Continuing on the theme “Greece is probably hopelessly tangled up by its own corrupt government”…

Lesson #1 of turning your home into a 3rd world country: When things go wrong (as they inevitably do), find some historical grievance to pin it all on.

http://news.bbc.co.uk/2/hi/europe/8533240.stm

...But Mr Pangalos accused Italy of being more inaccurate with its financial statistics, and said Germany should not criticise Athens because it had wrecked the Greek economy and slaughtered thousands during the Nazi occupation. "They took away the gold that was in the Bank of Greece, they took away Greek money, and they never gave it back. This is an issue that has to be faced sometime in the future," he added...

Translation: Germany owes us forever....stop complaining and start paying. And while we're at it, don't insult our pride by calling any money we extort from you a "bailout", let's just call it a friendship-thing, even though we just blamed it all on you, forever.

Wow...I don't think the current generation of German citizens is going to like this at all. And rightfully, why should they?

Germany's Spiegel seems to capture this sentiment quite well, http://www.spiegel.de/international/europe/0,1518,679988,00.html  (read to bottom)

Keep in mind that both England's BBC and Germany's Spiegel are well established and respected mass-media. Yikes...these are dangerous chemicals to be playing with.

More on this theme from the WSJ: http://online.wsj.com/article/SB10001424052748703510204575085822102779364.html?mod=WSJ_World_LEFTSecondNews

Marx may well be proven to be right on this count – though with the craziest of irony. While Marx was speaking of the specter of an imminent Communist Revolution, something truly strange has happened in the 160 years since he made those remarks. Today the specter is not that of Communist Revolution, but of serious national bankruptcy and debt default. This specter looms large across the continent, and it is going to cost A LOT to fix. In fact, there may very well be no easy solution.

A recent NYT Editorial touches on these issues:

http://www.nytimes.com/2010/01/18/opinion/18mon1.html?adxnnl=1&hpw=&adxnnlx=1263841266-/bypFYbIFT9V4aScBY6H/g

While not Marx’s Communism, a form of communal sharing has in fact spread across Europe in the form of a common monetary policy. With the adoption of the Euro ~10 years ago, individual countries gave up their sovereign right to issue currency. This control was given to a central, and in theory non-political, authority known as the European Central Bank.

There were very good reasons to do this. The use of a common currency immeasurably simplifies cross border trading, for example, the sale of oranges from Spanish farms to supermarkets in Finland, or the selling of German cars in Spain. Further, companies can more effectively invest in people and infrastructure across Europe with confidence that their investments will retain stable value. This is a giant win, and a non-trivial accomplishment. Hurray for the Euro!

However there is a darker side to this communal coin, and this is the ability to issue debt in Euros and the responsibility to pay those debts back in Euros. Think about this carefully… in the past we had Germans issuing national bonds in Deutschmarks, Italians in Lira, Greece in Drachma, etc, etc, etc. A bit chaotic, but basically you could trust that the Germans would not allow their Deutschmarks to drop in value (the acts leading to World War II brought on a huge fear of inflation, see http://en.wikipedia.org/wiki/German_hyperinflation_of_the_1920s). You could also pretty well count on the fact that the Italians and the Greeks would periodically run the presses to devalue their currency. For this reason, investors demanded a much higher rate of return on a Lira denominated bond vs. a D-Mark bond from Germany.

Q: Why did the Greeks, Italians, Spanish periodically run the currency presses?

A: Inefficient labor markets. Because the local working classes continually and effectively demanded higher pay (money that the countries did not have), they basically said “yes, we’ll raise your pay” and then printed money to do this. Classic wage infation.

The advent of the Euro changed all this. Countries like Greece, Italy, Portugal and Spain agreed to give up their ability to run the currency presses and basically handed currency control over to the Germans and French. In one sense, this is very good; because the risk of currency inflation has been removed, these countries can borrow at a much lower rate of interest vs. before. On the other hand, it required that these same countries “just say no” to large deficits and the wage-inflation stoking demands of their unions. They have failed miserably in doing this. Having sold lots of Euro denominated bonds at lower interest rates than they were able to get before adopting the Euro, they turned around and spent the money on, you guessed it, a bloated civil service and higher wages. Now the day of reckoning has come.

People who have not spent time in these countries will have difficulty appreciating how very different the labor force is from that in North America; they strike, they burn cars, they really, really protest hard. Civil unrest is a very real concern when any kind of austerity program is tried by a fiscally cornered government. Inevitably the governments relent, and things lurch forward to the next crisis. You can only do this for so long before people stop buying your next set of Euro denominated bonds.

We are rapidly approaching that day, and it would appear the Greece will be the first country to go through a real crises where a massive Euro debt default is not only possible, but seemingly probable.

So what happens when Greece announces that it simply cannot pay its Euro debts? There are several possibilities…

#2 They simply default on their Euro debts. “Sorry, we’re bankrupt! We’ll only pay bondholders 10% of face value on our debts. Problem solved!” The obvious problem here is that no one will ever lend them money again, and without those loans their economy will go into a terrible spiral.

#3 They withdraw from the Euro, declare all their debts to actually be in a new currency (the neo-Drachma), and promptly devalue that currency. This is the “quit the Euro” scenario…the problem is that it is basically identical to #2, it is a total debt default.

#4 Some continuing half-measures where the ECB (Euro Central Bank) and member countries pretend that Greece (and the other countries) are getting their house in order in exchange for a series of bridge-loans intended to get them past the crises. This is really just a delaying action, hoping against hope that the economy will pick up fast enough to let the countries scrape by. The problem here is that is does nothing to actually solve the wage/competitiveness problems of these countries; fundamentally the populace and civil servants will need to accept large reductions in their (falsely funded) standard of living. This gets us back to the civil unrest problem.

It’s going to be a messy, painful, and possibly unstable year for the poorer Euro-zone countries…. Marx was right, there is indeed a specter haunting Europe.

Like many people I know, I support the concept of a increasing gasoline tax. The reason for this is straightforward; we want to discourage the wasteful use of this finite resource. As was amply demonstrated when we had a market spike in the price of gas to $4/gallon in the summer of 2008, the consumption of gasoline is in-fact “elastic.” This is fancy economics-speak, that basically translates to “as the price of gasoline goes up, people will use less of it.”  Simple concept, everyone gets that. A steadily increasing national gasoline tax, say increasing it $0.25 a year for the next 20 years, nicely and transparently encourages the right kind of consumer and environmental behavior. Use gas wisely.

Now let’s examine the issue of auto-insurance. In the United States we have a fairly vibrant market for auto insurance, with interesting pricing options along at least two dimensions:

(1)    Consumers can choose the level of deductable they want to incur. Choose a high deductable, say $1500, and your monthly auto-insurance goes down. This makes rational sense because the auto-insurance companies know that you will now apply rational economic thinking to the day to day costs that you incur. Imagine the reverse, if you had a $0 deductable; why not insist that every small ding, dent or scratch gets immediately fixed?

(2)    Auto-insurance is risk-based. If you have a history of speeding, drunk-diving, or auto-accidents, you are a risky driver. Auto-insurance should cost more for you because you are making decisions that are riskier. If you can prove that your driving has become safer, your rates will come down. Again, very rational.

Most states mandate that drivers carry no-fault auto-insurance. This is important because driving is a shared-risk activity. Simply by being on the streets and highways, you incur the risk of being at-fault in an accident or the victim of another drivers irresponsibility. (Conversely, if you never drive, you cannot cause an automobile accident…simple logic dictates that the act of getting behind the wheel raises the risks above zero).

Now because everyone driving poses a risk to other drivers, and uninsured driving is costly to others on the road, a case could be made that we should simply include the cost of auto-insurance in the cost of gasoline. The more you drive, the more gas you use, the more automatic auto-insurance you get. Simple, eh? Yet almost everyone sees the moral-hazard here; we’ve removed the issue of personal responsibility, because both risky and safe drivers get taxed the same way. Speed all you want, run red-lights and take chances, you will pay no more for gasoline than the “55 keeps you safe & alive” person behind you filling their tank. Obvious moral hazards here. So almost everyone agrees that auto-insurance should be priced relative to individually controllable risks. 

So that’s auto insurance – what about the right to drive? Driving is economically important. Further, a gasoline tax can be seen as a “regressive tax”, one that effects the poor disproportionally. There is some truth here. A poor person, who drives an old 18mpg clunker 45 miles a day to go to work, will pay a disproportionately higher part of their income toward gasoline vs. a wealthy person who drives a brand new 18mpg sport-utility-truck 45 miles a day to work. Perhaps we should subsidize the cost of gasoline for the poor? Hear we run up against a stark economic fact – if we subsidize gasoline use by the poor, we will encourage the overuse of gasoline. This is the heart of the law of elastic demand. As you raise the price of gasoline the first people to change their behavior will be those most economically affected – this is why you see more poor people on the bus. So if you want less wasteful gasoline usage the people who will lead that charge will be those that are most economically affected -- fair or not, that's the way it is kids.  The fair strategy is to invest in subsidizing alternate (less wasteful) means of transportation, e.g. take some of that new gas-tax and pump it into more frequent bus service, trains, etc, to give the poor (and everyone else) more non-gas guzzling options.

The implications for health-care should be obvious.

(1)    Healthcare is important, but is a finite resource. Removing price transparency will not encourage its careful usage. This is the fallacy of single-payer argument. Just as “free gasoline” will encourage its wasteful usage, “free healthcare” will encourage the wasteful usage of unnecessary tests and medical procedures. The only alternative to this is a rationing system, where the government decides what care will be supplied to its citizens. This is not necessarily an unacceptable option (Canada does this), but let’s not pretend we can have all the healthcare we want, when we want it, and it will magically get paid for. That system does not, and cannot, exist economically.

(2)    Catastrophic health insurance is important for everyone. Simply by living, you pose a potentially large burden on the health system that we all pay for. People get hit by busses. Through no fault of their own, they also fall victim to diseases that are life threatening and expensive to treat. This is a serious, real, and potentially devastating lottery we are all participants in. For this reason alone (shared, faultless risk) a common-scheme for catastrophic risk insurance is necessary if are not to arbitrarily bankrupt members of society. There simply must be a maximum cap in out-of-pocket expenses. This is known as the "high deductible" option.

(3)    Personal lifestyle and behavior should play an important role in pricing healthcare. Let’s be crystal clear here: all else being equal, obesity and smoking will result in higher healthcare costs, so will a myriad of other personal choices. To remove these from the day-to-day cost of health-insurance is even less wise than to remove driving behavior from auto-insurance.  We should not mandate "safe lifestyle" behavior (that's very anti-freedom), but we should apply clear statistical costs metrics to it.

A baseline

We should have a system where everyone is offered reasonable catastrophic healthcare coverage – this is the price of entry into our society. But this catastrophic health care coverage should kick-in only after a high deductable. Health care decisions below this threshold should be highly price transparent (i.e. out of pocket), so that people make intelligent decisions on the use of a scarce resource. The care provided past this deductable needs to be “rationed care” (meaning that yes, the government will decide what amount of care can be provided based on the need to provide care to the maximum number of people -- there is no other solution to a government funded option).

Personal responsibility

Just as you are allowed to buy lower deductable auto-insurance, you should be able to buy lower deductable health-insurance. Private insurance can provide both lower deductibles, and higher levels of (non government rationed) service. Importantly, this health-insurance must be adjusted to “personally controllable risk factors” (yes… you can control your weight and smoking habits).

Charity

Should people decide that “the baseline” of high deductable insurance is unfair to the poor (and people will clearly decide this is so), this is a wonderful domain for charity to supplement the baseline. Minimum deductibles can be partly or fully subsidized by charities. Supplemental health services above the “baseline” can be provided or funded by charities. Since we cannot all collectively agree on these supplemental services (e.g. which AIDS drugs should be free? Or shall we concentrate our funds on treating Type II Diabetes? – both worthy causes for sure.  What about the right to an abortion for a 15 year old girl? – Clearly we will not all agree!), let’s let individuals decide how they will make society better though their own charity.

The answer: Probably not. 

I just read the recent New York Times article on Motorola's new social-networks oriented phone offering.
http://www.nytimes.com/2009/09/11/technology/companies/11moto.html?hpw

Seven years into our attempts to transform Afghanistan into a stable and progressive country, we still have not been able to credibly answer an important question:

What is the business plan for a stable and progressive Afghanistan?

It may seem glib talking about “business plans” for Afghanistan when people are dying daily (US soldiers, impoverished citizens, etc), but it is actually a fundamental issue. We can do all the “peacekeeping” or “peacemaking” we want, but without a viable economic plan things will simply regress towards the preexisting and terrible “mean” for that country. By analogy, a bicycle not in forward motion is unstable and will fall on its side. It’s no different (but much more complex) for a society; without a legitimate story of “what they are going to do?”, all the stabilization effort will be for naught.

In contrast, the situation in Iraq is actually much simpler. Despite large factional problems between the Sunnis/Shiites/Kurds, the country has a clear and viable business plan. “We export oil, which we can extract at low costs and sell to the world. Over time, we hope to use the profits from this to branch out into other value-add things.” That’s actually a pretty good plan. Things can get gummed up in the implementation, but the basis is sound.

Compare this with Afghanistan. What is the business plan here? Decades of war have ruined the infrastructure and decimated the educational base. They have no cheap oil or natural gas to export. No valuable mineral resources are sitting near the surface that can be developed. No shipping ports from which to ship things in or out of to other countries. Seemingly the one great business plan is “We can grow Poppies, extract opium, and sell that for a profit internationally.” To be fair, this is a GREAT business plan, but it also one that currently concentrates power in the wrong hands, and one that the international community finds unacceptable. There are only two potential paths forward:

#1 Try to find an alternate set of crops that Afghanistan can grow with a “comparative advantage”  There are efforts to try to do this. See the WSJ’s article “US Seeds New Crops to Supplant Afghan Poppies” ( http://online.wsj.com/article/SB125021357982431177.html). There are however perhaps two potentially fatal flaws here: (i) Commodity food prices are low and are heavily subsidized in advanced western countries – this makes achieving any “comparative advantage” or even “comparative parity” impossible. How to truly make a sustainable profit here in a poor and not technologically advanced economy is a hard problem. (ii) Poppy and the opium derived from it are high-value goods – this is where the money is. Doing this is swimming against a swift current – good luck.

#2 Honestly embrace the truth that there is a lot of money in Afghan Poppy (Opium) cultivation and swim with the tide instead of against it. This is an unpalatable choice – very few people are “pro opium”, yet it must be weighed against the alternatives. In a very real way the alternative is “more deaths” of US soldiers and civilians, “more expense” in continuing operations to fight the underground economy. As distasteful as bringing Poppy and Opium cultivation into the legitimate economy is, it is perhaps the best option for giving Afghanistan a legitimate and stability maintaining “business plan”.

So as a country, we have three options:

1. Give up.  The pack up and leave option is tempting, but bad news. Let's remember that the original response to terrorism that brought us to Afghanistan (with international support I might add), was a direct result of the abdication of responsibility following the post-Soviet implosion of Afghanistan into a failed state.

2. Be righteous and continue to ignore the "business plan problem". We can swim against the firm economics of Poppy/Opium cultivation and pour massive funds into trying to develop Afghanistan into a more modern and self progressing economy that can find a new "business plan".  This is super hard and the chances of success are low, because the infrastructure and educational base are very low. (No one is lining up to build factories or call centers in an unstable Afghanistan). This will take decades, if it is even possible. People will continue dying, and large scale resources will be spent.

3. Abandon righteousness, and legitimize the only business plan that has proven to be successful in the region in the last 30 years. Yep, it's Poppy/Opium production. Let's have the courage and pragmatism to acknowledge this and to bring it into the legitimate economy. Make it legal, and drive the corruption out of it. Use it to build the tax base, and move forward.

Let's face facts... if we cannot solve the business plan problem, we cannot be successful. This is not a partisan issue - it's a fundamental issue of "Do we have the courage to take the steps that will succeed, even if we find those steps highly unappealing?"