A budget 'compromise'
It is almost a certainty that when a politician offers a ‘compromise’, plenty of people on both sides of the argument will find reasons to hate the proposal. So it goes with President Barack Obama’s latest bid to break the political deadlock over the US federal budget. This week, he unveiled his proposed budget. It won’t get up. But it does at least suggest the White House is willing to negotiate. Still, in a highly partisan environment, its unclear whether that apparent openness to compromise will actually amount to anything.
David Walker, a former budgetary bureaucrat, sees some grounds for optimism. For a start, he observes that Obama has conceded the need for changes to two key entitlement programmes. On Social Security (a system of welfare payments), the president has accepted Republican demands to change the basis on which cost-of-living payments are adjusted for inflation. On Medicare (public funding for healthcare of the elderly), Obama is vowing to introduce more stringent means testing of healthcare benefits. Neither of these will be popular with Obama’s own side: congressional Democrats are likely to baulk at cutting social insurance.
Republicans aren’t impressed either though, because Obama has also committed to further tax hikes — an anathema to conservatives. In particular, the president wants to hike the tax take from the wealthy, through changes to income tax rates and limits on particular tax deductions. Even if such proposals were to be accepted, they amount to mere tinkering with the tax code and would not do enough to balance the budget.
On this point, Walker has a simple message for Obama: you must do more to spell out what needs to be done to put the nation’s finances on a surer footing. He proposes that the president formally set a target for reducing public debt within the next 10 to 15 years. He also suggests that further structural changes be endorsed for Social Security and Medicare to rein in spending: for example, a gradual increase in the retirement age, and restrictions on the annual growth in healthcare costs. Obama should also pursue comprehensive tax reform that will ‘broaden the base’ — by eliminating a whole host of deductions, exemptions and other loopholes — and allowing some tax rates to be reduced, while still increasing revenue.
Perhaps Walker’s most important point of all is that the president must engage more directly with US voters to explain the tradeoffs involved in setting fiscal policy. Too few politicians have spoken honestly to the public about the challenges that the United States faces. For the most part, ordinary Americans simply don’t know how precarious their nation’s finances are. The easy — and politically appealing — path would be for Obama to simply browbeat Congress. But that strategy can only work if the electorate itself is educated on the scale of the problem, such that it may in turn demand action. In the absence of real leadership, it is a sure bet that no meaningful budgetary bargain will ever be achieved.
So is Malta the next Cyprus? Is Italy the next Greece? Is France the next Portugal? Or was it all the other way around?
Oliver Marc Hartwich, economist
Notwithstanding a brief respite over Christmas, it seems Europe is the source of a near-constant stream of bad news. Indeed, the negativity has been so persistent, markets have become inured to the misery: each sad announcement is greeted with the equivalent of a shrug. Perpetual crisis is apparently Europe’s ‘new normal’. In February, Italy produced an inconclusive election result and the country’s politicians are still unable to form a government. Meanwhile, a bailout of Cyprus last month was badly bungled, unleashing fears that bank customers across Europe might find their deposits raided. Now Portugal is back in the spotlight, after its constitutional court rejected budgetary measures designed to give effect to the terms of that country’s bailout.
As Oliver Marc Hartwich observes, the reaction from Brussels to the bombshell from Lisbon has been blunt: there will be no renegotiation of the Portuguese assistance package; the government will just have to find a way to circumvent the verdict of the judiciary. What could possibly go wrong?
European officials have long expressed a commitment to keeping the euro afloat. The argument has been that the costs to any country from departing the Eurozone would be vastly greater than any punishing measures that need to be adopted to stay within it. It is clear they believe their own rhetoric about the absence of viable alternatives — hence, there is no price too steep for saving the single currency. But Hartwich is a contrarian on this point: the alternative, dumping the euro, is eminently doable.
There is no denying that there would be significant costs to resurrecting national currencies. But the advantage is that troubled economies would be able to devalue their currencies against their European peers in a way they currently cannot. This would provide a fillip to exporters, and a spur — currently absent — to economic activity. A less extreme option would be a two-tier Europe, with separate currency zones for strong and weak economies. This would broadly reflect the existing dividing line between debtor and creditor nations within the Eurozone.
Ultimately, Hartwich argues that something needs to change. Persisting with the status quo only guarantees that the cycle of crises continues indefinitely, progressively striking down different countries. It is no longer a question of if the next domino will fall, or even when — merely which country will be the victim.
While … gradual capitalist reforms might be good for [North Korea], they would be far too dangerous for the current North Korean elite.
Andrei Lankov, Kookmin University
North Korea is possibly the most destitute country on the planet. Largely shut off from the outside world, it is a communist hellhole — the country’s leading elite feather their own nests, while leaving their people to suffer in unrelenting poverty. Yet as its neighbours show, such misery need not be the case. Economic reforms allowed prosperity to spread in both South Korea and China. In both cases, these reforms were championed by authoritarian regimes — and while South Korea is nowadays democratic, China’s communist party continues unchallenged under a system of one-party rule. So, why doesn’t Pyongyang contemplate a similar economic transformation?
As Andrei Lankov writes, it is precisely because of the modern successes of Asia’s tigers that North Korean leaders are nervous about their own futures under economic liberalisation. Reform, they rationally conclude, would mark the end of their power. South Korea would provide too powerful an example to the ordinary folk inhabiting the north of the peninsula — precisely why the flow of information is so tightly controlled. Under a more open economy, the capacity for Pyongyang to maintain the message that its leadership is essential to the country’s existence would be fatally undermined. It would be akin to how East Germans discovered the standards of living enjoyed by those in West Germany: and they were only three times poorer; North Koreans are at least 15 times poorer than their southern kin.
This information problem would be exacerbated by the fact that the economic reforms North Korea needs would amount to a total overhaul of the state. With the benefits likely to take time to materialise — and amid a short-term state of chaos — many North Koreans might well reckon that reunification with the South would deliver much faster gains. Pyongyang’s ruling classes would be promptly tossed aside, much as East Germany’s leaders could not survive the fall of the Berlin Wall. Moreover, stripped of their power, North Korean leaders would face the prospect of being finally held accountable for their brutality. As Lankov identifies, that prospect alone is enough for them to reject any thought of reform.
So what do they do? Keep the borders shut, restrict the flow of information, and use nationalist rhetoric to brainwave the population into believing there is no alternative to Pyongyang’s rule. All of it will be a show — maintaining the façade of a functioning state, while everything continues to crumble. But for the despots of North Korea, that is still better than the alternative.
Euromyths!
Bureaucrats in Brussels get blamed for a great many things. And certainly, there is much going on in the European Union that deserves criticism — particularly the numerous problems that have been encountered while the region’s grapples with its rolling debt crisis. On occasion though, Brussels unfairly gets a bad rap, as tabloid newspapers whip their readers into a frenzy over supposed EU initiatives which are either misunderstood or simply made up.
Czech politician Pavel Poc has been compiling his own list of fascinating ‘Euromyths’, and Lenka Petrášová offers a summary of some of the greatest hits. For example, the press in the Czech Republic had a field day over reports that a porn star was getting a subsidy to produce a biographical film about his life. In fact, there is precious little evidence to support that assertion — while a filmmaker did produce a documentary, it was rejected for a EU-funded workshop, and withdrawn by the producer from another. No euros were committed by Brussels.
Other reports included:
- hairdressers being banned from wearing high heels — but this was just an agreement between employers and employees, not an EU directive
- a ban on various plastic toys, including balloons — in fact, European officials had mandated safety labels relating to small parts in toys that children might inhale
- limits on the curvature of cucumbers and bananas — really, this was a consolidation of various national standards, as demanded by greengrocers
- the withdrawal of freshly baked donuts — the EU had merely mandated that consumers should have a choice of buying packaged donuts.
Certainly, policymakers are capable of producing laughable regulations. But the lesson is for media consumers is a simple one: you can’t believe everything you read in the papers.
Mrs Thatcher believed that societies have to encourage and reward the risk-takers, the entrepreneurs, who alone create the wealth without which governments cannot do anything, let alone help the weak. … The essence of Thatcherism was a strong state and a free economy.
Blighty blog, The Economist
Margaret Thatcher was the first, and to date only, female prime minister of Great Britain. She won three elections, and held power for over 11 years. Despite her political longevity — or perhaps because of it — she was seemingly loved and reviled in equal measure. But that never seemed to phase her. If anything, the prospect of conflict fuelled her more than the affection of her countrymen and women. Whatever people might think of her, the Iron Lady — who died on Monday, aged 87 — indisputably transformed the nation she once led.
There is much to define Thatcher’s legacy. Perhaps most significant is the economic change she brought to the UK. As prime minister, Thatcher recognised that the state had for too long propped up inefficient industries — overregulation and limited competition had stifled innovation and turned Britain into an economic laggard. She championed the free market, unleashing what Joseph Schumpeter described in the 1940s as the ‘perennial gale of creative destruction’. She charged into battle against trade unions who resisted policies that would lead to the shuttering of myriad factories and other heavy industry facilities. It became a bruising war, with a surge in unemployment and a plunge in her personal approval ratings. Lesser leaders would have backed down. But Thatcher famously declared she ‘was not for turning’. And she didn’t.
The short-term economic misery might have made Thatcher a one-term prime minister. But events half a world away marked a revival in her fortunes. Argentina’s invasion of the Falkland Islands cast Thatcher in a new light in the eyes of ordinary Britons. Not prepared to let a British dependency topple to a South American dictator, Thatcher dispatched a military taskforce, which in turned reclaimed the islands. Her decisiveness was respected by voters, and the Falklands victory saw her rewarded with a second term.
Another hallmark of Thatcher’s tenure was her strong relationship with US President Ronald Reagan during the 1980s. In political terms, the two were kindred spirits, sharing a common position on economic philosophy. At home, the two countries pursued a similar agenda of liberalisation at home. On the world stage, the American and British conservative leaders stared down the Soviet Union. Together, Thatcher and Reagan were credited with bringing down the Iron Curtain, and the success of capitalism in the Cold War. While that probably overstates their contribution to the USSR’s collapse, their resolute stance against communism is beyond question.
In the end, like many leaders, Thatcher overstayed her welcome. An unpopular tax to fund local councils — the so-called poll tax — was the proximate cause of her downfall. But the problems were stewing long before then. After winning an historic third term, Thatcher’s colleagues began to tire of her increasingly imperial style — trampling over the cabinet to impose her will. Successive senior ministers resigned, and eventually the party as a whole turned against her. After a Conservative leadership ballot compromised her authority in 1990, Thatcher left 10 Downing Street, tears rolling down her cheeks.
However, that ignominious departure does not detract from the record she left behind. Thatcher inspired a new orthodoxy for economic policy not merely in Britain, but around the world. She stood for liberty: free markets, self-determination for Falkland islanders, an end to totalitarianism in the crumbling Soviet empire. Despite the anger she provoked in many quarters, those positions became unchallengeable within mainstream British politics. Britain is a different place — a stronger place — for her leadership. Her successors at home and counterparts abroad are left only to ponder how she achieved so much.
