Repeating the Soviet Union’s Mistakes

Putin is a captive of his own past and of the system of state-controlled capitalism he has built

By the Editors

In his second incarnation as Russian president, Vladimir Putin looks set to repeat some of the mistakes that brought down the former Soviet Union, including a nuclear arms race he can’t afford. He should change course for his own sake, if not Russia’s.

Putin recognizes the challenges of demography, technological backwardness and overdependence on natural resource extraction that his country faces. He certainly knows the deep impact that a euro-area depression could have on Russia’s economy. But so far he appears unwilling to do what’s needed to address these threats. Today, as Russia marks its day of independence from the USSR, it’s worth revisiting some lessons from the fall of the Soviet Union.

During his first two terms as president, Putin repeated a critical error from the 1970s, failing to use the wealth produced by high oil prices to institute structural reforms. The price of Russia’s benchmark Urals crude rose almost fivefold from 2000 to 2008. According to the government, the oil and gas industry accounted for four percentage points of the 7 percent average annual growth rate that Russia enjoyed for the last decade, money that created a middle class that is now demanding more political freedoms.

The Debt Fractal

By Incentivizing Debt, We've Guaranteed Debt-Serfdom and Stagnation

Incentivize debt and you create multiple overlapping death spirals.

By Charles Smith

The incentives to take on debt are so ubiquitous that we underestimate their pernicious power to trigger self-destructive behavior.Want to go to college? Just borrow the money now, with no payments until you graduate. Need some consumerist-retail therapy to lift your sagging spirits? Just use plastic, and pay for the splurge later. Want to buy a house? Hey, the interest on that 30-year mortgage is all tax deductible. It's crazy to pay taxes when there's a big fat deduction for mortgage interest.

This same set of incentives works on a national and global scale, too. Put yourself in the shoes of the typical spineless, campaign-donation-dependent politico whose primary obsession in life is clinging to power via winning the next election. Every heavy-weight constituency is protesting any tiny reduction in their share of the Federal swag, so drastic cuts are out of the question. What's the only painless option? Borrow $1.5 trillion every year to make sure the swag is fully funded and the restive constituencies are quieted for another election cycle.

But debt has a consequence called interest that feeds a destructive self-reinforcing cycle. At a certain threshold, there is no painless way to pay the interest except to borrow more money. That increases the interest payments due next year, and so the "solution" is to borrow yet more next year.

As I explain in Resistance, Revolution, Liberation: A Model for Positive Change, the Status Quo has relied on "growing our way out of debt" to overcome this cycle: if the new debt fuels a rise in productivity, the economy will grow so much faster than the debt that the relative burden of the debt actually declines.

In a simple example, if a $1 trillion economy borrows $1 trillion and invests it such that the economy rapidly expands to $5 trillion of goods and services, then the rise in national income means the interest on the $1 trillion can be paid out of the huge increase in income generated by the rising productivity.

The same is true for a company that borrows what appears to be a large sum in order to boost production. If revenues leap from $100 million to $1 billion as the result of a $100 million investment, the interest can be paid out of the higher cash flow.

The wheels fall off the "growing our way out of debt" strategy if the borrowed money was spent on consumption or invested in low-productivity purposes. After it's all said and done, the money's gone but the debt remains and the interest is still due.

This is where the housing bubble enters the picture. Given that mortgage interest (even the interest on home equity lines of credit, HELOCs) is deductible, then it was incredibly attractive for those with equity to borrow that equity for consumption, an addition/remodel or to fund another home purchase as an investment or vacation get-away.

We isolate and overload Germany at our peril

Asking Germans to work until 80 so that French can retire at 60

By Gideon Rachman

Visiting the Financial Times a couple of weeks ago, Luis de Guindos, Spain’s economy minister, predicted: “The battle for the euro will be fought in Spain.”

With Spain’s decision this weekend to accept international aid to save its banks, the battle is now joined. The stakes are very high. Writing in this paper, Niall Ferguson and Nouriel Roubini warn that Europe is “perilously close” to “repeating the disasters of the 1930s”.

As in the 1930s, a conflict in Spain is now seen as critical to a wider struggle for the fate of Europe. It cannot be long before an international brigade of Keynesian economists sets off for Catalonia. Once again, Germany is cast as the villain in a pan-European drama.

Of course, nobody questions modern Germany’s democratic credentials. Only in the wilder fringes of the Greek press has Chancellor Angela Merkel been compared to Adolf Hitler. But the picture that emerges from the world’s press is of a stubborn Germany, whose actions threaten the world. This weekend’s Economist magazine cover showed the global economy as a sinking ship and beseeches Ms Merkel to “start the engines”.

The magazine summarises an international “consensus on what Ms Merkel must do”, including “shifting from austerity”, “a banking union with euro-wide deposit insurance” and a “limited form of debt mutualisation”. Privately, world leaders from London to Washington and Rome are urging similar actions on Berlin.

The demands being made of the German government spring from a sincere desire to avoid a rerun of the 1930s, when economic disaster provoked political catastrophe.

However, while these demands may make economic sense, they are politically unrealistic and dangerous. They are textbook solutions that fail the real-world test. Worse, if enacted, they would risk provoking the very political radicalisation they are ultimately meant to prevent.

Consider just one of the proposals on the shopping list: a Europe-wide bank deposit insurance scheme. As a senior Dutch politician who shares the German view, puts it: “We cannot push through a banking union when the French have just cut their retirement age to 60 and we have raised ours to 67.” From the Dutch and German point of view, it is unfair for their citizens to underwrite the banks of countries using their own money to pay social benefits that are more generous than those on offer in Germany or the Netherlands.

Capitalism, Happiness, and Beauty

The incredible prosperity machine

by Ludwig von Mises

Critics level two charges against capitalism: First, they say, that the possession of a motor car, a television set, and a refrigerator does not make a man happy. Secondly, they add that there are still people who own none of these gadgets. Both propositions are correct, but they do not cast blame upon the capitalistic system of social cooperation.

People do not toil and trouble in order to attain perfect happiness, but in order to remove as much as possible some felt uneasiness and thus to become happier than they were before. A man who buys a television set thereby gives evidence to the effect that he thinks that the possession of this contrivance will increase his well-being and make him more content than he was without it. If it were otherwise, he would not have bought it. The task of the doctor is not to make the patient happy, but to remove his pain and to put him in better shape for the pursuit of the main concern of every living being, the fight against all factors pernicious to his life and ease.

Socialism in Practice

The Lethal Laboratory

by Gary North

What is the longest-running socialist experiment? What has its success been?

If someone asked you to defend the idea that socialism has failed, what would you offer as your example?

Where did modern socialism begin?

In America.

That's right: in the land of the free and the home of the braves. On Indian reservations.

They were invented to control adult warriors. They had as a goal to keep the native population in poverty and impotent.

Did the system work? You bet it did.

Has the experiment been a failure? On the contrary, it has been a success.

When was the last time you heard of a successful Indian uprising?

Are the people poor? The poorest in America.

Are they on the dole? Of course.

Last year, the US Department of Agriculture allocated $21 million to provide subsidized electricity to residents on the reservations whose homes are the most distant from jobs and opportunities. You can read about this here. This will keep them poor. Tribal power means tribal impotence.

Middlemen and Markets

Value as a social phenomenon is created not by production but by exchange

By Stephen Davies

One of the persistent features of politics and social life is the way that many insights of economics conflict with strongly held and widespread beliefs among both the general public and the business class. This contrast between the economic way of thinking and what we may call the “gut instincts” of many people makes economics seem counterintuitive much of the time. In many cases the principles of economics also conflict with moral intuitions or commonly held sentiments, and so the analysis is felt to be not only absurd but also immoral.

One example of this phenomenon is the widespread hostility to middlemen: people who speculate in commodities by buying them at a low price in order to sell them at a higher price. The popular intuition is that such people are simply parasites. That is, they do not create wealth or value because in the final analysis they do not actually create anything real such as a physical product or a direct service. A popular example of this is the intense hostility many people feel toward “scalpers” (or “touts,” as they are called in my own country), who buy tickets for events and concerts at face value and then resell them for more. The point of course is that the people who buy tickets from scalpers do so willingly; thus by definition it must have been worth their while to do so. Yet often these very customers complain the most bitterly. Hostility to scalpers means that in many jurisdictions it is a criminal offense to buy tickets and resell them to willing purchasers.

Subprime college educations

“Pop!” goes the bubble

By George F. Will

Many parents and the children they send to college are paying rapidly rising prices for something of declining quality. This is because “quality” is not synonymous with “value.”

Glenn Harlan Reynolds, a University of Tennessee law professor, believes that college has become, for many, merely a “status marker,” signaling membership in the educated caste, and a place to meet spouses of similar status — “associative mating.” Since 1961, the time students spend reading, writing and otherwise studying has fallen from 24 hours a week to about 15 — enough for a degree often desired only as an expensive signifier of rudimentary qualities (e.g., the ability to follow instructions). Employers value this signifier as an alternative to aptitude tests when evaluating potential employees because such tests can provoke lawsuits by having a “disparate impact” on this or that racial or ethnic group.

Germany, Not Greece, Should Exit the Euro

A German exit today might set the stage for a stronger reunion tomorrow

By Red Jahncke

All the debate about the pros and cons of a Greek exit from the euro area is missing the point: A German exit might be better for all concerned.

Unless Europe’s leaders take some kind of radical action, such as adopting and executing some of the many reform ideas they have floated, the currency union is headed for disintegration.

The problems of Greece, Ireland and Portugal have spread to Spain, the fourth-largest economy in the euro area. Italy is probably next. The other members of the currency union can’t afford to bail them all out. Further loans will serve only to exacerbate the fundamental problem of too much debt and add to the growing enmity between the strong northern tier and its wards to the south. Without healthy economic growth -- and Europe is now back in a recession -- multiple countries will have to restructure their sovereign debts. Greece’s agonizing two-year restructuring experience suggests that doing several more would be extraordinarily difficult, if not impossible.

Germany's Nuclear Phase-Out Brings Unexpected Costs

The Move to Renewables

By Alexander Neubacher and Catalina Schröder

After two weeks, the first letter arrives. The second notice comes a week later. On the fourth week, the bell rings and a technician from the power company, Vattenfall, is at the door. He has a black toolbox under his arm and he means business.

Aminta Seck, 39, has been through this twice before. If she doesn't pay the technician at least part of what she owes the company, he'll disconnect her electricity, leaving Seck and her three-year-old son Liam sitting in the dark in their two-room apartment, without lights, a working stove, refrigerator or TV.

Electricity prices in Germany have risen by more than 10 percent since the current coalition of the center-right Christian Democratic Union (CDU) and business-friendly Free Democratic Party (FDP) took office. The price hike has been too much for some like Seck, an unemployed decorator from Berlin's Prenzlauer Berg district.

"Approximately every tenth household currently has problems paying for rising energy costs," says Holger Krawinkel at the Federation of German Consumer Organizations.

The Fascist Threat

The fascist economic model has killed what was once called the American dream

"In the long run even the most despotic governments with all their brutality and cruelty are no match for ideas. Eventually the ideology that has won the support of the majority will prevail and cut the ground from under the tyrant's feet. Then the oppressed many will rise in rebellion and overthrow their masters."

by Lew H. Rockwell, Jr.

Everyone knows that the term fascist is a pejorative, often used to describe any political position a speaker doesn’t like. There isn’t anyone around who is willing to stand up and say: "I’m a fascist; I think fascism is a great social and economic system."

But I submit that if they were honest, the vast majority of politicians, intellectuals, and political activists would have to say just that.

Fascism is the system of government that cartelizes the private sector, centrally plans the economy to subsidize producers, exalts the police State as the source of order, denies fundamental rights and liberties to individuals, and makes the executive State the unlimited master of society.

Meanwhile, in the new Socialist Utopia…

Hollande Strikes Again

by Pater Tenebrarum

Mr. 'Growth instead of Austerity' Hollande strikes again – Mish has already written about the latest policy blunder to emerge from France last week, but we would like to add a few words.

Apparently the new French government believes that the proper method of combating the recent 13 year high in unemployment is to make it 'as expensive as possible for businesses to fire people'. Seriously. Evidently the economic illiteracy runs really deep at the highest echelons of France's political leadership – the idea was proposed by the minister of labor. How did Fred Sheehan put it? 'They think they can order nature around'.

Such measures will guarantee that institutionalized unemployment in France will increase even further – and as Mish correctly remarks, the mere threat of such legislation should lead to a wave of layoffs just before it comes into effect. Producers that can afford to move their production facilities to more business-friendly climes will do so at the earliest opportunity. The ranks of small business owners are likely to thin out further and fewer new businesses will be started. Many should probably begin to study the bankruptcy code, just in case.

Spain, Debt and Sovereignty

The glue that holds nations together is missing in the European Union

By George Friedman

Eurozone countries on June 9 agreed to lend Spain up to 100 billion euros ($125 billion) to stabilize the Spanish banking system. Because the bailout dealt with Spain's financial sector directly rather than involving the country's sovereign debt, Madrid did not face the kind of demands for more onerous austerity measures in exchange for the loan that have led to political instability in countries such as Greece.

There are two important aspects to this. First, yet another European financial problem has emerged requiring concerted action. Second, unlike previous incidents, this bailout was not accompanied by much melodrama, infighting or politically destabilizing threats. The Europeans have not solved the underlying problems that have led to these periodic crises, but they have now calibrated their management of the situation to minimize drama and thereby limit political fallout. The Spanish request for help without conditions, and the willingness of the Europeans to provide it, moves the European process to a new level. In a sense, it is a capitulation to the crisis.

A Game of Euro Chicken

Playing Until the Germans Lose Their Nerve

by Jan Fleischhauer

For Germany, being part of the European Union has always included an element of blackmail. France has been playing this card from the beginning, but now the Spanish and the Greeks have mastered the game. They're banking on Berlin losing its nerve.

France's newly elected Socialist government has just decided to lower the retirement age to 60. From now on, no Frenchman will be forced to work any longer just because it might help kick-start the country's flagging economy. And there's no way the French are going to work as long as their poor fellow Europeans in Germany, whose government is obliging them to labor and toil until age 67.

Blessed France, where the ruthless laws of the economy lose their ability to frighten people bathing in the eternal sunlight of socialism. Granted, this grand nation doesn't produce enough children to guarantee the prosperity of its inhabitants into old age. But in France, something that would elsewhere be viewed as a serious demographic problem demanding tough attention is seen as a mere misunderstanding that the strong arm of the president can simply dispel with the stoke of a pen, should he so desire.

The Politics of "Consensus" Is the Politics of Failure

Horse-trading and other vices

Persuading those in power to limit their power via "consensus" doesn't work. Both the legal system and the horse-trading politics of "consensus" have failed.

How do you get "consensus" in politics? You horse-trade. You give everybody something they want. You cut everyone into the deal. That passes for "consensus" in politics: divide the swag.

If you want to understand President Obama's failure as a leader, ask where did he learn politics? 

In Chicago. Big-city politics boils down to getting the ward bosses, ethnic-neighborhood leaders, Chamber of Commerce and public unions together and making them all happy with concessions, give-aways or some other slice of swag so they all agree to to support some minor policy tweak of the Status Quo.

Any constituency left out of the swag distribution squeals like a stuck pig and kills the "consensus."

This "making sausage" consensus is passed off as "the only way to get anything passed," but the truth is that it's the politics of failure: nothing meaningful can possibly get done in the politics of "consensus" because 95% of any useful reform must be traded away to get everyone willingly on board.

The screwed generation

It can happen anywhere

by Joel Kotkin

In Madrid you see them on the streets, jobless, aimless, often bearing college degrees but working as cabbies, baristas, street performers, or—more often—not at all. In Spain as in Greece, nearly half of the adults under 25 don’t work.

Call them the screwed generation, the victims of expansive welfare states and the massive structural debt charged by their parents. In virtually every developed country, and increasingly in developing ones, they include not only the usual victims, the undereducated and recent immigrants, but also the college-educated.

Nowhere is this clearer than in the European Union’s Club Med of Spain, Greece, Portugal, and Italy, the focal point of the emerging new economic crisis. There’s a growing sense of hopelessness in these places, where debt is turning politics into an ugly choice between austerity, which reduces present opportunities, or renewed emphasis on public spending, which all but guarantees major problems in the bond market, and spending promises that can’t be kept.

The Spanish Bailout Explained With One Image

Another one down the drain

In the meantime, the debasement of paper money continues

Prozac-craving markets

by DETLEV SCHLICHTER

In my view, there is no escaping the fact that things are not getting better. If anything, they are getting worse. Following the large swings in financial markets this past week and reading the commentary in the press, it strikes me that there is still a surprisingly strong belief out there that our fate is in the hands of the policymakers, who presumably still have it in their power to make things better for the economy. How can they do this?  Well, expect nothing new here: Mainly by the time-worn strategy of lowering official interest rates again – where this is still possible – or by injecting more fiat money into the system through fresh loans to the banking industry or by yet another round of debt monetization. Talk about the laws of diminishing returns!

The World is Flat and other Tales from Spain

The cancer has spread to the lymph nodes

“The very powerful and the very stupid have one thing in common. Instead of altering their views to fit the facts, they alter the facts to fit their views... which can be very uncomfortable if you happen to be one of the facts that needs altering.”

                                                                      -Dr. Who

By Mark Grant

The art/science of Deduction is a process that I engage in daily. To paraphrase Mr. Sherlock Holmes; it is where I make my bread and cheese. On the most fundamental of levels you must have the facts right before you can reach any conclusion or series of conclusions and here is where Europe tries its best to mislead you; they do not wish for you to have the correct data. I used to think it was just some political strategy of giving the public information but I now honestly believe that the Europeans engage in a very devious manipulated charade quite on purpose. It probably dates back to the Church claiming that the Earth was flat when it was heretical to disagree with the doctrine which was provided by Rome. The way the Spanish Prime Minister is behaving concerning the Spanish bailout he must still believe this heretical nonsense today. This week the bailout; next week the Inquisition.

The law of unintended consequences is the only real law of history

Niall Ferguson on How Europe Could Cost Obama the Election

Spain has accepted a big bank bailout, but the Eurostorm isn't ending anytime soon—and it may come to American shores just in time for the election.

by Niall Ferguson  

Could Europe cost Barack Obama the presidency? At first sight, that seems like a crazy question. Isn’t November’s election supposed to be decided in key swing states like Florida and Ohio, not foreign countries like Greece and Spain? And don’t left-leaning Europeans love Obama and loathe Republicans?

Sure. But the possibility is now very real that a double-dip recession in Europe could kill off hopes of a sustained recovery in the United States. As the president showed in his anxious press conference last Friday, he well understands the danger emanating from across the pond. Slower growth and higher unemployment can only hurt his chances in an already very tight race with Mitt Romney.

France and the rest of the eurozone need to wake up

Any way you slice it, Germany wins

Germany holds all the cards in the euro power struggle: It prospers even as countries around it collapse, and that means it will likely end up with even more control over the eurozone after this is all over.

By Cyrus Sanati

The faster Europe realizes that Germany holds most, if not all, of the cards when it comes to ending the eurozone debt crisis, the faster a lasting solution can be found. With positive economic growth, low unemployment and fantastically low interest rates, Germany is simply in no rush to implement reforms that have been proposed by its economically weaker neighbors, as they would negatively impact Germany's ability to borrow cheaply and expand exports.

The only way the EU's biggest member can be convinced to take on reforms, like issuing eurobonds, would be if it were granted incentives, such as control over the fiscal policy of the eurozone. Other members of the eurozone, namely France, have been wary about handing more of their economic power over to Brussels and ultimately to Frankfurt. But while solutions like the pooling of eurozone's existing debt is a good first step to diffusing the crisis, they still require incentives for Germany to get on board.