Topic: International Economics and Development

Do You Hear the Drivers Honk?

Last week, taxi drivers in France protested the Uber ride-sharing service by blocking access to airports and train stations, erecting barricades, destroying vehicles, and assaulting rival drivers in confrontations that led to injuries. American celebrity Courtney Love Cobain, caught up in the chaos, tweeted: “they’ve ambushed our car and are holding our driver hostage. they’re beating the cars with metal bats. this is France?? I’m safer in Baghdad.”

The government of France then responded to the violence in oh-so-French fashion: it arrested Uber’s executives

My Cato colleague Matthew Feeney wrote the whole story up and you should go read his Forbes piece now. My humbler role is to set the episode to music, by way of a tune you may have found hard to get out of your head if you’ve ever seen Les Miserables

Do you hear the drivers honk
Smashing the heads of random chaps
It is the music of a people
Who will not give way to apps

When the tapping of a screen
Summons a ride with just their thumbs
It is the future we are fighting
When Uber comes

When technology disrupts
The cozy pasture where we graze
We’ll challenge it with fisticuffs
And self-serving Luddite cliches

[repeat chorus:]

When the tapping of a screen
Summons a ride with just their thumbs
It is the future we are fighting
When Uber comes.

[thanks to Rogers Turner and John Strong for suggestions on the lyrics]

Washington and Havana Officially Restore Diplomatic Ties

It was long overdue. After over half a century of unsuccessfully trying to bring about regime change in Cuba through isolation, President Obama announced today that Washington has reached a deal with Havana to reopen embassies on July 20th.

There was a lot of posturing in the process, particularly from Cuba. At some point, the island’s dictator even said that restoring diplomatic ties would not be possible unless, among other things the United States returns Guantanamo and pays economic reparations for 50 years of embargo. In the end, it came down to the removal of Cuba from the U.S. list of states that sponsor terrorism and an agreement about the movement of U.S. diplomatic personnel around the island.

By restoring diplomatic ties, removing Cuba from the terrorist-sponsor list, and relaxing some elements of the embargo and the travel ban, the Obama administration has gone as far as it can using its executive authority. Lifting the outstanding elements of the embargo and travel ban is a prerogative of Congress. As it is, it looks unlikely that a bill in that regard will reach Obama’s desk for the remainder of his term.

Polls show not only considerable bipartisan support for Obama’s policy toward Cuba, but also a majority of Cuban Americans favoring rapprochement. Sooner rather than later, Congress–and the Republican presidential field–will realize the futility of sticking with the status quo.

Under no circumstances should we deceive ourselves on the current nature of the Cuban regime. It remains a Stalinist dictatorship. Dissidents are still harassed and arbitrarily arrested. The much-hyped economic reforms announced by Raúl Castro eight years ago have been too timid and seem more aimed at allowing Cubans to survive in the private sector without becoming prosperous.

However, political and economic isolation failed at weakening the Castro regime. American policy actually strengthened the Cuban government by providing itself as a scapegoat for Cuba’s disastrous economic policies and as a victim of U.S. aggression, thereby rallying support from all over the world.

Despite the embargo and travel ban still remaining in place, this is a historic move by the Obama administration.

Greece: A Financial Zombie State

Banks in Greece will not open their doors Monday morning. Greece has been moving towards this dramatic final act ever since it was allowed to enter the Eurozone with cooked fiscal accounts in January 2001 – two years after the euro was launched. One Greek government after another embraced the idea that it did not have to rein in fiscal expenditures to match revenues because Brussels would cover any shortfalls. That idea appeared to have worked, until other members of the Eurozone realized that the entire European project would fall apart if it became a transfer union.

This realization was brought into sharp focus by the bailout demands of Prime Minister Alexis Tsipras and his left-wing coalition government. Brussels finally realized that if the demands of the Tsipras government (read: Europeans must pay for Athens’ largesse) were met, the Eurozone would morph into a giant moral hazard zone. So, Brussels was forced to throw down the gauntlet: enough is enough.

Where does Athens go from here? Well, to quote former President George W. Bush, as he observed the unfolding financial crisis in 2008: “If money doesn’t loosen up, this sucker could go down.” Well, “W” had a point. Changes in the money supply, broadly determined, cause changes in nominal national income and the price level.

Since October 2008, until the Syriza party took power, the broad measure of the Greek money supply (M3) contracted at an annual rate of just over 6%. And as night follows day, the economy collapsed, shrinking by over 25% since the crisis of 2008.

Since the Tsipras government took the helm, the monetary contraction in Greece has accelerated. This means that a Greek depression of even greater magnitude is already baked in the cake.

And that’s not all. It is going to get worse. The total money supply (M3) can be broken down into its state money and bank money components. State money is the high-powered money (the so-called monetary base) that is produced by central banks. Bank money is produced by commercial banks through deposit creation. Contrary to what most people think, bank money is much more important than state money. In Greece, for example, bank money makes up just over 84% of the total money (M3) supply.

With banks so wounded, Greece is destined to become a financial zombie state.

That Time We Presented a Bust of Hayek to Yevgeny Primakov in the Kremlin

Crane Presents Hayek Bust to Primakov

Yevgeny Primakov, a Soviet apparatchik who made a very successful transition to the post-Soviet era in Russian politics, has died at 85. He served as speaker of the Supreme Soviet, head of the Russian intelligence service, foreign minister, and prime minister. As Andrew Kramer of the New York Times writes, “With hooded eyes and a gravelly voice, Mr. Primakov struck an image of the archetypal Soviet diplomat and intelligence operative.”

I was in Primakov’s presence once, and that’s the way I remember him. In 1990 Cato held a weeklong conference in Moscow titled “Transition to Freedom: The New Soviet Challenge.” The largest gathering of classical-liberal thinkers ever to take place in the Soviet Union, the event included Nobel laureate James Buchanan, Charles Murray, and numerous Russian scholars and members of parliament. “When Cato’s president Edward H. Crane reminded the large audience that ‘the government that governs least governs best’ … hundreds of Russians clapped and cheered wildly,” the Wall Street Journal reported. “Only a handful of die-hard Communists sat glum-faced, arms folded.” As shown in the photo above, Crane presented a bust of F. A. Hayek to Primakov, then the chairman of the Council of the Union of the Supreme Soviet, as more than 1,000 Soviet citizens attended their first open forum.

Fourteen years later, at another Cato conference in Moscow, Crane reminisced about his encounter:

And it’s been pointed out on numerous occasions at this conference that for civil society to thrive, the institutions of the rule of law, constitutionally limited government, a strict respect for private property and the sanctity of contract, as well as a free and open private sector media are essential. Indeed, there are no great secrets to achieving economic prosperity and a free society, a thriving civil society.

When I was in Moscow for Cato’s 1990 conference, I made that point when I had the privilege of presenting a bust of the great economist and social philosopher F.A. Hayek to Yevgeny Primakov, then chairman of the Council of the Union of the Supreme Soviet. I concluded my remarks by saying, “It is, therefore, particularly appropriate, here in this lavish hotel built exclusively for the Communist Party Central Committee, to acknowledge through the presentation of this bust that Hayek was right and Marx was wrong.”

“It is the Cato Institute’s sincere hope that this bust of F.A. Hayek will rest in a prominent place in the Kremlin where it will remind Mr. Gorbachev and other leaders of the Soviet Union that there are answers, readily at hand, to the problems that beset the USSR.”

Mr. Primakov was gracious in accepting the award, under the circumstances, and said that when he next visited the United States he would present me with a bust of Lenin and that I put it where ever I wanted. I think I know what he had in mind.  

Speaking of Greece…

If you think that the Fed isn’t involved in the Greek mess, you may want to think again. Paul-Martin Foss, our good friend at the Carl Menger Center, wrote a very nice post a few days ago concerning how the Fed may be getting itself tangled-up in an impending Greek default, through its swap lines with the ECB.

According to the Federal Reserve Board of Governors, those swap lines were first established in December 2007 “to improve liquidity conditions in U.S. and foreign financial markets by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress.”

Those original swap facilities, never meant to be permanent, were shut-down in February 2010. But — wouldn’t you know it? — similar facilities were announced in May 2010 in response to “the re-emergence of strains in short term funding markets in Europe.” Those facilities were also supposed to be temporary, but then, in October 2013 — what do you know! — they were made permanent. According to the Fed, that step

further supports financial stability by reducing uncertainties among market participants as to whether and when these arrangements would be renewed. This action results from the ongoing cooperation among these central banks to help maintain financial stability and confidence in global funding markets.

What has all this got to do with Greece? Here is Paul-Martin:

If you want to get a sense of the Fed’s involvement in Europe, watch the swap lines. Swap line data is published every Thursday afternoon on the Fed’s balance sheet, the H.4.1 release. If you look at the St. Louis Fed’s charts and data on swap lines, you’ll see the huge amount of swaps during the financial crisis, and then a smaller but still significant increase in swap lines during the first iteration of the Greek financial crisis back in 2012. While swaps have been relatively non-existent this year, there was a small blip back in April, likely Greek-related, and more importantly, another blip this week. While the amount, $114 million, is a drop in the bucket compared to what it has been in the past, this number needs to be watched. It could very well be an indicator of the Fed getting involved in Europe again. And if the doomsday scenario ends up taking place next week, expect that $114 million figure to skyrocket. The Fed seems to want the conversation to revolve around a possible upcoming interest rate hike, so it’s been relatively silent on the topic of Greece and its involvement in bailing out Europe. But even if the Fed doesn’t say anything about Greece, its money-printing to pump up the swap lines will do plenty of talking.

That was on June 19th. Well, the CMFA’s champion Fed watcher, Walker Todd (who you will be hearing from shortly on these pages) has been keeping a sharp eye on those swap lines. On June 11th — a week before the transaction showed up on the Fed’s own H.4.1 release — Walker reported that “Someone in Europe drew a small amount on a dollar swap with FRBNY”:

ECB website today has details below on a swap line drawing this week against the US dollar swap line with FRBNY. It says that there was one bidder; one wonders whom. Amount is $113 million. There has been no swap line activity for several months now. These numbers should show up on FRBNY next week (due to timing of swap drawings and time zone differences, there usually is a one-week lag between a drawing in Europe and the FRBNY report of the same drawing).

(The $1 million difference between the numbers mentioned by Paul-Martin and Walker reflects a Bank of Japan draw of that amount.)

The day after Paul-Martin’s post came out, Walker alerted us to another transaction that had not yet been reported by the Fed:

It won’t show up until next week in Fed statistics, but ECB statistics show that an unnamed entity (one suspects the same one as last week) borrowed again for a week under the dollar swap line for $115 million. The drawing was $113 million the last time I checked. As a purely hypothetical example, a Greek bank could be borrowing dollars under the swap line. Other than a token $1 million to $2 million that Bank of Japan borrows from time to time to reassure itself, this is the only borrowing outstanding under the Fed’s swap line, according to FRBNY statistics. The notable thing is that it is still there and growing.

Today the swap was rolled over yet again.

Stay tuned…

[Cross-posted from]

Europe’s Hard Choice

In Monday’s Financial Times, columnist Gideon Rachman presented a grim outlook for Greece and the European Union. He argues there are no good outcomes. There are three options. First, the EU can make concessions to Greece. Second, the EU can stand firm and allow Greece to leave the Euro. Third, the Greek government can accept the EU’s terms.

The first option represents a near-term victory for the Greek government. It also creates moral hazard within the broader EU. Governments in other countries implementing austerity measures would come under pressure. Populist parties would make further electoral gains across Europe. Consensus rule within the EU would become impossible.

It is feared the second route would put pressure on other countries, e.g., Spain and Italy, viewed as being vulnerable to the economic woes besetting the Greeks. That is an argument for “contagion.”

The third outcome may offer no long-term solution. Even were the Greek government largely to accept what the EU, the ECB and the IMF want to impose on it, that would likely not solve the Greek problem in the long run. Greece’s debt level would still likely be unsustainable. It is not clear that any government can implement the far-reaching economic reforms needed to put the Greek economy on a sustainable growth trajectory.

Richman’s analysis is cogent, if bleak.

In Calling on Government, the Pope Underestimates Power of the Market

Pope Francis’ new encyclical, Laudato Si, advocates a new “ecological spirituality.” Yet this challenging call is diminished by the document’s tendency to devolve into leftish policy positions. The encyclical underestimates the power of market forces to promote environmental ends.

There are serious environmental problems but Laudato Si presumes rather than proves crisis is the norm. Moreover, nothing in Scripture or nature tells us how much to spend to clean up the air.

Drawing environmental lines requires balancing such interests as ecology, liberty, and prosperity. One cannot merely assume that the correct outcome in every case is more of the first.

Indeed, the Pontiff’s own goals conflict. He speaks movingly of the dignity of work and its importance for the poor. But the more expensive and extensive the government controls, the fewer and less remunerative the jobs.

Perhaps most disappointing is how the Pope seemingly views capitalism, and especially property rights, as enemies of a better, cleaner world. Yet most environmental problems reflect the absence of markets and property rights, the “externalities,” in economist-speak, which impact others.