In Which I Lose Any Vestiges of Respect I May Have Had for Tsipras

Memo to Alexis Tsipras:  Teddy Roosevelt famously said, "Speak softly and carry a big stick."  We Americans consider that to be the very essence of wise negotiation.  Of course, he was speaking as the big bully on the block in how to deal with little countries in Central America and the Caribbean that we could kick around at will.  When you are a small and weak power, that is not so much an option.  In that case, the best advice is, "Speak softly and carry the biggest stick you have available, even if it is a toothpick."

The main stick Greece had was leaving the euro.  That was something everyone on both sides of the negotiating table wanted to avoid.  Granted, to many people for Greece to threaten to leave the euro was less like threatening the other side with even a toothpick than like holding a gun to its own head and threatening to shoot.  Yet many people will act to prevent even such an action.

Now it appears (at least according to Krugman) that Tsipras considered a Grexit impossible.  (I am not clear whether that means politically impossible or operationally unfeasible).  He thus never made even contingency plans for leaving the euro, which  meant throwing away the only bargaining chip (however weak) that he had.  This was a huge mistake.  From day one, the Syriza government should have been gaming out an exit from the euro, making operational plans, and making discreet contacts with Russia, the US, Greek Americans, and even Turkey for necessary help in getting through the shock of devaluation.  This does not mean that Grexit should have been a favored option.  But every army knows that it should game out scenarios that it considers highly implausible just in case.  This is a new form of warfare.  The treasury should have been gaming out the Grexit from the start to make it a feasible operation if worst came to worst.

With leaving the euro ruled out, the only possible options open were capitulation and begging for mercy.  This being the case, speaking softly became all the more urgent because pleas for mercy made in tones of anger and bluster are most unlikely to be heeded.  In effect, Tsipras ruled out going for the long shot gamble and pleading for mercy effectively.  That left no option other than capitulation, but capitulating after going out of your way to offend the other side is a surefire way to guarantee the worst terms possible.  Right now, those terms are apparently that by Wednesday the Greek Parliament must past legislation demanded by by EU finance ministers including severe austerity, and turn state assets worth 50 billion euros over to an EU trust for privatization.  In return, Greece will get loans enough to tide the banks over for a few more days until negotiations can resume.  There is not guarantee that these negotiations will yield any further assistance or debt restructuring, only that Germany has absolutely ruled out any debt reduction.  And Tsipras is on the verge of capitulation because he has no plans in place for the Grexit.

Whether the Greek Parliament will also cave remains to be seen.  Another possibility is simple paralysis and indecision, leading to a Grexit forced by circumstances.  Any chances of a good outcome from leaving the euro have been substantially reduced by Syriza's idiotic failure to make any sort of plans for it.  Could any worse bungling be possible?

How to Convince a Liberal on Immigration

Anti-immigration activists do have one point.  It is simply not possible for the US to accommodate everyone who wants to move here.  I have seen the estimate, for instance, that if all immigration barriers with Haiti were removed, as much as 70-90% of the population would move here.  But at the same time it seems harsh to shut out people in need.  So what do you do?

I recall an column by David Neiwert commenting that while should take a firm stand against nativist views treating immigrants as a plague and a scapegoat, still, admitting everyone is not the answer, so what is the liberal answer.  Well, to me the liberal answer is straightforward enough. Improve conditions in Mexico to the point that people from Mexico lose interest in moving here.  But what do we do in the meantime?  And if you want to make the liberal argument for restricting immigration, what do you say?

So if any of you nativists are out there wondering how to convince a liberal (I know you aren't), let me give some pointers on what not to say.  Do not tell pro-immigrant people that they are part of a conspiracy by a sinister global elite to destroy Western Civilization by contaminating it with Third World people.  This tends to give offense.  Do not describe immigrants as a disease, a pollution, a contaminant, criminals destroying our society, etc.  Do not, in other words, make comments to the effect that immigrants (legal or illegal) are un-people and have no place within the circle of people who morally "matter."  To a liberal, that is simply not acceptable.  Do not blame all our social ills on immigrants.  That is scapegoating.  That is also unacceptable.  Moving into more realistic territory, don't argue that illegal immigrants are criminals and should apply for admission through legal channels, even if it takes decades.  The distinction between "wait for decades to be processed" and "don't come here at all" is one mostly without a difference.  Don't blame our loss of good-paying blue collar jobs on immigration.  A whole lot of those jobs were automated away or went overseas.  And even for the ones that don't automate or go overseas, I don't see a lot of anti-immigration activists clamoring for jobs picking vegetables or working in a meat packing house.  Don't complain that a multi-ethnic society just can't work.  That sounds a lot like concern trolling.  Besides, our country has done a whole lot better at making multi-ethnic society work than anyone ever thought possible.

Finally, I understand that the nativist wing of conservatism and the libertarian wing are not the same (with a few exceptions like Ron Paul).  But really what you are seeing at work here is the law of supply and demand.  It applies to labor just the same as to anything else.  And yes, I agree, that is troubling.  In college economics, our international trade class focused on the theory that over the (very) long run, wages would tend to equalize worldwide.  It seemed mostly abstract at the time, but what we are seeing now is the early phase of just that.  A scary thought in a high wage country!  But at the same time, as my economics textbook put it, the invisible hand fights back.  I am not one who believes that the minute anyone introduces any economic regulation whatever we have taken the first step on a slippery slope that leads all the way to the gulag.  But I do believe that when the regulation takes the form of banning a product that people want (cheap labor for employers, better jobs for immigrants), distortions enter the system, people resort to elaborate lengths to evade the ban, and ever more repressive measures are needed to enforce it.  One hears a lot about this these days with the War on Drugs.  Here is an account of the War on Cloth Buttons and War on Calico in 17th Century France.  It works with labor, too.

Nonetheless, the argument can be made convincingly if you consider not only the effect on the US, but on the effect on the country supplying the immigrants.  Consider Marine LePen.  (Can't be bothered to find the link.  Sorry).  When confronted with a high-performing African immigrant professional asking what Ms. LePen had to say to her, Marine did not tell her that she was destroying France or that she was a disease or cancer in the fabric of society.  (Mixed metaphor intended).  She said that the immigrant was, indeed, contributing productively to French society, but that she was depriving her home country of a valuable member.

Certainly this article by Matt Yglesias is revealing in looking at the unusual case if Puerto Rico.  Puerto Rico is, for the most part, a Third World country, but it is also a US possession and all Puerto Ricans are US citizens.  That means there are no barriers to immigration.  What is the result?  No doubt Puerto Rican immigration puts some burden on the US. But the one really being harmed by it is Puerto Rico.  Mass emigration makes for a declining population, which, in turn, causes a shrinking tax base and makes the per capita government debt burden ever greater.  Which leads to higher taxes, less services, and more emigration. Paul Krugman has noted a similar phenomenon in Europe.  And within the US, when a local area sees its economic base removed, the most energetic and dynamic portion of the population leave, and the remaining portion spirals ever further and further downward.  In Haiti as much as 70 to 90% of the population would move to the US given the opportunity.  For the US, the burden would be tough but manageable.  For Haiti, it would mean complete societal collapse.

All of which means that any liberal attempt at cutting back immigration will have to be transnational. Protect our country from alien scum just won't cut it.  Improve the quality of life in other countries to make staying home more attractive and convince the most dynamic and mobile people that their country needs them will have more appeal.  Of course, it will also be slow-moving.

Greece: The Deja Vu is Killing Me

So, while waiting for developments in Greece, I will take time out to discuss the annoying tendency to treat debtors as sinners and creditors as blameless, or to treat importing as sin but exporting as virtue.

The logical flaws here are obvious.  Every export is necessarily an import.  Every amount borrowed is necessarily an amount lent.  If borrowing and importing are sins, then lending and exporting abet sin.  If using drugs is a sin, then the drug dealer who never samples his product is not virtuous or even neutral, but deeply complicit.  Or the teetotaler bartender, or the chaste pimp, etc etc.  As Paul Krugman likes to say, the world economy is a closed system, which means that until we find another planet to export to, it will not be possible for every country to run an exports surplus.  (Well, I suppose we could make stuff and blast it into outer space even if there were no buyers, but that would be stupid).

In the case of Greece today, as in Latin America in the 1980's and many times since, the banks have made foolish loans, but the entire cost of their mistakes is expected to be born by the people of the borrowing country.  Well, at the risk of sounding libertarian, that sounds awfully collectivist to me. The nation has sinned and the nation has suffered without any thought to the individuals involved. Well do I remember reading about the Latin American debt crisis in the 1980's and hearing about the boom that preceded it and all the VSP's of the day shook their heads and said that Latin American countries had lived beyond their means and would have to pay the consequences.  Then you read about the boom that preceded the crash, vast growth in GNP, almost all of it concentrated in the upper quintile of income distribution while the poorest quintile received an increased income of about $2 per year.  And when the crash came, it was the people who benefited least (and certainly did not borrow any money from foreign banks) who were expected to bear the brunt of the adjustment. Financial moralists scolded the boy shining shoes on the streets of Brasilia and others in the marginal sector, telling them that they had lived beyond their means during the preceding boom and would just have to tighten the belt now to pay for their old extravagance.  And in Greece today when children search the garbage for food, when mental patients are thrown out on the street and malaria makes a comeback, creditors tell them that it serves them right for borrowing so much.  The attitude was then and appears still to be that countries should not squander resources on people who don't even produce foreign exchange when banks are facing losses.

So I thought I would quote this article on why it is unreasonable to place all the costs of adjustment on the debtor and let the creditor off scot-free:

For the record, my sophisticated hard-working elite European interlocutors, the term moral hazard traditionally applies to creditors. It describes the hazard to the real economy that might result if investors fail to discriminate between valuable and not-so-valuable projects when they allocate society’s scarce resources as proxied by money claims. Lending to a corrupt, clientelist Greek state that squanders resources on activities unlikely to yield growth from which the debt could be serviced? That is precisely, exactly, what the term “moral hazard” exists to discourage. You did that. Yes, the Greek state was an unworthy and sometimes unscrupulous debtor. Newsflash: The world is full of unworthy and unscrupulous entities willing to take your money and call the transaction a “loan”. It always will be. That is why responsibility for, and the consequences of, extending credit badly must fall upon creditors, not debtors. There is one morality tale that says the debtor must repay, or she has sinned and must be punished. There is another morality tale that says the creditor must invest wisely, or she has stewarded resources poorly and must be punished. We get to choose which morality tale we most use to make sense of the world. We do, and surely should, use both to some degree. But if we emphasize the first story, we end up in a world full of bad loans, wasted resources, and people trapped in debtors’ prison, metaphorical or literal. If we emphasize the second story, we end up in a world where dumb expenditures are never financed in the first place.

This is, perhaps, a bit overly harsh to creditors.  The concept of moral hazard is that if people are shielded from the consequences of their mistakes, they take excessive risks.  But the opposite applies. If the consequences of failure are too harsh, people become overly risk-averse.  This can shrink credit to the point of crimping the entire economy.  But if there is one thing events from 2008 onward have proven, it is that the upsurge in credit caused by an overly creditor-friendly regime is only a short-term blessing.

The author goes on to explain why it is dangerous to give creditors too much power in cases of default:

A state cannot be liquidated. In bankruptcy terms, it must be reorganized. Corporate bankruptcy laws wisely limit the control rights of unconverted creditors during reorganizations, because creditors have no interest in maximizing the value of firm assets. Their claim to any upside is capped, their downside is large, they seek the fastest possible exit that makes them mostly whole. The incentives of impaired creditors are simply not well aligned with maximizing the long-term value of an enterprise.

Yeah, basically.

Greece: It Ain't Over Till the Fat Lady Sings

The fat lady has not sung yet in negotiations between Greece and its creditors.  The most recent development:  Greece, after voting to reject the creditor's demand, has offered to agree to even tougher ones.  The creditors are saying to little, too late.  So what do they want, bodies of starving children?  German finance minister Wolfgang Schauble, known as the creditors' ultra-hard liner, has made an extreme proposal. Either allow the EU to take over Greece's public administration and run any money lent for its own benefit, or leave the euro for five years.  This sounds like the sort of ultimatum people offer when they are trying to provoke a war Grexit but don't want to look too much like the aggressor, one meant to be met with an outraged Ohi!  It also remains very much the minority view among creditors, who are increasingly split over where to go from here.  Stay tuned.

It is official then.  Greece has surrendered.  All that holding out, tough bargaining, calling a referendum, and voting Ohi! have come to nothing.  Syriza has agreed to terms tougher than the ones they just rejected.  In return, they have asked for some measure of debt relief.  There is definite momentum in Europe, with the possible but not certain exception of Germany, to agree.

So two questions remain.  Will the Germans accept the surrender?  (The other Europeans appear to be agreeable).

And, assuming that they do, will the positive effects of debt restructuring outweigh the harm from further austerity, and from the crisis?  I don't even understand what what the proposed debt restructuring means, let alone how long it will take to yield benefits (if ever).

And, I suppose, there is a third question.  How will all this effect other anti-austerity parties in Europe?

Planning for the Grexit

There is no doubt to my mind that right now the Syriza government should be frantically planning for the Grexit.  There is no doubt to my mind that the Syriza government should have been doing just that from the first it was inaugurated.  And, as someone (I forget who and certainly could not find the link) commented that if Syriza has been making any such plans, they have been hiding them well.

That is somewhat a different story.  While I believe Syriza should have been making such plans, it should also be keeping them as secret as possible.  This post, though speaking of FDR, explains the problem very well.  Any time a government is planning a devaluation, it must lie about it until the very last minute because as soon as a government says that it plans to devalue, there is immediate flight from the currency forcing an immediate devaluation.  And anytime people thing a government might devalue, it leads to bank runs, currency hoarding and -- well, see what has been happening in Greece in the past week.  In the interregnum between Hoover and Roosevelt, it went on for months. The author has a fascinating post about the fear and damage the economy suffered at the mere thought that Roosevelt might devalue -- as opposed to the immediate, immense benefit it reaped when he actually did devalue.

In the US, when there was fear that Roosevelt would devalue the dollar against gold, there was a stampede to convert dollars into gold.  This meant taking dollars out of banks and out of circulation, which led to mass credit freeze and bank runs.  Even people who were not thinking of converting their dollars into gold wanted to get them out of banks once the banks started to look shaky. Likewise, in Greece, fear that the government will introduce a new currency, which everyone agrees will fall fast, is making people want to take their euros out of the bank and hoard them.  Even people who aren't thinking of hoarding euros don't want to leave their money in a shaky bank.

But there are at least two critical differences between the US in 1933 and Greece today.  First, the US was a large enough country to be largely self-contained and have very little foreign debt, and besides, it was a creditor.  This meant that a devaluation would not have the catastrophic result that it has had in other countries, a skyrocketing of foreign debts.  And, surprisingly, Greece is apparently a net creditor in private finance, i.e., its investments abroad in private hands exceed its private foreign debts.  But both amounts are much larger in Greece today than they were in the US in 1933, so no one doubts that devaluation would be much more traumatic.

The other, huge, difference was that in 1933, US dollars, in paper, did physically exist.  To devalue did not change the currency that normally changed hands; it simply meant that currency could be exchanged for less gold than in the past.  In Greece, by contrast, drachmas have no physical existence and will have to be re-started.  This will take time, and given all that has been said about speed being of the essence, that is a serious problem.

This article is the best account I have seen yet on how to reintroduce the drachma.  It recommends legislation converting all financial assets and liabilities and all contracts from euros into drachmas at a rate of one to one.  (The drachma will then fall in international trade, but there will be no need to modify domestic contracts).  Banks will have to close for a few days to reprogram their systems. After that electronic transactions in drachmas would be possible until the physical drachma is introduced, which could take months.  It would be inconvenient but more annoying that anything for people with bank accounts and electronic transfer cards.  For people without banks or cards, it could be devastating.  Such people are most common in the informal sector.  In hard economic times, the informal sector grows.  And the line between the poorest members of the formal sector and the informal sector can be hazy.  A lot of the poorest members of the formal sector don't have bank accounts and deal in cash.  (Trust me, I know whereof I speak).  There would be other problems with skyrocketing foreign debt and bankruptcies and controlling inflation, but these problems would be the same in any devaluation.  It is creating a new currency where none existed before that makes the Grexit such a challenge.

The article convinces me that the transition is doable, and greatly facilitated by the use electronic transfers as money.  But the transition will require skill and competence.  Syriza does not impress the author with either.  Or me either.

The Importance of a Plan B

Up till now I have been a champion of the Syriza government in Greece.  I have blamed Greece's problems primarily on the European system being unreasonably slanted toward creditors.  I have watched in outrage as the whole idea that a country should be run for the good of its domestic population instead of for foreign creditors is treated as something radical or even insane.  I have gnashed my teeth in fury at the Europeans for crushing the Greek economy and then complaining that they feel betrayed by Prime Minister Alexis Tsipras' insistence on having some breathing room.  I have been outraged by their chutzpah in complaining refusing to allow even a few face-saving token compromises and them denouncing Tsipras' intransigence.  But this time I actually do agree that Syriza has done the inexcusable.  It doesn't have a Plan B.  Apparently Tsipras came to the table without a detailed plan.

Let us concede that Tsipras and the rest of the Syriza team were naive in thinking that Europe was going to relax its grip just because the Greeks had voted in favor.  Let us concede that they were naive in believing that bringing a democratic mandate to the table would be enough to make Europe budge.  Still, all that can be dismissed as inexperience and not knowing what they were up against.  It is a pardonable failing.

But now Tsipras and his team have had five months to learn what Europe is made of, five months to learn what the Eurocrats think of democratic mandates, five months to learn that the Eurocrats don't want negotiations and compromise, they want unconditional surrender.  So Tsipras held a referendum asking the Greeks, in effect, do you want your country to be run by a bunch of Eurocrats for the sake of its creditors.  By a landslide, the Greeks voted "No."  So what does Tsipras do?  He heads back to the negotiating table waving an even stronger democratic mandate, thinking that this will make Europe finally agree to more favorable terms.  As the old saying goes, insanity is keeping on doing the same thing and expecting a different result.

As I have learned through long and frustrating experience, any time you base your plans on the other person doing what you think they should do, you are setting yourself up for disappointment.  No matter how obvious it is to you that you are right, there is no guarantee that the other person will agree -- or share your priorities.  If you can persuade the other person, great.  But if you can't, then to base all your plans on getting the other person to do what you want is to give the other person a unilateral veto over anything you want to do.  You really don't want to do that.  If your ideal plan requires a certain course of action by the other person and there is no way for your ideal plan to work without it, well, go ahead and make your ideal plan.  Just don't count on it.  Have a Plan B ready if things don't go your way.

Tsipras appears to have actually believed what he said about the referendum strengthening his hand in negotiations.  He does not appear to have taken any account of the obvious -- that it would not.  He should have gone to the negotiating table with Plan A ready at hand, ready to drive a hard bargain.  And all the while, he should be working like mad on Plan B, the Grexit.  It now appears he did neither but simply expected Europe to respect the results of the referendum.  And this incident convinces as nothing did before that Greece needs a new Prime Minister.  This one is clearly incompetent.