Juba, Southern Sudan

Sudan’s long history has been closely tied with Egypt’s on its Northern border. The British control of Sudan from 1899 – 1956 was motivated largely by its desire to safeguard its planned irrigation damn at Aswan by controlling the Nile, which flows North through Sudan and Egypt into the Mediterranean. For the Nile, down river is north, the opposite of all the big rivers I have known of.  The British effectively ruled the largely Arabic, Muslim North and the Black African Animist/Christian South separately. When Sudan became independent from Egypt and the UK on January 1, 1956, it was the largest country in Africa geographically but with a modest population of only 42 million.

A civil war between Northern and Southern Sudan broke out the year before independence and lasted for 17 years. The war resulted from Southern concerns over Northern domination and a variety of personal ambitions. Following a ten-year hiatus, war resumed when the North attempted to impose Islamic law on all of Sudan, contrary to the terms of the Addis Ababa Agreement of 1972 than ended the first civil war.  This second civil war raged until a Comprehensive Peace Agreement (CPA) was signed in January 2005. The Sudan People’s Liberation Army (SPLA), which now rules Southern Sudan, was formed at the beginning of this second civil war. Omar al-Bashir of the National Congress Party (NCP) is President of Sudan, ruling from the capital of Khartoum in the North. The International Criminal Court in The Hague indicted al-Bashir for war crimes on March 4, 2009.

The per capita income of Sudan is one of the lowest in the world at $2,380, which includes substantial oil revenue going to the government, and much lower for the South.  A census in 2008 counted 8.3 million people in the South, though some think the actual number is significantly larger. The two civil wars resulted in the deaths of 2.5 million Southern Sudanese, massive destruction, and infrastructure neglect in the South.

The Comprehensive Peace Agreement under which the country is now governed was designed to “Make Unity Work” by granting considerable autonomy to the “Government of Southern Sudan” (GOSS) in Juba, which oversees regional (state) governments and participates in the national government in Khartoum, sharing oil revenue with the South (where most of the oil fields are located), and other sharing arrangements. The CPA also established the Bank of Southern Sudan (BOSS) in Juba as a branch of the Central Bank of Sudan in Khartoum, though it operates somewhat independently. Very importantly the CPA provides for a referendum in the South in January 2011 of whether it wants to
become an independent country. The wide spread view in the South (I am told) is
that the North has not dealt and shared fairly with the South and that it will vote for independence.

I am working there to help the GOSS chose an appropriate monetary regime and to prepare it to issue and manage its own currency, if, as expected, Southern Sudan does become independent next year. In this capacity I am working for Deloitte Consulting under a USAID contract. My first two sets of meetings with the management of BOSS were in Nairobi last month and in 2007. My most recent meetings were in Juba a week and a half ago. While we have advised that the conditions for the successful launch of a new currency would be better after several years of dollarization, the Southern Sudanese want
their own currency as soon as possible. The management of the BOSS with whom I
work has agreed with us that such a currency should be issued under currency board rules (see my book about the currency board I helped establish in Bosnia, “One Currency for Bosnia”). I am now working with my Deloitte colleagues on drafting a new central bank law and an establishment plan for a new central bank, both to be discussed and finalized when I return to Juba in September.

I was not allowed to travel outside of Juba for security reasons. Juba, itself is a garrison city of refuge for hundreds of thousands of Southern Sudanese from years of war. Since the peace agreement in 2005 Juba’s population has exploded from 160,000 to over 1.1 million today. The capital city has few paved roads and I never imagined that the hills and valleys of rutted city roads could be so deep. Malaria is a problem. A scattering of huts surrounds
our relatively lovely camp on the banks of the White Nile. Our driver was proud to live in one such hut, which, he explained, has a real bed (off the ground with a mattress). Apparently that is all that it has. My colleague Adam, who has been in Juba for over a year, described a father and his four little sons who emerge every morning from their hut neatly dressed and with smiles on their faces. Adam asked the father, why they smile so brightly each morning. “Because we know we will have food today,” he replied.

These good and long suffering people deserve better. I don’t really know whether independence or Making Unity Work will be better for them. But I am happy to contribute what I can to at least improving the prospects of their having a stable currency if they issue one.

I am reluctant to photograph people in such poverty, so below you see two of my colleagues breakfasting at our lovely Camp by the White Nile.

A South African Hero

It was interesting being in Kenya this past week while the World Cup football (soccer) matches were being played near-by in South Africa. When Kenyan’s interrupted their viewing of a match to converse with me and learned that I was an American they inevitably wanted to know how I thought President Obama was doing. I hated telling them. The current World Cup in South Africa, however, made viewing Clint Eastwood’s “Invictus” on the plane on the way home even more moving than it would have been anyway. The movie dramatizes South Africa’s first post apartheid President, Nelson Mandela’s, decision to save and embrace South Africa’s national soccer team, “Springboks,” so loved by white South African’s and thus hated by black South Africans, as an element of his program of national reconciliation.The wisdom, courage, and compassion of leaders like Mandela, Gandhi, Martin Luther King overwhelm me. These leaders placed the well being of their people, their countries, and mankind more generally above narrower concerns for justice or revenge. They looked forward not backward. Mandela understood that his fellow black South Africans would have richer more fulfilling lives if they embraced and worked with it’s white citizens rather than simply displacing and replacing them in positions of power. He also knew that that would be a hard sell.

I remember well some worldly wise “friends” telling me in the 1970s that there was no chance in hell that white South Africans would allow blacks to vote and thus turn over the government to blacks. They would fight to the death rather than give in. My “friends” were reflecting not only the view that South Africa’s blacks were incapable of ruling the country
efficiently and justly, but that those in power for all those years would never give it up to anyone. In part my “friends” were ignorant of the actual attitudes of many of South Africa’s whites toward South African blacks. And no one expected a Nelson Mandela to take over the Presidency. It is still too early to know whether post apartheid South Africa will succeed in efficient and just governance, but that it even has a chance is the result of the belief and commitment of Mandela and the last white President F. W. de Klerk and others that the nation must rise above the hatred and score settling for the injustices of decades of the oppression of one people by another if it was to become great (or even survive).

My old “friends” were reflecting an all too human and common attitude of those who have ruled and dominated others for many years. They were reflecting the fear that the “ruling class” might not be able to stay in power on the basis of merit alone and thus needed to become more and more repressive toward the groups that might challenge them. Consider, for example, the outcry of some older American immigrants—we might call them the decedents of Mayflower Christians who came here to find religious freedom and less oppressive government—toward new immigrants, legal as well as illegal. The Mexicans and other Latin’s flooding into the U.S., for example, are not bringing an alien culture with them. They are part of that broader Anglo culture dominated by the Roman Catholic and other Christian Churches and the values they hold. So what is it that our old guard nativists fear? In part, perhaps largely, they fear the loss of their position in society. But why should they fear that in the “land of the free” if they hold their positions by merit? We must be suspicious of the motives of such people.

Before he was President of South Africa, Mandela was in prison for 27 years for opposing the white South African government as a leader of Umkhonto we Sizwe, the armed wing of the African National Congress. He was released February 11, 1990 and led the ANCs participation in the negotiations that resulted in a new constitution opening participation in the government to all South Africans. He was awarded the Nobel Peace Prize with de Klerk in 1994. It was not easy for black South Africans to forgive a lifetime of oppression by whites. But for a man who had spent 27 of the most productive years of his life in prison to not only forgive but to lead his fellow black South Africans to deep and genuine reconciliation with their white oppressors in the interests of all South Africans is extraordinary and the mark of a truly great man.

Great leaders like Mandela, Gandhi, King, and Ronald Reagan, another of my heroes, were optimists who believed that the world could be made a better place for everyone and devoted themselves to that task. Those who out of fear (or plain malice) spread misinformation about others—e.g., Muslims who demonize America and Americans who demonize Islam—can create the very world they fear if we take them seriously. They endanger all of us and potentially make the world a worse place. I stand in awe of the greatness of Nelson Mandela, who could rise so far above his own suffering and the injustices against him to see and promote the higher principles that help make people and
society decent. “Invictus” is a deeply inspiring and moving movie.

Kyrgyzstan in Crisis

My heart goes out to the poor people of Kyrgyzstan. They seem to be sliding into civil war. The current government of this small, poor central Asian country of 5 million people, in power for only two months, seems unable to contain the ethnic violence in the south near the Uzbek boarder and is appealing for outside help. Nestled between Kazakhstan to the north, China and Uzbekistan to the east and west and Tajikistan to the south (and Afghanistan just beyond), Kyrgyzstan provides an example of how it might look easy for the U.S. to help a friend—they have allowed us to set up an airbase there that we use for supplying our troops in Afghanistan to the south. The Kyrgyz Army is weak and its police corrupt. The new government just drove out a corrupt President, Kurmanbek Bakiyev,
who had come to power in March 2005 in the bloodless Tulip Revolution that replaced Askar Akaev, Kyrgyzstan’s first President since its independence from the Soviet Union in August 1991. They need help to survive.

When I first visited this little mountain country in February 1992, I referred to it as the Switzerland of central Asia. Like Switzerland its snow-capped mountains are spectacular and it has few natural resources. I suggested that like Switzerland it could become wealthy with free markets, good policies, and hard work. I lead the International Monetary Fund’s
technical assistance to the National Bank of Kyrgyzstan and helped it replace the Russian ruble with its own currency, the Som, in May 1993. A matched set of that currency with the serial number 000000011, personally signed by the then governor Kemelbek Nanaev, hangs proudly on my office wall. At a celebration of the 5th anniversary of the Som, President Akaev, whose match set of the Som has the serial number 000000001, personally presented me with Kyrgyzstan’s Certificate of Honor for my role in introducing the currency. Some of the most exciting days of my life were in Kyrgyzstan. My strongly felt sympathies are with the new government. Yet it would be a tragic mistake for the United States to become militarily involved in restoring peace there.

Ms. Roza Otunbayeva, the interim leader until elections can be held later this year, has reaffirmed the U.S. lease on Manas Air Base after her deposed predecessor had tried to close it. She seems to be surrounded by pro market, pro freedom reformers. We have every reason to wish her government well. But a U.S. intervention would be taking sides in a potential civil war. Russia has bases in Kyrgyzstan as well and can hardly be indifferent to the fate of its neighbor and former fellow member of the Soviet Union. Russia has, up until now, wisely rejected Ms. Otunbayeva’s call for help and both Russia and the U.S. are exploring the possibility of international (U.N.) assistance. The U.S. Manas Air Base is an important U.S. air link to Afghanistan, but Kyrgyzstan is not critical to U.S. security. In any event, Ms. Otunbayeva asked Russia for help, not the U.S.

Were she to turn to us for help, it might look relatively easy to provide it. We have troops there already. But then for good or ill her problems would become ours and there is no knowing, really, what problems we might be taking on. The Viet Nam, Afghanistan and Iraq wars looked very different when we got into them than they did at the other end of the process (when ever that might be for the later two). We need to try hard to imagine how it might look in a few years looking back. If there is a good case for external help, the U.S. and Russia should be able to make that case to the U.N. If and when the U.N. acts, it will clearly be doing so above and beyond the potentially conflicting national interests of parties to a new Great Game that we and the rest of the world can ill afford.

A Nation of Immigrants

I have had to remind myself of late that there is much to be proud of as an American. And I have not been prouder for a long time than I was last night listening to this year’s recipients of the Merage Foundation for the American Dream’s National Leadership Awards. Paul Merage family’s foundation is dedicated to “Helping Immigrants Join Mainstream America.” Mr. Merage is himself an immigrant from Iran, which he left in 1979 by necessity. But his choice to settle in the United States was his, and the Merage Foundation is one of his ways of expressing thanks for the opportunities that opened up to him here and to give something back to help keep America the dynamic, innovative home to immigrants that has been such an important component of our success as a
nation.

America is the wealthiest nation on earth because it is the most productive. Many other countries provide us with first class competition these days. We will retain our markets and our edge only through remaining productive and innovative. We will be the best only as long as our workers and entrepreneurs are the best trained, best equipped, and best incentivized to continually perfect processes and innovate.

America is exceptional among nations in that it is almost totally a nation of immigrants – self selected immigrants who chose to come to our environment in which they were free to work hard and experiment. Mr. Merage noted that immigrants must change to adapt to their new homes and that a culture of change is good for innovation. In our globalized, highly competitive market, innovation is our competitive edge. Mr. Merage stated that those who say that America’s best days are behind her are wrong. They are wrong because of the continual infusion of enthusiasm and innovation from a never-ending
inflow of eager new immigrants.

Mr. Merage also noted that no nation can receive new immigrants without some trepidation and worry about how they will fit in and adapt to its culture and ways. Fear is a powerful emotion. Mr. Merage noted that we can all understand the fears of Arizonans and others over whether our relatively open borders are letting in the wrong people. Fear can cloud good judgment, for example, about who are criminals and where they come from. But America remains the most welcoming of all countries to our great benefit. Its can do spirit and the general decency of its people are magnets for the world’s best and brightest and most hard working. The Merage Foundation is dedicated to
helping them assimilate successfully.

This years winners of the National Leadership Awards where:
Eric Benhamou (Algeria), Chairman and CEO of Benhamou Global Ventures, cofounder
of Bridge Communications, and CEO of 3Com and Palm; Amador S. Bustos (Mexico),
Chairman and CEO of Bustos Media in California; Roger Cohen (England),
Columnist for the New York Times; Gloria Estefan (Cuba), singer, composer and
author; Dikembe Mutombo (Congo), Former NBA star; Arnold Schwarzenegger
(Austria), Governor of California and former Terminator; and Ahmed H. Zewail
(Egypt), Nobel Prize for Chemistry in 1999. The event was cosponsored by the
Woodrow Wilson International Center for Scholars and I am grateful to my friend
Steve Meeter for inviting me.

Each winner addressed us with touching stories of how and why they came to America and how they flourished here financially and spiritually. The Terminator spoke to us by video because of the elections in California that day. Most of them expressed understanding but sadness that fear had pushed Arizona to trample on some cherished American qualities of openness to immigrants. Sorting out a proper balance and policy toward immigration is not and will not be easy but it is a critical, pressing need.

The most dramatic address was by Dr. Halel Esfandiari, Director of the Woodrow Wilson International Center for Scholars Middle East Program. At last years awards dinner, Ms. Esfandiari was in prison in Tehran, where she had been since May 8, 2007. She had returned to her native Iran in December 2006 to visit her 93-year-old mother. The blood curdling story of her arrest and imprisonment can be found on the Woodrow Wilson center website.  She told us that those at last year’s awards dinner had prayed for her release and here she was. Keep those prayers coming, she said, there is so much more to do.

Paul Merage summed up the spirit of the evening by noting that the symbol of America must remain the welcoming Statue of Liberty, not The Wall (pick your favorite).

Greece’s Debt Crisis Simplified

Greece suffers from unsustainable public sector debt, low productivity, and an overall uncompetitive economy. In 2009 the government’s fiscal deficit was 13.6% of Greece’s Gross Domestic Product (GDP) and its outstanding debt stood at 115% of its GDP. Lenders were losing confidence in Greece’s ability to repay them. Before the loan agreement with the International Monetary Fund (IMF) and the EU announced on May 2, they were demanding an almost 10 percentage points premium over lending rates to
Germany, which worsened Greece’s deficit. Even with the large corrective measures Greece has agreed to undertake, its debt is projected to increase to 149% of GDP in 2012 before beginning to shrink in 2014.

Greece’s government must cut spending and improve tax revenue in order to greatly reduce or eliminate its need to borrow, reduce the cost of its output (via domestic deflation or leaving the Euro and depreciating a new currency) in order to restore the external balance between its imports and exports, and to reduce the impediments to economic efficiency and productivity growth so that its economy can grow more rapidly. How did it get in such a mess? What role was and is played by its use of the Euro? And what are its options?

How Did it Get There?

American’s like to think that we are responsible for our own well-being and turn to others for help only reluctantly and exceptionally. We do not generally think of others, whether through government or private organizations, other than our families, owing us
anything but civil treatment and respect for our property. American’s are generally critical of Europeans for their entitlement attitude and the large state welfare systems that result from and/or feed it. Surprisingly, European per capita income grew a bit more rapidly than it did in the U.S. over the ten years since 1997 (67% vs 55%), however this outcome reflects the unusually rapid growth in those Old European countries that reformed their welfare systems and markets the most (such as Ireland and Sweden), the broadly favorable effect of the Euro on competition and improved productivity, and the fact that population is stagnating in Europe while growing rapidly (via immigration) in the U.S, thus sharing the income growth among fewer people.

But following the retrenchment of entitlement spending resulting from Clinton’s welfare reforms in late 1996, the U.S. has more recently joined Europe in an ever-expanding welfare budget. Two factors were particularly important for the growth in such expenditures: the aging of the population and a global abundance of saving and hence low interest rates. Commitments were made (unfunded social security promises, medicare, etc) in the U.S. and elsewhere that generated future rather than current costs. Thus today’s politicians could gain credit for increased benefits that future generations would have to pay for out of (hopefully) larger incomes. Unfortunately, the future work force will be smaller relative to the retired workers they must support, greatly compounding the burden. In addition, borrowing costs have been unusually low making short term deficit financing particularly tempting. Low interest rates encouraged the shortsighted expansion of government programs financed with money borrowed from present and future generations. The result is a growing debt burden and a slowdown in the growth in output with which to pay it. But the future is now at hand and adjustments
MUST be made in the U.S. and in Europe.

Americans tend to think of the Nordic countries and especially Sweden as leading Europe in the third way of a generous welfare state. In fact, over the last decade
Sweden has trimmed its welfare programs, privatized much of its education, and
liberalized its labor markets. It is in Southern Europe that economic efficiency suffers the most from overly generous work rules and benefits and competition stifling professional syndicates.

The Economists’ Charlemagne observed that: “Deep down, tensions inside the
euro-zone involve clashing social contracts and democratic preferences. Post-war German governments have won voters’ consent by offering thrift and monetary stability (a comfort for Germans with a folk memory of life savings lost to hyperinflation), plus an elaborately consensual capitalism. Greek governments have instead spent years buying social peace and votes with public spending, generous pensions, tax breaks, EU money and jobs for life, directed to an array of rent-seeking interest groups. This sort of social contract, lubricated
by endemic corruption and lax law-enforcement, has evolved to suit a country emerging from a vile civil war and years of dictatorship in which consensus was painfully absent. Unfortunately the Greek model has proved itself unsustainable.”[1]

The Role of the Euro

Greece replaced its currency, the drachma, with the Euro in January 2002. It entered the Eurozone in part on the basis of lying about the government’s finances. By replacing its own currency, which suffered chronic devaluations to offset chronic inflation, with a currency it could not itself inflate, Greece removed a major source of risk to
international (or other European) investors. The risk of devaluation of the Greek currency, at least visa vise other Euro countries, no longer existed. As a result, Greece was able to borrow at lower interest rates than were available before. Unfortunately, this weakened the financial discipline of the Greek government even more and it borrowed with abandon against the prospect of future growth.

The Greek economy suffered in another way that had nothing to do with its use of the Euro but which the Euro helped to hide for a while. The Greek economy actually grew more rapidly over the last ten years than most other European economies, but its per capita income is still half that of Sweden. Its growth was fueled in part by a growing deficit in the government’s primary budget balance and prices in Greece also rose more than in other Eurozone countries, worsening Greece’s terms of trade (its external competitiveness). Thus it needed to borrow abroad to finance the excess of its imports over its exports giving rise to a large private sector debt alongside the public sector’s debt.

Greece needs to greatly reduce its government’s borrowing and to increase its international competitiveness to reduce its balance of payments deficit. Leaving the Euro and reintroducing its own currency would open the possibility of devaluing the new currency to restore external competitiveness. However, a nominal devaluation would not overcome the real rigidities in the Greek economy, which must be addressed if it is to
remain competitive. According to Willem Buiter, Chief Economist of Citigroup and a former member of the Bank of England Monetary Committee: “Unless the balance of economic and political power is changed fundamentally, a depreciation of the nominal exchange rate would soon lead to adjustments of domestic costs and prices that would restore the old uncompetitive real equilibrium.”[2]

The role of the currency in which people, companies or countries borrow and the solvency of the borrower are often confused. Greece is fundamentally insolvent, but this does not necessarily harm the currency it uses. If New York City had defaulted in 1975,
as it nearly did, the fact that its debt was in U.S. dollars would not have harmed the dollar (measured by its domestic purchasing power or its exchange rate, or the willingness of investors to lend dollars to more prudent borrowers). Similarly a default on its debt by the Greek government would not in and of itself affect the value and soundness of the Euro. The Euro could suffer indirectly if a Greek default harmed Europe’s real economies (i.e., the production of goods and services) and thus affected Europe’s balance of payments (balance of imports and exports) with the rest of the world. The Euro could also suffer if the European Central Bank (ECB) increased the supply of Euros too much in an effort to prop up Greek bonds causing inflation.

The Euro is currently overvalued relative to the U.S. dollar. It needs to devalue in order to achieve a better balance between Europe’s imports and exports with the rest of the world. Thus the fact that the Euro depreciated some in recent days should not be seen as weakness or a lack of confidence in the Euro, just as the depreciation of the dollar against other currencies a few years ago, which was and is also needed to restore better external balance, should not be seen as a lack of confidence in the dollar. Quite the contrary, a depreciation of the dollar with an improved external balance of payments, would increase confidence in the dollar.

More challenging are the payments imbalances within Europe. In the United States, for example, where prices and labor markets are more flexible, imbalances between the poor South and the industrial North in the last century produced lower wages and labor costs in the South that gradually drew more capital to the South. Wages in the North declined while they increased in the South. The process took decades and is still underway, but no one speaks of an economic imbalance between the North and South any longer. If Europe is lucky, the Euro and the market liberalization promoted by the EU will over time reduce the economic imbalances among its member states. Unfortunately, the first decade of the Euro saw the less productive southern states increasing rather the reducing labor costs and thus discouraging the reallocation of capital to the South.

Options

Three options for the government of Greece in the face of its debt crisis are considered here: a) fiscal consolidation without assistance, b) default/rescheduling, and c) the program of fiscal consolidation and structural adjustment actually being financially
supported by the IMF and EU.

Fiscal consolidation without assistance

According to the IMF: “The sharp increase of general government debt to 115 percent of GDP in 2009 can be attributed to three factors, which will continue to weight on Greece for some time: (i) a drop in economic growth, (ii) high real interest rates (as the recession has brought down inflation significantly and market confidence weakened), and (iii) a sharp increase in the fiscal deficit to 13.6% of GDP.”[3] While economic recovery would significantly improve Greece’s fiscal finances, they would remain unsustainable without large spending cuts and tax revenue increases. Furthermore, without a significant improvement in Greece’s terms of trade (its competitiveness with the rest of the Eurozone and with the rest of the world), its imports would continue to outstrip its exports needed to pay for them, which would necessitate continued borrowing from abroad. As Greece cannot devalue its currency within the Eurozone, its terms of trade can only be
improved by domestic deflation, structural reforms to improve productivity, and/or (with regard to the non Eurozone) a depreciation of the Euro itself.

The fiscal correction needed, from a deficit of 13.6% to near zero, is extremely large. Even if spread over three or four years the negative impact on aggregate demand will almost certainly depress GDP growth in Greece for a year or two even under very optimistic assumptions. Falling or stagnant output will temporarily worsen tax
collections. Vigorous implementation of structural reforms (e.g., labor market
liberalization, state enterprise privatization) designed to improve the economy’s productivity and growth will help speed up the reallocation of resources from the public to the private sector and restore growth, but the positive impact will take time to materialize. The success of this strategy depends, in addition to successful implementation of the promised consolidation and structural reforms (requiring at least begrudging acceptance by the Greece public), on its credibility in the eyes of those buying Greece’s debt. It depends on reducing the risk premium demanded by lenders both to finance the additional deficits needed by Greece during the several years of adjustment and to
refinance its existing debt (half of which will mature in the next five years). If risk premiums don’t fall sharply from recent levels, deficits will worsen to cover increased interest costs. However, the more sharply the government reduces its deficit the more sharply income and tax revenue will fall in the short term. Greece is between a rock and a hard place.

The IMF’s debt sustainability assessment projects that Greece’s public debt would peak at 149% of GDP in 2013 and fall to 120% by 2020 if it faithfully implements the policies agreed with the IMF.[4] Slower fiscal adjustment would have a smaller negative effect on the baseline scenario than would slower economic growth. “A smaller adjustment of 1 percent of GDP per year would imply a more gradual decline [of its debt] to about 132
percent of GDP by 2020…. A one percentage point reduction in the GDP growth rate each year would result in debt rising to around 166 percent of GDP by 2020; (on the other hand, faster growth by one percentage point would bring the debt down to 80 percent of GDP by 2020.”[5] With no policy change the IMF projects Greece’s debt at 194% of GDP by 2020. The key to success is in improving Greece’s productivity and growth.

Default

A default would allow the government of Greece to stop payments of interest and repayments of principle on its debt until it reached an agreement with its creditors on rescheduling it under terms it could manage. “The IMF, which has pretty good experience of fiscal crises, privately recommended that Greece restructure its debt (a kind of soft default, renegotiating payment terms). It was refused point-blank by the European authorities.”[6]

Greece’s actual deficit in 2009 was €32.3 billion or 13.6% of GDP. Of this
amount €11.9 billion was interest. A debt service suspension in 2009 would have
left the government short by €20.4 billion forcing spending cuts and/or tax
revenue increases of that amount. For this year, Greece has already enacted or
plans cuts in spending of €4.3 billion and increases in tax revenue of €4.7
billion leaving an unfunded primary deficit of €5.6 billion. A debt service
suspension (default) would require additional spending cuts and tax (or
privatization) revenue increases of that amount (€5.6 billion). Such large up
front fiscal adjustments are bound to reduce actual output further in the short
run, thereby complicating the adjustment process.

The contagion risks of default are considerable. Over half of Greece’s gross debt of around €300 billion is held abroad, and French and German banks hold much of that. Greek banks hold a substantial part of the rest. A default could push some of these banks into insolvency. In addition, lenders have already expressed concerns (in the form of higher risk premiums) about the ability of Portugal, and Spain and even Ireland and Italy to repay their debts. A default in Greece could precipitate defaults in one or more of these, producing even more losses to banks and other lenders. To appreciate the magnitude of the problem for Europe, consider that “the sub-prime property market in the US, together with its slightly less toxic relatives, represented a $2 trillion mound of debt. The combined public and private debt of the most troubled European countries – Greece, Portugal, Spain
and so on – is closer to $9 trillion…. Should Greek government bonds collapse, the country’s banking system would become insolvent overnight.”[7] While it is possible, though not generally desirable, for a solvent government to bailout insolvent banks, it is not possible for an insolvent government to do so. Finally, the Greek government would be locked out of financial markets foreign and domestic for some years forcing them to adjust even more sharply.

The primary benefit, which would be a very important one for the future health of financial markets, would be the harsh lesson to lenders to pay more attention to the credit worthiness of borrowers in the future.

Actual IMF/EU supported program

Neither of these options was adopted. Instead, the EU and the IMF have provided financial assistance to the Greek government in order to moderate the severity of the fiscal adjustment Greece will have to make while avoiding the losses to lenders (for the time being) of a default. This financial assistance is contingent on Greece implementing policies that should return it to a sustainable level of debt without external assistance.[8]

“Greece is adopting an ambitious comprehensive multi-year adjustment program to lower the fiscal deficit and the debt ratio, reduce domestic demand in line with capacity, and increase supply and competitiveness so that the economy can step onto a higher growth path led by investments and exports.”[9]

Compared with the first option of adjustment with no financial assistance, Greece’s adjustment will be somewhat more gradual. The expectation is that the more gradual adjustment will produce a smaller drop in output with its negative impact on tax revenue and thus deficits in the short run and should enjoy easier, broader support among Greek
citizens, an essential element of any successful adjustment program. Real wage cuts and the relative deflation needed to restore competitiveness with the rest of Europe will be particularly difficult.

If successful, and thus Greece avoids defaulting on its debt, the IMF/EU supported program will reduce the prospects of losses to lenders to Greece and potential bank failures and contagion to Spain, Portugal, Ireland, etc. Greece will still have to pay off
its debt but the economy should grow faster than it would have without
structural reforms. The moral hazard of international assistance is mitigated
by the strong conditionality (spending cuts, privatization of state
enterprises, etc) attached to that assistance. However, the market discipline
of banks that underpriced the risk of lending to Greece has been undercut.

European Stabilization Mechanism

A resolution of the debt crisis requires government adjustments that will contain and/or reduce their debts and convincing lenders in the interim that the measures being taken will in fact do the job. Following the announcement and subsequent approval by the IMF and EU of Greece’s stabilization program and financial assistance, market confidence
in Greek debt improved. The spread between ten-year Greek government bonds and their German counterpart dropped rapidly from almost 10% to under 5% by mid May. However, markets remained very nervous and risk premiums on Portuguese and Spanish debt remained high (1.9% and 1.1% respectively). By May 27 the risk premium on Spanish debt had risen to 1.5%.

In order to reassure lenders that the EU and IMF are prepared to provide similar assistance to other qualifying European countries, eurozone members established a more formal European Stabilization Mechanism (ESM) with commitments to lend up to one trillion dollars if needed (of which the IMF would provide about one third). According
to The Economist: “The pipes of the world’s financial system are gumming up again. One concern is that American money-market funds, which Barclays Capital reckons have lent $300 billion-$500 billion to European banks, are cutting their exposure to Europe, making it hard for banks and companies to borrow. LIBOR, the interest rate that banks charge one another to borrow, has jumped to levels not seen since August. The pressure
is growing on EU states to get a €500 billion stabilisation fund, the biggest chunk of the bail-out, up and running.”[10]

Angela Merkel, German Chancellor, and others have correctly noted that international financial assistance to Greece or any other EU members with debt problems only buys time. If their fundamental fiscal and structural problems are not fixed, the financing will have been wasted.

Because actual implementation of the ESM will take some time and because, according to the European Central Bank (ECB) debt markets had choked up, the ECB also announced that it would start buying member government debt as needed to restore the liquidity and smooth functioning of those markets. The dollar swap lines established with the Federal Reserve in 2008 were also reactivated. According to The Economist the situation “leaves the ECB in a quandary. In buying bonds of distressed countries it is, in effect, opening the emergency exits of a crowded theatre. Its hope is that in doing so it will make everyone feel safer and thus less likely to bolt at the first wisp of smoke. Yet the risk it faces is that in making an exit easier, more people will leave. That already appears to be happening in Greece….”[11]

Though the ECB is sterilizing the monetary consequences of its new sovereign debt purchases, these steps by the ECB have been very controversial bring into question its political independence and commitment to inflation between zero to 2%. Time will tell.

Implications for the U.S.

Success of the Greek “bailout” will result in more rapid European wide economic recovery. This will carry with it continued growth in European demand for American exports, which are a major source of U.S. recovery. Outside of North America, Europe is America’s biggest export market.

Failure could take several forms, but all of them would hurt U.S. exports and further weaken U.S. banks (to the extent that they hold Greek, Portuguese, Spanish, etc. debt) and thus the U.S. recovery. Greece may well default before the year is out or in 2011. A default might also be tied with the replacement by Greece of the Euro with its own
currency giving it again the option of devaluing in the hopes of restoring external competitiveness.

Greece could leave the Euro without further repercussion to the rest of the Eurozone. However, a Greek default raises the prospects of the default of other over indebted European countries unless the time bought by the IMF/EU supported adjustment program in Greece gives Portugal, Spain and others sufficient time to strengthen their own adjustment programs sufficiently to maintain market confidence in their debt. It could undermine the efforts of the U.K.’s new government to rein in its
deficit. A default would also further weaken already weak banks; though the loss would fall on the ECB to the extent it had purchased Greek debt. Bailouts of banks hurt by a Greek default would complicate efforts of southern European countries to reduce deficits.

It is possible, but highly unlikely, that all Eurozone countries would reintroduce their own national currencies, though one or more of the weaker members might do so. The EU itself could be threatened but French and German commitment to European unity is too strong to allow the complete dissolution of the EU. However, sharp differences
in situations and aspirations could result in the shrinkage of the Union to its
northern core with or without the more dynamic new economies to the East.
Alternatively, the current crisis could result in strengthening EU institutions (or among those that remain in it), including some surrender of sovereignty over fiscal policy. One way or the other, the crisis is bad for growth prospects in the near term and will thus slow the recovery of U.S. exports and the economic activity that accompanies them. The optimists can hope that it will accelerate market reforms that will promote more rapid growth in the longer run.


[1] Charlemagne, “The Euro’s existential worries”, The
Economist
, May 6 2010, page 57.

[2] Willem Buiter, “Sovereign Debt Problems in Advanced Industrial Countries”, Citi, Global Economics View, April 26, 2010

[3] “Greece: Request of a Stand-By Arrangement” International Monetary Fund, May 5, 2010, page 35.

[4] “The baseline scenario assumes that the primary balance [debt less interest
payments] will improve from -8.6 percent of GDP in 2009 to 6 percent of GDP by
2014 and beyond. Output is expected to contract in 2010–11, but growth will
reach 23/4 percent after 2015, while inflation is moderately below EU average.”
Ibid. page 35.

[5] Ibid.

[6] Edmund Conway, “Is Europe heading for a meltdown?”, Telegraph,
May 27, 2010

[7] Ibid.

[8] The conditions attached to IMF lending are specified quarter by quarter and loan
disbursements are also made quarterly. A quarterly disbursement cannot be made
until the required actions for that quarter have been taken.

[9] “Greece: Request for a Stand-By Arrangement”, International Monetary Fund, May 5, 2010

[10] The Economist, “That sinking feeling”, May 22, 2010, Page 75.

[11] Ibid, Page 76.

Breakfast at Rosewood

May 21, 2010

My dad’s and my birthdays on the 19th two days
ago are an almost distant memory. I had spoken in the afternoon to a gathering
of Rosewood residents (the retirement community my dad lives in as had my
mother and her mother) about a few of my travel adventures for the IMF
(Kyrgyzstan, Bosnia, and Iraq) and this was followed by dinner in the Rosewood
dinning room. My brother and sister and I had wanted to take dad out somewhere
for the birthday dinner but he insisted on inviting relatives to join us for
dinner at Rosewood. He had booked the 4:30 pm sitting. Dad’s 93rd
birthday was announced during the regular activities announcement period as was
the remarkable fact that his visiting son was also celebrating his own birthday
on the same day. Balloons where delivered to our table and every one sang happy
birthday to us. We were all still there through the 5:00 sitting and another
birthday announcement and a second round of “happy birthdays to you,” as we
were through the 5:30 sitting and a third round of “happy birthdays to you.”

I don’t quite understand why my father preferred this to
going out to a restaurant, but the next day at my speech to the Quest Club (a
group of Bakersfield business leaders that has met monthly for 75 years), dad
related with pride that he had been sung happy birthday to three times the day
before. Who would have guessed?

Each day during my visit dad has taken me walking, saying
quite correctly that the exercise would be good for me. This is a task normally
performed at home in Maryland by my friend Will. Walking with my dad, while
pleasant, is of limited exercise value as his pace with his walker is rather
slow and he must sit down and rest every two blocks or so.

I missed breakfast with dad at Rosewood the previous two
days due to urgent deadlines for comments on notes being prepared for officials
in Southern Sudan by my Deloitte colleagues Steve Lewarne and James Dean. Their
workday in Juba ends about 4:00 am California time and I need the Internet
connection in my hotel room not available in my dad’s apartment in Rosewood to
respond to them. But today I made it in time for the 7:30 breakfast service at
Rosewood. I sat across the table from my dad and next to Mr. Hall, who told me
again (as he had at lunch the day before) that he had been called up twice by
the Army—WWII and the Korean War.

Dad told us once again that the very nice lady in the
kitchen had asked him what he wanted to eat for his birthday. Being caught by
surprise, he told her that he would like upside down pineapple cake. Later,
after the opportunity to think about it more, he told her that he would like
carrot cake. She service both he proudly told us. I decided not to mention that
I had eaten the carrot cake with him two days before. Dad was always the one
with the impeccable memory. Now, like my mom in her final months who lost her
short term memory but remembered clearly events from decades earlier, he
remembers earlier years clearly but is beginning to forget what happened
yesterday.

Like me, dad has always been the quiet one, letting mom do
most of the talking. Now, as if to fill the void, he has become rather chatty.
Mom had prepared his obituary as well as her own for our use, and he informed
me that he wanted to redo it himself and then proceeded to recall all of the
things he wanted to include.

In no time we returned to the dinning room down the hall for
lunch. Mr. Hall asked where I was from and told me that he had been in the Army
twice. Dad asked me again how far I lived from the Capital. People seemed more cheerful
and up beat than when I was here the last few times just preceding and just
after my mother’s death. The staff remain as cheerful and attentive and gentle
as ever.

When I arrived for this visit I found it a bit jarring to
see on my dad’s assisted living apartment door: “Sue and Warren Coats.” For a
few days I pondered how to approach the subject of its removal with my dad.
Seeing indications that he was moving on, tossing out one unused and useless
item of mom’s then another, I worked up my courage and asked him if he thought
we should remove mom’s name from door. Sure he said, and when we returned from
our walk it was gone.

Where Should We Go From Here? Inflation, Regulation, and Debt

I will present the following to the
Quest Club in Bakersfield,
California May 20, 2010. I will celebrate my joint birthday with my father in Bakersfield May 19 and attend my 50th high school reunion May 22.

"Where Should We Go From Here? Inflation, Regulation, and Debt" Quest
Club. Bakersfield, California. May. 2010.

Available at: http://works.bepress.com/warren_coats/19 

 

Comments on When Values Clash

Thank you all for your comments. Four of them cry out to be
shared. The first is from Kelly Young, a long time friend here in DC, who is a
lawyer. The second is from Steve Paliwoda, who was an ATO fraternity brother at
UC Berkeley in the mid 60s and now lives in Alaska. The third and four—which
landed in my in-tray next to each other and both have things to say about the
Mormon Church are respectively from Diana Paskett, my cousin and the most
loving person on the planet, and Steve Lang, my English/Russian interpreter in
Kazakhstan, Kyrgyzstan, and Moldova in 1992 – 96. Steve was such a good
interpreter that when translating my frequently given Monetary Policy 101
lecture, he sometimes translated statements before I made them. He later became
the personal interpreter of Mikhail Khodorkovsky, the Russian oligarch who
built up Lukos Oil before being imprisoned (where he remains today) for gaining
Putin’s disfavor by becoming somewhat political. Putin’s friends have managed
to steal Khodorkovsky’s companies as the government bankrupted it with phony
tax claims. Steve remained in that position even after Khodorkovsky was put in
jail, but has now moved to Canada after the Russian government banned him from
entering Russia.

*****************

Warren,

Yep.  You hit the nail on the head:  the
fundamental problem here is the unnecessary involvement of government in
running universities, which necessitates political resolution rather than
private, market-based, and diverse solution-making.

Another problem, which you didn’t touch directly, is that
Hastings, like nearly all universities, levels a head tax in the form of a
“student activity” fee on all enrollees and uses.  It then uses monies to
fund such recognized groups, which it naturally has to define.  Hence, a
First Amendment problem akin.

Consistent with your argument, private institutions ought to
be free to decide whether to organize themselves by imposing such fees and
using them however they please.  The market will decide which systems work
and which don’t.  But there is a strong argument that even private
organization – especially one as large and diverse as a university — ought not
to do such a thing, as Berkshire Hathaway approximates in allowing each
shareholder to decide how the company spends his share-based portion of the
company’s allocation of charitable contributions.  Of course, as Friedman
argued years ago, corporations ought not even try to make truly charitable
gifts but simply return profits to shareholders to let them spend, save, or
give away as they see fit.  Unless the organization has a comparative
advantage in making such decisions or can reduce transactions by doing so, the
economic – but not political – argument is quite strong:  focus on your
mission, whether profit maximization, education, or national defense – and
avoid taxing, spending, and other actions that don’t advance THAT mission.

I made this very argument in the late 1980s when I was an
undergrad at UVA.  I wrote a bi-weekly column for one of the newspapers
and called for repeal of the student activity fee as an inefficient and often
unfair “tax.”  As you might suspect, I was roundly…ignored.

Thanks for making and sharing your points.

Kelly

******************

Warren:

Public universities represent our Government, and
our Government says there can’t be discrimination; therefore, all groups
associated with public universities must adhere to the values of the
university, which in turn must adhere to the values of the Government. 
It makes no sense whatever for a public university to provide on-campus
meeting facilities for (1) A local wing of the American Nazi
Party — which advocates, among other things, discrimination
against Jews, or (2) A local section of the Ku Klux
Klan — which advocates, among other things, white supremacy,
or (3) A meeting of NAMBA — the North American Man-Boy
Association — which advocates pederasty.

It is an easy trap for parochial organizations to fall into,
that they claim they have the "right" to bar from membership all
non-believers (and gays — even if they are believers).  Today,
such groups are dealing with questions that are not yet fully resolved by
the law.  For example, the law, as well as general public
opinion, are pretty clear and unified regarding such issues as
racial discrimination, poll taxes, women suffrage, child labor, vigilante
justice, state secession, and slavery.  However, we have yet to clarify
and come to terms with such issues as sexual discrimination, abortion,
terrorism security, and illegal immigration.  And before too
long, we will have to deal with such issues
as diminishing available funding for social security, medicare and
national defense.

While the above "laggard" issues are being
resolved in the courts, the law must be obeyed.  This means that parochial
groups that discriminate cannot, and should not, have the use of public
facilities, or receive public funding or backing. 

Steve Paliwoda     

******************

Warren,

I so completely AGREE with you, it is late so I shouldn’t comment
further, however I will briefly say that as my Christian Church, the Church of
Jesus Christ of Latter Day Saints, AKA the Mormons, will one day, if we
have not already, come head to head on this very issue.  The several BYU
campuses, many campus organizations, our Temples which even our membership must
meet very specific requirements to attend are all at risk.  Many of our
students depend on federal financing – grants etc., we are told which holidays
we MUST celebrate, and HOW we must celebrate them etc. I am not well
versed on the subject, but I hear people who are – discussing the issues
with great concern.  I am afraid we are sleeping through the loss of most
of our freedoms.

Have a good night,

Diana

******************

Hi Warren,

Hope this finds you well.  Thought I’d toss in my two
cents’ worth on this one for a change.  But before I do, some sad news
from Kyrgyzstan.  I don’t know if you recall one of the housekeepers on
the foreigners-only floor of the old Dostuk hotel.  Her name was Olga, and
she was tall and statuesque and looked like a cross between Geena Davis and
Whitney Houston.  She was the only non-Kyrgyz among the housekeepers.
 Anyway, I know Dave Lindsey would remember her (I am ashamed to admit
that I still haven’t written to him as I’ve been intending for several years),
as would Isaac Svartsman.  Anyway, Olga had one son, whom she was raising
alone, his father having been a Cuban exchange student who had long ago
returned to Castro’s paradise, and she absolutely worshipped the kid.  He
was around 21-22 years old this year.  I’ve been in touch with Olga all
these years, and last week I called her to find out if she was okay because of
the recent disturbances there, as I had called during the previous ones, since
she lives only a few blocks from the central square and, being so obviously
non-Kyrgyz, would be a natural target for any racist violence.  She was in
tears within seconds, saying that the disturbances are nothing compared to the
fact that in December, her son was one of the passengers in a car being driven
by a kid his age, very fast, and it lost control on a bridge, rolled over
several times, and smashed into a concrete wall, killing everybody instantly.
 I can’t imagine what her life must be like now, after having invested so
much of her life energy into her son.  I then did a bit of internet
research on the accident, and learned that it was a new BMW, registered to a
humble 23 year old clerk in the city court (the chairman of which is Marat
Sultanov), who had loaned it to his buddies for their joy ride to oblivion, and
that he had been fined a whopping 300 som for having given them the keys
without having first drawn up the necessary documents for the transfer with the
road police, so he was in a way responsible for the accident, see…  In
the former Soviet states, you have to draw up the equivalent of a power of
attorney to allow someone else to drive your car without you.  By the way,
have you got a valid email address for Isaac?  I found some old aol or
hotmail address for him and wrote him about the accident but he didn’t respond,
so I suspect it’s an address he doesn’t use any more.

Okay, let’s talk about clashing values…

When I was a student at Cal State Long Beach, I remember
there being all sorts of special-interest clubs registered on campus, with the
right to hold meetings on campus property, post notices about events on campus
property, and hold these events on campus property, provided they followed all
the rules.

These organizations included all sorts of narrow groups that
one would think discriminated:  there were definitely Christian
"fellowships" and probably a Catholic society, GLBT
"alliances", young Democrat and Republican groups and probably
various socialist-leaning ones as well, a black student "association"
and comparable groups for latinos and the several varieties of orientals who
had big representation in the student body, etc.

I remember once attending some event and being given one of
those "HELLO" stickers to write my name and affiliation on, and I
wrote that I was with the Lesbian Buddhist Student Association, and ended up
getting some very angry looks from another attendee who, I suspect, was
probably a lesbian Buddhist student and was not amused.

But actually, my choice of fake affiliation illustrates an
important point that made all these groups legal:  membership was
technically open to everybody.  You didn’t have to be lesbian or Buddhist
to belong to my LBSA.  You didn’t need to be black to belong to the BSA or
pro-gun/anti-abortion to belong to the Republicans, or a Christian to belong to
the Christian "fellowship".  The question is, why would you WANT
to join a group of people you didn’t have anything in common with?
  But there were pragmatic answers to this question:  I know for
a fact that there were, for example, white guys who happened to be into
oriental girls who purposely joined the Asian Student Association or the like
just to get to meet lots of slant-eyed chicks.

The Mormons were different.  They like to be in control
of their own organizations, not beholden to the rules of an overseeing secular
institution.  They had a building off campus for all of their
extracurricular activities, where young Mormons could hang out in the safety of
their own kind and do all kinds of safe things together.  But even they
were open to outsiders!  I was actually a card-carrying member of the LDS
"institute" just off the CSULB campus and took Book of Mormon courses
there, and used their computer and printer, and their parking lot (which ended
up being cheaper than using the school lot).  And nobody kept me from
joining.

As an aside, in Utah, the Mormons have an
"Academy" building adjacent to every public school, where Mormon kids
go for an hour before or after secular schooling for some religious
instruction.  In Poland, there’s a priest teaching Catechism in most
public schools, but of course in the US that would be a no-no, so the Mormons
just build their own parallel schools right next to the public schools.

And, as another aside, one of the reasons the Boy Scouts are
as despicably reactionary an organization as they are is precisely because
they’ve been taken over (I mean this quite literally, at least in the US) by
the Mormons!  Every Mormon boy is a Boy Scout, the church sinks massive money
into the organization, and in return holds the majority of the executive and
board seats at the top of the BSA pyramid, where it sets the agenda for the
organization.  Mormon girls, however, do not join that dangerously rad-fem
lezbo-commie organization known as the Girl Scouts, because GSA categorically
told the nearly-dead old white men who run the LDS in Salt Lake City they could
go to hell when they came to the organization with an offer to richly fund it
in return for being given control.  And the Mormons are so misogynistic
that they wouldn’t let their docile and obedient matrons do the job in their
name – no, it had to be the MEN.

Okay, let’s get ourselves out of Utah already.  The
best way to diffuse a potentially dangerous campus organization is to flood its
membership with dissenters.  How dangerous would the Christian Legal
Society be if a whole bunch of leftist (sorry, like you, I find leftists to be
quite dangerous too, albeit less so than Christians) gay-tolerant agnostics
surreptitiously joined it, ultimately creating a large and vocal minority, if
not an outright majority, in the organization?  The only criterion for a
student organization (besides not engaging in criminal activity) ought to be a
firm insistence on open membership.

Such organizations are, indeed, discriminatory by their very
nature, and, as you correctly point out, that’s all fine out in the world of
private societies, as long as they don’t violate the rights of other people
outside their organizations.  But a public university campus would be a
far poorer place without its special-interest societies. Essentially,
prohibiting all these groups would create something no better than Jim Jones
University or Oral Roberts University or whatever Pat Robertson’s university is
called.  These schools also tightly control what kind of organizations are
allowed on campus, and permit only ones the administration deems to be
politically correct.  There’s no difference between that and a public
university only allowing pantheistic rainbow-coalition groups to exist on
campus!

Another aside:  How come White Student Associations
come under such fire at universities whenever somebody tries to form one?
 Why is it wrong for white students to associate AS SUCH?  Why is
"black pride" (or "gay pride", or whatever) okay, but
"white pride" is instantly labelled fascist/racist?  Why is it
okay to be proud of anything except being white (and male), and if you DO
express your pride in one of these two things you are, once again, a racist or
a sexist and very dangerous and probably another Timothy McVeigh?  And
even if these white groups DO believe whites are superior to others, how does
this differ from, oh, I don’t know… Black Muslims, or Muslims in general (who
are something entirely different from Black Muslims, who actually believe Allah
walked the earth seventy years ago), or CHRISTIANS (of all flavors!), who
believe they’ve got a monopoly on the truth and everybody else is destined to
roast in hell for eternity, and are not ashamed to let you know this?

Returning to the Boy Scouts for a moment, I find the
organization’s homophobia amusing, given that a) there is ample circumstantial
evidence to strongly suggest that its founder, Baden-Powell, was a repressed
homosexual himself (every Victorian was sexually repressed, regardless of
orientation…), and b) its real fear and concern ought to be the pedophelia
that I’m sure has always quietly existed in its ranks.  And if you really
don’t want testosterone-fuelled teenage boys to "turn gay" (I’m using
terminology the Boy Scouts leadership might use, which, naturally, does not
reflect my own views in the least), then it’s probably not a very good idea to
toss them together into close collective quarters running around naked together
and sharing tents together and what-not…

Back to the Christians…  You write that one of the
problems these days in distinguishing between private organizations (who can
deny membership to anyone they please) and public ones these days is the fact
that that evil big government has crept into more and more areas that used to
be the exclusive domain of the private sector through the evil of
"funding" (socialism creeping in through the back door?).
 Indeed.  While those super-fundamentalist universities in the south
(and Brigham Young in Utah) don’t take a dime of government money precisely
because they want to retain the right to bar negroes and homosexuals and
(gasp!) liberals, you’ve got plenty of mainstream schools (Georgetown,
American, etc.) that come from distinctly religious traditions but have long
ago sold out to the almighty dollar and become as secular as any public
university.

Which isn’t nearly as bad as the opposite trend, which we’ve
seen develop during the glorious reign of W.:  the government actually
seeking out and encouraging the formation of "faith-based"
organizations to give federal money to (but only approved faiths – I don’t
think they gave a dime to, say, Sikh or Shinto organizations).  When the
state actually starts giving money to organizations that are discriminatory by
definition (remember, any Christian organization, by definition, believes I am
inferior, whether they act on it or not, although, of course, there is a
fundamental difference between "prejudice", a belief, and "discrimination",
a behavior that acts upon this belief), it loses a lot of its moral right to
prohibit discriminatory organizations from asking for and expecting to get
money from the state, which brings us right back to the Christian Legal
Society.

And finally, a thought on school vouchers.  An idea any
true libertarian ought to champion, except, of course, that we then open up
another pandora’s box – who will determine which schools qualify?  Why,
the state of course.  This is already an acute issue in the US and
elsewhere in the modern world, when fundamentalist religious schools (of any
religion) fight to get accreditation.  Under a voucher system, they’d be
fighting for the accreditation in order to qualify to get state money, and here
we go again…

The knowledge that there are actually schools in Amerika
today that are teaching children creationism instead of science, and these
kids’ education is recognized as perfectly valid by the relevant government
agencies, simply scares me to death.  A former girlfriend of mine, who
always was into Jesus, has really gone off the deep end in her old age.
 She and her husband, both born-again musicians, have actually
home-schooled their five kids, and this is apparently a very big trend amongst
the fundamentalist crowd.  There’s a whole industry of teaching aids for
bible-based home-schooling.  One of this particular couple’s money-making
projects is making CDs of bible verses set to catchy music (think Sesame Street
or Electric Company songs, but with bible verses instead), as performed by
their kids.  These disks are then sold through the above-mentioned
teaching aids industry to help Christian kids learn their mantras, in between
learning about how Ezekiel begat Bathsheba and how first there was light and
then the sun and the moon were created a couple of days later.

Once again, I’m seriously scared when I contemplate that
there’s a whole generation of kids being home-schooled or Christian-schooled
today in an entirely different value system from the shared one you and I were
raised in a continent and a decade apart.  What will happen when this army
of reborn zombies has graduated from Christian colleges and begins to
infiltrate American society in ways that make today’s already alarming
infiltration by Christians seem like chicken feed?  And what will happen
when they clash with upwardly mobile young Muslim professionals, who will have
their own equally strong, but irreconcileably contrary views on who has a
monopoly on the truth?  I don’t want to be there when it happens!  And
it WILL happen…

And on that apocalyptic note, I bid you good night!

Steve

When values clash

The Supreme Court is about to hear a case brought by the
Christian Legal Society (CLS) against the Hastings Law School in San Francisco,
a public university. The law school refused to register CLS as a recognized
student organization because it discriminated against non-Christians and gays.
The CLS claims that this violates its freedom of association with others of
similar beliefs. Hastings says that CLS is free to believe what it wants but
cannot have university (state tax payer) funds and use of university facilities
if they violate the university’s anti-discrimination policies. Needless to say,
if this issue had a simple and easy resolution, it would have been resolved
long before reaching the Supreme Court.

As a country we have limited the areas of such conflicts by
limiting the scope of government involvement in our lives and associations.
Christian, Muslim, Buddhist, or atheist groups are free to form and limit their
membership to the like minded. Their right to do so is protected by the U.S.
Constitution and by the cultural respect for privacy and the rights of others
that is an enduring feature of our country. This right is unchallenged when
exercised in the purely private sphere. But as government involves itself in
more and more areas of our daily lives, such conflicts have multiplied and must
be resolved at the state rather than the private level where individuals are
free to have different answers to important moral and philosophical questions.

To me, it is foolish for a university to prohibit clubs that
will only admit members who share the purpose and beliefs of the clubs’
founders. On the other hand, I find it objectionable for the state to prevent a
university from setting whatever policy it wants for clubs or for the students
it wishes to admit and teach. However, such thinking is more clearly applicable
to private universities, which are in fact private associations like the
clubs/groups in question. Public universities are funded in part from general taxpayers’
money. As such, they must not favor the religious or social views of some
taxpayers against those of others. Here is where the conflict of values—freedom
of religious belief and assembly, and non-discriminatory use of the taxpayers’
money—arise.

The well known case of the Boy Scouts banning membership to
gays comes to mind. While I would refuse to join an organization with such
Neanderthal attitudes and find the image of some homophobic scout master
quaking at the thought of a potential encounter with a homosexual scout
pathetically amusing, I think the Boy Scouts should be free to define
membership qualifications anyway they like. The problem, of course, comes when
they want to use public facilities and public funds. And the real problem is
that it is increasingly difficult to find any activity that does not involve
public/taxpayer funds in some way or other. Jonathan Turley provides an
excellent discussion of this conflict and of this latest Supreme Court case in
Sunday’s Washington Post.[1]

The Court will hopefully find a pragmatic balance between
these two social and constitutionally protected values. But we should also not
give up on trying to limit the scope and reach of the government into our every
day lives. The argument made by Milton Friedman and others long ago that a
social interest in education does not justify the state building and operating
schools is as valid for universities as for grammar schools. He championed
tuition vouchers—i.e. public financing of education privately produced and
delivered—that students could use at any school they chose that would accept
them. It is hard to believe that the money government spends to subsidize
university educations in public universities produces better results than if
the same financial assistance were given in the form of vouchers (and research
grants) to be used at private universities of the customers’ (students’)
choice. The problem of conflicting values would not go away—could vouchers be
used at Jewish, Christian, Muslim schools—but it should make it easier to
fashion pragmatic solutions that broaden or protect the freedom of religion and
association of one person without violating such rights for others. It would
also surely improve the quality of education per dollar spent.


[1] Jonathan
Turley, “Inequality,
in the name of equality”
, The
Washington Post
, April 18, 2010. Page B01.