Tuesday, November 29, 2011

Inequality and Compromise

A basketball team works because players take different roles. Look at a box score --  the point totals are usually very unequal. Some players score points, some rebound, some excel at defense. The player with the most assists rarely gets the attention given to the high scorer – and it gets worse as the season progresses. The star players and the best teams get all the ink and airtime. Yet the team concept works and it performs well. This happens and you don’t hear much about the majority of the players complaining about the excessive treatment afforded to the few.

A marriage often brings together two people who are quite different. One spouse sometimes brings in the income while the other takes care of the household and families. Even when both spouses work one might be the main income earner while the other supplements. This often works very well and it makes no sense that one is jealous of the other’s public accolades.

A person from another planet might observe all this and marvel at the benefits brought by specialization, division of labor, and trade. Working together really works! A person from a completely different planet might, in contrast, worry about the obvious inequalities. Why does one player always seem to sit on the bench? Why does one spouse not go on exciting business trips to Ellettsville Indiana? Why don’t those people demand equal rights?

Some of you have already decided to quit reading. Obviously I must be a person who is totally insensitive to the profound historical and current injustices of discrimination that produce harmful inequality. Let me just say -- that it isn’t so. Trying to convince you that I am not a bigot is not, however, a useful or effective use of my time. Most of you know me and know who I am. What I will try to do – if you are still reading – is just point out that there are times and places when inequality is dead wrong – and other times when it is quite right. And it helps a lot to know the difference. Apparently our politicians either do not know the difference or they do and they think they can fool us.

Basketball teams and marriages are not the same as jobs and business firms. But let’s make no mistake about it – these same ideas hold. A business firm exists because an entrepreneur takes a risk with his own or borrowed funds. Whether it is a new neighborhood restaurant or a multi-billion dollar corporation, the owner or owners begin the process by taking what would have been their saving or spending and applying it to the land, capital, licenses, payola, and other things necessary to start a business. 

Then the firm has to find partners and employees to make the plan work. The government is one of the partners when it supplies infrastructure, police protection, or it gives the firm a tax break. Clearly the business is not going to be a success without employees – from the person who sweeps the driveway to the Chief Executive Officer.
Like the marriage or the sports team, the business firm is a team effort. And like any team effort, we would be fooling ourselves if we did not admit that some activities or decisions will impact some of the partners differently from others. It is traditional for the CEO to get different pay, benefits, and working conditions from the person who sweeps the floor. Furthermore, like most other partnerships, decisions are NOT made in a democratic fashion. The coach is chosen for his or her technical expertise. The coach makes the decisions. Sometimes the star player may not like the decision. Sometimes a bench player may not like it. Sometimes a team member might dislike a decision or a coach enough to quit and move to another team. But much of the time if the decisions seem to be made for the benefit of the team or the organization – people might grumble but they go along with it. Sometimes the grumbling turns into an effective communication that helps the coach understand that changes need to be made. 
Maybe a star player is getting too much attention and that negatively impacts the team. Either a coach makes use of this information and improves the team or the team begins to fail because of poor teamwork.

When the team begins to fail is when we learn even more about its weaknesses. Everything comes under the microscope including the owners, coach, the star players, bench players, and so on. This creates a “season” for focus on every aspect of the team. And that is as it should be. Open and transparent analysis and discussion might lead to saving an otherwise doomed organization.

Call me naïve but this little discussion helps us to think about problems in the US, Europe, and various other places. Whether Obama started this or not – right now we are in the middle of a blame-game that fails to recognize one very plain fact – WE ARE ALL ON THE SAME TEAM. That team has generated new businesses, successful existing businesses, profits, jobs, incomes for the middle class, and more. It has generated all that for centuries despite the very obvious and salient fact – blatant inequality of income, net worth, and other aspects of economic life. We exonerate some of the inequalities and we deplore others.

What makes these days different is the depth and severity of the world slowdown. There were failures in the system and we are now busy trying to figure out how to solve them. In the present negative environment we are not so much really trying to figure out the causes of our problems than we are pointing fingers at each other. Let the damn rich pay for it. Those lazy workers need to work harder. The poor and elderly are dragging us down with their entitlement mentality. Those corporations are rich and selfish.

Can you imagine a good athletic team winning with all those fingers pointing? Italy was smart enough to move to a technocratic (non-political) new government. It may or may not work. But clearly it is an attempt to reduce the finger pointing and have someone come up with a plan to improve the country. Ideally the plan will help the country – the whole team. But we would be naïve to think that the implementation of the plan will have equal impacts on everyone in Italy. So in a highly politically-charge environment it will be hard for people to see beyond the initial unequal impacts to the eventual positive impacts on the country. People will scream that a rising tide does not raise all boats the same. But what Italy and the USA and the rest of Europe need right now is a rising boat.

How to raise the level of the boat – going from sports to boating? Sorry. Anyway this is where some compromise has to be involved. This is not 2005 and it is not 1966. It is a very frightening and frenetic time. It is a time when all parties are going to have to be at the table. Any proposal designed to favor one group at the expense of another is not going to succeed in this environment. Focus should be on the national or team health and not on righting past grievances.  If this were not a moment of weakness then it might be possible to work harder on past inequalities. But that is not the case. The nation is weak and the focus must be on what will make it strong. It will take compromise to achieve this. 

As both the EU and the USA move the world toward another debt crisis we can only hope that our political leaders will understand that political ideology might appear to help their set of “good guys” but will only result in the suffering of all of us. Germany may have to give a little more toward a compromise but let's hope the bargain gives them more of what they want as well -- so long as the solution intends to strengthen Europe. The US will have to accept higher tax revenues but let's hope this is done in a way that the burden of adjustment does not single-out or penalize one group over others enough to risk a further crisis.  

Tuesday, November 22, 2011

ObamaCare, Jobs, and Global Competitiveness

President Obama has recently underlined two related themes -- improved opportunities for workers and opening up trade opportunities abroad for US firms. Breaking down trade barriers, it is explained, would increase opportunities for exports and that too would lead to more jobs. I will write another blog post about the recent attempts toward a free-trade agreement with Pacific countries. This posting will instead focus on ObamaCare and jobs.

I had a few minutes between Fox News and Glee so I decided to read “The Patient Protection and Affordable Care Act.” That is I weighed into the 2074 page tome sometimes referred to as ObamaCare. It doesn’t exactly read like Dr. Seuss so I focused on the part of the bill that explains a new $20 billion tax on the revenues of medical device companies. A medical device company, as we all know, makes pumps for old men like me who need a little extra help in the bedroom. They also make parts for hips, knees, and shoulders as well as devices like catheters, stents, scalpels, and pacemakers.  As you can imagine, this kind of production takes a lot of capital and skilled workers. Wages are good. These are good jobs. One would hope that in this century our national policy would be aimed at allowing these companies to be as competitive as possible. It would be great to see these companies expanding employment in places like Indiana, Massachusetts, and Minnesota.

But the truth is that policy seems to be doing just the opposite. ObamaCare was passed in 2010 and we know that this Medical Devices Tax will go into effect in 2013. There are some in Congress who are trying to repeal this part of the bill but so far they have been unsuccessful. The House has the votes to repeal but the Senate does not. 

The tax will be levied on a company’s revenues and amounts to 2.3%. My first response to 2.3% was to say that 2.3 is a really teeny number. If I lost 2.3 pounds I would still look like an elephant. Big deal – slap those rich medical device makers with 2.3%! They can surely afford it. Right? WRONG! There are estimates this 2.3% tax increase could lead to a reduction of 10-30% of the medical device workers in the USA. My first reaction was No Way Jose. To understand where this comes from we have to open up our General Accounting Textbook. Really? Yes really!

Let’s make this easy. Let’s suppose Davidson Peepee Pumps (DPP) sells 10,000 pumps each year and earns revenue of $40 million per year.  Let’s now suppose that DPP Inc has labor costs of about $10 million per year and another $27 million in material, capital, energy, and other costs. That leaves them profits before taxes of $3 million. Since it is a privately held company – DPP nets $3 million. No, not quite. DPP has to pay corporate income taxes. Let’s suppose it pays 25% of the profits to the government – that means old Lar has about $2.25 million to give to his mean kids or to go on Mediterranean cruises. Of course, he may want to use a good bit of that to buy some new machines or otherwise invest in the enhanced competiveness of the company.

Now let’s bring in the sales tax of 2.3%. In 2013 DPP has to pay 2.3% of $40 million. That means old Lar has to pay another approximately $920 thousand to the Federal government.  His $2.25 million after income tax profit is now a $1.3 million after income and after revenue tax profit. Notice that while the tax is 2.3% of sales it has reduced after tax profits from $2.25 million to $1.33 million.  That is a 41% reduction in after-tax profits.  In summary a 2.3% sales tax reduces profits by 41%.

You sharp cookies will notice immediately that DPP is not a real company and Old Lar is really a worn out economics professor. You will claim that I have rigged the numbers to exaggerate the claim. But go ahead and do your research and talk to any profitable medical device company and ask them for some real numbers. I am betting that you will not get a reduction in after tax profits of less than 25% caused by this single feature of ObamaCare. Worse yet, my example assumes a fairly profitable company and a low tax rate (a medical device company could be paying as high as 50% on income to federal, state, and local jurisdictions). What about young entrepreneurial ventures with sales larger than $5 million (since the act exempts those with less than $5 million) that might take 5-10 years to generate good profits? During those 5-10 years they would be even further in the red because of this sales tax approach. Note that any medical device company that does not generate a decent profit in any given year will have losses in those years because of this onerous sales tax approach.

So much for you sharp cookies. Let’s move on to you other cookies. You might say – who cares if we take another $920,000 from DPP? Medical device companies don’t need such high profits anyway.  But let’s be serious. In today’s slow growth economy there are not many companies confident about the economy. Most companies are in the hunker-down mode trying to reduce their costs as much as possible. They do not know how long this slow growth period will last and they obviously are not giggling as they go to their favorite credit unions.

So even if you don’t like profits of these companies, the more probable truth is that the 41% decrease in DPP profits is going to spur the company to reduce costs even more. In this case, let’s look at what happens if DPP protects its profits by reducing labor costs by $920,000. Labor costs drop from $10 million to about $9 million, a decrease of about 10%. The 2.3% sales tax now becomes a reduction in labor expenditure of about 10%. If US medical device companies employ approximately 400,000 workers, then we are looking at a possible reduction in labor force of approximately 40,000 US workers. 

High tech companies that have already survived the recession by replacing labor with capital will continue to do so in the face of a new tax increase. Of course there is no real reason for these companies to wait until 2013 since it may take a little time to get ready for the year when the new tax is introduced.  These high tech companies are not apt to reduce their non-labor costs since labor is uniquely saddled with higher healthcare, pension, and other employment handicaps.

Sadly, the above analysis is the more optimistic of two scenarios. In the above example we only lose 10% of the current workers. Another likely aspect of the revenue tax coupled with other aspects of ObamaCare is for these companies to close their operations in the USA .This means that all or most of these jobs are in jeopardy. A 40% reduction in after-tax profits is another way of saying that the US is not the best location to remain competitive. US medical device makers have to compete against companies located on foreign soil. 

Not only is labor often cheaper in these others countries but these countries may also have lower profit taxes and regulatory bodies more conducive to quicker product approvals. Boston Scientific, an important US medical device company, recently announced a decision to invest $150 million in a Chinese factory.  Boston Scientific is not the only one weighing its options for overseas locations. Higher taxes, tougher price controls, and slower regulatory approvals from the FDA are not exactly the ways to improve US national competitiveness. 

The upshot is that no matter how you look at this new revenue tax on medical device companies, it is a job killer. Companies that face large reductions in their profits will not stand still. Capital intensive high tech companies are going to make most of their adjustments with labor. This means they will fight for survival by either reducing their US labor forces or by doing more of their work overseas.  

It was thought that since ObamaCare brought more people into the health system with means to pay, healthcare companies should pay for this increase in taxes with higher revenues. But given what we already know about the pricing pressures and expected reductions in payouts from insurers, it is not clear that medical device companies are going to benefit much from a larger number of people covered. 2011 is not too soon to revisit parts of ObamaCare if we REALLY CARE about employment. 

Tuesday, November 15, 2011

Latvians, Homework and Budget Balancing

I went to a Latvian wedding last weekend and the dog ate my homework. Anyway, because of this or that my usual blog post may be a little shorter than usual. But I have been wanting to do this with or without the excuses anyway. This post is just a little data exercise to provide some perspective on what the so-called special committee is doing. Politics aside, their assignment is not really that difficult. One takeaway is that there is too little attention given to the fact that we are trying to create one solution for two very different problems. It’s like trying to find one shirt for Dolly and Gary Coleman. One size just won’t fit all.

The special committee is supposed to find roughly $1.2 trillion in deficit reduction over a time period of 10 years. In looking at spending and revenue possibilities everything gets lumped in and examined together – the Bush tax cuts, loopholes, spending on the military, etc. As a result we have an economic and ideological debate about what is and what isn’t a fair change. But the truth is that we really have two issues. The first one has to do with the short-run. We have a recession followed by a slow growth economy. The second one is the longer term issue of how to deal with an aging population. Separating these issues might help create some simple insights – and some simple remedies.

Let’s take the short-run first. The data is very clear. We jumped from having a very reasonable deficit of $161 billion in 2007 to one of about $1.3 trillion in 2010. That’s a 8-fold increase. The data is very clear about the source of that increase – between 2007 and 2010 government spending increased by $727 billion and taxes decreased by 406 billion. But that’s not the best measure of what happened. If government spending had grown at its normal rate (average rate since 1971) it would have increased in those years by $661 billion. Thus, only about $66 billion was an extraordinary increase in spending. It tax revenue had grown at a normal pace from 2007 to 2010, tax revenues would have increased by $602 billion. A tax decrease of $406 billion means that tax revenues were $1.008 trillion off their normal pace. It is absolutely clear that 2007 to 2010 was different from normal because: spending rose $0.066 trillion more than normal and tax revenues increased $1.008 trillion less than normal.

You spending clippers do not like this result because it focuses our attention away from cutting government spending to raising taxes. But you are wrong for two reasons. First, the spending issue has more to do with the long-run and I will get to that soon below. Second, I cannot tell you we need to raise specific taxes or tax rates because the tax reductions came from two very different sources – those that came from policies (e.g. Bush tax cuts, Obama tax cuts, etc) and those that came automatically as households, firms, and investors had less incomes and capital gains to claim. I can tell you that the fall-off of taxes was shared. Between 2007 and 2010 personal income taxes declined by $268 billion while business taxes decreased by $179 billion. Social Security taxes declined by only $5 billion.

Let’s move on to the longer-run. I am defining the long run as the 10 years from 2010 to 2020. Over those years government spending under existing law will increase by a total $1.705 trillion. This is, total federal government spending will go from $3.456 trillion in 2010 to $5.161 trillion in 2020. The changes in government spending over those years are projected to be:
Total                      $1,705 billion
                Social Security         502
                Medicare                 383
                Medicaid                 247
                Net Interest             436
                Everything else        137

Notice that if we don’t change any of those programs – and we cannot change net interest – we will need to raise taxes in 10 years by $1.7 trillion to cover spending. There isn’t much to cut from “everything else” and we can’t touch net interest. But we do have a nice hunk of future spending equal to $1.132 trillion that shows some promise.

Let’s emphasize now what is and what is not a cut. For example, Social Security spending is going to INCREASE by $502 billion. Just imagine that your check goes up by $502 billion by 2020. I would be pretty happy with that. But now, let’s say we decide to reduce the increase by 10% or by $50 billion. You would still find yourself $452 billion ahead of where you were in 2010. That will still buy a few nice prunes!  That is NOT a cut. It is an increase of $452 billion.

Speaking of Social Security, Medicare, and Medicaid if we slowed the increase by 10% we could save ourselves tax increases of $112 billion. If we cut the increase by 20% we would save $225 billion.

This short-run/long-run breakdown suggests that we have two different problems. The first one is to try to improve the tax system to offset reductions in taxes accruing from two recessions in the last decade and the tax cut policies that treated the recessions. As the temporary tax programs automatically are rescinded and as economic growth improves, much of that tax problem will disappear without any policy whatsoever. Of course, some attention to tax loopholes and attention to reversing temporary spending increases could hasten that short-run problem even more. 

With respect to the longer run the only game in town is spending. No program has to be cut. And tax revenues will increase. But reining in spending growth is necessary if we are to address our debt and deficit issues. Right now the baseline estimates have the deficit declining by a large amount in 2013 as temporary tax changes end with the deficit declining to 1.2% of GDP by 2010. I wouldn’t trust that number but it does show with some marginal attention to Social Security, Medicare, and Medicaid, all this is within reason.

I have not said a word about optimal spending and tax policies for long-term growth. I have not said anything about flat taxes or tax reform in general. Those are issues very worth addressing in another post. But what I am saying here is that we can do something about our worst debt and deficit problems. The solutions are not as impossible as our politicians make out.

If the European debt mess doesn’t send us a signal I don’t know what will. Our growth and our employment are dangling precariously as our leaders drink martinis and tell war stories. Boehner calls Obama a goof ball and ReidPelosi calls the Republican candidates worse names. They have within them to power to play political games that will soon seriously damage our country or they can wear big person clothes and address the humdrum but very doable task of letting the world know that we can handle our financial messes. From what I see in the news it sounds and looks more like continued political posturing and less attention to simple solutions. We should send all our government officials Barbie Dolls!

Tuesday, November 8, 2011

Hurricanes and Hot Air

Hurricanes have a notorious eye. I grew up in Florida and experienced a lot of hurricanes and it is true that after a hurricane hits you full force there is a time period when all again turns calm. But you know the devastation is not finished since the back end of the hurricane is coming in minutes. You have just enough time to close one set of windows and open the others to relieve the pressure that might blow your roof off and then bam along comes the trailing half. If that wasn’t enough, you know well that there is a hurricane season. Not long after you have dealt with the aftermath of one hurricane, your meteorologist warns of the next one heading your way. If the last one was a bad one, it makes you ever vigilant and always worried of impending doom despite the fact that most times most people never suffer through more than one bad hurricane in one season much less a decade.

It is human to expect tragedy to follow tragedy. Luckily when it comes to hurricanes, we don’t also have to worry that politicians will make hurricane policy the centerpiece of their campaigns for office. It is enough to deal with the uncertainty brought about by the winds. Worse can be the hot air and real policies advocated by politicians.

That little introduction brings us to the US economy right now. We had a once in a lifetime economic hurricane in 2008 known as the housing and financial crisis. The financial and housing crisis turned into a global recession. Despite the fact that the recession ended about two years ago, our policymakers seem to think we are still in the eye of the storm or perhaps between two equally devastating storms. Regardless, an impending presidential election year has these politicos acting as if we need saving from doom when in fact the worst is over and there is really very little they can do at this time to improve things. Politicians cannot benefit from that reality so they pretend like it doesn’t exist. The democrats want to pass another stimulus program they have labeled as a jobs program. The republicans play dueling banjos with their own means of stimulus. While stimulus sounds good to many people, the truth is that what we need now is a little patience and a little good policy addressed at what is really wrong with the economy.

Let me admit that I do not think that stimulus is a dirty word. When I teach macro I do cover cases where a Keynesian demand stimulus might be appropriate – usually when deficient aggregate demand is abetted by dismal expectations and spending needs a little boost. I think there have been times when such policies worked and I also think that the idea of some stimulus on 2008 was not a bad idea. I disagree with the form of much of the stimulus in 2008, but the general idea was not totally off base.

The trouble with stimulus can be likened to the idea of eating one potato chip. Maybe even one of those small bags of chips isn’t too bad now and then. But whether it is one chip or one small bag, the trouble comes when you eat 1.5 trillion of those little bags…each year.

That brings us to 2011. It is now November. Paul Krugman, Martin Wolf, and many other spokespersons for the economic left are strongly advising that governments avoid any rush into austerity programs and to immediately move to larger government deficits financed by an expansion of the money supply. This is very Keynesian stuff but 2011/2012 in no way fit the Keynesian requirements for such policies. Let me try to explain why this is medicine aimed at the wrong problem.

First, as recent economic data shows, the US economy has regained its legs. We are not ready for a marathon run, but let’s appreciate what we have. The US economy got socked by several shocks. These shocks all diminished our desires to spend. First was the diminished value of housing and other wealth that spilled over into Main Street. As sales of most goods were negatively impacted this led to layoffs and further reductions in spending. Despite the severity of all this, the economy did start to grow again and was on its way when bam along came a perfect storm of impacts from a tsunami in Japan, commodity price increases, and a whole chain reaction of supply chain disruptions. It didn’t help that Europe was falling apart and the financial impacts of the sovereign debt crisis were spilling over on wealth and spending in the US. This second storm had its predictable negative impacts on spending.

You might say – if the stimulus helped in 2008, then why not try it again in 2011? And my answer would be that while it appears like a similar situation again in 2011, it just isn’t the same. There are lots of differences. For one thing, the economy is growing now. Forecasters see further gains in employment. They are predicting that the unemployment rate will fall further in 2012 and that the economy could grow in that year by 2-3%. That is a lot different than 2008 when we had no idea when and where we would reach a floor in economic activity. The differences in consumer/business confidence are stark between 2008 and 2011.

Second, you might correctly point out that the growth of the economy at 2-3% won’t have a big enough and fast enough impact on the unemployment rate. You might add that without further stimulus policy, growth will be too slow and this will hurt too many people. But hold on Toto. Another difference between 2011 and 2008 is that we have added a massive amount to national debt with no real prospect of near term reduction. A little Keynesian stimulus when debt is a major concern makes no sense. Our credit has already been degraded. We have skated for a while as Greeks and Italians have watched their interest rates soar. But another US stimulus package will focus the world’s investors on the USA and we do not want to see what happens when they start aggressively selling US bonds, stocks, and dollars.

Third, while inflation is not an immediate threat to US citizens, it is much more a potential issue than it was in 2008. Already prices of many critical food items have risen and it is no secret that inflation is at or above what the Fed usually considers okay.   Adding too much stimulus right now just risks a return bout of inflation. Moderate growth sounds terrible for the unemployed but if stimulus-induced short-term increases national spending, then whatever help we give to the work force in the near term will soon be undone by a future bout of stagflation. Inflation is no friend of the worker.
Finally, a return to fiscal and/or monetary stimulus simply interferes with doing the right thing. I am not in favor of an extreme short-term loaded austerity program. But I am for a quick agreement that would set out the size and parameters of a medium term program to reduce the size of government deficits. I also favor a faster and clearer attempt to address housing and financial problems. It is possible to find solutions for specific financial problems that do not create a moral hazard for the future. The depth of the financial problem does require that investors and tax payers share in the support of the solution.

In sum, neither a quick stimulus nor austerity will help us improve the US economy. Both will make us worse off. What we need to do is address the real causes of slow growth – out of control private and public debt. Once investors and business firms see that sensible policies are being put into play then you will see some real progress in economic growth and employment. In today's environment of political frenzy it is hard to imagine a good ending. 

Tuesday, November 1, 2011

Financial Tornados Part 2: Satellites falling from the sky

In my last blog I suggested that it is important to distinguish between events that will likely repeat and those that won’t. Policy cannot be backward looking or we waste the people’s money. No matter how devastating it might be to have part of an orbiting satellite fall on your head, it makes absolutely no sense to spend huge sums of money to prevent something that almost never happens. Yet, more and more evidence is piling up that policymakers continue to suggest remedies that make little sense when a repeat of the past financial crisis is so unlikely. That does not mean that there are not affordable and reasonable things that can be done. Building better satellites or programming them to fall in the ocean seems more reasonable than building a roof over the globe.

I want to continue this line of reasoning with some comments about various solutions that keep popping up in the business news. For example, in the Financial Times of October 25th, William Dudley, president of the NY Fed called for a “comprehensive approach that should start with an urgent effort to remove the obstacles that make it difficult for all borrowers to refinance at today’s low mortgage rates.” In my previous blogs I have been a strong advocate of finding ways to solve the housing finance crisis. And refinancing is clearly important in that regard. But Dudley’s message misses the point. What got us into this mess is exactly what Dudley is suggesting. It is like telling an alcoholic that he needs to drink more to cure his addiction. The “obstacles” he refers to include the very things that are necessary to make sure that loans are repaid by the people who borrow the money. Dudley should be more direct. He really wants the government to subsidize the loan process. If that’s what he really wants, then he should recommend that bankers continue to use good banking principles while he asks for direct government support to those who cannot afford to pay back the loans. The latter would be temporary and more befitting of the problem. Suggesting that banks use poor policy is more permanent and guarantees a replay of the financial crisis.

In the same issue of the FT is an article by Barry Eichengreen and Raghuram Rajan recommending that central banks expand their responsibilities to include a dual mandate for monetary policy.  Instead of central banks focusing on employment and inflation alone, they recommend central banks also aim their policies at financial stability. While it is true that financial regulators were and are part of the problem of the financial crisis, it is not clear that the lack of a dual mandate for central banks caused the current crisis. Every country has a regulatory system with one or more institutions that oversea financial stability. In some cases they have too many overlapping institutions. But the industry is covered. I do not know what it is that suggests that central banks have an advantage in producing good financial policy. Most experts believe that central banks have a difficult enough time with just one mandate – finding a satisfactory balance between inflation and unemployment. E&R want to saddle these struggling central bankers with tradeoffs between unemployment, inflation, and financial stability? Wow. Crazy.  It’s like asking a one-armed juggler to add a few more flaming rings to his act.

Then there are the recommendations for increased European integration. George Soros has a plan to save the eurozone. It was not enough to have a stability pact that required that eurozone nations be mindful of the sizes of their deficits and debt. This pact had penalty fines attached and seemed like a great solution to protect the value and reputation of the euro. That worked until Germany had a little problem with the requirements and fines and the Germans simply said nein. That ended that. So now we are to believe that since there is a sovereign debt crisis, Europeans will enact a new treaty that creates a common European Treasury, a newly empowered European Central bank with direct controls over credit lines and portfolios of all banks, and more.  Did the lack of explicit policy integration stop countries from exerting their own preferences for fiscal policy? The answer is no. There was a treaty and when it infringed their own sovereignty, they found ways to avoid it. When Frenchmen and Finns feel threatened by European events they will always find ways to preserve France and Finland, regardless of agreements and treaties. Perhaps in 50 years Finns and Frenchmen will believe their interests are best served by a United States of Europe. For now, however, the recommendations of Soros and others amount to treating a one-time bout of the flu with an Iron Lung Machine.

The problem with Soros’ and other proposals for more European integration of fiscal and monetary policy is that these are solutions to problems that do not exist. The EU is not the United States of America. The EU is mostly a single market with a single currency designed to make its members more productive and competitive. It was designed to be a loose federation of sovereign states. This worked well until 2008. Then a “satellite fell on their heads”. This satellite is likely not to return yet serious economists and political leaders want to "build a roof" over all of Europe.  The sovereign crisis of Europe is serious. But the solutions should fit the causes of the problem. It makes no sense to enact permanent edifices for rare events. It would be much better to find short-term remedies designed to overcome the worst problems and then get on with the task of being a loose federation of sovereign states with a single market and money.