Uncharted Territory

May 13, 2012

Gifts to Greece

My first thought this morning was to write about the so-called UK drought again. Maybe I’ll post something on that later.

Then I had a strong urge to comment on the absurdly excessive punishment of Lewis Hamilton (a 5 place penalty or inadmission of his final run – moreorless equivalent punishments – would have been appropriate) after an error by his team in qualifying for today’s Spanish GP. I’d hardly call myself an expert on the sport, but a previous foray into F1 commentary attracted a good deal of attention.

Instead I’m going to channel my annoyance at the spoiling of what might have vaguely resembled a sporting event in Barcelona towards the Greeks.

All I want to convey is one simple point, that the Greek people have benefited hugely from the international loans on which they have already partially defaulted and look increasingly like failing to repay in their entirety.

We haven’t invented this thing we call money just for fun. Money allows resources to be allocated. If you borrow it, spend it and fail to repay the loan, you have acquired or consumed resources that could have been used by someone else. Take the Athens metro railway and all the other billions worth of infrastructure to support the 2004 Olympic Games. How was that funded? I’ll hazard a guess. Borrowed money, at least in part. And what will happen to all that capital investment when Greece defaults? It’ll still be there. These assets will remain in existence indefinitely for the benefit of the Greek people. To the extent they haven’t been paid for, they’ve effectively been stolen from the rest of the world.

Some loans may be riskier than others, because that’s how the world is, but, unlike equity investments, loans are designed to be repaid. Financial disruption – on a global scale over the last 5 years – arises when debts are not repaid. So, because of the knock-on effects, Greece’s default is worse than theft! The entire EU has been plunged into recession in large part because of the need for the financial system to prepare for possible Greek default. Instead of using capital to support new lending, banks have been writing down Greek (and other) debt and taking actual losses.

Obviously we’re just reaping what was sown when Greece and other European sovereigns borrowed unsustainably. The question is how to prevent repeats of this cycle of behaviour?

Let’s mull over that question for a minute. What is the popular conception of what’s going on?

I think it was Arthur Smith I heard on the radio yesterday saying the Greeks should be let off their debts because “it’s not the fault” of those protesting. In what sense is that, Arthur? Are you perhaps saying the average Greek took no executive decisions regarding the nation’s finances? Clearly true. But isn’t a large part of the problem that they haven’t paid and continue not to pay their taxes? What do you think is fairer, that every Greek homeowner should pay a special tax (they’re refusing) or that you and I should find the money?

And isn’t a large part of the problem the Greek public-sector? What do you think is fairer, that Greek workers should take whatever pay cuts it takes to balance the books (as has happened elsewhere in Europe, such as in Estonia – now growing again – Latvia and Lithuania) or that you and I should find the money?

Many non-wealthy Greeks must also be culpable of wilfully participating in a cash economy, benefiting from lower prices for services whilst complicit in tax avoidance. What do you think is fairer, that the Greeks start paying taxes commensurate with their public spending like people in most other countries, or that you and I should find the money?

But the really interesting point is that Greece is a democracy. They’ve chosen their own government since the ousting of the colonels in the 1970s. Collectively, then, they’ve repeatedly elected politicians, at least some of which have overspent, undertaxed and cooked the books, or appointed officials to do so on their behalf. Clearly, collectively, the Greeks have benefited from this behaviour. I’m intrigued, Arthur, whether you’re suggesting that, collectively, the Greek people are also not responsible for the situation they find themselves in.

That’s probably enough. After all, Arthur is a national treasure, practically the new Queen Mother, and perhaps a little fragile. Maybe he just didn’t think. Maybe, like the QM, he inhabits a world where decisions are made by waving a magic wand. Maybe, like the QM, he lives in a world where one need take no responsibility for one’s finances.

I also caught a snippet this morning of someone on the Andrew Marr Show invoking the precedent of Argentina. That great and honourable country, that upstanding, exemplary member of the international community most recently defaulted on their debts about a decade ago. And it’s been great for their economy! Who’d have thought it? It’d be great for my personal finances if I went out and bought a house, a car, new furnishings and white goods, new shoes, clothes and so on and then didn’t bother paying for them. I’m sure I’d feel pretty well off for a few years too.

Let’s pick on someone else. Arianna Huffington writes in the NYT:

“Yes, the Greeks acted irresponsibly before the economic collapse — the same way my father had acted irresponsibly in his private and professional life. But that is not reason to punish the children, to destroy their future as part of a remedy for a past for which they bear no responsibility.”

What Arianna is saying – for some reason “bleeding heart liberal” is the outmoded phrase that comes to mind – is a little more sophisticated than Arthur Smith’s indignant genialism. We have to draw a line, she says, to protect the innocent. Though, I can’t help pointing out yet again, these “innocent” are nevertheless beneficiaries of the misappropriated funds spent in Greece over the last decade or so. Perhaps they’ll remember that every time they hop on Athens’ shiny new metro trains.

The fear gripping financial markets – and contributing to the unnecessary economic hardship and suffering of innocent little children currently taking place in, say, the UK – is that other countries will follow Arianna’s line of reasoning too. Why shouldn’t Ireland, Spain, Portugal and even Italy say “don’t punish the children”? Having elected profligate, irresponsible governments that have given them what they wanted – low taxes, high spending – why won’t they now elect governments to satisfy their new desire for debt writeoff with some kind of moral justification (right wing nationalist or left wing anti-capitalist – take your pick, or, hey, what the hell, you can even pick both!).

If we want financial stability – quite possibly a good thing, I suggest, in light of the 1930s, just as a for example – then debts have to be repaid. And sovereign debts would be a good start.

So how can the international community protect itself against freeloaders? Against those countries who run up debts, fail to collect enough tax and then, in the words of the song about the girl next door and the bathroom floor, plead “It Wasn’t Me”?

Here’s my suggestion. Many of the countries that default are serial offenders. There’s something deeply ingrained, in their DNA if you like, that leads them to spend too much and collect too little tax. So cut them off from international finance for long enough for them to lose thir habits. This would be simple to implement. The financial services industry is highly regulated (all that effort’s been really effective, hasn’t it?). Regulators in responsible countries (say the UK, the US, the EU apart from Greece) could simply demand that no financial institution or its subsidiaries (maybe even no company) lends at all to a government that has defaulted on sovereign debt over the last 50 years – or maybe even more. Or, crucially, to any institution in that country dependent on its government, such as a bank or a company.

Since holding the currency of the defaulted country would constitute lending, all investment in defaulted countries would have to be funded locally in their own currency. Imports would require foreign currency that would have to be acquired beforehand by local institutions or individuals, i.e. by selling goods and services as exports (or small amounts of currency to tourists and other visitors). No publicly funded export credit guarantees would be available to UK companies, for example. In effect, such countries would be forbidden from running a trade deficit.

Such a measure would do two things. It would financially quarantine serial defaulters for a time longer than short-term market memory currently manages (defaulters tend to return to the international markets within a decade). And it would give non-defaulters pause for thought.


February 4, 2009

Globalisation rights

Filed under: Economics, Globalisation, Politics, Reflections — Tim Joslin @ 8:09 pm

Last year I attended a conference on “human rights and climate change” – something like that, anyway.  I remember in one session the penny suddenly dropped that what is being enshrined in international law is not in many cases what one would term “human rights”.  We were arguing – and that is the correct word – about the “right to develop”.  By no stretch of the imagination (I said) is this a “human right”.  Rather, it is the “right” of a state, and given the democratic deficit that might well apply, may well be of value only to an elite.  The “right to develop” is highly likely to act against the human rights of some of the population – indigenous people, for example.  How could there be such an emphasis on the “rights” of states?  Well, it’s in the UN that these “rights” are invented. And the UN is an association of states.  States have votes, not individuals.  National sovereignty is paramount.

When it comes to the national stage, though, we encounter a different problem.  Individuals have votes, which they use to secure individual rights.  But layer upon layer of individual rights may not be in the general interest.  The small cost of one person’s “rights” spread amongst many others may outweigh the advantage to that individual.  This may not be captured in the electoral process.  Perhaps we could say individual sovereignty is paramount.

I’ve been thinking about this as I watch the unseemly “British jobs for British workers” dispute.  Why do the local workforce think they have any right at all to the jobs?

In the world I’ve always lived in you have to persuade someone to employ you.  If they choose not to you have no recourse. Are we about to invent even more “rights” here?

Now, the case in point is a construction project at Total’s Lindsey refinery.  The work was awarded to an Italian company, IREM, who brought in their own staff.  It’s not entirely clear to me (I read the Guardian), but there is a lot of evidence to suggest that the company already employed the workers.  The Guardian said on Saturday, for example, that:

“IREM, which says it will bring in 400 of its permanent skilled workforce of Italians and Portuguese to do the job.”  [my stress]

The Guardian goes on to say:

“The strikers say there is sufficient unemployed skilled labour locally to do the work.”

But this is surely beside the point.  There are no vacancies. People are employed by companies, not necessarily just for a specific project.  What do the strikers expect IREM to do, sack their existing staff (no doubt at a huge cost in redundancy payments) and employ those who happen to live near the construction site instead?  Presumably IREM values its staff as any good company should.  Why should it recruit Joe Bloggs who happens to live next door to where the work happens to be being done and might not do as good a job?  Oh, and where does job security come into it, if work always goes to the neighbours of a building site? I’ve worked in a project-based environment and you don’t simply sack your London-based experts and recruit in Paris or Padstow just because that’s where the work has to be done for a few months.

There appears to be barely a shred of justification for the whole dispute (and if you think I’m ranting, check out our hero Willem Buiter’s Maverecon blog).

Perhaps, I suggest, it’s the idea of rights that is the problem.  You can’t blame the workers’ leaders (and later – the strikes are wildcat – the unions) for fighting like, well, wildcats.  They’re doing it because they can get away with it.

And why can they get away with it?  Because all politicians worry about is individuals.  British individuals in this case, not ones who can’t vote for them, of course.  They try to keep as many of them happy as they can.  But you can’t keep everyone happy all the time.

What is obviously needed is a leader who’ll stand up – and Mandelson has come closest – and start telling people they don’t have all the rights they think they have.  People don’t, for example, have:

– the right to a job that happens to be being done nearby – someone else may have already been chosen for that job.  Because other people have the right to choose who they enter into a business arrangement with;

– the right for the town they live in to remain the same forever.  Because other people have the right to a house as well, or to create a business, amenity or whatever.  (Maybe in this case affected people should have the right to compensation);

– the right to an unlimited amount of money deposited at a high rate of interest that has been lost due to a bank failure.  Because other people have to pay taxes to fund such compensation…

It’s a curious psychological point, it seems to me, that in the UK only in my memory the Thatcher government – the point is it was headed by a woman – has dared to tell people their rights may be limited.  Other Prime Ministers, such as Brown, more readily fall, it seems to me, into what I might term the “paternalism trap”.  They see themselves as the leader of the nation and try to put things right, keep everyone happy, dispense punishment to the few (the bankers) and reward the guiltless many (savers, “hard-working families” – especially mortgagees, “British workers”, the mass of voters in general).

Perhaps the nadir, though, was when – rather and stand up and say we just had an election to decide this – the Blair/Brown government decided a few drivers had the right to set the level of their fuel taxes.  Never mind the long-term consequences.

The paternalism trap is a case of the translation of small group behaviour to the national stage.  It results from universal suffrage democracy (I’m not arguing that that’s a bad thing, just that it has unintended consequences) and policies that, through repeated paternalistic commitments, have encouraged state-dependency rather than self-reliance, which never made sense, but does so less and less in a globalised world.

What’s needed is someone to stand up and say “these are the rules, that’s all we can do for you”.

I see a connection between “British jobs for British workers” and the tax avoidance by multinationals the Guardian has been reporting on all week.  I’ve cut out all the articles and I’m sure they’ll make fascinating reading, but I start to wonder if anyone’s thinking this through.  Maybe, just maybe, corporation taxes make less sense in a globalised world.  What’s the logic?  Now that companies can choose where to carry out various activities, attempting to tax said activities is bound to provoke relocation (does Britain have a “right” for the relevant activities to be performed within reach of the UK taxman?, for a company not to declare itself henceforth based in Ireland, Luxembourg, the Seychelles?).  Income taxes, say, make some sense.  We all pay a share of the cost of policing, defence, education, healthcare and so on based on where we work and/or live.  But even VAT is starting to make less sense, as, say, CDs are sent tax-free into the UK by post.  Now, if you want to browse racks of music, you can only do it at HMV – all the other bricks ‘n’ mortar stores else has gone bust.

And if you tax corporations, it simply puts up the price of their goods.  Where there is a problem, which I haven’t seen the Guardian point out yet, is between small and large companies.  If the smaller companies can’t set up tax avoidance schemes you end up with an uneven playing-field.  Smaller companies struggle and you end up with industry after industry dominated by pile-up-the-same-old-rubbish goliath companies.  Sector after sector of the retail industry in the UK is now dominated by a single chain.  And they don’t need to keep their standards up, because there’s nowhere else to go.  Homebase, Currys, HMV, Boots…, you know who I mean!

And people try to use the planning process to control this!  Any sensible Government would tell people they don’t have a right to stop Tesco opening a store in Mill Road (what about my right to shop at Tesco?, or for the competition from Tesco to raise standards at the local Sainsbury’s?).  But they do have a right to demand a level playing-field so there’s more choice of stores (and tax evasion isn’t even the half of it – power over suppliers allowing big players to keep costs down is probably the biggest problem).

Do people really want their right to apply for a job to depend on whether someone happens to create some jobs within – I don’t know – 5 miles?, one mile?, their constituency?, local council ward?  No, of course they don’t.  So, Gordon, why don’t you try telling people the way it is sometime?

The most sense I’ve read this week was a letter in today’s Guardian.  A Dr Martin Weale of London writes:

“…if you wanted to end tax avoidance by companies, why not consider abolishing corporation tax and raising the tax rate on dividends and interest paid by firms. Surely this is much simpler than tilting at windmills.”


Compare Vince Cable’s self-knotting:

“Corporate profits may not be an ideal tax base. But there is surely some basic justice in the proposition that companies should pay the government of their host country for the infrastructure and other tax-financed services they receive: education, health, transport systems, policing.”

No, Vince, these services are provided to people or (in the case of transport) can be funded from charges and other taxes, on fuel, for example.  And the more jobs that are created in the UK the more people there are paying income tax to divide costs.  “Corporate profits” are certainly not “an ideal tax base”, so why carry on flogging a dead horse?

We’re just part of a global economy.  We don’t have special rights because we’re British or French.  Wouldn’t it be better to focus on what rights do make sense?  And don’t require minutely-detailed international agreement and enforcement or an incorruptible, all-knowing, paternalistic world government to enforce them – because the first is unlikely and the second a childish fantasy.

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