Friday, May 18, 2012

Greasy Thinking

I love to hate Krugman's one-size-fits-all big-government answers to every problem but today through clenched teeth I have to agree with his op-ed yesterday (partially). Europe and the Euro need to put their big boy pants on and learn some bladder control. Fast. Diapers just aren't appropriate anymore. As he said in the NY Times today:
For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time.
Not sure how that jives with this first sentence, but anyway I agree with him: The Greece problem is not new. The Economist summarizes well this week:
Greece really has suffered: between 2007 and 2012 its economy is expected to have shrunk by almost a fifth. The economy is being strangled by a severe credit and liquidity crunch, with more budget cuts and tax rises to come. Even if all goes well, Greece’s debt will be 161% of GDP next year.
The Spanish, Portuguese, Italian and Irisih problems are not new either.

The facts about Europe (and especially these retarded countries) which have created the current situation are not new. The EC, the EU, the EMU, the European Parliament, the European Presidency - all impotent, except for farm policy (huh?). National governments, all ineffective, focused on pandering, philandering, scandal (either chasing or running away from). Citizens feel emasculated (at best), despondent and dependent (especially those just out of school), and generally pessimistic. Employers are hamstrung on everything from employment/firing to compensation to innovation to outsourcing. Consequently, employees are lazy (not dumb) and inefficient. The governments have pissed away more than enough livelihoods. They need to get busy.

As Reagan put it,
There are no easy answers but there are simple answers. We must have the courage to do what we know is morally right.
The answer to Europe's issues is simple. It may seem odd to use the phrase "morally right" in this case, but it IS a moral issue for Europeans. It should be if they care about their children, their nation, their place in the world. 

Krugman's focus yesterday was on inflation, but the price level is not the core problem, nor is inflating your way out of debt a silver bullet. Happily, it will make European products less expensive. Here's to more Bordeaux and aged Gouda and European vacations! This, however, just corrects an existing price misalignment. A croissant and coffee shouldn't cost the equivalent of $20. That's just nuts. The reason Krugman is wrong is simple:  prices go up, but productivity per worker doesn't change. Every European becomes poorer. Fewer car/house/consumer loans/credit cards are available. House prices go down. Companies can't as easily justify borrowing to invest or launch new products. Which means less innovation and growth.

And that's exactly what Europe needs, particularly in the south: GROWTH. Even Krugman will agree with that usually. 

The only ways to get there are through INNOVATION, PRODUCTIVITY, and/or DEBT.

The last one is Europe's current favorite: beg, borrow, and steal. From the rich. From the companies. From each other. From the future. Money flows from northern countries through the EU/ECB to southern countries without compensation or realistic ability to earn enough to pay it back. Money flows out of companies' profits and employees' income through high taxes but is not set aside for their own social welfare. Instead, it is used to buy votes from those without jobs and/or those with political power. Quoting Krugman again:
Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again ... This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks

It's just not sustainable. History is littered with examples of failed currencies and governments who thought they could just borrow their way to success. 

Instead, the core issues of low productivity, low innovation, and perverse incentives need to be addressed. Europe needs to start acting like a single community rather than a bunch of clans of grumpy neighbors. Europe needs to recognize the limits of socialism in the face of globalization. Europe needs to acknowledge global realpolitik. Protectionism and nationalism are luxuries they can no longer afford. The Euro cannot be a fiat currency - it needs backing based on the power of taxation and reserves.

On Productivity and Innovations:
  • Ya just gotta free up the labor market, folks, or productivity is never going to get better. People/roles/trades/companies/industries/countries (including those abroad) which are more productive than others should be allowed to crowd out the less-productive. Languages can be a barrier, but to the extent that, for example, a smart and/or ambitious Pole can speak enough Italian or German to work abroad, this should be enabled, not discouraged. Even in "protected" industries. Spanish companies should be able to put callcenters and operations in, for example, Guatemala.
  • Extending that point, you also need to accept that people/trades/industries/countries which are less productive are going to be less wealthy. Socialism hates inequality, but if a Finn can produce 4 cars a day while an Italian can only produce 3, the Finn should make more than the Italian. Similarly, if a Greek or Bulgarian (gasp!) is willing to earn EUR10 an hour to grow grapes while an Austrian insists on EUR25, the Greek and Bulgarian grapes should be trucked to Austria, crowding the Austrian farmers out of the business or forcing them to take a pay cut. 
  • Extending the above: Learn from the US (both what to do and what NOT to do) about immigration and foreign workers. Let 'em in! Create a controlled and net-positive process (as explained in my prior blog post) and then open the gates. For one thing, allowing younger immigrants into the workforce is the only way you will be able to pay for your pensions and healthcare systems going forward. There should be no prohibitive barriers against Uruguayans moving to and working in Spain, for example. Just make sure you charge them for it.
  • Aside from the ability to hire/fire the people they want and the ability to pay a market-clearing wage, companies need the ability to offer both contract and full-time work. They also need to be able to offer various tiers of benefits for interns, new-to-the-workforce, tradespeople, professionals, executives, etc. It can't be just the one-size-fits-all government-dictated (tarnishing) gold-plated package. A hundred years ago, Hayek correctly described where that road leads.
  • Moreover, you can't have your cake (of national champion companies in every industry) and eat it too (expecting them to be globally competitive and profitable without being able to scale). Accept that you are a common market and allow Euro-wide champions to arise in whatever Euro country they may. No longer can the Portuguese government spend money it doesn't have to promote and protect their own national paper, airline, or cell phone companies. It's ridiculous for richly-paid Italians, French, and Germans to produce nearly 10% of the world's steel ... at a loss when all governmental supports are factored in. Buy Turkish or even Indian steel!
On Perverse Incentives:
  • Government borrowing needs a revamp. Existing sovereign bond markets need to be priced based on country risk, not currency risk. Separately, the ECB should introduce Eurobonds which are guaranteed by all countries in the monetary union. Individual countries would buy SDR-like rights by either depositing collateral at the ECB or by legislating pledges of future tax receipts. They would then be allowed to request that the ECB issue bonds on their behalf, most of the proceeds going to the national government, but with an adequate reserve withheld by the ECB as collateral against future payment. Overall Eurobond issuance would be capped by the ECB based on market conditions and European Parliament votes.
  • More radically, impose, by irrevocable treaty, a 5% Eurozone value-added tax. Simultaneously reduce national VATs by the same amount such that there is no impact to consumers or businesses. These funds go to the ECB and are distributed according to agreed rules. In other words, taxes collected in Spain are sent to the ECB but might get sent right back to Spain if all's well. However, if one country is circling the fiscal drain, this provides a cash buffer to protect the ECB and the other Eurozone countries from getting sucked into the vortex. Most importantly, this creates a "lever" of power by the ECB over individual countries. If you don't live up to your commitments, you don't get your 5% back. The bank NEEDS this power to protect and defend the currency. It also needs it to enforce compliance with treaties and commitments.
  • Enforcement of the monetary union's and European Parliament's targets (ex. Growth and Stability) must be strict. Greece has NEVER met the very friendly targets they negotiated. Never intended to, I'm sure. They should be fined. They should not get their 5% back. Their voting rights in the European Parliament should be suspended. ECB transfers should be suspended. International remittances and account balances should be frozen.
  • While you're at it - fix the banking system's capital adequacy rules. Sovereign debt is NOT risk free.  
All graphics from

Tuesday, May 15, 2012

Follow Up: Far Better Approach for Huddled Masses

Back in ought-nine (naught-nine? nevermind.), I wrote a blog praising the prez for putting immigration on the agenda. Specifically:
  • "Remove incentives to enter illegally" (by cracking down on employers who hire illegals)
  • "Bring people out of the shadows" (with his "get to the back of the line" amnesty program)
  • "Create secure borders"
  • "Improve our immigration system"
  • and "Work with Mexico"
Not sure what happened next, but I suspect the dog ate his agenda. True, illegal immigration flows have changed due to the US Economic issues and (I suspect) border-patrolling cyberdrones. However, regarding legal immigration, he has scant little to brag about in the upcoming election. Apparently, he has calculated that the one gay vote in the hand is worth two Latin votes in the bush.

Go ahead - visualize it. 

Anyway, immigration SHOULD be on the agenda. Its an embarrassment. Still.

As I wrote at the time:
Step 1 is to provide people with a functional, efficient legal path to enter the country. If we want to avoid the "upside down" demographic nightmare of Japan and Europe, we need a steady supply of new, hungry labor ... Sadly, today's legal path is a joke ... our nation's most embarrassing interaction with the rest of the world is the nightmarish gauntlet we put our future fellow citizens through. The Visa process. An ideal process would filter for enterprising, aggressive, ambitious, smart, yet moral people. Instead, that ilk are slowly beaten into bureaucratic submission.

If Obama really wants to improve the economy in an effective and sustainable way, he should consider privatizing (um, I mean public-private-partnering) the process. The government doesn't design the cars they drive (unless they drive Volts). They don't design the planes they fly. They don't operate the phone network, power grid, or farm-to-table chain. They don't own (most of) the banks which process public and private payments (yet?).

Similarly, the government would take a bit of farce out of the immigration process by 
  • focusing their efforts on establishing sensible  rules for immigration (more on that below)
  • allowing private firms to competitively move applicants through. As I said before - think TurboTax or Google Maps or whatever silicon firm you like
  • regulating those private firms (just as banks, meatpackers, and airlines are)
Immigrant visas should be selective (no terrorists, no criminals, no derelicts, etc.) but not xenophobic or political.  The price should be steep. People and companies will sort out ways to pay (grants, loans, sponsors, etc.) Arbitrary quotas and impossibly bureaucratic processes with glacial progress just push people away or underground and have no place here. 

Applicants should choose between asylum/hardship, spouse/family unification,temporary work visa, temporary student visa, or all-you-can-eat citizenship. 

I won't spend much time on the first two categories in this blog - we already have criteria for those, albeit flawed. View them as a form of foreign aid. The remaining categories need to be structured to ensure a net benefit to the country for every new immigrant. The more the merrier!

Those choosing Temporary Work Visas:
  • must qualify. No criminals. No deadbeats. No terrorists. Model this screening on the Treasury's OFAC process (which is federally-regulated and monitored, but conducted privately by companies and banks)
  • must pay a significant deposit, refundable upon exit. Say, half the current US average annual income for the applicant's declared profession category. I know that's a lot. That's the point. Let them finance it if they're really serious about coming here
  • must pay a market-priced application fee. Instead of the current quota system, a sliding fee scale governs immigrant volumes based on our capacity to absorb, but ensures an efficient path for those who are highly motivated and highly confident in their ability to be successful here
  • must pay a US "Use Fee" each year to offset their use of public (or public-provided and free) goods such as roads, workplace safety, and clean air
  • must be able to provide proof of medical insurance, pre-paid through the term of the visa
  • do not need to have a job or a company "sponsoring" them. The deposit and fees above should be significant enough to make people self-assess their ability to get a job in the US and self-select. People are not required to find a company to "sponsor" them via "invitation" as the US and many other countries currently do. The current system allows for, among other things, nasty political games and power-broking, especially between unions and congressmen. People would be wise to find jobs before coming in order to get the companies to help offset the visa deposit and fees. But they don't have to.
  • must pay income tax (and other taxes) just like anyone else who works and spends time here
  • are not eligible for any government assistance or public services. If you are not interested in being a US citizen, that's fine but you can't have it both ways. Your country of citizenship is responsible for you, your behavior, and your needs. You screw up, you go home, and we keep your deposit.
  • convey their own citizenship on their children born here. The kids are not automatically US citizens. 
  • can apply to stay for any time period they choose and can apply for renewal as many times as they want. However, the "Use Fee" fee increases progressively the longer one stays (or the more times one renews). Thus, a farmer who crosses from Tijuana to Oxnard to pick strawberries for a month a year pays a little, although it increases over time. The doctor who comes from Pakistan and sets up a permanent practice (but chooses not to become a citizen) pays much more. The US should be a net beneficiary of the spoils of immigration.
  • Must voluntarily leave when their visas expire. Deposits are refunded only on confirmed exit. Those coming in an trying to disappear are criminals and thus immediately and permanently ineligible to be here. We already have means of validating right-to-work. That same process could be used any time public services are requested (driver's license, enrollment in public school, any federal assistance, social security, medicare/medicaid) or travel is booked (similar to the no-fly list).

Those choosing Temporary Student Visas:
  • must qualify (see above)
  • must voluntarily either leave when their visas expire (see above) or get a Temporary Work Visa
  • must be able to provide proof of medical insurance, pre-paid through the term of the visa (see above)
  • must pay a significant deposit, refundable upon exit (or transferable to a Temporary Work Visa deposit). This should be rolled into the whole student financial aid process so highly-desirable candidates can cover the deposit using grants/endowments, public funds, and student loans
  • must pay a market-priced application fee (see above)
  • must have been already accepted into an accredited school and eligible program (debatable whether associates degrees, trade/professional programs, etc. should be eligible)
  • must apply for a visa which covers the entirety of their planned degree program
  • must maintain enrollment with passing grades or the visa is immediately revoked
  • are free to work here, but must pay income tax (and other taxes) just like anyone else who works and spends time here
  • are not eligible for any government assistance or public services. Your country of citizenship, your family, and/or your school (however you negotiate it) are responsible for all your needs
  • (note: spouses/kids must apply for visas separately, either as students, workers, or via family unification)
  • (note: no "use fee" is charged for students. This is the US investment in incentivizing smart kids to come here)
Those choosing Citizenship:

  • must have lived and worked in the US legally under the Temporary Work or Temporary Student Visa process for a contiguous period of 3 (?) years, meeting all criteria above
  • must pre-fund their own social safety net (social security and medicare) commensurate with the average cumulative contribution of US citizens their age. They may choose to do this over time (during their Temporary Work Visa years) or as a lump-sum payment upon applying for citizenship. For younger applicants such as students, this would be low. For someone who has made an entire career abroad and wants to retire to the US, it will be significant.
  • must apply as a family if they expect to bring in any family members. Citizenship is not inherited or conveyed.
  •  must pay a significant one-time fee (per-head). It's worth something to be a US citizen. We shouldn't give it away. 
  • must pay a one-time immediate (10%?) tax on funds/assets/income brought into the US at any point during their citizenship. Or not. This one is debatable.
  • must understand that citizenship will be stripped and they will be exited if they are ever convicted of a serious crime
You may think "woah, that's expensive - only elite and wealthy will be able to come in." I would disagree by half. It is selective, but in a fair way. People coming here will cause the country some expense. This must be offset. Those who find it worthwhile to come here presumably think they can improve their life and/or financial situation. If they can credibly defend that belief, they should be willing and able to either put their own assets on the line, or get support via family, employers, grants, or banks. If none of these parties can be convinced of the immigrant's ability to succeed, maybe they're on to something.

On the other hand, if millions upon millions can meet the criteria for entry - bring 'em on! The cliche is true - this country was build by and for ambitious immigrants!