The Lesson From Cyprus: Europe Is Politically Bankrupt
TUESDAY, MARCH 26, 2013 9:18 PM
Over the past week, Europe, or rather the present EU leadership, has done damage to itself it will never be able to repair.
It seems to escape everbody, but that doesn’t make it any less true: people from Portugal to Spain to Italy to Greece to Cyprus and Ireland are worse off today than they were when they first adopted the euro. Moreover, their economies are all getting worse as we speak and projected to plunge further. The once highly touted blessings of the common currency are by now lost on most of southern Europe; for them, the euro has been a shortcut to disaster.
Until Cyprus, the EU had always maintained two prime objectives (and spent €5 trillion over 5 years to prove it): keeping all members in the eurozone, and guaranteeing all bank deposits under €100,000. These objectives exist from now on only in words. Brussels has threatened to both grab deposits of small savers and throw Cyprus out of the monetary union. Two watershed moments in one.
The membership of the European Union, the subsequent introduction of the euro and the seemingly endless flow of credit that came with these "privileges" provided the region with a temporary illusion of increasing wealth and new-found prosperity. Today it knows that none of it was real, or earned; it was all borrowed. It’s time to pay up but there’s no money left. It needs to be borrowed. From the European core and its banking system.
The EU’s financial scorched earth strategies have left its Mediterranean members with highly elevated unemployment rates, fast rising taxation levels, huge cuts to pensions, benefits and services and above all insanely high debt levels, personal, corporate and sovereign. And now, as ironic as it is cynical, their savings. The only thing that keeps the nations from going bankrupt is more debt, largely in the form of ECB loans.
What sets Cyprus apart from the other victims of Brussels’ expansion hunger is the timing. The country (actually only the Greek-Cypriot 59% of the island of Cyprus) was only allowed entry in the EU in 2004, and it didn’t introduce the euro until 2008. At that point, total bank assets were already well over €80 billion, or a very unhealthy 450% of GDP, and kept on rising with a vengeance. Four years later, in early 2012, the EU/ECB/IMF troika forced €4.5 billion in losses on the Cyprus banking system through the haircut on Greek sovereign debt. Now, one year after that, the same troika forces Cyprus to cough up €5.8 billion. No great math skills required: Cyprus was essentially pushed under the bus in order to – temporarily – save Greece.
The EU, with all its 1000s of highly paid employees and its multiheaded leadership structure, time and again fails to do its overseeing job, and then conceals this by turning around and bullying the victims of its failures. Of course they knew what state Cyprus was in when it switched to the euro, and the country should never have been allowed to enter. And of course the EU and ECB leadership knew all along what happened in Cyprus between 2008 and now, or at least should have. It’s their job to know. Hence, the leaders should be fired either for not knowing or for knowing and not acting. They just cost taxpayers yet another grab bag full of billions, and they should be held accountable for that.
The problem is they’re not accountable to anyone for anything they do, other than in name. Or put it this way: people like Van Rompuy, Barroso and Olli Rehn are not accountable to anyone but themselves, each other and Angela Merkel’s entourage. There’s a great word in the English language to describe their attitude; the ancient Greek "hubris". Add a side dish of arrogance and incompetence and you have a lethal combination.
By the way, here’s how European democracy works: when the whip comes down, everybody will do what Berlin wants. Germany has some 24% of the EU population, and Angela Merkel’s ruling party (through a coalition) has maybe a third of all votes. That means perhaps 20 million Germans, or at best 6% of the 332 million people in the Eurozone, decide what goes and what does not.
Hubris makes stupid (or, granted, it could be the other way around). That’s why we saw the following over the past week:
1) The announcement of the initial Cyprus plan, the one that included a 6.75% tax for all deposits below €100,000. It doesn’t matter that it’s no longer in the final plan, the "deposit grab" genie has left the bottle and will never return. It’s like breaking an egg; restoring confidence is no longer an option. No European small saver will feel safe again for decades, and many will take much of their deposits out of their banks, which will push banks over the edge, requiring more bailouts, rinse and repeat.
The troika, joined by German finance minister Schäuble, went out of their way to put all the blame for this on the Cyprus government (the ball was in their park), but given the obvious potential consequences (the devastating loss of trust), they should never have allowed either the responsibility or the blame to be there; it was theirs to take. That they didn’t, leads to point 2:
2) Brussels and Frankfurt can neither oversee nor control the consequences of their actions. The trust issue is just one of many topics that have made this clear. And as long as the present leadership structure remains in place, what happened in Cyprus will keep on happening, because:
3) They don’t care. They don’t care that the entire southern part of their union is falling over the edge. They don’t care what happens to the people in the streets of Nicosia, or Porto, or Sevilla, their jobs, their savings, their well-being, their children. They’re not accountable to those people. They’re untouchables as far as democracy goes in all but the most cynical definition.
Imagine you’re a cleaning lady or a primary school teacher, or you have a small grocery store or a bakery, in a town somewhere in Spain or Italy or Portugal. At home, you’ve already been hit with huge tax rises and budget cuts. But there’s one thing you can count on to stand between you from things getting real bad: the savings in your bank. And then you see on TV what’s happening in Cyprus. Where people had the same deposit guarantee you had, until from one day to the next they didn’t. What would you do with what’s left in your bank account?
People with bank accounts in Cyprus no longer have access to their money. They’ll be stuck in a repeat of Argentina’s early milennium capital controls for months. People in Spain and Portugal still have a choice. Maybe not for long, because at the first hint of capital flight to the backyard bank, control over your own money will very rapidly become a thing of the past.
The only reason for Europe’s Mediterranean nations to remain in the eurozone and the EU will be bullying from Brussels and Berlin. It’s this bullying from the core, from those who preach union above all else, which will be the undoing of the entire project, but after a lot more pain of the same kind that now hit the Cypriots will have spread north (the rot won’t stop).
Unless first one country and then inevitably others – soon – decide to leave, say thanks for all the fish, and (re-)build their own nation. That would be by far the best choice for all of southern Europe. Staying in the union has nothing positive to offer anyone anymore, except for those presently in power in Brussels and in the capitals of the rich core nations. The dissolution of the union is inevitable. Unfortunately, given the hubris in the core, so is the bloodshed that will pave the way there.
Statistics: Posted by yoda — Tue Mar 26, 2013 10:15 pm
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A Fiscal Lesson in Cyprus for Americans
Jacob G. Hornberger
Once again, the European Union is teaching Americans what lies at the end of the road of out-of-control federal spending and debt. Cyprus is the latest country that has required a bailout. But this time, the authorities have crossed the Rubicon in how they have addressed the problem.
The basic approach to overextended EU countries is to grant them immediate bailout money to enable them to make payments on their debts and other expenses, including their massive welfare doles to their citizenry. As a condition to receiving the bailout money, the EU requires the government to slash expenses, especially by reducing payments to the dole recipients, and to raise taxes. Additionally, bondholders have been required to take a loss on their investments.
With Cyprus, things have taken a different turn. To avoid having to slash expenses and raise taxes, the president of Cyprus announced that the government would simply expropriate money that people have deposited in the country’s banks. Those who have deposits in excess of 100,000 Euros would have about 10 percent of their monies confiscated. Those with less would have about 7 percent confiscated.
So, here you have an entire group of people who have saved their money, never dreaming that they would have to bear the consequences out of control government spending and debt, especially for those on the government welfare dole.
Not surprisingly, the Cyprus plan is having consequences, namely with old-fashioned bank runs. People are trying to get their money out of the Cyprus banks before the parliament formally approves the deal. Even more ominous, depositors are now taking their money out of banks in weaker countries and moving them to stronger countries.
Perhaps that’s why thethe president of Cyprus is keeping the nation’s banks closed on an extended “holiday.” Perhaps that’s also why both he and the parliament are now balking at implementing the bank-deposit confiscation plan.
Several years ago, the Argentine government was faced with a tremendous shortfall of revenues to cover its ever-burgeoning expenses. It simply confiscated people’s retirement accounts.
Would the U.S. government ever do these sorts of things? Well, don’t forget that President Roosevelt did it during the Great Depression when he nationalized gold and made it a felony offense to own it, notwithstanding the fact that it had been the official constitutional money of the United States since the founding of the nation. FDR ordered Americans to deliver their gold to the federal government, which paid them off in cheapened, devalued, irredeemable notes. It was a confiscation of wealth no different in principle from that that was done by the Argentine government and that is now being conducted by the Cyprus government.
Today, there is an enormous debate occurring here in the United States over the issue of out-of-control federal spending and debt.
The statists are saying: “Don’t worry. Be happy. Everything’s fine. The government should just keep spending and spending and borrowing and borrowing. It’s the key to economic prosperity.”
We libertarians are saying: “Out-of-control federal spending and debt is the road to national bankruptcy. Look at Greece, Italy, Spain, and now Cyprus. Governments cannot spend people rich. They spend people into impoverishment. It’s time to get off this road before it’s too late. It’s time to dismantle, not reform, the welfare-warfare state. Otherwise, be prepared for drastic measures employed by the federal government against the American people.”
If Americans continue following the statists, they will rue the day. Only by following the sound-money fiscal policies of the libertarians can we restore fiscal sanity to our land.
Jacob Hornbergeris founder and president of The Future of Freedom Foundation.
Reprinted from The Future of Freedom Foundation.
Statistics: Posted by yoda — Tue Mar 19, 2013 12:22 pm
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Daniel J. Mitchell
What’s the worst thing about Delaware?
Instead, the so-called First State is actually the Worst State because almost exactly 100 years ago, on February 3, 1913, Delaware made the personal income tax possible by ratifying the 16th Amendment.
Though, to be fair, I suppose the 35 states that already had ratified the Amendment were more despicable since they were even more anxious to enable this noxious levy.
But let’s not get bogged down in details. The purpose of this post is not to re-hash history, but to instead ask what lessons we can learn from the adoption of the income tax.
The most obvious lesson is that politicians can’t be trusted with additional powers. The first income tax had a top tax rate of just 7 percent and the entire tax code was 400 pages long. Now we have a top tax rate of 39.6 percent (even higher if you include additional levies for Medicare and Obamacare) and the tax code has become a 72,000-page monstrosity.
But the main lesson I want to discuss today is that giving politicians a new source of money inevitably leads to much higher spending.
Here’s a chart, based on data from the Office of Management and Budget, showing the burden of federal spending since 1789.
Since OMB only provides aggregate spending data for the 1789-1849 and 1850-190 periods, which would mean completely flat lines on my chart, I took some wild guesses about how much was spent during the War of 1812 and the Civil War in order to make the chart look a bit more realistic.
But that’s not very important. What I want people to notice is that we enjoyed a very tiny federal government for much of our nation’s history. Federal spending would jump during wars, but then it would quickly shrink back to a very modest level – averaging at most 3 percent of economic output.
So what’s the lesson to learn from this data? Well, you’ll notice that the normal pattern of government shrinking back to its proper size after a war came to an end once the income tax was adopted.
In the pre-income tax days, the federal government had to rely on tariffs and excise taxes, and those revenues were incapable of generating much revenue for the government, both because of political resistance (tariffs were quite unpopular in agricultural states) and Laffer Curve reasons (high tariffs and excise taxes led to smuggling and noncompliance).
But once the politicians had a new source of revenue, they couldn’t resist the temptation to grab more money. And then we got a ratchet effect, with government growing during wartime, but then never shrinking back to its pre-war level once hostilities ended (Robert Higgs wrote a book about this unfortunate phenomenon).
The same thing happened in Europe. The burden of government spending used to be quite modest on the other side of the Atlantic, with outlays consuming only about 10 percent of economic output.
Once European politicians got the income tax, however, that also enabled a big increase is the size of the state.
But Europe also gives us a very good warning about the dangers of giving politicians a second major source of revenue.
Here’s a chart I prepared for a study published when I was at the Heritage Foundation. You’ll notice from 1960-1970 that the overall burden of government spending in Europe was not that different than it was in the United States.
That’s about the time, however, that the European governments began to impose value-added taxes.
The rest, as they say, is history.
I’m not claiming, by the way, that the VAT is the only reason why the burden of government spending expanded in Europe. The Europeans also impose harsher payroll taxes and higher energy taxes. And their income taxes tend to be much more onerous for middle-income households.
But I am arguing that the VAT helped enable bigger government in Europe, just like the income tax decades earlier also enabled bigger government in both Europe and the United States.
So ask yourself a simple question: If we allow politicians in Washington to impose a VAT on top of the income tax, do you think they’ll use the money to expand the size and scope of government?
If it takes more than three seconds to answer that question, I suggest you emigrate to France as quickly as possible.
P.S. You probably won’t be surprised to learn that the crazy bureaucrats at the Paris-based OECD think the VAT is good for growth and jobs. Sort of makes you wonder why we’re subsidizing them with American tax dollars.
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By Daniel J. Mitchell
Everyone has a cross to bear in life, some sort of burden or obligation, often self-imposed.
For some inexplicable reason, I’ve decided that one of my responsibilities is to educate a backwards and primitive people who seem impervious to common sense, simple logic, and strong principles.
As you’ve probably guessed already, I’m talking about Republicans.
I’ve already identified them at the Stupid Party, but they seem especially ill-informed and clueless on the topic of government borrowing.
I even created a “Bob Dole Award” in hopes of getting this point across. Simply stated, fixating on debt opens the door for higher taxes.
And does anyone think our economy would be stronger, or our fiscal position would be better, if we replaced some debt-financed spending with some spending financed by class-warfare taxes?
Especially since the higher taxes almost certainly would trigger more spending, so government borrowing would stay the same and the only thing that would change is that we’d be saddled with even more waste.
Notwithstanding all my educational efforts, Republicans couldn’t resist jumping up and down and making loud noises earlier this week when the national debt hit the $16 trillion mark earlier this week (a google search for “$16 trillion debt” returned more than 24 million hits).
So let’s walk through (again) why this is misguided.
First, let’s clear up some numbers that cause confusion. Republicans are complaining about something called the “gross federal debt.” This number is largely meaningless (see table 7.1 of the OMB Historical Tables if you want to look at the details).
It is the combination of a somewhat meaningful number of more than $11 trillion known as “debt held by the public,” which is a measure of how much the federal government has borrowed over time from the private sector, and a totally irrelevant number of about $4.5 trillion known as “debt held by federal government accounts.”
The latter number is simply a total of the IOUs that the government issues to itself, most notably the ones at the Social Security Trust Fund. But the “assets” in the Trust Fund at the Social Security Administration are offset by the “liabilities” at the Treasury Department. This is an empty bookkeeping gimmick, just as if you took a dollar out of your right pocket, put it in your left pocket, and left an IOU in exchange.
That being said, it is important to recognize that politicians have imposed poorly designed entitlement programs, and future spending on these programs will skyrocket far beyond current revenues. That growing gap, which is explained in this short video, is sometimes known as “unfunded liabilities.”
This number depends on a whole range of assumptions and can be measured in current dollars, constant dollars, and present value. I prefer the middle approach, which adjusts for inflation, and it’s worth noting that “unfunded liabilities” for Social Security and Medicare are more than $100 trillion.
That’s a number we should worry about, not the make-believe $4.5 trillion of IOUs that comprise part of the “gross national debt.”
Now let’s get to the most important issue. The reason we should worry about that $100 trillion number is that it is an estimate of how much the burden of spending will climb in the future. That additional spending will weaken the economy whether it is financed by borrowing or taxes.
Sort of helps to explain why entitlement reform is completely necessary if we want to keep America from a Greek-style fiscal collapse at some point in the future.
Here’s my video on the topic. In an ideal world, Republicans would not be allowed to talk about fiscal policy until they were first strapped in chairs, given a bunch of ADD medicine, and forced to watch this on automatic replay about 50 times.
Now for the all-important caveats. Yes, a nation can reach a point where debt becomes a problem. All you have to do is look at the mess in Europe to understand that point.
And I’ve shared numbers from both the Bank for International Settlements and the Organization for Economic Cooperation and Development to indicate that almost all nations – including the U.S. – are going to face similar problems if government policy is left on autopilot.
What I want people to realize, though, is that governments only get into that kind of mess because there’s too much spending.
Government spending is the disease. The various ways of financing that spending – taxes, borrowing, and printing money – are symptoms of the underlying disease.
View full post on Cato @ Liberty
The Lesson of the Cheesehead
“When you see that in order to produce, you need to obtain permission from men who produce nothing — when you see that money is flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self- sacrifice — you may know that your society is doomed.”
— Ayn Rand
Could you prove that America needs the “cheesehead”?
Once upon a time in America, the free market determined which products and services reached consumers. Aspiring entrepreneurs could test out new ideas to see whether consumer interest justified their production. “Good ideas” — i.e. for things people were willing to pay for — could flourish and evolve while “bad ideas” — i.e. for things no one wanted — could die quietly and unobtrusively.
Today, by contrast, government regulation too often chokes this process by protecting existing businesses against competition and thus preventing new products and services from ever reaching the market. “Certificate of necessity” or “certificate of need” laws are perhaps the most pernicious of such anti-capitalist intrusions because they require that someone wishing to enter an industry must first demonstrate an existing “public need” for a new business before marketing a product or service.
To illustrate the absurdity of this concept, take the “cheesehead,” — the garish yellow/orange wedge-shaped foam hat that Packers fans don every football season. The term “cheesehead,” although originally a derisive term for Packer fans, became a term Packer fans embraced. These Wisconsinites, proud of their state and its cheese-making tradition, turned a slur into a statement of pride.
Ralph Bruno, inspired by this sentiment, came up with the idea for cheesehead hats while reupholstering his mother’s couch. He cut the leftover foam into a wedge-shaped hat, painted it yellow, and wore it to a 1987 Brewers-White Sox game. According to Bruno, “I just had to put something on my head that said, ‘Yeah, I am a Cheesehead.’” Others clearly felt the same way as they snapped up his homemade creations, which he began selling out of trash bags at games.
Eventually, he started his own business to manufacture cheeseheads…and the rest is history. But imagine what would have happened had Bruno been required to obtain a certificate of necessity requirement before marketing his idea. And imagine further that obtaining such a certificate required him to prove the existence of a public necessity for the product before being able to produce it. According to Bruno, developing the cheesehead was “like charting new land” because “there was nothing like that out there.” So how could he have demonstrated a public necessity for his product when nothing like it existed?
Originally, “certificate of necessity” laws applied only to “common carriers,” such as railroads, and public utilities like gas and electric companies. The rationale was that because these industries were so heavily regulated, government needed to encourage private investment. In addition, shielding these types of service providers from competition was considered appropriate, given that they were prohibited from discriminating against consumers. Railroads, for example, were often required to serve out-of-the-way, unprofitable routes.
But over the course of the twentieth century, certificate of necessity laws spread to encompass industries where neither the rationale of “encouraging private investment” nor the rationale of “compensating service providers for regulatory burdens” made any sense. Today, these laws often apply to taxicabs, moving companies, car lots and hospitals.
In 2006, for example, Adam Sweet and his brother were unable to operate their moving business in Portland, Oregon, because in order to get a license, they had to first face objections from existing moving companies and to prove that there was a “public need” for their business. A similar Missouri law, giving existing moving companies the right to object to the issuance of new licenses, prevented entrepreneur Michael Munie from expanding his business.
Unfortunately, not only do certificate of necessity laws stifle economic opportunity, they also block consumer access to essential services, including healthcare. On the Hawaiian Island of Maui, for example, development of a private hospital was held up for years because a state agency refused to issue a certificate of need. Even though the island’s only existing, state-run hospital was too small to care for the island’s residents and visitors, the agency denied approval because a new hospital would negatively impact the existing hospital’s business. A free society should not tolerate such blatant, government-mandated economic protectionism. As Pacific Legal Foundation attorney, Timothy Sandefur, explains in his recently-published law review article:
These laws bar entrepreneurial opportunity, stifle the creativity and industry of those who might otherwise be productive innovators in our society, and lead to bitterness and resentment against the hypocrisy of a nation that claims to care about economic opportunity, social mobility, and the “natural aristocracy” of “virtue and talents,” and which rewards merit instead of political influence.
As Sandefur and others also point out, it is difficult to measure the damage that these protectionist regulatory schemes cause. “It is impossible to assess the economic costs that these restrictions impose,” he writes, “since they are what economists call ‘unseen’: they take the form of the countless businesses that nobody ever starts, the productivity that is never begun, the wealth that is never created.”
It can, therefore, be hard to convince people that business- licensing schemes are harmful. It is like asking folks to imagine a world in which their favorite product or business does not exist because it was never created in the first place. In other words, it is like trying to imagine an America without the cheesehead.
Thankfully, the cheesehead exists in our world as the result of one man being able to pursue an idea without government interference. But it’s easy to imagine that many other products and services — both whimsical and vital — will never advance from concept to implementation, simply because certificate of necessity laws will block them from ever reaching the market.
for The Daily Reckoning
Editor’s Note: Jennifer M. Fry is a Fellow in the College of Public Interest Law and works primarily in Property Rights and Environmental Regulations.
Statistics: Posted by DIGGER DAN — Thu Jun 21, 2012 2:40 am
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Posted: 14 Jun 2012 06:09 AM PDT
Humans originally existed as members of small bands of nomadic hunters/gatherers. They lived on deer in the mountains during the summer and would go to the coast and live on fish and lobster in the winter.
The two most important events in all of history were the invention of beer
and the invention of the wheel. The wheel was invented to get man to the
beer. These were the foundation of modern civilization and together were the
catalyst for the splitting of humanity into two distinct subgroups:
1 . Liberals
Once beer was discovered, it required grain and that was the beginning of
agriculture. Neither the glass bottle nor aluminum can were invented yet, so
while our early humans were sitting around waiting for them to be invented,
they just stayed close to the brewery. That’s how villages were formed.
Some men spent their days tracking and killing animals to BBQ at night while
they were drinking beer. This was the beginning of what is known as the
Other men who were weaker and less skilled at hunting learned to live off
the conservatives by showing up for the nightly BBQ’s and doing the sewing,
fetching, and hair dressing. This was the beginning of the Liberal movement.
Some of these liberal men eventually evolved into women. They became known as girlie-men. Some note worthy liberal achievements include the
domestication of cats, the invention of group therapy, group hugs, and the
concept of Democratic voting to decide how to divide the meat and beer that
conservatives provided and became the ultimate “gimme faction”.
Over the years conservatives came to be symbolized by the largest, most
powerful land animal on earth, the elephant. Liberals are symbolized by the
jackass for obvious reasons.
Modern liberals like imported beer (with lime added), but most prefer white
wine or imported bottled water. They eat raw fish but like their beef well
done. Sushi, tofu, and French food are standard liberal fare.. Another
interesting evolutionary side note: most of their women have higher
testosterone levels than their men. Most social workers, personal injury
attorneys, journalists, dreamers in Hollywood and group therapists are
liberals. Liberals invented the designated hitter rule because it wasn’t
fair to make the pitcher also bat.
Conservatives drink domestic beer, mostly Bud or Miller. They eat red meat
and still provide for their women. Conservatives are big game hunters, rodeo
cowboys, lumberjacks, construction workers, firemen, paramedics, medical
doctors, police officers, engineers, corporate executives, athletes, members
of the military, airline pilots and generally anyone who works productively.
Conservatives who own companies hire other conservatives who want to work
for a living.
Liberals produce little or nothing. They like to govern the producers and
decide what to do with the production. Liberals believe Europeans are more
enlightened than Americans. That is why most of the liberals remained in
Europe when conservatives were coming to America .. They crept in after the
Wild West was tamed and created a business of trying to get more for
Here ends today’s lesson in world history.
Statistics: Posted by DIGGER DAN — Sat Jun 16, 2012 3:49 am
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