Where is the Eurozone Headed?

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After Italian 10-year bonds surpassed 7 percent earlier today, the question on everyone’s mind is once more: where is the Eurozone headed? At this point even the strongest of EU supporters seem to realize that structural reform will be necessary for the quickly sinking ship. Unfortunately, there does not seem to be any easy fix and what to do is highly arguable. The uncertainty over a solution only adds to the growing crisis as expectations worsen.

The past few months have seen Germany and France pushing hard to try to save a failed Greece, not necessarily because the bailouts and confidence were in the best interest of the Greek people, but more so because they were in the interest (or seemingly at the time) of German, French, and other EU banks that hold a tremendous amount of Greek debt. It was to stop a contagion in Europe and beyond. That approach, however, seems to have failed, especially if the situation in Italy continues to get worse. In effect, the money and resources spent on “saving” Greece will end up having only delayed the inevitable for the Eurozone. The key moving forward should be to avoid another such outcome because every bailout and every kick of the can down the road only worsens the situation for the people.

That means that should an Italian rescue be proposed (which would mean an expansion of the bailout fund), it would have to somehow be more of a “sure thing” than the Greek packages were. A guarantee like that is not realistic though and thankfully, an Italy bailout does not seem like a popular choice amongst officials right now. That is subject to change, but I for one think it would be in the interest of the majority of citizens for it not to happen and as such, I do not support it. I just do not see how the Eurozone can stabilize markets for the long run with an Italian bailout , especially considering the risk associated with such a gamble.

Should a bailout be out of the question, the discussion will likely center around structural reforms- really what should have been done in the first place. There are already several proposals including the establishment of a “core Eurozone” in which a select few countries would work closer together in terms of policy in an attempt to increase stability. Of course the key players in such a proposal will be in favor of it and the others like will not. At the end of the day, someone will not be happy with what happens- the current structure has just promised too much to too many and promises will have to be broken and losses suffered. In the case of Greece, failure (default) will most likely end up being a good thing. For others, they might deny it at first (or forever, should they hold a grudge as politicians like to do), but eventually should it come to default, it will likely be the right solution for the long run. It is an unfortunate, but stark reality.

The Overemphasis on Income Inequality

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In light of the Occupy Wall Street demonstrations, debates over the issue of income inequality are once more in full swing. The spark came from the popular “99% vs. 1%” campaign in the OWS movement, which attempts to stress growing income inequality in the United States. Unfortunately, as is often the case with such sensationalism, the issue is tremendously misunderstood and the conclusions drawn misguided.

Aside from the arbitrary, but marketable selection of 99 vs. 1, income inequality is often overrated as a problem. History has shown that there is nothing inherently negative about income inequality. Even today, some of the world’s most equal nations (in terms of income) are echelons behind other less equal countries in terms of living standards, happiness, GDP, and other common measures of success. The Gini coefficient for income inequality for the United States is 45.0 out of 100 (100 signifying perfect inequality) and is often cited as a negative for the US due to generally lower coefficients for other first world countries. At the same time, there are some second and third world countries that have much lower coefficients. For example, Khazakhstan was at 26.7 in 2009, Kosovo was at 30.0 in 2006, and Pakistan was at 30.6 in 2008 (these figures were the latest on record for each nation respectively in the CIA’s World Factbook). On the other end, there are nations that are much more advanced and in which even the lowest of income earners are generally much better off than the “more equal” citizens of the aforementioned countries. The United States at 45.0 in 2007 is one of them as is Singapore, which has a Gini income coefficient of 47.8 in 2009.

Qualitatively, it is virtually undeniable that a population of poor, yet equal wealth is less desirable than a population of varying wealth levels, especially when the lower wealth levels in the latter are equal or better off than the completely homogeneous population. This possibility is precisely why income inequality should not be a key measure in the utility of a population.

The case against overemphasizing income inequality grows even stronger when systemic outcomes are considered. Specifically, there is an argument that freer systems while possibly leading to greater inequality, might also allow for greater strides in income growth throughout the population. The classic capitalism vs. socialism argument has often been along these lines. Winston Churchill put it quite concisely when he said, “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

Income inequality has often taken the front stage when there are other factors such as income mobility that might be equally or even more important. More on this soon.

NGDP Targeting and the Fed Mandate

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NGDP targeting is all the buzz in monetarism right now after gaining quite a bit of support ranging from Paul Krugman to economists over at Goldman Sachs in recent weeks. The proposal would be a switch over from the current central strategy of inflation targeting by the Federal Reserve to a strategy based around targeting nominal GDP. Should the Federal Reserve want to target both aspects of its dual mandate (full employment and price stability) and with the belief that monetary policy can stimulate the economy, NGDP targeting almost obviously seems to be a more encompassing tool than inflation targeting when it comes to meeting both goals. The more definite commitment to stimulus increases expectations and would likely be much more effective than the current sporadic actions through inflation targeting and quantitative easing.

While I believe that NGDP targeting might be more effective at fulfilling the dual mandate, I do not consider myself to be a proponent of it simply because I am not a supporter of the current dual mandate to begin with- particularly, the goal of full employment. While it might seem a goal of noble intention, it often has unintended consequences as we have learned the hard way in recent decades. While NGDP targeting might improve expectations in downturns, it would also likely provide a false crutch in times of prosperity- something that could be a moral hazard.

While NGDP targeting might seem like a savior right now, I think it would be unwise to just jump into this, especially if it is meant to be a permanent fixture. Even before considering NGDP targeting, the dual mandate really needs to be looked over once more so that the negatives it added to the housing bubble and prior to that are considered in its utility before a major policy change is made that further supports it.

I, Pencil, an Essay Worth Reading

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I, Pencil is an essay written by Leonard Read and is a short, but great read. It tells the story of a creation of a pencil in first person from the view of the pencil. It talks about the numerous processes required in mining, growing, and harvesting the necessary resources for the pencil, the transportation to bring everything together, assembly, and everything else involved. In it, the pencil makes the claim that no one actually knows how to make it from scratch.

Upon reading the piece, it becomes clear that the pencil is right. Almost certainly no one in the world knows how to make a pencil from scratch, let alone mass produce them at a reasonable cost. The whole story makes one appreciate the power of markets and the widespread coordination that naturally takes place in them.

The essay was originally written in 1958 in the libertarian journal The Freeman. It has since been reprinted in a few editions, notably as a pamphlet in 1998 in which Milton Friedman wrote the introduction and Donald J. Boudreaux wrote the afterword.

The Political Flip-flop Delusion

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Changing one’s opinion is often seen as a negative action in the arena of politics. Politicians are often vilified for “flip-flopping” regardless of how naïve or foolish the previous stance might have been or what new data might have come into consideration. Those officials who do switch their stances are often left making excuses or trying to hide the matter as they are berated by the media and political opponents. This is not in any way a logical position.

The idea that one should not change their opinions in virtually any circumstance is only asking for intellectual dishonesty. It becomes downright absurd when considering that some politicians start off as freshman to the game in their 30s or 40s (maybe earlier) and pressured not to change their positions for their entire lives despite all the experiences and changes in outlook they might have. It is almost as if those who view flip-flopping as inherently negative think the world is completely intuitive and open for reading as young as a person can comprehend and remember things. That is most likely not true (at least I hope not), but their stance on flip-flopping is illogical to say the least.

And this stance against changing opinions stands until everyone is wrong. An example is the bursting of the housing bubble in 2006. At that point not only was changing one’s mind okay and expected, but revisionism and finger-pointing often become the next strategy to make political opponents look bad. It is a good thing that at least in these circumstances it is okay to flip-flop because really it should always be okay to flip-flop if it is based on rational reasons. Even this process though does not happen without the usual childish games and he-said, she-said nonsense that is such a big part of politics.

In advocating for the acceptance of flip-flops, I am not calling for politicians to be exempt from scrutiny for breaking campaign promises or working against the people. By all means, I am not. It is just that in some instances, especially when it comes to big picture ideas new research, information, and experience should and must be incorporated into one’s views in order to move forward rationally and in the best way that person believes. To be stuck in one viewpoint and never deter from it only for the sake of not changing is nothing short of foolish.