Observations from Germany

The end of another long week I ended in Germany, and spent some time in Schröder's home state of Lower Saxony, visiting some long-standing business relationships in the area. In the course of business meetings, the topic of poltics is seldom mentioned explicitly. The risk of doing so is high for both parties. Political disagreements seldom affect the business itself, so by not mentioning the topic you can avoid the risk of ending up in a heated argument which might sour the relationship. My experience is that the more controversial a subject is, the more carefully it is approached (or not at all). It was therefore interesting to see the naked pessimism and the despairing comments about the new government. Bad-mouthing Schröder is apparently not a very controversial thing to do anymore and the people I spoke with all spontaneously aired their displeasure. Although the business community is hardly representative of the country as a whole, this was the first time I've heard such comments in Germany. It's not really news, but Schröder really is in trouble. The latest speculation in German newspapers is that he might not even last the winter in office. The showing of the SPD in the February elections in Hesse and Lower Saxony will be important in deciding the fate of this government. The current signs don't look good for Schröder.

The rampant pessimism about Germany's economic future bodes ill in the short-term. On the other hand, it is also a realistic assessment of the situation, and that is encouraging. Japan's problems have been exacerbated by institutionalized denial of the problems. Only by dribs and drabs have the problems been even acknowledged, and there's still a lot of acknowledging to do. In Germany at least, there is greater awareness of the predicament the country is in. That's the first step to recovery, as they say, but it's going to be a painful slog, and I am not sure the CDU/CSU and FDP politicians (the alternative to the current government) really grasp the severity of the problems. Even if they do, the question then still is whether they will want to prescribe the medicine necessary, or whether they'll just tinker at the margin.

No blogging tomorrow

I'm traveling to Germany tomorrow, and that will mean no blogging. I'll be in the state of Lower Saxony as it happens, so perhaps I'll be able to pick up on the mood in Schröder's home state. Thanksgiving in a German hotel. I wonder whether they'll have turkey on the menu.

Blair still looks secure

In a comment below, Walter asks what I think about possible replacements for Blair and the future of the Tories. I've been reluctant to blog about the problems besetting the Tories, since I don't really see a clear way out for them at the moment. As long as Blair remains entrenched in the center ground of politics and keeps the economy going, the Tories are going to remain locked into their inward-looking battles. Blair would need to screw up in a big way for the Tories to profit from it in their current state.

There are two possible scenarios for Blair's departure: he either loses the next general election, or he is deposed by the Labour party before then. The latter scenario is very unlikely unless things get completely out of hand. The first could happen if things get somewhat out of hand (quite possible) and the Tories can put up a halfway coherent front (not very likely). They need to figure out what they really stand for in order to do that. The internecine warfare in the Conservative Party and the policy paralysis is Blair's biggest asset. The fatal blow to the Tories came when Britain was forced out of the Exchange Rate Mechanism in 1992. The ERM was the precursor to European Monetary Union, and Britain had joined the ERM in the Thatcher years despite serious misgivings by the Iron Lady herself. Membership of the ERM became the linchpin of economic policy, and when the ERM peg proved unsustainable (it was causing grave damage to the British economy; this is why EMU can still fail), the Tories' reputation for economic competence was lost. They have not been able to regain it ever since, mostly because they've not managed to agree on what they stand for. The old conflict between authoritarians and libertarians has been flaring up with neither side able to score a decisive victory, or finding a way of building a consensus within which both wings of the party can live. Actually, the situation is even more complex than this, with some "modernizers" advocating a shift to the middle ground. Rather being skeptical of the welfare state, their pitch is that the Tories should return to their role as better guardians of the welfare state that they had in much of the post-war era. Perhaps a better way of describing the factions is to call them "christian democrats" (in the continental European mold) and "anglo-saxon conservatives." The cross-currents are many. There also used to be a big divide on European policy, but most of the pro-Europeans have either retired or become marginalized. At least that aspect of the civil war seems to have been settled. But as long as the Tories can't figure out whether they're in favor of a socialist welfare state or not, they're not going to be able to stage a revival. Once they've figured that out, they could start to build policies on that. A message of lower taxes and a more consumer-friendly attitude at currently state-run (and failing) services is the basis on which the Tories should be able to win back ground. But the message has to be consisent, persuasive and above all, not shrill. The tone of Conservatives has been one of their big problems. They need to learn the craft of Opposition. In any case, it would require a major disaster on Labour's part to hand the initiative back to the Tories.

In the current dispute with the firemen, Blair knows he has to defeat the strikers or he's toast. The economic problems for Britain are mounting, but they are not as dire as those in Germany for instance. Higher taxes and more red tape are going slow the economy down, but perhaps it's not going to get bad enough for the blame to stick to him yet. A weak global economic environment is a great excuse. So he has time and should be able to win the next election too. I think he'll survive for a while yet. If he does get replaced, it's almost certainly going to mean a return to the left for Labour. Gordon Brown is a likely candidate, but that will only work if the economy is still doing well.

Romeo and Juliet in 21st century Europe

Kassablanka, a Flemish film, is causing uproar in Antwerp. It's a classic Romeo and Juliet story, but set in contemporaneous Belgium. It deviates from the original plot in that it has a happy end, but its capacity to generate tragedy is taking place in real life. The twist in the film is that Juliet is a muslim girl of Moroccan descent who's grown up in Belgium, but whose father is a fundamentalist muslim who preaches jihad against America. Romeo is Flemish and his father is a member of the extreme-right Vlaams Blok (Flemish Block) party. The conflict between the families is obvious as Leilah (our muslim Juliet) and Berwout is thus set. Her father dreams of the caliphate, his father of a racially pure Flanders. I haven't seen the film, so the following is based on the Dutch newspaper story linked above.

The film is actually a comedy; it ruthlessly makes fun of both fundamentalist Islam as well as neo-nazis. Love conquers in the end, and the relationship between Berwout and Leilah comes to a happy end. By poking fun at the dysfunctional atavistic elements in both the native as well as the immigrant groups the film shows the idiocy of both. And it conveys the positive message that even youths coming from polarly opposite backgrounds can live together and fall in love.

Great, huh? Well, the Moroccans living in Antwerp are not happy about this. Cinemas showing the film now have much increased security due to violent and loutish behavior by Moroccans. For instance, when Leilah takes off her headscarf in the film, there's booing, heckling and a loud "slut!" resounds. Last week 30 Moroccan youths stormed the cashiers at one megaplex. The Arab-European League has started a petition against the film. But fortunately not all Moroccan immigrants feel the same way: Umiva, an organization of mosques declined to participate in it.

But the reaction of radical Moroccans living in Belgium is dominating the headlines. And their yen for antediluvian behavior extends to far beyond the cinemas. The Moroccans actresses starring in the film are routinely accosted in public with taunts of "whore" and "disgrace for the Arabs." Says Souad Hamdaoui, "A few Moroccan boys had recognized me. They drove their car slowly past me and scolded me. I was furious. Some immigrant men can't stand the idea that a girl of muslim origin would behave in a modern way." She plays a minor role in the film. As the case of Ayaan Hirsi Ali shows in the Netherlands, the apostate is in gravest danger.

The dysfunctional relationship between the sexes in Arab societies is well-documented. Oppression of women is second nature to Arab men, and the liberation of muslim women who live in the west is just something that they cannot accept. This is but one aspect of the barbarous movement that has declared war on us. It is important for moderate and non-fundamentalist muslims to speak out against the Islamofascists in their midst.

The director of Kassablanka, Guy Lee Thys, says:

The film is particularly aimed at the Flemish Block, but why can't I laugh at the muslim who arranges his prayer mat with a compass? And then I'm being mild. I could also have made a realistic film about a women who's forced into a wedding, kidnapped and murdered."

The point he makes about this film being mild about the reality of Arab culture and fundamentalist Islam is correct, but I using the example of praying in the direction of Mecca is disturbing. Sure, it's silly, but so are many aspects of other religions. Eating the body of Christ in church or keeping meat and milk separate to the point of having two dishwashers is not rational either. But faith by definition is not, and I really could not care less which direction Muslims face when they pray, what Catholics eat and drink in church, or whether Jews have a second kitchen in order to be kosher. Those things don't harm others. The teachings of fundamentalist Islam do harm others. That's what needs to be exposed and attacked, not the arcane rituals of religion.

Weird weather patterns and airport security checks

How often is it that you arrive in London from Italy and are thankful for better weather? I just got here from Milan, where it's been raining for days on end. Serious flooding conditions are beginning to prevail. Over here, it's actually dry. Amazing. On my flight out of Amsterdam this morning I without getting my ID checked. The Italians were more assiduous in checking my credentials upon departure. The most thorough security check I've had recently was upon departure from Dulles last Sunday. They were taking the display of security quite seriously and they were even timing how long it took people to move through. The security guard actually made some conversation with my about my digital camera (pictures of the Giant Parking Chickens of Dulles to follow), which is a dangerous thing to do with someone with a nerdly past. I wonder how they deal with passengers who don't speak English though. I did enjoy how the guy in line in front of me, who was flying Saudi Airlines, was stopped at the metal detector by a female guard. I guess it was not done on purpose, but he did not seem very happy.

Time for dinner.

Showdowns in France and Britain

Two governments in Europe are faced with a challenge from organized labor that threatens the economic vitality of the two countries. The strikes in France are following the well-established pattern with strikes causing maximum disruption. The truckers' strike affects not just the employers, but the truckers are actively blockading choke points in traffic, trying to bring the country to a halt. A similar, bigger wave of protest brought down the last right-of-center government in the mid-1990's. The 1996 strike is thought to have cost France about 0.6% of GDP growth, which is significant especially in slow-growth Europe. This time, the government looks to be handling the situation a bit better, by taking surprising line that the rule of law cannot be undermined by wild strikes. How the current wave of strikes will be important in determining the future course of developments in France, as it will show whether the rule of law can actually be upheld there. If the government fails to break the strikers' blockades (if necessary by sending in the army to clear them), France is in for another wave of union militancy and more economic stagnation. The blockades have nothing to do with the right to strike; they are means of depriving others of their freedom to go about their business. The government cannot allow the unions to get away with this again. It seems the government is taking a harder line, and that unions are less feisty now, so there is some hope.

Meanwhile, across the Channel, the British government is also faced with a new wave union activism. Gordon Brown's promise of a huge increase in government funds for the public sector has whetted the unions' appetite for huge pay increases. The firefighters are demanding a 40% pay rise, and are refusing to change their arcane and archaic working practices. The union is now led by a radical socialist, who traces his roots to the Scargillite union militancy of the 1970's that pretty much bankrupted Britain. It was Margaret Thatcher who broke the back of these marxist/trotskyite/leninist (take your pick) union leaders and freed the economy. The economic revival of Britain since then is in no small measure due to the reduction of union militancy and also a decline in the relevance of the union movement as a whole. This was the bedrock upon which the Thatcherite revival of the British economy was founded, and it is also the bedrock upon which Tony Blair has been able to build his reputation for economic competence (despite the many tax rises he's pushed through). If he lets the unions turn the clock back, the health of the British economy and Blair's re-election prospects are in grave danger.

So while in Britain the unions are trying to turn the clock back, in France it's a question of getting the sand out of the gears of the clock to try to get it moving again. The outcome of these battles between governments and unions will show in which directions European economies are likely to develop.

On food, license plates and spies

My absence from the blogging over the past week was caused by quite a bit of travel (there's more coming this week, but only within Europe) which took me to Washington DC. The Latham hotel in Georgetown was a bit disappointing in all. It certainly does not measure up to its pretention of a full-service luxury hotel. Then again, at the rate I got I suppose I can't complain too much. On the other hand, the restaurant in the hotel is absolutely excellent. It's Michel Richard's Citronelle which offers great ambience, good service and exquisite food. The food was in fact so good that even stuff I usually don't like tasted good. I had the Tuna Napoleon as the first course, which was amazingly light and melty on the tongue. The main course was the venison special with port sauce and a puree of chestnuts. Normally, I would not have even touched the latter, but the first course convinced to be braver. The best parts were the wine and dessert. They have a great wine list (including a 1961 Cheval Blanc at $4,000 a bottle), but I settled for a less bank-breaking Carruades. Dessert was the famous chocolate bar. Excellent small bars of crispy chocolate in a sweet hazelnut sauce. Fantastic.

Anyway, so much for the food. One thing that struck me was the composition of out-of-state license plates. For some reason, I saw a lot of cars with Alabama and Tennessee plates. I thought it might have been the influx of staffers for newly elected senators and representatives, but that leaves unexplained why there were no Minnesota plated-cars. Very peculiar. Of the Maryland-plated cars, I saw a great many with Ehrlich bumper stickers, while the Townsend stickers were much rarer. This points to much higher mobilization among Ehrlich voters, or perhaps they're just more disposed to putting bumper stickers on in the first place. I am sure somebody must have done a study on bumper sticker frequency as a predictor of election results. Since nobody's using it, I guess it's not a very good predictor. And what to make of the Giant Parking Chickens of Dulles?

I can recommend the Spy Museum if you have a few hours to spare in DC. It has a nice collection of actual spying gear from many countries around the world. Button-hole cameras, various bugs and surveillance mechanisms are explained. I found the actual stories that go with the devices most interesting. The various attempts at bugging the US and Soviet embassies in Moscow and Washington respectively are explained in some detail. Some other items such as suicide capsules highlight the dangers of undercover work.

The Spy Museum also has exhibits on well-known traitors and the consequences of their treason. There's Mitrokhin, a KGB agent who for years copied files at the office and stored them at home. When he defected to Britain, he took 300,000 files with him, which obviously was a great help to us. I have no sympathy who betrayed our side though. In the Cold War, there was a clear moral choice to be made between good and evil, right and wrong. The difference between the two opposing systems was clear and obvious. Many of the ideologically-motivated traitors were the kinds of people who saw themselves as the avant-garde of enlightened opinion. The kinds of cultured intellectuals who saw the superior ways of communist dictatorship that the capitalist-democracy-supporting sheeple simply were too stupid to understand. The kind of people who were so smart that they managed to convince themselves to believe incredibly stupid things. That's how the Soviets got the secret of the bomb.

Examples of the archetype exist in today's war too. The big difference is that there is no centralized enemy, but a more diffuse set of loosely cooperating enemies, which are not well equipped to mount a massive intelligence operation against us. But I am sure that it's not for lack of trying, or for lack of useful idiot volunteers who despise the capitalist liberal democratic system. I suppose there are fewer useful idiots who actually want our enemies to establish an Islamofascist theocracy; however, their dislike of the west blinds them to the evil that is now arrayed against us.

We won't know how many of those who profess their disdain for western civilization will actually end up actively helping the enemy for a while yet. But I am certain there are present-day Rosenbergs and Fusches lurking somewhere to be tapped. And one wonders: how can people be so stupid?

No anti-semitism to see here, please move on

American commentators have been pointing out the resurgence of anti-semitism in Europe. The response from European politicians has mostly been one of denial. No anti-semitism here, please move on.

To combat this non-existent anti-semitism, the Anne Frank Foundation is launching a new campaign and a book. The Dutch daily Parool carried this article with the following quotes:

"More and more, the Anne Frank Foundation is receiving signals from teachers who for instance in their lessons on the Second World War and the persecution of Jews are confronted with anti-semitism under their pupils. [...]" says the Foundation.

Teachers are afraid to give lessons on the holocaust and the hatred of Jews, because half the class will walk out, says Jan van Kooten, head of education at the Anne Frank Foundation. "Another example: pupils from Monnickendam were not allowed by their parents to visit the Jewish Historical Museum, because they did not want their children to learn about Jewish culture, 'because Jews are bad.'"

[...] "Many groups in the Netherlands have feelings of loyalty to the Palestinians and are therefore by definition against Israel and the Jews. Hatred of Jews and the policies of Israel are thus becoming entangled. As far as I'm concerned, anyone can say that he's opposed to Israel's policies, but that can't mean that every Jew in the Netherlands becomes the victim of that. Just as it is wrong to hold all Muslims responsible for the actions of Bin Laden," according to van Kooten."

The Anne Frank Foundation does a lot of good work in keeping the memory of the Holocaust alive, and it's needed too. But I do wonder how effective they can be if their own spokesmen blithely trudge down into the morass of moral equivalence, equating Israel's self-defense with Bin Laden's acts of barbarism. Of course it's true that not all Muslims should be held accountable for Bin Laden's acts, but the fact is that many of them are cheering him on, even those living in the west. If you can't tell the difference between the deliberate mass murder of civilians on the Islamofascists' part, and Israel's self-defense (which seeks to avoid civilian casualties), then you have no business being in charge of education at a foundation like Anne Frank.

Not only is anti-semitism alive and kicking, but even those fighting against it suffer from the European disease of Muddle-Headedness.

Schröder still sinking in the polls

I haven't been able to keep track of either the blogosphere or the wider news over the past week, but it does appear that news of Schröder's problems has become bigger news internationally. The latest poll results show the enormous beating he is taking. The latest two polls of the 21st of November show the SPD on 30% and 29% respectively, down about 10% from the election result. The CDU/CSU is up about 10% to 48%.

In the regional polling data, the two relevant states are Lower Saxony (Niedersachen) and Hessen, both of which hold state-wide elections on February 2nd. In Hessen the ruling CDU/FDP coalition is comfortably ahead, while in Lower Saxony the CDU is polling substantially higher than the SPD. This is Schröder's home state, which has been held by the SPD since the 1990 election when it gained 48% of the vote; polls now put it at 37%. Based on these polling results, the SPD would be kicked out of office there. This would make governing for the federal government even more difficult, as it would enhance the majority in the upper chamber of parliament (Bundesrat) of the CDU/CSU and FDP-governed states.

The new federal government is looking shaky, but at the moment I don't yet see a catalyst that would lead to its fall. The SPD will be keen to avoid a new election, but the Greens aren't doing too badly in the polls. They'll be worried that the Schröder millstone will start to drag them down too. What is required is an issue on which the Greens can escape from the coalition. When the liberation of Iraq starts, the the use of American bases in Germany could provide just the right excuse. The Greens can pander to their anti-American base, and Schröder will be caught between a rock and a hard place: either support UN-sanctioned action against Iraq, or cause further damage to Germany's international reputation. If he chooses the first course of action, he'll upset the Greens. If he opts for the second, he may hope for a revival of the anti-American boost he got just before the election, but I don't think it's going to happen. The German electorate has at the margin become more aware of the price to be paid in its international reputation, and Schröder's credibility has effectively been destroyed. It will be seen as a desperate political maneuver rather than a principled stand.

It will all depend on whether the Greens want to be in an unpopular government, or whether they prefer to keep their electoral base by moving to the opposition.

Saudi generosity

The wonderful generosity of the Saudi Royal family extends to the September 11th terrorists, according to today's Times:

THE FBI is investigating how funds from a senior member of the Saudi Royal Family found their way indirectly to two of the September 11 suicide hijackers.
A Saudi spokesman said yesterday that the wife of Prince Bandar bin Sultan, the Saudi Ambassador to Washington, had unwittingly paid $2,000 a month to a woman who has since been identified as the wife of a student who befriended the attackers in the United States. He said that the woman, Magda Ibrahim Ahmed, gave some of Princess Haifa al-Faisal?s cheques to her husband and that she may also have given at least one payment to the wife of a second student, Omar al-Bayoumi.

Mr al-Bayoumi is said to have helped two men to set themselves up in San Diego, California, in early 2000. The next year the men were part of the five-strong group that hijacked an American Airlines passenger aircraft and crashed it into the Pentagon.

It was all unwitting and accidental, of course.

I'm back (sort of)

My apologies for the prolonged absence. I've been out traveling and did not have as much time and opportunity to blog as I thought I would have. I hope to return to more normal service later today.

Expanding the state's role

First of all, my apologies for the continues light blogging. I remain restricted to dial-up, which makes keeping track of what's going on a bit harder; I'll follow up on your comments Real Soon Now (thanks for commenting though; I do enjoy reading your thoughts). An additional complication is that I am also trying to remember what time zone I am in and I am bit jetlagged, so my blogs may be even less coherent than usual. So here's a few short items for your amusement.

A "family pedagogue" at the University of Nijmegen has called for the state to provide television programs that would instill "socially desirable" behavior in children. It's to be targeted tp both children and parents. The professor sees it as modern way of providing the kind of social guidance that used to come from the church and other social activities.

What a creepy idea. Fortunately, I don't think there is much chance that it'll happen. I'd much rather have private and voluntary organizations take on this role than have a politically-driven government program. Who'll decide what is "socially acceptable" behavior? You can't force people to be good, and beaming propaganda on TV at them is not going to help much. Social norms have to be constructed from the bottom-up, and not imposed top-down. The Netherlands has become a society where it is taken for granted that the government does everything. Or at least, if there is a problem, it is the first port of call for those who want something done. I am not sure there's an easy way out. After all, it is comfortable for the government to do things for you. And if you've never known anything different, the prospect of being out on your own to deal with life is scary. How can there be order if there is none that is imposed? That's always been the siren call of collectivism as people seek order and stability in a society that has changed dramatically from the small-scale village life of just a century or two ago. It is this yearning for stability that underlies much of the thinking of the statists. The thought that systems can have emergent stability without constraining them to a single stable state appears harder to grasp. But stability for its own sake brings problems because it reduces the adaptability of the system. Japan has a stable social and political system, yet this very stability has condemned the Japanese economy to a decade of stagnation and recession. The complete absence of any constraints does not work either. A state of anarchy is the exact opposite of freedom. Theoretically you might be able design a fantasy society where anarchy works, but in practice it's always led to misery (remember Somalia?). Freedom and anarchy are not compatible. Anarchy means getting rid of rules just for the sake of it; it's bleak and nihilistic. For freedom to exist and be preserved you do need some rules, some form of authority that can help safeguard them. The state is inevitable. Making sure the state remains the guarantor of freedom is the really hard part. Perhaps somewhere, sometime we'll get it right.

Demographics, Europe and immigration

I had forgotten how slow dial-up modems are. Does anybody really still use them? The internet in its current form is painfully slow on dial-up. That cable modem at home has really spoiled me, although I usually think it's still too slow. The transatlantic latency is one of the problems. If I'm lucky, I get ping times of around 90 ms to the east coast. If I ever feel sufficiently nerdy, I'll calculate the theoretical minimum latency for transatlantic connections.

As I mentioned in my previous blog about Rome, the Pope went to speak to the Italian parliament for the first time since the Italian state was founded. The problem is that the Popes used to rule much of Italy, and the founding of the unitary state of Italy in the 19th century took away the last bit of Papal sovereignty over what are now Italian lands. The relationship between the Popes and Italy has thus been strained with many Italians being suspicious of Papal ambitions despite the Roman Catholicism that remains widespread in the country. The Pope spoke on many issues, but one thing that struck me were his comments exhorting Italians to have more children. The birth rate in Italy is now substantially below replacement rate, with Italian women giving birth to just 1.2 children on average. To keep the population stable, the birth rate has to be just a smidgen over 2 children per woman.

This is not a problem unique to Italy. Most of the countries in the developed world are faced with declining birth rates too. The most spectacular case is of course Japan, where the population has already peaked and is projected to decline by 2050 to the same level it was in 1950. Within Europe, the worst demographics are in Italy, Spain and Germany, but virtually all countries on the European continent share in this. Aside from the social implications of a declining population, the economic consequences are far-reaching too. The economy can be expected to grow roughly in line with the population. If the population increases at a 1% per annum pace, then the economy should grow at the same pace on average. More people need to buy more food,. consume more services, buy more houses. Of course, this is a huge oversimplification. The first requirement is that you need to have an economic structure that can actually provide this kind of growth.

This is the first time in history that the human race has voluntarily limited its own growth. As prosperity expands around the globe, we can fully expect the currently underdeveloped economies to join this trend too. Sometime in the next century or two, the world population will stabilize or perhaps even start to decline. But the reality of this new trend will first be faced in Japan and Western Europe. The demographics of the United States are pointing slower growth were it not for immigration. Since this is a new situation, there is no precedent for finding an economic structure that can provide sufficient prosperity for the entire population. Until now, the increasing numbers of young people have subsidized the old. This is no longer sustainable since there simply aren't enough young people anymore.

To maintain positive economic growth in an environment of declining population, the shortfall will have to be made up by increased productivity. Adding more value per hour worked will have to counteract the demographic headwind. The answer lies in technology, and the more technology-friendly and innovation-friendly an economy is, the better it will fare.

But there is one big catch: the transition from an expanding population to a constant or even shrinking one is going to be tough. I alluded to the problem above: there aren't enough young people to subsidize the old. And the old have not saved enough money to provide for their own retirement. The state pension systems work on a pay-as-you-go basis. This means that the current tax payers are paying the retirement benefits of the current pensioners. This works fine with an expanding population, but with demographics it's no longer affordable. So what you need a funded pension system, in which the people save for their own retirement. But moving to a funded pension system is expensive and takes a long time. It's expensive because you still have to pay for current pensioners and at the same time you have to build your own pension. So it's a double pension payment. Even in countries that have a fairly well-established funded pensions systems, such as Great Britain and the Netherlands, the pensioners still depend on the extra money that comes from the state's pay-as-you-go system. In other countries, such as Germany, France and Italy, the problem is far worse because funded pensions are rare there.

There are a few options for fixing this. The intergenerational transfer payments have to be revised. You can simply tell the current tax payers that they?re out of the luck and need to pay more. Raising taxes is not the most popular of things to do as Schröder is finding out. Alternatively, you could tell the pensioners that they're going to get less money. That may not be overly popular either. Raising the retirement age will mitigate the problem as well. A combination of all three is most likely.

There is another option, and that is immigration. In fact, for Europe, it's probably the only option out of its demographic trap. Europe needs more young people to pay for its pensioners and start building a funded pension system, because paying for all of that with the currently available resources is going to be prohibitively expensive. So Europe desperately need more immigrants. And that's not going to be easy given the experience with the last big wave of immigrants from North Africa and Turkey. As I have written on this blog on previous occasions, they tend to be poorly integrated into society, and often are in fact openly hostile to the liberal democratic host-society. The past experience with immigration in Europe is indeed a bad one given the problems that the immigrants have caused.

Even that is not the whole part of the story. The overregulated and overtaxed European economies have not been able to sustain any endogenous growth. The rigid labor markets have led to sky-high unemployment. And of course, immigrants get blamed for these problems as well, which would exist even in the absence of any immigration. In many countries undifferentiated immigrant-bashing has become politically advantageous. It neatly deflects from the real problems underlying the economy and puts the blame on a clearly identifiable group. This will only go away if the European economies can liberate themselves from the state-controlled past in order to generate economic growth. But that is going to be hard to do with the large costs of the intergenerational wealth transfers hanging over them. And the problem will get worse the longer they wait. So Europe needs immigrants to solve its demographically induced economic problems, but it can't do that until it escapes from its self-inflicted economic straitjacket.

Irregular blogging for the next days

Due to various commitments and travel, the blogging schedule will be highly irregular for the next days although updates will continue on most days. A semblance of normal service should resume shortly though. There's quite a backlog of material that I want to post but I need to find the time first. Thank you for your patience.

The blog is back

Looks like the blog is accessible again. The connectivity problems were caused by failures on the name servers at Hosting Matters. The problems seem to have been fixed.

It's good to be back.

Apocryphal quotations

I am always skeptical about claims that hilariously funny quotes are actually real, but one should not underestimate the human mind. The following are supposedly actual quotes from performance evaluations. Might come in handy when I have to do them again next year...

•    "Since my last report, this employee has reached rock bottom and has started to dig."

•      "His men would follow him anywhere, but only out of morbid curiosity."

•      "I would not allow this employee to breed."

•      "This associate is really not so much of a has-been, but more of a definitely won't be."

•      "Works well when under constant supervision and cornered like a rat in a trap."

•      "When she opens her mouth, it seems that this is only to change whichever foot was  previously in there."

•      "He would be out of his depth in a parking lot puddle."

•      "This young lady has delusions of adequacy."

•      "He sets low personal standards and then consistently fails to achieve them."

•      "This employee should go far - and the sooner he starts, the better."

•      "This employee is depriving a village somewhere of an idiot."

Near-death experiences in Rome

Speaking of Rome, in December last year I had more near-death experiences than usual. Two of my Italian colleagues joined me for the meeting, which was late in the afternoon, scheduled for around 5 PM or so. In true Roman fashion, the meeting did not even begin until 6:30. This is by no means a record, as the longest delay I've had in starting a meeting was about four hours (and I almost missed my plane in that case). Starting meetings on time is just so north-Italian. Life in Rome is more relaxed. My Roman colleague would stay in Rome, but the other one was flying back to Venice, and it was getting pretty late for his flight. The number of flights to Venice is limited, so he was very keen to make his. He told the cab driver to get to Fiumicino airport as quickly as possible. The cab driver took this very seriously, which resulted in one of the most hair-raising cab rides ever.

Taking a cab in Rome is somewhat exciting under normal circumstances, but this was exceptional. The cab driver drove as if he had strobe lights and a siren. He ran several red lights (not too rare, but still), wormed his way between several cars, cut others off and generally drove like a maniac. Merging onto a crowded thoroughfare was done under the motto "they'll stop when they see me," even though they had the right of way. I saw several cars coming straight at us, braking hard. There were numerous occasions on which we came close to being flattened against some antique relic or other (they're fairly common in Rome). Ah, to die in an accident with 2000 year-old aqueduct!

Then as we were getting closer to the highway, we were on a small winding road uphill out of the city, with several feet of rocky incline on either side. In other words, there was no shoulder, no room to escape. And traffic in our direction was mostly stationary, since it was the late end of rush hour. The cab driver pulled out onto the other side of the road whenever he spotted a gap in oncoming traffic, accelerated hard and hopped ahead by a few dozen meters. Except traffic was stationary on our side of the road, while the oncoming traffic was not. So he slammed on the brakes really hard and somehow managed to press himself back into the right lane before we got flattened by another Italian maniac coming from the other direction who seemed very disinclined to stop. It was his side of the road after all, and he was damn well going to use it. Not daunted by a single close escape, the cab driver performed this maneuver several times.

In the course of the trip, we also came close to killing three drivers of the little Italian motorscooters that are so popular in Italian cities. And in this case, it's not an exaggeration. In the various swervings we were subjected to, some had to be aborted very rapidly. In one case, there was less than an inch between death and some poor Italian sod on a small motorcycle. This was by far the most frightening cab ride I've had (and I have had many). My colleague just missed his flight. I made mine.

Who says business travel is boring?

Another bad day for Gerhard

The spiral of bad news is spinning ever faster in Germany. Today the increasingly unpopular government of Gerhard Schröder got hit by more depressing reports. First of the European Commission took the German government to task for the budget deficit breaching the 3% of GDP limit this year and next. Economic stagnation this year means that the deficit to GDP ratio is going to be as high as 3.7% or 3.8%. This means the European Commission will have to impose some disciplinary action on Germany, although I remain skeptical much will come of it.

More bad news came from the "Five Wise Men," a panel that advises the German government on economic matters. They warned of rising unemployment and poor economic growth ahead, with GDP in 2002 growing by just 0.2% and not much improvement in 2003 at 1.8%. Germany will once again underperform most of the other European economies. The wise men highlighted specifically in their report that the underlying reasons for the dismal situation are structural in nature. They asked the government to start to address the growth weakness of Germany which are mainly caused by the lack of structural reforms.

To top it all off, Handelsblatt reported today that business confidence has hit an all-time low. The October survey of the German Industry and Chambers of Commerce. In the space of one month, the responses have deteriorated enormously, and the cause of that is the re-election of Schröder and his tax-raising policies. Two-thirds of those surveyed think that Germany's competitiveness will become worse, up from just 14% a month ago. Three-quarters said they fear that the new government will make their lives more difficult. Much more worrying for the German economic outlook is that only 8% of managers said they were going to increase investment in the next year, while 43% said they were going to reduce. Unemployment will get worse, as only 9% of companies say they're going to hire more people, while 54% are looking to reduce their payrolls.

Schröder's personal credibility is in tatters, and his government's is not faring much better. The speed with which he has fallen from grace is amazing, and the situation in Germany is coming close to an acute crisis. With a government that has lost popular support, while only having a wafer-thin majority in parliament, the country is essentially rudderless. The measures that have been announced are only going to make Germany's malaise worse, and the underlying structural problems of high taxes and inflexible labor markets remain unaddressed. This government can't address these issues anymore. Schröder is transfixed by the headlights of the onrushing truck. He's desperately trying to maintain his fiscal credentials in the European sphere by pretending that Germany can get its finances under control again within the limits of the Stability Pact. But this is undermining his popularity and it's hurting the economy, which in turn means he does not have the political capital to undertaking the major structural reforms that are necessary. The election victory bought by pandering to base anti-American sentiments is beginning to look ever more expensive for Germany.

The usual chaos in Rome

Rome is one of those cities with just the right amount of chaos. It's highly unstructured, but it all does work in a weird sort of way. Not getting killed in traffic depends on the skills of your cab driver, and thus far I managed to cling on to life. Of course, today's traffic was even more chaotic than usual, as the pope was making his historic speech to the Italian parliament. This meant that there was a huge police presence with heavily armed men on every streetcorner.

For someone used to the atrocious climate of Amsterdam, I also enjoyed the weather down there. With temperatures in the high 60's (around 20 C) it was pretty much like a summer's day in Amsterdam. All the Romans were wearing heavy coats though. It must be the time of year, or they're even more sensitive to cold than I am. There was an actual log fire burning in the lobby of my hotel. Very nice. Of course, I did not get to see much of the town, as usual, but I suppose it's better than nothing.

Now back to more regular blogging.

Sparse blogging ahead

I'm off to Rome in a few hours, and will be back tomorrow. It's unlikely there'll be much blogging in the interim.

Capitulating to criminals

After the defeatist comments of the Amsterdam police chief about crime, we now get a report from the Scientific Council for Government Policy on crime. Their shocking advice: serious crimes should always be prosecuted. Only if it is in the public interest not to prosecute, should prosecution be foregone. Of course, this means that right now, not all serious crime is prosecuted as a matter of course. The Council says that especially in serious violent crimes prosecution should always take place. Makes you wonder what the policy is right now.

The Council furthermore points out that the Dutch police is ineffective compared to the German police. No further Europe-wide comparison were given in the newspaper article, and the report itself is not online (yet?) at the Council's site. Other salient points: in the Netherlands, there is no reaction from the justice system to even serious crimes. "That raises questions about the internal efficacy of the police." The Council recommends hiring more judges and prosecutors.

But the Council shows the same defeatism as the Amsterdam police chief. Crime is "policy-resistant, the goal of stopping or reducing crime appears to be too ambitious." That's why the Council opposes tougher sentences. Holy legal mazes! Do you really have to be a social scientist to think that locking up people for long periods of time is not going to reduce crime? While they're in prison repeat offenders are not very likely to be committing crimes on the street, are they? Three strikes and you're out sounds like a good policy to me. But getting there is going to be hard; this is the country where a "life" sentence means you're out in 18 years (if not sooner; I'm trying to find hard data on that). Life sentences are rare though. Often murderers get "long" sentences of 10-15 years, which gets them out in 2/3rds of the time.

What would have happened to New York City if Rudy Giuliani had had the same mindset? Both the police and the policy makers have capitulated to crime. By shrugging their shoulders and saying it can't be affected by policy anyway, they shirk their responsibility and condemn the citizens to more crime.

Qualifications for parliamentary seats

In the party list system that many European democracies have, the way to enhance your career as a politician is to be popular within the party hierarchy. This leads to perverse incentives for political hopefuls. With elections coming up again in January in the Netherlands, the parties are busy deciding whom to put on their lists. Where you get placed decides whether you can get elected or not. One of the people moved to a low, unelectable position is the Labor politician Rehwinkel. I'd never heard of him before, but apparently he's been moved to somewhere between 30 and 35 on the list, meaning that the Labor party needs to get that many seats for him to return to parliament. That seems very unlikely.

So he's upset. In fact, he's so upset that he has resigned. He claims he's been given a low place on the list because he lives in the Randstad (the area of Amsterdam, The Hague, Rotterdam and Utrecht) and because the placement committee wants give preferential treatment to women and minorities. So his argument for a better place is to claim he's a member of a minority too (he's gay).

Apart from the inherent problems of the list system, shouldn't competence matter in this at all? And how far have you sunk as a party if the quota system has become so entrenched, that there's now a bidding war for "minority" status going on? He's not even trying to argue on the basis of merit. This kind of superficial tokenism is a reflection of intellectual enervation. Tokens and symbols matter more than actual merit, talent or accomplishment. Whistling in a vacuum. It's not only unhealthy, it's also not going to get you anywhere long-term.

Schröder's fall continues

The newly elected government of Gerhard Schröder has been declining steadily in the polls since it was elected. The Germans are not taking kindly to the huge tax increases that he is dumping on them. The German economy is in deep trouble and higher taxes are going to make matter even worse.

The latest expression of dissatisfaction in Germany with Schröder's policies comes in the form of a satirical song, which portrays Schröder as a thief and a liar. He steals from a Red Cross collecting tin and flushed the constitution down the toilet. The lyrics are pretty brutal too (I'm only translating parts of it):

What you can promise today
you can reverse tomorrow
and that's why I'm getting myself every last bill
your money, your loot, your piggy bank!

[Chorus]

I raise your taxes
Elected is elected, you can't fire me now
That's the cool thing about democracy

I'll delve deep into your pockets
each one of you is hiding some dough
and I'm gonna get it, I'll find - no matter where it is

I'll clean you out, yeah you fools
you'll be wondering but I can still surprise you
there's no tax that does not exist for me!

In the song he also muses about a bad weather tax, a ground-use-tax, a breathing levy, a tooth tax for eating... you get the idea. Inevitably, there are already calls for this song to be banned. This is the gut instinct of the Euro-sophisticates; ban speech you don't like. The First Amendment is after all such an unsophisticated concept...

(More on European attitudes to free speech at USS Clueless and The Volokh Conspiracy.)

UPDATE: There's a whole web site dedicated to the song. It's called Steuerkanzler, or Tax Chancellor. It has Real Media streams of the audio and part of the video! (The audio stream has not worked for me though).

Euro coins: a failed user interface

For those allergic to these things, let me just say that this post is not going to become a Mac versus Windows item. Having said that, I have been a Macintosh user for a very long time. One of the things that has always attracted me to the Macintosh was the superior usability of the Mac platform. The foundations for this were laid in what are now the prehistoric times of computing. While Windows has caught up to some degree, it's still a skin-deep appropriation of the user interface design principles that made the classic Macintosh interface what it was. The difference between the Mac and Windows has become even smaller with Mac OS X, which in many cases is a step backwards in terms of usability. I can understand that Microsoft has had trouble acquiring a deep understanding of user interface design, but Apple should have known better. Designing good user interfaces is hard work, but there has been a lot of research done in the quarter century since mice and GUIs were invented at Xerox PARC.

User interface design is a surprisingly neglected field, even in places where one would expect a large premium to have been placed on getting things right. The canonical example of VCRs being hard to program is harmless. But even in aviation user interface design can go horribly wrong. The crash of a commuter plane in Switzerland about a year ago was due to a poorly designed display. One display panel for landing approaches had two modes: one to show the rate of descent, the other the angle of descent. So a display of 3.2 could mean either a descent of 320 ft/min or 3.2 degrees, depending on which mode the display was in, without any clear identification of which mode was being used. The pilots had not had many flying hours in the type of aircraft, and thought they had the display in the other mode than was showing.

The best user interaces are those that you don't even notice. A hammer has a simple user interface. But even something as seemingly simple as light switches can be infuriating. Many a time have I had to wrestle with light switches in hotel rooms before I got them to work. Money has a user interface too, although in this case it's just the design of the notes and coins that matters. As regular readers of this blog will know, I am not a big fan of European Monetary Union as it exists now, but I am also unhappy with the usability of the coins specifically.

Having used euro coins for almost a year now, I still spend way too much time trying to find the right coins. This is an inordinately long time to get used to the coins, because whenever I have to use other currencies, I seem to become acquainted with the coins within days. Is it just a spill-over from my dislike for the concept of the euro?

It's more of a design problem with the euro coins. The design of euro coins was an excellent opportunity to come up with new coins and designers had a field day. The winning design is a nice, logical ordered sequence. There are three sets of coins: the 1, 2 and 5 cent pieces are reddish in color, the 10, 20 and 50 cent pieces are golden/yellow and the 1 and 2 euro coins are two-colored. The coins all have distinguishing marks with differing edges and different thicknesses. So clearly the designers did have distinguishability in mind.

But why does it not work? There are two big problems. The first is that there are too many coins. There are 8 in total, compared to the 6 we used to have in the times of the guilder. US coins are especially parsimonious with only 4 coins in common use. Sacagawea dollars are too rare to be counted. But simply the number of different coins can't be the whole story, because German marks came in the same 1, 2, 5 series up to 5 marks. So there were even more of them than euros. The British pound coins have the same face values as the euro coins, yet it's still easier to find the right coin when I am in Britain than when I am in the eurozone.

This leads to the second big problem: the euro coins are too logically arranged. They're too ordered. For all the efforts to make them different, they're still too similar in shape, size, color and weight. The old Dutch dime and the US dime shared the trait of being very small. There's no logical reason to make the dime smaller than a penny, or why a 50 pence piece should be octogonal. The haphazard historical evolution of coins led to an almost random assortment of coins in shape, size and weight. This large disparity made recognizing coins easier, especially when fumbling around under poor lighting conditions in your wallet. I find it hard to tell the difference between a 10 and 20 euro cent piece, or between 20 and 50 cents in practice. Even the different colors of the 1, 2, 5 series and the 10, 20, 50 series become less apparent in poor light. The sizes are not sufficiently different to tell them apart quickly. Even the difference between a 1 and 2 euro coin can be tricky to tell from just seeing them half-obscured at an acute angle. Yet that's how they end up jumbled in my wallet.

Euro coins need to be redesigned to alleviate this problem. We need some whacky coins, like the old Dutch rijksdaalder (2.5 guilders) which was much larger than the 1 guilder piece. Or make a big coin like the 5 mark, 50 pence and a small one like the dime. One thing though: don't make them too heavy. I hate to carry around one pound coins, as they weigh so much. And get rid of the 1 cent piece. I always end up with large quantities of those (much like pennies in the US), and they're just a damn nuisance.

It's not going to happen of course. The design of the notes and coins was politically sensitive, so re-opening this issue is not going to happen for a very long time. I also suspect the political sensitivity of the initial design led to the situation we have now. The euro coins would never been allowed to look like any existing coins of the legacy currencies, so the safe escape route of making them logical and orderly was an obvious way out. Except I don't think it works in practice. Then again, this would not be the first time that political expediency triumphs over practical concerns. I would expect that there has been research into the usability of coins and that coins designers are aware of it. But as the aircraft example shows, neither the research nor the awareness of it can be taken for granted.

The Bogdanov Affair

It may not have been a hoax, but it looks like the brothers Bogdanov did manage to publish nonsense papers on theoretical physics in peer-reviewed journals. For a thorough look into the affair, read this article in the Chronicle of Higher Education.

There are a number of failures that have come to light. First is the process by which Ph.D.'s are granted at the University of Bourgogne. The review committee, by its own belated admission, did not contain anybody who truly understood what the Ph.D. theses were about. At the time Igor's thesis was in serious trouble and was given a way out: publish three or four papers in peer-reviewed journals and he would be given his Ph.D. This is a horrible cop-out, and it set up the circumstances under which Igor at least had a big incentive to get papers published quickly. That he managed to get these papers published with his brother points to the second big failure, that of the peer-review process. Again the papers were reviewed by scientists who did not really have the background to assess the validity. This has left a lot of egg on faces.

The article makes the point that theoretical physics has become so esoteric and removed from reality, that it is becoming increasingly difficult to establish the vital link between theoretical predictions and actual experiment to falsify the theory. Once you break that link between theory and experiment, you move out of the realm of science and into the world of blather.

Physicists did expose the nonsense in these papers, so in that sense the scientific process still works. But that's not the point. The peer-review process should have prevented these papers from ever being published.

Veterans' Day

Thank you.

Great moments in Peace Movement History

I am sure Le Chi Quang is delighted that the Peace Movement stopped war in his country. He is a 32 year-old Vietnamese man who got sentenced to four years in prison for "propaganda against the Socialist Republic of Vietnam." Who cares about freedom of expression when you can have peace? Protesting against this sentence, the organization "Reporters without Borders" wrote to Vietnam's Justice Minister: "Even if your government persists in abusing the basic rights of its citizens, we appeal to you to free Le Chi Quang because he is seriously ill." But at least they have peace now in Vietnam. The group also said that Quang was in a very weak state with a swollen face. He has kidney problems that the prison officials are refusing to treat. Good thing they have peace though in Vietnam. The government says Quang was "caught red-handed" while "illegally uploading the information" to the Internet. What would the situation be like if they didn't have peace though? The Hanoi government accuses Quang of posting articles that "distort the situation in Vietnam, slandering the Vietnam Communist Party, the state of the Socialist Republic of Vietnam and undermining the national and religious unity." Fortunately, the people of Vietnam now can live in peace. That must be the reason for the exodus of boat people from Vietnam. They probably wanted to convey their personal thanks to the Peace Movement for bringing Peace to Vietnam. It's so good to live in peace, you know.

I am sure the Iraqi people are very worried their peace may soon end. Thankfully the Peace Movement is out in force again to help Saddam Hussein maintain the Peace, thereby helping the Iraqi people to achieve the same kinds of benefits their intervention in Vietnam has brought.

Pacifism is not some muddle-headed, harmless pastime. Pacifism aids and abets those who want to destroy us. Pacifism is not merely wrong, it's morally repugnant. Pacifism is evil.

South of the border

I hadn't been to Brussels for a long time, so this weekend has been a good opportunity to acquaint myself with the town. Driving down in driving rain on Friday night, I ended up in a state of confusion around Antwerp when there were two roads marked as leading to Brussels, the A12 (I think) and the E19. Of course, I should have taken the latter, but I took the former. It was not too much of a problem, but I do think the Belgians need to invest in clearer signage. Then as I wound my way into town, I was greeted with a police roadblock. A whole host of police cars, lights flashing and several policemen with machine guns standing around as they were checking cars for something or other. I was waved through, but machine guns? Why? Are roadblocks really that dangerous that the police needs to have that much firepower? Or is it just a way of intimidating the populace?

There's some fantastic architecture in Brussels spanning several centuries, including some wonderful modernist buildings from the early 20th century, such as this pair of buildings on the Stefanie square on the Louizalaan. There's also a lot of absolutely atrocious architecture there from the Concrete Era of the 1960s and 1970s. The Belgian Finance Ministry further up on Louizalaan bears an eerie resemblance to its Dutch counterpart in The Hague. Cold, ugly, impersonal monuments to an era blandness when being heavy handed was seen as the golden future. But building gargantuan structures is a constant throughout history as the Palace of Justice shows. Although meant to show the magnificence of the Belgian state, its superhuman scale just serves to make the point that the state can build big things. Really, really big things. In fact, if we can build things this big, we can steamroller right over you. Symbolically, it's a Borg structure, the Belgian state's way of saying "Resitance is Futile." All in the name of the people of course.

The Belgian state also seems to be confused about the difference between public and private. In front of the Palace of Justice, I found this hilarious sign. It says "Private State Property." Apparently it's the kind of state property that belongs privately to the state. You may have paid for all of this with your tax euros, but it's not yours anymore. It belongs to somebody else, the State.

The best thing about Brussels is the amount of chocolate that is present. Every other shop sells chocolate. Chocolate shops are almost as common in Brussels as ski stores in Vail, but not quite. In order to ascertain whether the quality control processes in the Belgian chocolate industry are up to scratch, I had to conduct several chocolate-consuming experiments. I even brought some experiments home with me. And I also visited the best-smelling museum in the world: The Museum of Cocoa and Chocolate. The aroma of cocoa is overpowering when walking into the building. The museum itself is fairly small, and I was disappointed in the content. To bring the exhibits alive, they should have more interactive displays where customers could experience the chocolate more directly. They do have some interactive chocolate items (they taste good), but more would have been better.

Apologies for the blogtectomy

I have just returned from a weekend in Brussels, so blogging will resume shortly. Contrary to my earlier plans, I never had the time to post an appropriate warning to the blog about the forthcoming bloglessness, nor was the business center in my Brussels hotel open when I had time to blog. I knew I should have taken that laptop... Normal service will resume shortly.

Dim Wim stands pat

After yesterday's 50 basis point rate cut by the Federal Reserve, the European Central Bank in its usual form refused to do anything, despite the fact the Eurozone economies are substantially weaker than the US economy. Unemployment is higher and economic growth is lower. The ECB insists on fighting the previous war against inflation by trying to get it under its own 2% "reference rate," which in practice has acted more as a ceiling rather than aas a symmetric inflation target. But the main problem for the ECB is the divergence of the Eurozone economies in their economic cycles and the corresponding macroeconomic indicators. The ECB has the task of fitting the one square peg of monetary policy into the 15 oddly-shaped holes of national economies. It just does not work. The Monetary Union project is headed for longer-term problems.

The German economy is now on the verge of a deflationary spiral and the current interest rate is way too high. Of course, the problem is compounded by the fact that the German government is doing exactly the wrong things by raising taxes in order to try to stick to the Stability Pact. But inflation in other parts of the Eurozone, such as in Italy and the Netherlands is much higher. Yet if Germany does indeed sink into the morass of deflation, then the whole of the Eurozone will be dragged down with it to some extent. This is the real danger the ECB should be focusing on.

This talk of what the central banks are doing also points to a scarier problem. Central bank policy has now become the choke point of modern economies. It's the single point of failure that can strangle an otherwise healthy economy, and having fewer central banks around the world just reduces variety and competition. If one of them screws up, it affects the domestic economy, but now we have the Fed, the Bank of England, the ECB and the Bank of Japan as the major players. Japan is already paddling up many creeks with miasma emanating from every pore, Europe is sickly and the Bank of England and the Fed have not screwed up in a big way recently. They still could.

Variety and competition are good things as they build resilience into the system, allowing it to function more robustly. Also, it makes the system handle failure modes more gracefully. A monetary monoculture can be wiped out by a single antagonist organism. But building more diversity into the global monetary system is going to be hard to do. Private currencies are the answer, but there are serious implementation issues with that. That's a topic for another day.

Blowing and drinking

According to an evangelical foundation for drugs care called "The Hope," children in Dutch schools have increased their use of alcohol and drugs. The headline mentions "blowen," which is the Dutchified version of the English verb, and which refers to (unless I am terribly mistaken) to the use of marijuana. They base this on a survey of 14,000 kids in the ages of 13-18 or so (it says "voortgezet onderwijs," which encompasses roughly that age group). 6 out of 10 drink alcohol, while 13% did drugs. This is up from 50% and 6% respectively in 1998. About 26% smoke cigarettes and 11% gamble.

What puzzles me is the additional statistic that 28% claims to have learned about the consequences and dangers of drug use, but a full 40% says that they decided never to use drugs as a consequence. How is that supposed to work? Assuming all those who decided never to use drugs as a result of a visit by The Hope to their schools, that still leaves 12% who did not learn anything and still decided not to use drugs anymore. Weird.

On a related note, there's a discussion in the comments at England's Sword in the comment section about the negative effects of drug use on one's health. Those in favor of drug legalization are trying to undermine the validity or credibility of the research cited. This smacks of protesting too much, without passing judgment on the research that the blog referred to. It's the wrong argument they're trying to win. Trying to establish that drugs have no ill effects is futile. The real question is whether the negative effects of trying to interdict drug use and trafficking are outweighed by the positive effects of saving users from themselves. I don't think they are.

More jihadis in the Netherlands

They nabbed another one. A 22-year old man was arrested in the southern town of Eindhoven on Monday who apparently had been recruited in the international jihad. The police found a tape with his farewell message to his family. A second man who was also arrested has been released.

New initiatives in law enforcement

I have blogged quite a bit about the sad state of law enforcement in the Netherlands, and here's another twist to add to it. The police chief of the Amsterdam-Amstelland region J. van Riessen has said that people should only be entitled to police assistance if they've demonstrably tried to prevent the crime they have become the victim of. He wonders, "does a citizen have a right to an investigation after a burglary if his house was insufficiently protected?" He answers his own question in the negative. "As a government, you can force people to protect their houses. For instance through building permits, so that all houses end up secure to a certain degree." He thinks the police should only start to track down criminals if towns, building corporations (usually pension funds who build aparments and then let them) or citizens have done everything possible to prevent crime.

So next time you're the vicitim of a crime, the police will first start to investigate you to see if you've done enough to prevent the crime. I find this disturbing. The main reason for giving the state as much power as it has is that it will act as the enforcer of the democratically enacted laws. That is the police's sole function, and it's failing miserably in that function over here. By saddling victims of crime with the burden of proof to show that they are entitled to police help it's making a mockery of contract between the people and the police. It's really scary that someone in as senior a position as this would entertain such notions and air them publicly.

For all that, I do feel that citizens do have a responsibility to protect themselves, and do all in their power to defend themselves. Outsourcing all responsibility for your own safety to the state is an abdication of your own duties as a citizen, yet the dependency culture of many European countries has driven many people to do just that. But even with that proviso, it's not acceptable for a police chief even to suggest what van Riessen did.

As a coda, van Riessen also proves defeatist. He also said that the impact of laws, the efforts of police and the judiciary on crime are "marginal, really marginal." More cops on the beat, more prisons or more money for judges will not lead to a substantial reduction in crime in the Netherlands. It's not clear what in his opinion will reduce crime. And he's chief of police in Amsterdam. Yikes.

The Raines Effect

Oh boy. How bad a sign is it for the New York Times if an election analysis in a Swiss newspaper pokes fun at it? The newspaper in question is the Neue Zürcher Zeitung, which always has had excellent international news coverage. I don't always agree with it, but they do have reporters in weird places that tend not to get covered well by other newspapers. Anyway, they have some good election analysis, in which they have this right at the beginning:

With the risky big deployment of their very popular president the Republicans have succeeded in obtaining majorities in both houses of Congress. That is very unusual in mid-term elections, and the "New York Times" reacted with marked reluctance in the comment section "Mr. Bush's Big Night."

A casual jibe. Ouch.

Whom shall we name this award after?

Dangling prepositions be damned. In Andrew Sullivan style, I think we're going to need an award for this here. It's an election analysis in the serious right-wing (by Dutch standards) NRC Handelsblad paper. Under the headline "George Bush is Finally Elected," their US correspondent Marc Chavannes starts off by saying that Bush finally got elected with a real majority, pointing out that he only won because of the Supreme Court ruling in 2000 and had half a million fewer votes than Al Gore. The analysis then goes on to explain how the Republicans will now be in charge of the committees in the Senate, and how that will help Bush. Then analysis really goes off the deep end. He claims it could be a pyrrhic victory, because he spent so much time fighting against moderate Democrats like Carnahan (MO), Cleland (GA) and Johnson (SD). These are the Democrats Bush could do business with, he goes on, and by alienating that kind of Democrat he risks provoking a harder and more coherent Democratic opposition. I suppose neo-Marxist class warfare Gore-style probably is harder and more coherent. It's also a vote loser, but that seems not to register.

The truly amazing part comes at the end. I'll translate it for you.

But for another reason it's only the question whether this victory is as remarkable as is claimed. The most often heard reaction in the American media last night was that the Republican victory was unique because the president's party usually loses. This was the second time in one hundred years that this happened. [sic]. In 1998 the Democrats pulled it off.

According to Nelson Polsby, the veteran Congress-watcher and professor of political science at Berkeley University this analysis is incorrect. "Who won the 2000 elections?" he asks rhetorically. "Exactly, the Democrat Al Gore. His party lost slightly this year. It's the normal setback for the party that really gave it its all last time around." In this reading of the results of mid-term elections the historical trend has not been broken at all."

It is of course well known that Berkeley University professors are well-grounded in reality, so they make the ideal commentators on election results. Living in the alternate reality of planet Zog where Al Gore did actually the 2000 election, Polsby embarks on his fantasy quest to present today's result as another Democratic triumph. Two consecutive election cycle defeats for the Democrats suddenly become two victories. Really, how pathetic is that? And why is it that only professors at elite universities are capable of NOT seeing the blindingly obvious? Is it something in the water? A secret medical procedure they carry out?

Zaphod Beeblebrox had glasses that turned automatically black whenever there was danger, so as not to alarm him by not allowing him to see the source of the danger. Somebody's been passing these things around at Berkeley and our other elite instutions of Moral and Intellectual Blinkering.

The inevitable election commentary

I suppose I should add some comments about the mid-term elections in the US, since it seems to be the hot topic of the day. First of all, I'm glad the Republicans did well. I'd also like to extend my congratulations to my loyal readers in Maryland who'll be delighted with the Ehrlich win (whoo-hooo), as well as the Missourian who forgot to get her absentee ballot. (*ahem*) But all's well that ends well, I suppose. Be more careful next time.

At the time of this writing, the Senate race in South Dakota has not been conceded yet. Johnson, the incumbent Democrat leads the Republican challenger Thune by 167.481 to 166,954. The Libertarian Evans managed to pick up a few thousand votes, just enough to spoil the Thune's chances. What's even sadder is that he suspended his race on October 17th and endorsed John Thune. I don't know whether the people who voted for him were extremely absentee or postal voters, or whether they were the Libertarian ideologues who'd rather have Utopia than something that's second-best. I just hope this thing doesn't end up being a rerun of the 2000 Florida debacle. Don't litigate this race to hell and back. I hope whichever candidate (most likely Thune) who ends up behind after a few days will have the grace to concede. It would be in keeping with the Republicans' message of serious politics, rather than the Democrats' poltics-at-any-cost sleaze. While the Republicans may end up with one seat less in the Senate, a gracious concession would win them points longer-term. Let the Democrats be the Nasty Party.

Perhaps I am too optimistic though. In any case, the Republicanization of the South continues. I am still amazed at how many Democrats manage to get elected in the South. Those roots go deep. Very deep. But here too, as in Lautenberg's New Jersey and Mondale's Minnesota, the Democrats are the party of the past. The future is Republican in the South, and gains made by Jeb Bush amongst Latinos show that the GOP can reach out beyond its caricature white aging businessman core. Georgia completely flipped to the Republican Party this cycle after more than a century of Democrat control. One thing I am wondering about is what this means for the Republican coalition. Did the GOP win because of its socially conservative message or because of its economically liberal message? (I know, I am fighting a futile campaign to return the word liberal to its original, non-pejorative meaning.) If you will, it is a conflict between the Values of Religion and the Values of Investing. The increase in share ownership is a trend favorable to Republicans, which is predisposing swathes of suburban knowledge economy workers to the Republican party on economic issues. They're the Investor Values people, and they don't much care for the social conservatism of the Religious Values people. Both currently share the Republican tent, and neither has a place to go unless the Democrats come to their economic senses and dump the last vestiges of sneaking socialism in their program. The best way for the Democrats to win back a majority is to stop business-bashing and embrace the free market. Of course, they're not going to become Libertarians, but a centrist position with a non-government tilt would do really, really well. It also requires the Democrats to get serious about the war. The survival of America is at stake. Chanting Vietnam-era slogans is not going to dispel the Islamofascist threat, and the American people know that. The Vietnam-era slogans condemned the people of Vietnam to communist tyranny. I'd like to avoid having a Islamofascist tyranny in America. Get serious.

I haven't seen much commentary yet on this (then again, I don't spend all day reading blogs, although it sometimes seems that way), but there has been a Republican revival in the northeast. Pataki won big in New York, Republicans won gubernatiorial races in Connecticut, Maryland, New Hampshire and Massachussetts, while they might win in Vermont too. Sununu won the Senate race in New Hampshire. Sure, New England is not going to become a Republican hotbed because of this, but it does mark a revival after some poorer showings recently.

So what should President Bush do with his new majority? Two things: ruthlessly prosecute the war against the Islamofascists, and give America another tax cut.

Guns and crime in the Netherlands

Yesterday saw the publication of a report (PDF) by the Dutch Justice Department on guns and gun crime. (There's an English summary on page 173). It has been summarized in the newsmedia, with the key headlines being that it's easy for criminals to buy guns. For 250 euros you can get a basic gun. The most popular is the Browning Highpower while Glocks and Berettas are popular too. The more refined criminals pay 1500 euros for an honest-to-goodness Smith and Wesson. Machine guns start at 1900 euros, and hand grenades can be had for 7 euros a piece.

The total number of illegal firearms is estimated to be between 85,000 and 120,000 depending on various assumptions on circulation speed and extrapolations from the numbers of confiscated arms. It's also estimated that up to 20,000 firearms trade hands each year. Most weapons are single-use. The criminals get rid of the weapon once's it been fired. In some cases, they sell it on to clueless newbie criminals.

By European standards, it's easy to get a gun legally in the Netherlands. The requirements are that you have to have been a member of a shooting club for a year, be 18 years or older, prove that you can handle firearms safely, have enough shots to your name and you obviously can't have a criminal record. The actual procedure for buying a gun is arcane and requires approval from the shooting club and the police. You must keep the gun in a safe in your home (so it's no use for self-defense), you're only allowed to transport it to and from the shooting club, and the police will come inspect your home at least once a year to check on how you're storing the gun. There are about 80,000 people with a gun license in the Netherlands.

This report focuses almost exclusively on illegal gun ownership. It makes no mention of how many legal guns were used in committing crimes. The report does point out that going the legal route of obtaining a gun makes little sense for criminals, since it's long and cumbersome while they can get guns easily anyway in the illegal circuit. If there had been many legal guns used, I suspect it would have been mentioned.

The number of gun crimes has been relatively constant in the three years that the report covers (1998-2000). There have been 30 crimes with firearms committed per 100,000 inhabitants. There are huge regional variations. In Amsterdam the rate was 72 per 100,000 people, while in the rural provinces of Drenthe and Zeeland the rates were 14 and 13 respectively. The big cities have much higher crime rates than rural areas, so the higher incidence of gun crimes is no surprise.

How does this compare to America? The FBI's Uniform Crime Reports provide the answer. The UCR keeps track of gun use in three kinds of crime: murder, robbery and aggravated assault. There are 5.6 murders per 100,000 people in the US (page 19 of the linked PDF) with 63.4% involving firearms (table 2.9, page 23). Robberies run at 148.5 per 100,000 (p.32) with 42.0% involving guns (table 2.22, p.35). Aggravated assault occurs at a rate of 318.5 (p.36) with 18.3% gun use (table 2.24, p.38). This means that gun-related crime in the US runs at 124 per 100,000 people.

This is substantially higher than the 30 reported for the Netherlands, although the 72 rate in Amsterdam comes rather closer. But this is not the whole story. Does lower criminal gun ownership translate to lower crime rates overall? Looking at the FBI data in table 1 on page 64, the violent crime rate in the US was 504.4 per 100,000 inhabitants, while property crime ran at 3656.1 per 100,000 inhabitants. The Dutch Central Bureau for Statistics has crime numbers online, but not the crime rate. The table shows 101,143 violent crimes and 919,262 property crimes in 2001. With a population of 16,171,520 (September 2002), this works out as 625.4 violent crimes per 100,000 people and 5684.4 proprety crimes. Or, to put it differently, the violent crime rate in the Netherlands in 24% higher than in the US, and the property crime rate is 55% higher.

More guns, less crime. What a surprise.

German stagnation and the growth gap

Germany has the third largest economy in the world after the US and Japan. And its economy has been underperforming not only the US, but Europe as a whole for at least a decade. Japan's economy is already in a deflationary slump, and now Germany is in danger of following in its footsteps. On the one hand, monetary union has forced inappropriately high interest rates on Germany, while on the other hand it suffers from deep-seated the structural problems. The ECB is not going to help out on the former, while German politicians have no clue about the latter.

The German economy's underperformance is a result of an economic structure built on social consensus rather than market forces. The Weimar republic and the following Nazi era led to Germans attaching a very high premium on domestic stability. As the economic boom of reconstruction after the war produced great wealth, the predominant socialist ideology of the welfare state spread ever further. Labor unions demanded shorter work weeks without proportionate falls in pay, while the captains of industry built a cozy network of cross-shareholdings with their banks. This system worked for a while, but the ever-increasing amounts of legislation under the banner of "social protection" shackled the economy down one by one. The road to serfdom is paved with good intentions. to protect workers from getting fired, laws were passed making firing people expensive. Now the risk of hiring workers in Germany is high, because you may not be able to fire them again. The great fundamental flaw in building this system was the belief that you could legislate your way to social cohesion and prosperity. One particularly egregious example are the "Arbeitsbeschaffungsmassnahmen." This word translates into "measures to provide employment." All kinds of retraining programs fall into this category, and over the years the unemployment statistics have been massaged downward by sending people off on these projects. If the government could indeed wave its magic wand and provide employment like that, Germany would have no unemployed. Instead, the unemployment rate is around 10%.

The structural rigidity of the German economy has meant that it could not react quickly and nimbly to changing circumstances. Germany has not yet made the wholesale transition from a manufacturing to a service economy. It is not able to climb the value-added ladder, and competing in manufacturing with much cheaper labor in Poland or the Czech Republic is futile. Yet there are no politicians in Germany who really get this. Occasionally the FDP might mumble something that would be a step in the right direction, but aside from their self-inflicted implosion, they would in any case not be a major force.

Unification provided a brief boost to the German economy at the beginning of the 1990's, but that proved ephemeral. The monetary union between East and West Germany shows the dangers of joining two disparate economies. What's even worse, the worthless Eastern Marks were exchange at a one-to-one rate for Western Marks. This was a political necessity, but the long-term economic consequences are still being felt. Despite a truly gargantuan transfusion of money from West to East, the eastern part of the country is still very far behind economically. It's quickly becoming the German mezzogiorno, the name given to the destitute south of Italy, which gets huge handouts from the prosperous north.

Ever since unification, the German economy has not been doing well. Retail sales have been flat for ten years now. The only growth Germany has seen has been export-driven as it has been unable to generate self-sustaining domestic growth. While growing a little less every year may not sound like a catastrophe, the cumulative effects do add up (or rather, they multiply up). Since 1981, the German economy has grown in real terms by 54%. However, in the same period the EU economy grew by 61%, the British economy by 69% and the US economy almost doubled in size with growth of 92%. The comparison since unification 1991 is even more shocking. The Germany economy grew just 15%, beating Japanese growth by about 5% over the period. But the performance of the Anglo-Saxon economies was in a different league altogether: the US economy increased by 41% and the British economy grew by 31%. In terms of virtually every macroeconomic indicator, the US and British economies have done better than Germany.

What Germany needs is exactly what Schröder promised not to do: a strong dose of Anglo-Saxon economic medicine. The German economy needs to be unshackled, taxes need to be cut, the labor market needs to be liberalized. Without radical change, the German banking sector is heading towards a systemic crisis like the one in Japan right now.

How much pain is necessary before the changes can be made? It took Britain a winter of discontent to get serious about breaking the unions and restoring economic sanity. With the German premium on stability, the gut instinct will be to try to muddle through as long as possible, all the while making the problem worse and the eventual cure more painful. And if Germans have an economic pain tolerance like the Japanese, Europe's biggest economy will be in for a very long period of misery.

URLs on radio

Running radio commercials with a URL for your web site makes sense. However, there is the problem of how you pronounce the URL on air. Hypens, numerals and ambiguous spelling have to be clarified so that listeners can actually find your site. One radio commercial here promotes the region of southern Tyrol and it directs listeners to the site by pointing out that the ü in S¨dtirol is spelled as ue in the name. This works for me. In one of those "did they really say that" moments I heard an ad for the Schönberg Ensemble, which is a small orchestra with a modern classical repertoire. To plug their website, they decided to pronounce the schoenberg part of the domainname in Dutch rather than German. It sounds horrendous. At first I didn't even recognize it, because everyone pronounces Schönberg (or in this case, the written Schoenberg) the German way and the Dutch pronunciation is so different. Not only that, "schoenberg" in Dutch means "shoe mountain." Talking down to the target audience of your ad is never a good idea. Those interested in contemporary music would have been able to figure it out. Really.

Apple's Revenge

Since the Return of Jobs the HQ at One Infinite Loop in Cupertino has become a darker, more menacing place. You don't cross Apple of Jobs. He's a perfectly peaceful Vegan vegetarian, but he'll happily rip your head off with his bare teeth if you disagree with him. Ah, those peacenik hippie rapscallions!

But the Jobsian reach is longer than I had thought. Steven Den Beste has long been a vocal critic of Apple and its policies, and this has not gone unnoticed at Jobs Central. Steven posted a comment to this blog below, and the email that Moveable Type sent to announce the comment was immediately classified as "Junk" by Apple's Mail progam. Just shows you how vindictive Jobs can be... in the next version of OS X, all mention of Den Beste will automatically be censored. New Macs will come with earplugs and blinkers. In fact, just to make sure, Apple will ship all new iMacs with a Polynesian midget who'll blindfold you and shout "LALALALALA-IMNOTLISTENING-LALALALALA" in your ear should anything Den Bestian come into range.

You just don't mess with Jobs. You just don't.

Cocaine as a weekend staple

The town of Volendam is best known for its picturesque port and it's also a major tourist destination. It's now also a cocaine use hotspot. According to the report, on any weekend between 50% and 80% of under-25s use cocaine. That puts the weekend cocaine consumption in town at one to two kilos. This comes out of a 3-month project run by the police in Volendam this summer, the aim of which was the reduce the excessive use of drugs and alcohol. It failed miserably. A police spokesman said that using cocaine was considered completely normal. An anonymous telephone hotline to snitch on dealers received no calls at all.

I wonder how they came up with the 50 to 80% number. The margin seems rather wide which leads me to suspect that the data gathering might not have been too strict. Furthermore, one to two kilos of cocaine is a lot. According the to most recent data I could find, a gram of cocaine cost between 32 and 49 euro in the 1998 to 2000 period. Multiply that by a thousand for a kilogram of cocaine, and you're talking between 30k and 50k in weekly turnover. It's a lot of money, but I suppose it's not so much that people can't afford it. The combined population of Volendam and Edam is about 28,000. Assuming a shot of cocaine is a gram, that gives us between 1,000 and 2,000 people using the cocaine, and fewer than that if the average shot is larger. If the 50% of under-25s number is correct and we put a lower limit to the age band at 15, this means that there should be between 2,000 and 4,000 people in that age band in the area; this works out at between 7% and 14%. That is close enough to make sense. The 80% number is almost certainly too high, because this would mean that the 15-25 population would comprise only 2 to 4% over the overall population. That is way too low.

Cocaine is nominally illegal in the Netherlands and the authorities are trying to stop trafficking in it. Given the widespread use of cocaine, it seems they're not having much luck. The more interesting aspect of this story is that it provides a great opportunity to study what would happen if drugs like cocaine were legalized. Such widespread use as in Volendam amounts to de facto legalization (although a further drop in price would be expected if the frictional costs of extralegality were removed). How are the cocaine users doing? Is it affecting their job performance? Is it affecting their health? How dependent on the drug are they? What is the impact on crime?

I do hope somebody is using Volendam for some serious data gathering. It's too good an opportunity to pass up.

Divergence undermining European Monetary Union

When I looked at the possibility of European Monetary Union being undone, I pointed out that the strains and stresses the Eurozone is currently subjected to are already making the entire project fray at the edges. The current member nations of the Eurozone are too diverse to form an optimal currency area and labor mobility is much too low for it to function as a balancing force. The United States in its history has had periods of monetary strain too, when asymmetric shocks hit certain parts of the country much harder than others. For instance, a drought could depress the agricultural states, while the eastern seaboard still had strong economic growth. This led to conflict between the regions over the then-equivalent of money supply, namely gold. The stock of money could be expanded or decreased by adjusting the gold reserves and the areas that were in recession obviously sought relief. While these conflicts did take place, they concept of the Union was never questioned as a result. The United States was a solidly established country, with strong domestic support. The big glaring exception to this is the Civil War, but that was fought over the issue of slavery, not money supply.

The European Union lacks such strong domestic support. The "politics first" way in which the monetary union was conceived and implemented has led to irrational economic decisions within monetary union which have sewn the seeds of its eventual demise. Not all choices being made necessarily have to be economically rational; it would be nice, but reality is seldom that kind and the political reality especially can impose constraints on the freedom of action. As long as this is realized and the consequences of the irrational choices are not too grievous, it need not be fatal. Look at it as a tactical retreat to win the wider war. But the European Project as it has been in the last 20 years or so has increasingly become a plaything of the European political elites. They found themselves on autopilot towards "ever closer union" and they never stopped to question why. Post-war Europe certainly needed reconciliation between Germany and the countries it had invaded, but by the 1980?s the European Project had acquired completely new dimensions. The political elites went along with it partially out of inertia, and partially because it was a rich source of cozy jobs. It also provided a structure for them to solidify their hold on power, moving ever further from the pesky electorate that so often inconveniently ruined their domestic plans. And so the European Project steamed merrily into the turbulent waters of monetary union. The political decision for monetary union had long been made, but the consequences were certainly not understood by the politicians. Huddled in their Reality Distortion Fields they had no clue what they were letting themselves in for. More importantly, they were (and are) under the impression that political fixes can counteract the weight of economic reality; if it works in backroom deals in parliament, why should it not work in the economy?

However, a semblance of macroeconomic rigor had to be maintained. So in the Maastricht Treaty, in which monetary union was formalized, contains a number of convergence criteria that aspirant countries have to meet in order to be allowed in. The buzzword here is convergence. If the economies converge sufficiently, then they can be joined in monetary union. But they way these criteria were drafted they ended up as being coincidence criteria rather than convergence criteria. They converged much as a stopped clock converges with the time of day. Sure, it'll be briefly right, but it does not mean the clock can be relied on to show the time. It's the convergence of two elevators, one going up, the other going down. Real convergence can only happen over time, and it needs to be measured over time. The Maastricht criteria did no such thing, and even then they were subject to political fudging. The criteria were:

1. Price stability. Inflation rates had to be no more than 1.5% over the average of the three best performing countries over a period of one year. For a supposedly irrevocable monetary union, one year of roughly similar inflation is hardly convergence.

2. Government deficits and borrowing. The budget deficit should not exceed 3% of GDP and national debt should not exceed 60% of GDP. Since neither Belgium nor Italy would have had any chance of meeting the 60% criterion, this rule also gives a passing grade if the national debt is being reduced. And the 3% of GDP budget deficit rule has been fudged in many countries, by counting one-off privatization revenues as structural.

3. Exchange rate stability. Within the precursor to monetary union, the European Rate Mechanism the aspirant countries' currency had to maintain their pre-set bands. Britain almost wrecked its economy by trying to stay within the ERM in the early 90?s by trying to create artificial convergence. A very deep and painful recession was the result.

4. Convergence of interest rates. The yields on long-dated government bonds had to be within 2% of the average of the three best performing countries. This is virtually a consequence of point 1 above, although bond markets tend to be harsher than politicians. But once it was clear that political considerations would allow countries like Italy to join, the great convergence play in the bond markets was on.

None of these criteria actually measures real convergence, for that could only be observed over much longer periods of time with a number of business cycles to go through. These criteria were a political fig leaf, prone to and designed for easy and expedient manipulation.

The European Central Bank's key role is to keep inflation under control, targeting a rate of 2%. The Federal Reserve in the US has a less specific goal, as it has to keep prices stable while also taking economic growth into account. Looking at the US experience and contrasting it with the situation in Europe is instructive. How diverse is the US economy by region? It is very diverse, but it does rise and fall on the same business cycle. The Bureau of Labor Statistics has a wealth of information on regional inflation data and it's available online. It has data going back to 1915 for various conurbations, and a second set of series for larger regional areas since 1967. Using the numbers for the All Items CPI series, this graph shows that inflation did vary by region, but the moves were very highly synchronized. There's a striking divergence at the very end of the series though, as the brown line representing San Francisco, Oakland and San Jose spikes upward. This is the internet bubble and most of this rise is due to the housing component in the area. I also plotted the largest dispersion over time by taking the highest inflation rate and the lowest, and looking at the difference between the two. This graph shows two lines, one for all regions, the other excluding Silicon Valley. In post-war America the dispersion of inflation rates has been fairly low. It was only the high inflation period of the early 1980?s where the dispersion ticked up to around 4%. But with 13.5% national inflation, the difference between 15.8% inflation in Los Angeles and 11.4% in New York matters not so much. Both are way too high, and the monetary response is obvious (and Paul Volcker certainly applied it). Had the national average rate been 3% with individual regions fluctuating between 1% and 5%, then the situation changes. You don?t want to push the 1% regions into deflation, yet the 5% regions are in danger of spiraling out of control. But this situation has not arisen in the US aside from the internet bubble in Silicon Valley. Arguably the area would have benefited from higher interest rates when its inflation started to creep up as much as it did, and in that sense it's a small-scale failure of monetary policy there.

The situation in Europe is more difficult to assess, simply because data is harder to come by. I managed to scrounge together some data on Harmonized Inflation in Germany, France and Italy from various sources. Unfortunately, the amount of history is limited. Still, the graph shows that as recently as 1996 there was an almost 5% inflation differential between Germany and Italy. The last time there was a regional differential this big in the US was in 1917. It is completely unrealistic to assume that the Italian and German economies have become sufficiently similar to share the same interest rate simply because the Italians managed to get inflation down to something reasonable in the late 1990's. And the divergence is growing again as Italian inflation is almost 2% higher than German inflation. In other words, real interest rates are 2% lower in Italy than in Germany. This is exactly the opposite of what is required, as the German economy flirts with deflationary oblivion and the Italian is doing relatively OK by European standards.

Right now, the one-size-fits-all interest rate in the Eurozone is clearly and painfully inappropriate for many parts of the continent. There is no convergence, nor has there been any. These are the fault lines which lie under the exterior of European Monetary Union. The sad thing is that there were pre-programmed.

Tomorrow I will have a follow-up, focusing on the growth gap between Japan, Germany, Europe and the US.

Faster page loads I hope

A small administrative note: I've reduced the size of this page by having it show only the entries from the last 7 days. Previously it had been set at 14 days, but as blog entries have become bigger, this page had ballooned to almost 200K in size. This should speed up your page loads.

The monthly archives are still available in the left sidebar.

How the Muppet Show got it wrong

It was last week when I happened across a rerun of the Muppet Show on Dutch TV. It had been ages since I'd last seen an episode and I was getting tired of flipping through channels anyway, so I watched it. This was the episode where the ballet dancer Rudolf Nureyev. Since a representative of High Art was going to be on the show the Muppets dressed in formal evening dress, and Sam the Eagle was especially excited to get some Real Culture on the program instead of the low-brow demotic frivolity that so he looked down upon. This of course set up a running joke throughout the program, with Sam ending up sorely disappointed as Rudolf did "Top Hat, White Tie and Tails" complete with Astairesque tapdancing routine.

Sam was the Muppets' token caricature conservative on the show. Choosing a bald eagle for their caricature was also telling. Aside from this one episode I have just seen, I haven't seen any in decades, so I don't remember what Sam really was like in the other shows and I'm not going go off on that tangent. Instead what struck me on reflection is that the light-hearted amalgamation of High and Low culture on this Muppets episode was quintessentially American. Sam's haughty attitude was more akin the European condescension towards American culture than a reflection of America. Instead of a bald eagle, a stinky weasel would have been a better character.

It's not just the Europeans of course. The lefty pomo intelligensia in the US fawns over the haughty Europeans and joins them in lusty self-flagellation. Bad TV! (Whip!) Bad Consumerism! (Whip!) Shallow cowboys! (Whip!) Uncultured brutes! (Whip!)

I guess it makes them feel better. And boy, does it ever feel good to proclaim self-righteously that you never watch TV. Every moment not watching TV brings additional karma. But the conservative right has representatives that share at least part of these sentiments. Much like the caricature Sam, they look down on popular American culture and pine for the days when everything was better. I still have such tendencies too in my weaker moments when I get nostalgic for an age I never even knew. But the imagined Golden Age is always better than the one the people at the time had to live through. I prefer to live in the present, thank you very much.

It's not that I actually like pop culture very much, but I wouldn't want to be without it. Countries that lack a strong pop or counterculture have always been terrible places to live. Sure, the Soviet Union had endless productions of Swan Lake and a Shostakovich or Tchaikovsky festival every year, but the culture was sterile. It was ritual veneration of the past without creating any new. The creative process is messy. Most of the stuff that is created will be crap. Sturgeon's Law states that 90% of anything is crap. And it's universally valid. (This blog is of course in the other 10%, that goes without saying).

Having sometimes execrably crappy pop culture, silly game shows on TV and all the rest is a good thing. It's a good thing because it's a reflection of freedom. No freedom comes without a price. The First Amendment means that people will be able to say things you find offensive, or practice a religion you find repugnant. But it means you're free to speak your mind, to assemble peaceably and seek redress of your grievances. The Second Amandment means that people will use guns to commit crime, but also means guarantees your right to defend yourself against criminals and the government, should it become too oppressive. The Fourth and Fifth Amendments mean that those guilty of crimes will walk free sometimes, but they also give you a fair shot at a trial and acquittal if you're innocent. In each of these instances, the benefit of having these freedoms far outweighs the negative corrolary effects they have. So hooray for consumerism and pop culture. I would not want to live without it.

The German post-election hangover continues

The first polls after the election already showed that the ruling Red/Green coalition was losing popularity. The votes the Germans cast in their shameful embrace of vile anti-Americanism are coming back to haunt them. At least quite a few of them are having second thoughts, as a further opinion poll shows. Shown on Bericht aus Berlin, a current affairs program on the German public television ARD network, the results for Chancellor Schröder are not pretty. The new government is losing credibility very quickly as confidence in its economic competence is fading. In the main question of "Whom would you vote for on Sunday?", the shift away from the SPD is a full 3%. Just six weeks after a very close election, the opposition parties of CDU/CSU and FDP would get a comfortble majority of the seats in parliament. In the election, the CDU/CSU and SPD came in about equal. Now the gap is 7 percent between them. That's a huge swing.

The poll also shows that the government's credibility is suffering. Asked whether the 14 billion euro budget deficit will get larger, 77% said yes. Moreover, the government's claims that the full extent of the budget crisis was only knowable after the election finds no support: a full 84% is not falling for it. The Germans feel cheated and lied to by the government.

The government's plans to reduce unemployment also inspire little confidence. Only 10% of those polled think that the plans are going to reduce unemployment substantially.

So there you have it. The government has made a disastrous start to its new term in office. Were the election re-run today, the result would not even be close. But do-overs only happen in the wet dreams of Democratic operatives; Germany is stuck with the Red/Green government until it implodes under the weight of the country's economic problems. They have no plan, no concept, no clue how to solve them. The German malaise is going to continue, and it's going to be a millstone dragging down other European economies as well.

The sad thing is that even had the election result been different, any hope for a significant change of course in German economic policy would still be far off. The specter of Japan is hovering ever more prominently over Germany. Since unification, Germany has already had something of a lost decade. Growth has been threadbare, and a second decade of stagnation looms. If they don't get serious about deregulating the economy, cutting taxes, introducing more flexible labor laws, disentangle the cross-shareholdings, reform the pensions system, overhaul the socialist welfare state... what was I saying again?

Never mind. It ain't gonna happen.

So it is a hoax or not?

Just when I thought that the dust was settling on the possible physics hoax, things are stirred up again. The discussion on the Ars Technica forum as well as in sci.physics.research seemed to be trending toward the consensus that the papers by Igor and Grichka Bogdanov are indeed nonsense. There's a lot hand-wringing over the peer review process, especially in the highly specialized fields such as quantum gravity and string theory. One of the Bogdanov papers was published in Annals of Physics, another in Classical and Quantum Gravity, both of which are generally well-respected and respectable physics journals. If their peer review process lets hoaxes through, then no publication is safe. Moreover, the Bogdanovs seem to have gotten Ph. D.'s in physics based on the work presented in the papers. This would also be a massive failure of the academic process and it would be sure to destroy the career of their advisor. So if this is a hoax, it's a pretty big deal.

Now the two brothers at the center of the controversy have responded to the allegations of a hoax and they vehemently deny that it is a one. They claim their work is valid, real research. Still, the evidence seems to be pointing to a hoax, since the Bogdanovs have been involved in plagiarism and tried to get Ph.D.'s on the quick in the following trial. According to Jacques Distler, the papers are complete nonsense. Interesting that if this nonsense, it should be coming from France, the country of silly post-modern vacuity. Has it really infected physics too?

I still don't know what to make of this. I hope their work is real, because as an erstwhile physicist myself I would be greatly saddened that even the supposedly hard science has now sunk to the level of the liberal arts with shoddy peer review. But since I am not even remotely competent to judge the work on its merits, I have no option but to wait for the scientific process to do its work and ferret out the truth. The work could be real, but wrong. There is no shame in that as long as it is not outrageously and obviously wrong as some people are claiming that it is. They could be kooky hecklers from the fringe. They could be misunderstood purveyors of a new insight.

I absolutely detest not knowing things. All I can do is wait.

Swinging wartime songs

Praising Lileks is utterly futile. Even if I were to whip up an attempt at a Lileksian simile, the things he writes are an infinitely more impressive testament to his writing skills. At some point in the future, the English language will have the expression "you might as well praise lileks" as a way of expressing the blatantly superfluous. Entire immersive tactile 3D hypernetsites will be dedicated to finding the etymology of "lileks." It was a kitchen implement! It was an AI computer! It was a hoax! Bush had him murdered!

Enough of that. The Daily Bleat has long been a staple and those of you not reading it should start doing so right now. Immediately. The reason I'm bringing Lileks up is his recent Bleat about wartime songs. As a big Sinatra fan, I was reminded of the songs on the "Rarest Sinatra" CD, where there are four World War II vintage performances. (I'm not going to delve into the huge stack of Glenn Miller songs; that would take forever to blog.) The lyrics are marvelously unsubtle and would face the Inquisition of the PC touchy-feely brigade in a blink.

There's the "War Bond Man:"

The Jap as you should know
will be the toughest foe.
We've got to win, but that takes dough.
Back up the war bond man!

We have a score to settle on that far Pacific shore
Before we're done the Rising Sun will set to rise no more.

[...]

Why let your dollars nap, when they can set the trap
for the rat that they call the Jap, back up the war bond man!

[...]

What would your fortune be without democracy?
In liberty, security buy all the bonds you can!"

Little is left to the imagination there. And it's a swining tune too. Here's some lines from the Victory Polka:

And when we've lit the torch of liberty
in each blacked-out land across the sea,
when a man can proudly say "I'm free,"
we'll be dancing the victory polka.

It'll be a Hot Time in the Town of Berlin:

It'll be a hot time in the town of Berlin
when our fightin' boys begin
to take the joint apart and tear it down
when they take old Berlin.

They're gonna start a row
and show them how
we paint the town back in Kokomo.
They're gonna take a hike
through Hitler's Reich
and change that Heil
to watcha know Joe.

And you know what, they did.

After the funding for the war came the funding for the peace. The song "Buy a Piece of a the Piece" exhorts Americans to swingfully use their gold and what money they could muster to fund the reconstruction effort after the war.

You can all buy a piece of the peace
big or small, buy a piece of the peace.
Seven times before you've bought the bonds we've sold
victory isn't free so trade it in for your gold.

This is it, buy a piece of the peace
do your bit, buy a piece of the peace
Please for freedom's sake don't cease
come on and buy a piece of the peace!

[...]

Dig way down, buy a piece of the peace
go to town, buy a piece of the peace.
Just to say OK no matter what the cost.
Listen friend, unless you spend
the things we've won can be lost."

I think we needed a few more exhortations to buy a piece of the peace. But I should not be cynical. It's too easy to slip into trendy and effete cynicism; it the money that was stumped up by Americans after the war that allowed Europe to revive economically, just as it was American power that kept us free and prosperous during the cold war.

I have no idea how much these songs contributed to the war and peace bond funding drives. As Lileks said, Americans will have had they BS detectors back then too. That's not the point. The point is that America did win the war, did liberate western Europe and Japan, we did have the Marshall Plan, and both America and Europe benefited enormously from it. For what it's worth: thank you guys. Europe owes you big time. It's disgraceful European politicians have forgotten that.

Unintended consequences

Decimalization all seemed so perfectly sensible. Stocks in the US used to be quoted in fractions: halves, quarters, eights, sixteenths and even thirty-seconds of a dollar were the fractional prices paid for equities bought and sold on the US exchanges. The rest of the world had long since switched to decimal pricing, and with ever smaller increments being quoted for US stocks too (sixty-fourths anyone?) the pressure was on to rationalize the system. No more fractions and prices for equities could be expressed in dollars and cents, just like virtually everything else. The changeover took place in April 2001.

The Nasdaq market relies on "market makers," which are big institutions who intermediate between buyers and sellers on the market. They make their money by selling the stocks at a slightly higher price than they buy them: this is called the bid-ask spread. There had been much criticism of market makers and the high spreads that were quoted on many Nasdaq stocks, and decimalization was supposed to bring spreads down. And down they have come. In fact, they have come down so far that the profitability of making markets in smaller stocks is no longer viable, or so claims Nasdaq CEO Wick Simmons. He says that the decision by some big market makers like Merrill Lynch to withdraw from smaller stocks proves the point, and he now says that decimalization was a horrible mistake. What's worse, this makes access to the trading of smaller stocks more difficult, hurting both small investors and small companies.

So is this a classic Hayekian case of unintended consequences? I'm not so sure. The erosion of the bid-ask spread is a classic case of a more efficient market. The bowing out of some players is also a market response; you can't force people to engage in unprofitable business. (Well, you can, but it's not a good idea). So thus far what we're seeing is the market changing participants' preferences. Those who find no utility in making markets in small stocks will leave, and have their place taken by competitors who think they can make a buck doing so. It's also worth bearing in mind that decimalization took place at while the big Internet Bubble was deflating, and all Wall Street firms have fallen on tough times since then. Trading volumes aren't what they used to be, and small investors' appetite for small cap tech stocks is way down too. So perhaps Merrill Lynch's decision to exit the market making business in small caps is more related to the bear market than to decimalization. It would be interesting to see some data on other market-making exchanges around the world (couldn't find hard data on this).

We'll have to see how this pans out. Based on the evidence I have seen thus far, I'm not willing to say that decimalization is at fault here. If many players exit the market-making business in small caps then spreads will start to widen again as a illiquidity premium will have to be paid. As supply goes down, prices (i.e. spreads) will go up, which will attract players until the market reaches a new equilibrium. No need to panic yet. We'll announce the proper time to panic on the PA system.