WeBlog

So one set of Economists have come out and said that Government spending should be cut in 2010 and another group have come out and seid no leave it 'til 2011.

Surely the key thing as Greece is finding out is that you will have to cut when your creditors turn off the tap. The debate that assumes that cutting is in the hands of the government is to some degree artificial. If we are to convince our creditors that we are going to go on a diet, like going on a diet we can't say it will start tomorrow. I fear we have no choice but to start now.

Recently found this briefing paper about the UK Tax System produced by the Institute of Fiscal Studies, well worth reading.

http://www.ifs.org.uk/bns/bn09.pdf

I'm currently in Austria, so haven't been following the day to day crisis that is affecting Greece. There has been a lot of talking about whether this could cause the break-up of the Euro. It seems that there are two ways in which this is being proposed might happen:

Germany Leaves the Euro

At one level this seems the most attractive option because the German Mark of equivalent could be allowed to appreciate, and there would unlikely to be a run on the dollar. Because Germany runs a current account surplus, in simple trade terms there is an excess demand of Marks (due to the surplus) would cause Mark to rise, reducing the current account surplus etc.

However, I think there are two reasons this won't happen, firstly, the Germans who have seen their real incomes fall (to account for increasing currency) are unlikely to allow the other European countries to devalue their currencies in order to allow them to re-balance output the easy way.

Secondly, the Euro is a reserve currency block, many central banks have been holding Euros as  response in the decline of the purchasing power of the US Dollar as the US Government has been running a large current account deficit. The act of Germany leaving the Euro would lead the a mass run from the Euro into the Mark, Sterling and the Dollar, something that would not benefit Germany.

Greece Leaves the Euro

Ireland has been toying with this for about a year. However, for Greece to leave the Euro would be equally difficult to achieve in the short term. If they simply decided to start paying debt, workers, benefits etc. in Drachma, however, Greek's including their creditors would be unlikely to be pleased by this, probably causing them to off-load Greek Debt, leading to spiraling inflation (as the purchasing power of Drachma declined). Thus the Greek government would achieve the cuts in real expenditure through a painful devaluation and inflation.

So either way Greeks see a fall in their real incomes.

Conclusion

Therefore, on the basis of the above, the only option is for the Euro zone to carry on, Germany will have to accept that it will have to help Greece out in return for having purchased German goods for some years. These fiscal transfers will be unpopular in Germany and the costs unpopular in Greece. However, both countries benefit from being part of a reserve currency group, that will allow them if they can get through this crisis to continue to borrow cheaply. It's the only option, and probably Europe has the political will to do it.

When Obama when to Berlin to cheering crowds, many thought he echoed John F Kennedy and his “Ich bin ein Berliner” speech. However, for historical perspective perhaps looking to Kennedy’s successor Johnson might be more informative.

Obama seems to be heading for what may be a landslide, and whilst it will not equal that of Johnson in 1964 who won 62% of the popular vote, it is going to be large.

Johnson signed the Civil Rights Act, that he correctly said would loose the south for the Democrats for a generation. What the US economic woes and the fact that Obama is not a black candidate from the Civil Rights Era (he is half white, and his father was not actually American) have given is an opportunity for Obama to connect with white working class Americans in the way that Bill Clinton did. Obama has genuinely been the post-racial candidate because he is too young to truly remember that era. Americans who vote for Obama in spite of him being black because of economic worries, will have then voted for a black President, and because he is not Jesse Jackson, they will realise that there is more to being a black president than being black. Perhaps Johnson’s generation will have passed.

In the same way, Obama like Johnson may be in a position to enact genuine change in American, like Johnson’s “Great Society” programme, that changed the political landscape. The challenges that Medicare and Medicaid face (both started in 1965) are well documented and Obama will have to deal with them giving him an opportunity for genuine reform. If he has a united government in Congress that might be possible (however, loosing the mid-terms might derail his programme).

Johnson is always remembered as the president who escalated the war in Vietnam, but he was not the president who started the war (that was Kennedy) Johnson had to decide what to do next. Obama’s position in Afghanistan is similar (although in no way so serious) and in Iraq the improving security situation may make an exit more reasonable.

Obama’s Vietnam will be the economy. He was not the president that got the US into this mess, however, he is the one who can make it worse. Thoughtful advice, retaining free trade and remembering the lessons of history are going to be important. If he handles it well then perhaps he will be remembered as Johnson would have been without Vietnam.

Who would want to be writing a weekly news magazine at the moment? It’s bad enough for the newspapers you wake up every morning and another twist or turn has occurred. So how does the Economist respond? Well in the only way it can, giving the historical perspective. History doesn’t change, and all you have to do is identify the relevant issues and write stuff well.

The Economist’s piece of the history of modern finance is excellent in giving this perspective. It should be good reading for anyone trying to get their head round the present financial situation.

I've been thinking about general election swings. If you look at the Butler Swing of the big landslides of the 20th Century then the biggest ones are:

1906 Liberal 6%
1945 Labour 12%
1979 Conservative 5%
1997 Labour 10%

Because of the large number of Liberal Democrat votes at the last election, it is difficult to calculate the national swing needed to overturn Labour's majority. However, a swing of over 8% would appear to be needed . This would be greater than they had achieved even in 1979. The large landslides of the century also have tended to be to the left rather than the right, even further showing the mountain the needs to be climbed.

Just seen Ruth Kelly is standing down as an MP as well at the next election:
http://news.bbc.co.uk/1/hi/uk_politics/7649662.stm

Well without the incumbancy factor and a majority under 2,100, that's going to be a seat lost that'll be a win for the Tories I suspect.  There was a strong swing from Labour to the Tories in 2005 of 4.2%. Gordon Brown won't be thanking her!

Some weeks ago the Economist said of Hillary Clinton: "She also has awesome stamina, an orderly mind, a terrific organisation and a will to power that would make Nietzsche sit up and take notice. "

Well perhaps we have seen some of this in the last few days, but what also has been seen is the Democratic party's fear of the untested nature of Obama, what he has most to thank for his lead is actually John McCain. Many Democrats feared that McCain would get core Republican support in a fight against a Clinton but not in one against Obama. Now I think many Democrats are worried that Obama's inexperience might also leave him vulnerable against McCain  as well.

Fundamentally, the Democrats cannot decide between these two candidates because, they are not sure which is the lesser risk. They are ahead in the opinion polls for the General Election in November, however, there is still time for that lead to slip. When you are ahead you tend to be cautious, the trouble is the Democrats aren't sure on the safe bet.

The economist is this week doing a 10-page special report on relgion. What it is concluding is that religion is back with a vengance:

"In 1960 John Kennedy pleaded with Americans to treat his Catholicism as irrelevant; now a born-again Christian sits in the White House and his most likely Democrat replacement wants voters to know she prays. An Islamist party rules once-secular Turkey; Hindu nationalists may return to power in India's next election; ever more children in Israel and Palestine are attending religious schools that tell them that God granted them the whole Holy Land. "

and is here to stay both in the personal and the political field:

"Atheists and agnostics hate the fact, but these days religion is an inescapable part of politics. Although it is not the state's business “to make windows into men's souls”, it is part of the government's job to prevent grievances from stirring into bloodshed, and fanatics from guiding policy. But it isn't easy. Catholics did not get back into Parliament for 224 years after the Gunpowder Plot. Unless politicians learn to take account of religious feelings and to draw a firm line between church and state, the new wars of religion may prove as intractable. "

However, it's solution to draw the line between Church and State may be a little difficulyt to achieve as it points out. I wonder is Rowan Williams comments about the creation of Moral Communities might be a way forward. It is important to have engagement between Church and State, but this engagement must not become set inn biogtry. Instead, allowing the creation of moral and also religious communities withiin a democratic state that engage and debate with one-anohter retains something of the character or the moral and religious state without the danger of a new 16th and 17th century war or reigion.

In any rate a very good set of articles and well worth reading.

There is a really good letter in the FT supporting changes to capital gains tax as well as supporting further changes to equalise taxation on all capital income and moving towards equalisation of tax on labour income. This would be a good thing. In the knowledge economy everyone is a small business, they take the same individual risks so should be treated no differently to any other entrepreneur.

See the letter here: http://www.ft.com/cms/s/0/1026e5f2-7d
13-11dc-aee2-0000779fd2ac.html?nclick_check=1