ESM). It remains to be see whether the latter can perform the tasks of a European Monetary Fund.

2.Meeting the Kenen criteria: EMU based on inter-country fiscal transfers (“transfer union”)

To some extent, deficiencies in the real economy criteria for an optimal currency area can be made up through fiscal transfers (outright or via joint debt issuance). However, to make permanent and sizeable fiscal transfers from stronger to weaker member countries politically sustainable monetary union would need to be complemented by much closer political union. Substantial parts of national sovereignty would have to be permanently surrendered to a central EU government, which would decide on the mix between economic flexibility and fiscal transfers in a democratically legitimate process. Such a political union would be inconsistent with a union of sovereign nation states and require a federal structure for European states. However, in view of existing language and cultural barriers among European nations, a political federation of European states seems hardly possible in the foreseeable future. Hence, policy makers most likely will shy away from creating what is commonly called a “transfer union”. In any event, it would in our view not represent a stable future state of EMU if it were tried.

3. Cheap central bank credit: The “inflation union”

In principle the effects of the disappearance of cheap capital market credit can be offset by a generous provision of cheap credit from the central bank. However, although this would avert default of illiquid and insolvent countries and hence an immediate collapse of EMU, it would most likely only create a transitory state. The use of central bank credit as a substitute for real economic and fiscal adjustment would eventually lead to rising inflation and trigger the exit of EMU member countries with lower inflation preferences. Indeed, monetization of government debt has induced the break-up of monetary unions among sovereign states before, notably that of the Latin Monetary Union (among a number of mostly southern European countries) before WWI.

4. Redrawing the EU’s geography: Core EMU within a diverse EU

Last but not least, the Mundell-Kenen criteria for a common currency could be achieved by reducing the number of EMU member countries to those closest to meeting the criteria. This would leave us probably with a small EMU around the French-German couple (which for historical reasons would be determined to keep the euro). Most likely, such a union would also include the Netherlands, Luxembourg, Austria, Finland, and Belgium, the latter possibly in its two separate parts. Any shortfall in meeting the real economy criteria for the currency union would be covered by the fast-track creation of closer political union. We would regard such a small EMU more likely than a complete break-up into national currencies because of France’s insistence on the continuation of at least a core-EMU, a demand Germany cannot refuse for historical reasons. Of course, France has never liked the idea of a core-EMU in view of its strong commercial and financial relations with Southern Europe and concerns about German economic dominance. It would therefore insist that the economies of the participants in the core-EMU be managed via a tight regulatory system, a pro-active industrial policy, and perhaps a nationalized banking sector. Industrial policy and a nationalized banking industry would be used to arrange permanent fiscal transfers from stronger to weaker EMU members. The countries outside of EMU would form a large group with economies and currencies of vastly different strength and quality, held together by the common market of goods, services, capital and labour.

Replacement of private credit by central bank credit through Target 2

If cheap private credit was necessary to sustain EMU during the first decade of its existence and cheap private credit has disappeared, why has EMU then not already collapsed into one of the above described states? The answer is that with the decision of the ECB to provide unlimited funds to banks at a fixed rate against a wide range of collateral in its weekly refinancing operations cheap private credit has been replaced by cheap central bank credit to sustain the system. Commercial banks no longer able to fund themselves in the private markets, mostly in southern European countries, turn to the ECB as their primary or only source of funding. Thus, the banking sector of a country unable to fund net payments abroad arising from the country’s current account and / or private capital account deficit—in other words a country with a balance of payments deficit—turns to the ECB as the lender of last resort.

The reserve money provided by the ECB to the banks of this country then flows through the euro area’s inter-bank payment system “Target 2” to the banks in countries with current and / or capital account, i.e., balance-of-payments, surpluses.⁵ Since the beginning of the financial crisis the ECB has replaced more than EUR670bn in private credit from a few balance of payments surplus countries to the deficit countries (Chart 3). As the reserve money accumulates in the balance-of-payments surplus countries and banks at present are reluctant to increase private sector credit, the banks in these countries have turned into net lenders to the Eurosystem (Chart 4). If continued, the replacement of cheap private credit by central bank credit will create an excess supply of reserve money that will eventually lead to inflation.

Hard or core EMU?

The GIIPS group has embarked upon efforts to come closer to the Mundell critera for currency union. Although the prospects for achieving this goal are very doubtful in the case of Greece and still uncertain in the case of Portugal they look good for Ireland and perhaps fair for Italy and Spain. Since public support schemes at the EU and international level (provided by the EFSF and the IMF) are probably insufficient for the funding needs of the latter two countries, help by the ECB in accessing the private capital market—in other words a “start-up funding” of the adjustment efforts—will probably be needed. Of course, involvement of the ECB raises the risk of moving to an “inflation” union and will happen only as a measure of last resort.

What could pave the way for ECB intervention? First, the countries in financial difficulties, notably Italy and Spain, would have to implement credible economic and fiscal adjustment programmes. Second, there would have to be agreement on a new fiscal governance structure for EMU which ensures that economic and fiscal adjustment presently under way continues until all countries are fit for a hard EMU and remain so in the future. To this end, the European Council is likely to agree on changes or additions to the EU Treaties at its December 9 meeting. When both conditions are fulfilled, more forceful ECB intervention (e.g. by imposing a cap on bond yields at, say, 5%) would seem plausible in the face of a further increase of market tensions. Intervention could be rationalized by the need to create monetary conditions in Italy and Spain allowing the adjustment programmes to succeed. Although the German members in the ECB’s Governing Council rejected ECB intervention in government bond markets in the past and may well do so in the future, there will most likely be a large majority in the Council in favour of such intervention when the time is ripe. A drop in capital market rates in Italy and Spain would give the new governments there at least a fighting chance for successful economic adjustment and fiscal consolidation.

Whether the efforts will eventually be successful or fail will probably be decided in early 2013, when Italy prepares for the next regular elections. First positive results of the Monti government would set the stage for the election of a new government with the mandate to continue the adjustment effort. Against this, dire economic conditions at that time could lead to the election of a government hostile to reform. In the first case, chances for the creation of a “hard EMU” would rise significantly, in the latter the risk of continuous monetization of southern European government deficits and debt by the ECB would rise sharply. The ECB could then stop intervening and trigger a move towards a core- EMU as described above. On the other hand, ongoing monetary funding of government deficits and debt would raise inflation expectations and trigger efforts in inflation- averse countries to leave EMU and create a new, more stable common currency. Most likely, these efforts would be led by Germany. However, as in our above described fourth scenario, we would expect France to stick to Germany in case the latter left EMU, followed by the Benelux countries, Austria and Finland. In this case the final state would again be a new core-EMU, surrounded by the old (Latin) EMU and the remaining EU countries with their national currencies.

Conclusion

With the disappearance of cheap credit EMU 1.0 lacked an essential element compensating for its deficiencies as an optimal currency area. In principle, cheap credit from the markets could be replaced by government transfers from stronger to weaker EMU countries or ample central bank credit. However, we would consider a “transfer union” or an “inflation union” not as stable states of EMU. This leaves in our view only two options for EMU 2.0: A hardening of EMU or a redrawing of the boundaries of EMU such that only countries meeting the real economy criteria for a currency union are members. We expect EU governments and institutions to do everything possible to retain an EMU with a large group of countries. This requires credible and irreversible adjustment in the countries in financial difficulties and an improved economic governance structure in EMU. Most likely, it also requires start-up funding from the EU level, including from the ECB as other facilities (e.g. IMF and EFSF) lack the necessary financial fire-power.

Thomas Mayer is Chief Economist for Deutsche Bank Group and is Head of DB Research.

Notes

1. Robert A. Mundell, A Theory of Optimum Currency Areas, American Economic Review No. 51 (1961), pp. 657-665.

2. Peter B. Kenen, The Theroy of Optimum Currency Areas: An Eclectic View, in Mundell and Swoboda (eds.), Monetary Policy Problems of the International Economy, Chicago 1969, pp.41-60.

3. There is an interesting parallel to the role of cheap credit for fulfilling the economic aspirations of low income private households in the US. As Raghuram Rajan has argued, cheap credit made up for the limited earnings capacity of these households due to insufficient education (see. R. Rajan, Fault Lines, Princeton 2010). Similarly, cheap credit allowed low income economies in EMU to narrow the consumption gap to more dynamic or richer economies.

4. See T. Mayer, “The Case for a European Monetary Fund”, Intereconomics, May/June 2009, pp. 138-141, and Daniel Gros and Thomas Mayer, “How to deal with sovereign default in Europe: Towards a Euro(pean) Monetary Fund”, CEPS Policy Brief No. 202 / February 2010.

5. For a more detailed discussion see “Euroland’s hidden balance of payments crisis”, GEP from 25 October 2011