New Government in Japan No Reason For Comfort – No New Ideas, While Country Is Deeply in Debt And Population Is Shrinking – More Broadly, Population Declines Throughout the West – Lack Of Faith In The Future?

By Paolo von Schirach

December 23, 2012

WASHINGTON – Japan’s Liberal Democratic Party (LDP) won the elections with an almost historic landslide. With its allies of the Komeito the LDP now controls 325 seats in the lower house, the Diet. The Democratic Party, the humiliated incumbent, is now down to 57 seats (from 230).

No good news

So, good news for Japan, now finally with a stable government? Not really. As The Economist reminds us, this victorious Liberal Democratic Party, now under the leadership of Shinzo Abe, is pretty much like the old one: “cynical, chauvinistic, in parts corrupt and beholden to special interests”. It did not win because of new, bold ideas and brilliant leaders. It won by default, because the inept Democratic Party imploded.

Except for ill advised plans to force the hand of the Bank of Japan, so that it will do more to end deflation, no new ideas. In particular no new ideas that will relaunch a tired economy, and cut down a gigantic national debt, (more than 200% of GDP). And certainly no magic formula that will increase the birth rate in a country that is slowly but surely becoming a geriatric ward.

Negative fertility rates

Yes, unless well established demographic trends are quickly reversed, Japan will become a society of old people and down the line a country with a shrinking population. With a fertility rate of 1.39 children per woman, Japan is well below population “replacement levels”, (at least two children per woman). As Japan does not welcome immigrants, if not enough children are born at some point there will be no more Japan. This may sound preposterous, but it is mathematically inevitable. The only variable is the actual speed of the overall population decline.

With this rather bleak background in mind, whatever the fortunes of the new LDP government led by Prime Minister Shinzo Abe, it is hard to be bullish on a society that does not believe in itself.

No children in rich societies

More broadly, we should not ignore that we have similar or even worse population decline trends throughout the West. With the exception of the United States and France (a country in which there are laws encouraging families to have children), in Europe and Canada we see negative fertility rates. And this goes also for the richest Asian countries, big and small: South Korea, (1. 23 children per woman); Taiwan, (1.10); Hong Kong, (1.09); and Singapore (0.78).

Northern Europe, with an average of 1.7 children per woman, does a little better than the South, where the average is 1.4. Former Communist countries do very badly. (Hungary, 1.41 children per woman; Serbia, 1.40; Poland, 1.31; Czech republic, 1.27).

Hard to say what is causing this population implosion across affluent or semi-affluent countries; but it is abundantly clear that shrinking societies in which the elderly will become the dominant component do not have a bright future.

Immigrants cannot be easily assimilated

In the case of Europe, the only source for replenishment are immigrants from poor Africa. While this may be comforting for those who look at numbers, the assimilation of semi-illiterate new comers who are hardly in a position to become net contributors to these societies is a source of additional worries.

Whatever happened to the West, its self-confidence and faith in the future?




Thanks TO ECB Cash Infusions, Eurozone Financial Picture Much Improved – But Systemic Weakness Remain – Greece Not Bankrupt, But In Chaos – Strikes And Daily Disruptions Are The Norm

By Paolo von Schirach

December 21, 2012

WASHINGTON – Thanks to huge liquidity injections care of Mario Draghi, President of the European Central Bank, (ECB), the Eurozone crisis subsided. But even though no country is going bankrupt because of this new cash infusion, there is no sign that a new culture of work, productivity and accountability has taken roots.

Money infusion improves picture…

Sure enough with (mostly German) money now flooding the system, the obsessively watched ”spread” between German 10 year bonds and those of the poor cousins of Southern Europe (Greece, Italy, Spain and Portugal) is much smaller. Even wretched Greece is doing a lot better. Greek 10 year bonds until a few months ago used to have a 40% yield –yes, it was 40%. Now the yield is “only” 11%. (Germany’s 10 year bonds have a yield below 2%).

…Yet, no real changes

That said, let’s not be fooled. Central Banks can provide strong pain killers; but they have no cure of deep illnesses. There is no sign that Southern Europe has turned any proverbial corners. The economies remain weak, investments are low, productivity gains non existent, unemployment still sky high, (Spain is above 25%), while long term demographic trends indicate populations becoming rapidly older and therefore more reliant on government funded social programs.

Even as the Greek Government may rejoice in looking at bond yields descending from surreal levels, the Greek national debt, with all the massive injections from the EU, the ECB and the IMF with a rating of B- is just junk. Notwithstanding years of support with more to come The Greek national debt will stay way above 100% of GDP, with no chance of significant reductions.

Which is to say that Greece is in permanent intensive care with little or no chance to get back on its feet and become a self-sustaining society if and when all these massive interventions will stop.

Greeks in denial

And this is due mostly to the simple fact that most Greeks have yet to grasp the seriousness of their predicament. The people remain in an infantile state of denial. Instead of getting busy, the Greeks keep on protesting. They protest and they strike, on a daily basis, against “everything”: lay offs, against social programs cuts, against reductions in public employment. And all this takes place in an atmosphere of angry chaos.

Strike bulletin

As the WSJ reports, (In Greece, When Everything Grinds To a Halt, Nobody is Surprised), there are so many strikes that some IT people set up a dedicated website called “apergia”, the Greek word for strike. While the article looks like a piece of entertaining “local color”, in fact it describes a country near melt down in which all public services, from transportation, to schools, to courts are disrupted on a daily basis, causing enormous economic losses, not to mention inconvenience and stress.

Wasted opportunities

Up to a point this picture of life in constant chaos may look funny, just like an old Marx Brothers movie. But if you think of it it is truly tragic. The Greek debt crisis exploded in the Fall of 2009. Greece has gone through every possible bail out package. There have been political crises, new elections resulting in a new coalition government, and what not. And yet the people still do not get the message. “Fellow citizens, the free lunch is over. It is time to get serious, invest, work and become a productive society”. No, Sir. We keep protesting against this injustice caused by malicious hidden enemies.

More free lunches

In fact, may be there is a reason why the Greeks are still in denial. And that is the bail outs. While the country is essentially bankrupt, the Northern Europeans have decided that keeping Greece alive through constant cash infusions is a price worth paying because a messy Greek exit from the Eurozone would have (in their estimates) even worse repercussions on European financial markets.

Self-inflicted death?

And so this means that the “free lunch” is not over for the Greeks. In fact, with the latest bail out package, they just got some more. And it seems that they decided to use this new precious respite to protest and strike some more; this way guaranteeing that the hoped for turn around will never take place. The web site detailing the daily strikes may very well become Greece’s obituary: “Death By Self-Inflicted Thousand Cuts”.




Out Of Control Entitlement Spending Will Bankrupt America – Beyond That, Studies Show That “Found Money” Makes People Less Happy – Well Being Is Increased By Personal Efforts Resulting In Earned Income

By Paolo von Schirach

December 20, 2012

WASHINGTON – Broadly speaking everyone should acknowledge that spending priorities in a democracy are a reflection of beliefs and values. Therefore we should all be able to agree that America, just like many other advanced industrial states, has come to embrace an entitlement culture. This is to say that our value system today accepts the idea that some categories of citizens, (the elderly, the poor, some minorities, and what not), “deserve” to receive something from the Government that will help them overcome their hardships.

Entitlement spending is contentious

That said, if this is indeed so, any debate on this transformation involving values and spending can become very contentious, if not poisonous. We all remember that when Mitt Romney made the point that about half the country will vote for the Democrats no matter what, because the Democrats will guarantee current and future benefit, this assertion caused an uproar. Romney’s comments appeared insensitive. Essentially he said that too many Americans are “takers”, people who demand something for nothing, etc. Politically this was a disaster. No way to get the votes of the “takers”, on the promise that President Romney would cut their benefits.

But even if we assumed that deserving people are getting benefits, then there is the issue of affordability. The trend affecting all major industrial democracies is one of larger deficits and higher debt due to increased social spending, in part due to the fact that the elderly (they get most of the benefits) have become a larger segment of the total population.

“Found money” is in fact bad for you

That said, there is an additional, if more complex, perspective. Some would argue that receiving something for nothing, especially if this is on a semi-permanent basis, is bad for the psyche of the recipients. Arthur Brooks, the president of the American Enterprise Institute, a Washington conservative think tank, argues in a WSJ op-ed piece, (America’s Dangerous Powerball Economy, December 20, 2012), that in general people are much happier when their earnings are a direct result of their own efforts. “Found money”, be it from a lottery win or from welfare does not reinforce individual well being and any sense of self worth. Brooks argues that the issue before us is not just about the affordability of entitlement spending; but its psychological consequences.

“It is a simple fact that the United States is becoming an entitlement state. The problem with this is not just that it is bankrupting the country. It is that the entitlement state is impoverishing the lives of the growing millions dependent on unearned resources”.

Bad even if affordable

The argument is clear. Even if we could afford all this public spending on subsidies and benefits, this largess has a negative impact on our society. People accustomed to getting “stuff” may be better off economically, but they are neither happier nor more self-confident. Subsidies kill the entrepreneurial spirit of self-reliance at the foundation of so many American success stories.

Good old days of self-reliance?

The essence of the argument is that money is of course essential for all Americans; but how you get it is apparently even more important than how much you get. Brooks indicates in his essay that we may have a golden opportunity to rethink and recalibrate social spending in America so that it is both affordable and properly targeted. Very true. But the politics of all this are toxic.

Those who favor benefits will claim that they all go to deserving people and that those who want cuts are cruel and heartless. This is a politically savvy way to avoid a serious debate on the fact that growing entitlement spending created a welfare mentality that has gradually transformed America –and not in a good way.




Accountability Review Board Found That Security Was “Profoundly Weak” In Benghazi – Yet Do Not Expect Top Policy Makers To Pay Any Price For The Death Of Four Americans – Secretary Of State Clinton About To Leave Office, May Manage Not To Testify

By Paolo von Schirach

December 19, 2012

WASHINGTON – The attack against the US Consulate in Benghazi, Libya which occurred right before the November elections, (on September 11, as it were), resulting in the death of four Americans, including Chris Stevens, the US Ambassador, was immediately treated by the White House as a political problem.

A political problem

We know that there was a deliberate effort to muddy the waters by claiming that this attack had nothing to do with US policy failures. It was all about the now famous anti-Muslim ”video”. We also know that UN Ambassador Susan Rice who was dispatched by the White House to tell this unlikely story is now a political casualty of this spinning. Once it became apparent that she knew that what she was saying in public was not accurate, she lost her chance to become the next Secretary of State.

Secretary Clinton’s role

Still, it is amazing how Secretary of State Hillary Clinton, the cabinet officer in charge of all US diplomats, managed to avoid any political damage. At least until today. Now her responsibility in this sorry mess has been officially established.

Accountability Review Board

An Accountability Review Board, (appointed by Secretary Clinton herself), co-chaired by Admiral Mike Mullen, former Chairman of the Joint Chiefs and Thomas Pickering, formerly a high ranking US diplomat, found that the security arrangements in Libya were “profoundly weak”. The report also found “lack of proactive senior leadership” in managing security. In other words, nobody was minding the store.

The report goes into the details of how locally hired Libyan security firms were supposed to provide security for the US diplomatic facilities and personnel in Tripoli and how they failed to do their job. The report also indicates that it was believed by all that the US should not have more of its own security people on the ground because they could be perceived as hostile by the Libyans.

The report cannot state in a definitive way whether the attack against the US Consulate in Benghazi was indeed orchestrated by al Qaeda or not. It is still not clear who did what.

Clear finding: inadequate security

Be that as it may, it is now abundantly clear that the security arrangements in place at the US Consulate in Benghazi at the time of the attack were grossly inadequate. It is also clear that the Secretary of State, that would be Hillary Clinton, was and is responsible for providing adequate security for US diplomats stationed abroad. Therefore it should also follow that Clinton and her staff were grossly negligent and that this negligence resulted in the death of four Americans, including the US Ambassador to Libya.

Will Clinton be damaged?

At least in theory this should be enough to cause a major embarrassment for Clinton who is about to leave her job as Secretary of State with sky high favorable opinion polls. But may be she will end up avoiding blame after all.

So far Clinton managed not to testify on the issue. And now it looks as if she will not appear before Congress because…. she is sick. So, with this or that excuse, she may actually manage to avoid any direct questioning on the Benghazi disaster before she leaves office in January, with her reputation just a bit scarred; but still mostly intact.

Politicians always ahead

This Mullen-Pickering ad hoc Accountability Review Board was supposed to determine who did what and who in the end is “accountable”. So far, as a consequence of this scathing report, we have had only the resignation of Assistant Secretary of State for Diplomatic Security Eric Boswell, and of his deputy. But it turns out that the expert politicians like Clinton are always a step or two ahead. Four Americans are dead due to major incompetence. And yet the Secretary of State –the person ultimately responsible for this security failure– most likely will leave the scene without a scratch.




No Sign Of Seriousness In Resolving America’s Long Term Fiscal Crisis – President Obama Is not Leading, He Blames The Republicans – Short Term Political Gain For Him, A Bad Outcome for The Nation

By Paolo von Schirach

December 15, 2012

WASHINGTON – The way in which the “Fiscal Cliff” negotiations have been conducted so far by the White House is not very encouraging. Too much posturing. Too much demagoguery. In all this I see a desire to gain political points and not an honest determination to tell the truth about America’s long term fiscal crisis and start working to fix it.

GOP is to blame

Just one example. The White House says that if there is no agreement by December 31 and therefore tax increases for all Americans will kick in at the beginning of 2013, the Republicans are to blame. You see, these bloody minded ideologues, these troglodyte defenders of the fat cats, are doggedly determined to avoid higher taxes for the rich –you know the fair and even handed approach that we proposed and all sensible people have endorsed– and in so doing they will prevent a good deal to be hammered out, this way causing taxes to go up for the struggling middle class. Shame on them!

Only posturing

So, this is it? This is the essence of America’s problems? The real issue at the root of our systemic fiscal crisis is that the rich are not paying their “fair share”? This is cheap populism, easy appeal to emotions through the old fashioned “Us (the many and good), versus Them (the few, the greedy).

This approach may work politically but it will do little to forge a solid bipartisan agreement on what should be the proper size of entitlement programs, who is eligible and when, and how do we pay for all this.

The nature of our problem

In a sense, the problem confronting us is quite simple. Just like other advanced Western nations, America is beginning to suffer the unintended consequences of generous health and income support programs for the elderly that over time have proven to be way too expensive.

Medicare is the worst offender, simply because it has become a large component of a horribly conceived American health care sector that seems to be purposely designed to be grossly inefficient, while driving up costs year after year without any commensurate value.

Bad demographic trends

These are the issues. And, just like in other rich countries, they are made worse by unfavorable demographics. While America in this regard is doing somewhat better than most of Europe and Japan, the trends are worrisome. As birth rates have declined, we have too many eligible old people, and not enough young active people paying into the system.

Let’s make this clear. The entire architecture of all entitlement programs rests on the assumption that a large number of working people pay into the system so that relaatively few retirees can get the money until they die. It also rests on the parallel assumption that retirees will collect for only a few years before they die. But these assumptions are now gone. There are far fewer active people paying into the system. In the meantime, because of medical advances, retirees live longer, and this means that they collect much more. At the same time, the cost of programs seniors enjoys has gone up substantially. Here you have it. More beneficiaries getting more for a longer period of time and a smaller pool of contributors.

This system cannot work anymore

Simply stated, the system as originally designed cannot work anymore. If we want to keep it as is, then we need to increase tax revenues quite substantially, causing economic dislocation. If we do not want to increase taxation, then we have to downsize these programs, while narrowing eligibility criteria.

Conceptually this is very simple. Politically this is really heavy lifting. People need to be told that going forward they cannot expect all these goodies. But it is possible to tell the truth. If America’s leaders really want to lead, they can explain the nature of the problem and then engage in serious reforms aimed at restoring fiscal health, this way “bending the spending curve” and at the same time injecting new confidence in our future.

GOP should abandon its no new taxes pledge

The Republicans have to overcome their ideological biases. As we try and fix this mess, it is appropriate to have more revenue, as long as we do not punish the creators of new economic activities, this way killing the will to invest and start new businesses. The GOP has to get over its almost theological “no new taxes” pledge.

Will this President lead?

That said, we have only one President. And it is up to just re-elected President Obama to lead, even if this may cost him politically. He has to get out and tell the truth about America’s long term fiscal predicament. Our system of social protections is unsustainable and essentially broke. America needs a new Grand Bargain, a new consensus on the appropriate and fair size of entitlements.

This is more important than gun laws

In the aftermath of the Connecticut massacre, a teary Barack Obama pledged to do something about gun laws, whatever the politics. This sounded courageous, even daring, given the way Americans feel about their “right to bear arms”.

Well, with due respect to the children killed in the shooting and their mourning families, our fiscal crisis is a lot more serious. America is getting close to its own demise. Every day that goes by it gets worse. Our national debt keep going up. In the end it will choke us. The President should summon all leaders and engage in serious talk to the Nation.

But, for right now he is just a clever politician. And this is a disappointing indication that Barack Obama does not want to lead. He wants to reinforce his popularity among his core constituents. Good for him, bad for America.




America Stunned By Mass Killing In Connecticut – Flags At Half Staff In Washington, President Obama In Tears – Yet Nothing Will Be Done To Seriously Restrict Access To Fire Arms – A Misinterpreted Second Amendment

By Paolo von Schirach

December 14, 2012

WASHINGTON – Mass slaughters keep happening in America. At Virginia Tech the victims were young adults. Today in Newtown, a small Connecticut community, they are little children and some of their teachers killed in The Sandy Hook Elementary School. All of them murdered by deranged individuals who, God knows for what reasons, went on shooting rampages.

Washington mourns

Today, in the wake of this Connecticut shooting perpetrated by 20 year old Adam Lanza which caused the death of almost 30 people, America is stunned. President Obama ordered flags on all government buildings to fly at half staff. House Speaker John Boehner ordered the same for the US Capitol. Washington mourns. When President Obama spoke to the Nation he could not control his tears. All this is very moving. Yet, I suspect that very soon this mass shooting that killed almost 30 people, most of them little kids, will be forgotten –just like all the other instances of mass shootings have been forgotten.

Guns and crazy people

The fact is that America just does not want to deal with its senseless addiction to guns. And when you mix easily obtainable guns and crazy people able to get hold of them without too much effort, we have to consider ourselves lucky that there are relatively few such incidents involving a deranged armed person deciding to go and kill people, most of them total strangers.

The Second Amendment

Our gun culture is supposedly blessed by the Second Amendment to the US Constitution, itself part of the Bill of Rights. This is the famous “right of the people to keep and bear arms“. And yet, if you read the entire text of the Amendment, its intended meaning should be obvious:

“A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed”.

This was December 1791, ladies and gentlemen. A difficult time in which the young American Republic was moving its first steps. At the time the issue at hand was the citizens’ right to bear arms in order to protect the Republic from would be tyrants. The issue was the right to keep Militias; and Militias had to have the right to bear arms. Hence the constitutional protection of this right. The noble goal of the Second Amendment was to protect freedom.

Guns for everybody

But over time our collective interpretation of the Second Amendment morphed into a sacrosanct right to self-defense that includes the legal right to purchase almost any kind of weapon with the easiness we buy a gallon of milk.

It is true, as the spokesmen for the National Rifle Association, the powerful gun lobby, gently remind us, that “Guns do not kill people. People kill people“. Absolutely.

However, it is also obvious that a lot of easily available guns create a lot of opportunities for bad or crazy people to kill fellow citizens. And when deranged people have easy access to guns, then we may have incidents like today’s shooting at the elementary school in Connecticut.

Fewer guns, fewer incidents

It is true that it would be impossible to absolutely prevent all such incidents. A determined bad guy may find a way to get a weapon, even when doing so is illegal. All true. Still, if guns were not so easily available, chances are that we would have fewer such incidents of shooting rampages. Unarmed crazy persons may be dangerous enough. Crazy persons with guns are deadly.

But unfortunately I suspect that, even though all the above is just simple common sense, nothing much will be done to seriously restrict access to fire arms. Most Americans are still very much in love with their guns. The Second Amendment is treated as a divinely inspired utterance, literally a God given right that no man can take away from us.

A price worth paying?

This being the case, we have to conclude that America is in fact prepared to accept more mass slaughters such as this one in Connecticut, if this is the price we occasionally pay so that our good citizens can continue to enjoy ”the right of the people to keep and bear arms”. May one day we shall grow up and abandon this nonsense. But not just yet.




Muslim Brotherhood Rule In Egypt Likely To Fail – Islamic Party Will Prove To Be Inept Economic Steward – Difficult To Stay Popular Without Delivering Any Growth

By Paolo von Schirach

December 12, 2012

WASHINGTON – The Muslim Brotherhood is in charge in Egypt, for the moment. But I would not bet on its staying power. For the time being, Mohammed Morsi is the President and his political supporters, the Freedom and Justice Party, are in control. They have hijacked the drafting of the new Islam inspired constitution and they may succeed in having it approved through a referendum.

Bad economic stewardship

But, as bleak as they may look from the stand point of liberal democratic Egyptians, these developments may signal the upper reaches of Islamic fundamentalist power in Egypt. To put it simply, a backward looking, religion inspired force concerned with enforcing piety more than with economic development is most likely supremely unqualified to lead the extremely complicated modernization efforts of the most populous –and quite poor — country in the Arab world. Egypt’s GDP is close to Sweden’s; except that Egypt has a population of 83 million, Sweden has less than 10 million.

Unlike Iran, no oil

In other words, Egypt is no Iran. In Iran the ayatollahs who took over back in 1979 managed to retain power because they controlled the significant oil revenue. No such advantage in energy poor Egypt, a country that is now in economic free fall because of structural weaknesses made only worse by a couple of years of political turmoil that caused capital flight and the halting of new investments.

To put it plainly, Egypt is now totally broke and it would be miraculous for a conservative political group instinctively suspicious of ties with the West to be able to turn around this over populated and miserable country and lead it into a future of major foreign investments, sustained growth and lower unemployment.

And let us not forget that almost half of Egypt rejected the Muslim Brotherhood. Millions of Egyptians would rather have a secular democracy and a more modern, pro-growth environment.

With economic stagnation, end of popular appeal

As soon as it will become evident that Morsi and the Muslim Brotherhood are incapable of relaunching the economy, their political fortunes will start declining. Sure enough, the Brotherhood will be able to count on a significant hard core of true believers, no matter what. But many others who voted for this Islamic group will be turned away. This may be unfortunately messy.

But I seriously doubt that Morsi and his associates have much flexibility. And time works against them. The more the economic mess will last, the more difficult for them to stay in power, even if they want to do this by force.

Muslim Brotherhood economic failure will be a milestone

All told, if indeed Egypt’s experiment with the Muslim Brotherhood fails very soon, such failure will be viewed as the turning point that will encourage Arab societies to look forward with the help of secular institutions and pro-growth political forces; and no longer backward, relying on Islamic inspiration for solutions to pressing public policy problems of growth and employment.




Disingenuous Outcries Regarding Appaling Work Place Conditions In Bangladesh and Pakistan – We all Know That The Western Brands Outsource To Low Labor Cost Countries – And They Are The Most Uncivilized When It Comes To Labor Standards

By Paolo von Schirach

December 11, 2012

WASHINGTON – The horrible fire and consequent high death toll at a garment factory in Bangladesh, accompanies by similar deadly accidents in Pakistan have caused strong reactions in Western media, in large part because these modern sweat shops are the main suppliers of the large European and American brands (Benetton, The Gap, and so on) and of the largest retail chains like Walmart.

Horrible work place conditions

It now emerges that the high death toll in these fires was caused by totally inadequate construction. The buildings housing the facilities lack modern fire controls systems, including escape routes. On top of that, it is clear that work place conditions, including proper ventilation, toilets and what not are primitive.

And so now Western media have “discovered” the ugly truth about the global supplies chains that keep the garment sector moving. Yes, the supply chains are built on the simple concept that the Western brands/major retailers will source their items in the countries (like Bangladesh, Pakistan, India or Cambodia) were labor is cheap and plentiful. And they will do this because all their competitors are doing it. Major retail is an incredibly competitive business with very low margins. For Walmart and the others the ideal match is a reliable and extremely low cost supplier. This is why the go to Bangladesh or China.

Standards created and circumvented

Sure enough, because of campaigns waged by NGOS and by some media in the last few years, the brands were forced to create labor and work place standards that supposedly their authorized suppliers have to observe. No doubt this is progress.

However, as the investigation into the Bangladesh factory fire has revealed, the rules and the mandates have been circumvented. Authorized suppliers routinely outsource production to off the list manufacturers. And so Walmart garments end up being made in facilities owned and operated by the bad guys.

Disingenuous outcries

That said, the “Oh My!” outcries following gruesome accounts of work place conditions look more than just a little suspect. They are downright disingenuous, given the countries we are dealing with. No, ladies and gentlemen, Bangladesh is not Switzerland. It is a poor, backward country with the dubious honor of fighting for top position among the most corrupt nations on earth. The notion that any agreement regarding work place conditions will actually be enforced in good faith is ludicrous, even with spot inspections and what not.

Supply chains originating in low cost countries

The ugly truth is this. Globalization is, among other good things, a race to the bottom. All Western labor intensive industries migrated to low labor cost countries. And these countries tend to be among the least civilized when it comes to workers rights and work place standards.

The next time you go to a Walmart store and happily snatch $ 4 T shirts remember that this ridiculously low retail price originates in a shoddy factory in China or Bangladesh in which (mostly illiterate) women workers toiling in appalling conditions are paid almost nothing. This is the apparel industry supply chain; and this is made possible by globalization.




President Obama Is Using The Tax Increase For The Wealthy Issue To Divide The Republicans – The Goal Is To Gain Politically, And Not To Shape A Solid Agreement That Will Restore Fiscal Health

By Paolo von Schirach

December 10, 2012

WASHINGTON – President Obama is not conducting a good faith tax and spending reform negotiation with Republican House Speaker John Boehner in order to avoid the “Fiscal Cliff” of draconian spending cuts (disproportionately defense cuts) and across the board tax increases.

Divide the Republicans

With his insistence that any deal has to include higher taxes on the wealthy, the President shows that he is primarily engaged in a clever political effort aimed at dividing the Republicans, an unruly bunch united only by their silly blanket pledge to oppose any and all new taxes. And he may actually win this critical battle because public opinion, rightly or wrongly, is on his side –that is the side favoring tax increases for the wealthy in the name of “fairness”.

Indeed why would Obama insist that no deal on real spending cuts (that have to include all the major entitlement programs) can be achieved, unless the Republicans capitulate on tax increases for the wealthy? Note that the President is not proposing a major tax policy overhaul that could include lowering rates in exchange for closing loopholes and special treatment for this or that group. He wants “the rich to pay more” because this is feel good policy, old fashioned populism.

Tax hike would not raise much revenue

If the President were really focused on substantive measured aimed at reducing the deficit, it is obvious that this tax hike would not be a top priority. Higher revenue coming from taxing America’s rich more would help only a little bit in reducing America’s huge annual deficits.

The projections are that these higher taxes would raise about $ 70 billion a year. Real money, for sure. But if you are serious about deficit reduction this would be of little help. $ 70 billion would be less than 10% of the deficit. In fact, this additional tax revenue would be enough to cover 9 days of annual federal spending.

So, if we agree that as a revenue increase measure this tax hike would not produce that much, why Obama’s unyielding assertion that there will be no deal unless he gets the Republicans to agree on it?

Good politics

Very simple. Because it is very good politics. All opinion polls indicate that large majorities (about 60%) believe that higher taxes for the rich are a good thing. Equally large majorities believe that if a deal to avoid the “Fiscal Cliff” cannot be reached because the House Republicans keep objecting to higher taxes for the rich, the public would hold the GOP responsible. If there is no agreement and we end up jumping off the dreaded “Fiscal C’liff”, it’s the GOP’s fault.

And here we see Obama’s strategy –a strategy that has little to do with providing leadership on how to fix public spending, so that Washington would convince the world and the bond markets that it is finally “bending the federal spending curve”.

Chance to gain politically

Obama has been re-elected. But he knows that his numbers were not that great. If recent history is any guidance, the Democrats will end up losing seats in the House and Senate in the 2014 mid-term elections. If that happened, after January 2015 Obama would be a spent force, an inconsequential President, prisoner of a hostile Republican Congress. So, the strategy is to exploit all the GOP weaknesses.

Obama knows that flat opposition to any revenue increase whatsoever is the only ideological glue holding Republicans of different stripes together. If some Republicans break away (they read the same polls) and decide to go with the President on tax increases for the wealthy Obama would have managed to divide the enemy camp, perhaps in an irreparable way, thus gaining more leverage later on.

On the other hand, if the GOP stays united and unyielding on the tax increase issue, then Obama can still say “no deal” without such an increase and blame the consequences on the Republicans. He is comforted by the fact that public opinion, at least on this, for now is squarely on his side.

Republicans created their vulnerability

Of course, Obama can use this tax issue, because the silly Republicans created it. And this shows the GOP inherent political weakness. If opposition to any and all new taxes is the essence of the Republican political message, it is a rather poor message. In fairness to them, it is true that this country just like most other advanced western industrial democracies, has a spending addiction problem. Higher taxes are required only because more spending is generated by politicians who want to give more “stuff”, so that they will get more votes. In this context, resisting pressures to raise more revenue at least in principle is not a character flaw.

That said, the Republican Party, if it wants to seriously compete in this political environment, has to be able to articulate a positive message of new things that will be done, as opposed to: “Fellow Americans, If we are in charge, we are going to cut all your favorite programs. And that just about sums up our entire platform“.

Still, even if President Obama is clever in exploiting this fundamental Republican political weakness, his behavior shows very clearly that he is not negotiating in good faith a fair deal aimed at restoring confidence in America’s public finances and in the political process that guides it.

Good politics, bad leadership

No, he is mostly interested in scoring a political victory. He realized that the Republicans are vulnerable on this issue, and so he wants to divide them, hopefully humiliate them. And, as I said, this may actually work. Owing to their own ideological stubbornness, the Republicans are vulnerable on this.

Still, as the elections are over and Obama won a second mandate, it would be good of him to stop campaigning and start governing by proposing a real spending and tax policy reform plan. But I am not sure that this President wants to lead and govern.




A Future Center-Left Government Led By Democratic Leader Bersani Will Be Unable To Steer Italy Towards Fiscal Stability And Economic Growth – The Left (In Italy As In The Rest Of Europe) Is Still Prisoner Of Unaffordable Big Government Models

By Paolo von Schirach

December 9, 2012

WASHINGTON – It was expected that Mario Monti would not have a long tenure as Italy’s care taker Prime Minister. The distinguished economist is an outsider, the non political technocrat called upon a year ago by President Giorgio Napolitano to fix Italy’s finances and restore a modicum of international credibility. And Monti delivered. He had the mandate to raise taxes and enact a few reforms aimed at containing public spending; and his government did so.

End of Monti

But now his time is up. Berlusconi’s party withdrew support from the government. And Monti indicated that he will leave office after the approval of his latest budget. That is to say that Italy’s scheduled national elections may take place as early as February 2013. And, looking at the politically fragmented scenario, with no solid center, this is probably bad news. At the moment, the left, headed by Pier Luigi Bersani, leader of the Democratic Party, (the reformed former Communist party), is favored to win a plurality of the votes. This means that, in order to govern, Bersani will need to form a coalition, most likely with a variety of groups to the left of the former Communists.

The center-right forces led by ultra-discredited former Prime Minister Silvio Berlusconi have no chance to win. Then there is a loud protest movement led by Beppe Grillo, a comedian turned politician, and finally the also discredited Northern League. Sadly enough, there is no real and vibrant political force that embodies the sound reformist approach of the Monti government.

Democrats still believe in welfare policies

Look, if Bersani and the Democratic Party win this is not going to be another Bolshevik Revolution. This party of former communists, leftists of various persuasions and other “progressives” is not plotting to nationalize all assets. However, they are still ideologically committed to a watered down socialist ideology. And this is bad enough.

Denying facts and historic experience, they still believe in the soundness of statist policies and in the desirability and affordability of clearly unsustainable social programs. They simply do not understand that a society with more and more seniors no longer supported by a large number of active workers cannot generate the revenue to sustain costly benefits for retirees.

Center-left will be unable to produce pro-growth policies

While Mr. Bersani himself seems a reasonable man, a future coalition government led by him that will have to include several ultra-leftists will have little chance to continue the austerity course set by the Monti government.

True enough, austerity alone will not help relaunch a weak economy. Italy needs growth. Still, I have serious doubts that a (most likely fractious) center-left coalition will be able to soften austerity, meet deficit targets, encourage new investments, raise more revenue and achieve sustainable growth. This is just too difficult.

Ideological blindfolds

Professor Monti for a moment gave the impression that Italy under his non ideological and sober stewardship had a real chance to become modern and credible. But now it is back to the pros and their outmoded ideas –ideas that prevent them from understanding that they are dealing with a country with too much spending, too much debt and no growth. In other words, a country in decline. Less austerity and a bigger tax burden for the rich eventually will translate into larger deficits and less growth. Exactly the opposite of what Italy needs.