A young, European Ahmadinejad

At the end of last year, lefty blogger/policy wonk Matthew Yglesias mentioned Camera Obscura's song French Navy as one of the best of 2009. I had never heard of them, so I looked them up and listened to the song, which is quite catchy and retro. Below is the video, which features some scenic shots of Paris and Rome. Below the video are a few observations about it.



Observations:

- The band's lead singer reminds me a little of a JetBlue flight attendant with her outfit.

- The blond fellow behind her reminds me a little of the blond guy from Trainspotting (perhaps partly because the band is from Scotland).

- Cheryl mentioned this one first, but I concur that the bearded young man gallivanting around France and Italy with his girl in the video looks sort of like a young, European version of Iranian President Mahmoud Ahmadinejad.

Lesson's from The European Parliament Elections

I meant to post a link to this earlier this week, but didn't get around to it. From Salon, here is Michael Lind's take on the victory of rightist parties across Europe in the European Parliament elections last week: "A warning for Democrats? The right just won all across Europe, thanks to nationalism, populism and recession. It could happen here too.".

Below is an excerpt from Lind's essay, followed by a few thoughts by me.

[I]t has become something of an orthodoxy among bien pensant progressives on both sides of the Atlantic that territorial nation-states are immoral because they privilege the identity of one cultural nation over others (the nation part) and because they favor the well-being of their citizens over foreigners who may be poorer (the territorial state part). Most progressives favor ending agricultural subsidies in Europe and the U.S., claiming that this would help poor peasant farmers in the global South export their way to prosperity (of course this would really benefit multinational agribusiness, not romanticized peasant farmers, but never mind). In debates about immigration, as in debates about trade, elite progressives whose own positions and incomes are secure frequently demonstrate their altruism by suggesting that it is acceptable if immigration somewhat lowers the wages of their less-fortunate fellow nationals, as long as poor foreign immigrants and receivers of remittances are thereby made better off. How generous of them!

The new pro-capitalist, anti-nationalist center-left finds allies in investment banks and college campuses but has little to offer ordinary people who view the nation-state as their agent and protector in a dangerous world. Nobody should be surprised when, in a period of economic crisis, significant parts of the population should turn to unabashed nationalists of the right, as opposed to progressives who fret that helping out their fellow citizens might be a form of discrimination against more deserving foreigners. It's true that toxic forms of racism and illiberal nationalism drive the anti-immigrant politics of the far-right parties that have benefited from protest voting in Europe. But the economic case for limiting the inflow of new workers into an economy at a time of mass unemployment is likely to seem commonsensical to many non-racist voters who do not share the new center-left's unease with national patriotism.

Lind makes some astute observations here, and Republicans can draw some lessons from this if they are willing to part company with Democrats on some of their shared orthodoxies (e.g., embrace of large scale unskilled immigration). The way to do this would be to acknowledge the challenges posed by globalization to the American middle class and offer some constructive solutions. In a recent post ("How Not to Create Broad-Based Prosperity"), we mentioned one Democrat (Matt Miller of the Center for American Progress) who acknowledged these challenges but didn't offer constructive solutions to them (e.g., Miller's proposed replacement for manufacturing jobs lost to outsourcing was to replace them with service jobs such as hospice aids; Miller proposed this without acknowledging the extent to which these jobs are currently filled by immigrant workers). I've made these points before, but two specific areas where Republicans can draw a contrast with Democrats are on immigration policy and energy policy.

On immigration policy, Republicans would be smart to buck the Chamber of Commerce's demands for cheap unskilled immigrant labor and advocate a transition to an immigration system similar to those of Australia or Canada, one that selects for immigrants with high levels of human capital. While unemployment is high, immigration should perhaps be further limited to foreign entrepreneurs who have the capital and intent to start businesses here and create jobs for American workers. To counter the inevitable accusations that anyone advocating an economically rational immigration policy is advocating it because of racism, Republicans ought to do two things. First, they ought to scrupulously distance themselves from anyone who advocates restricting immigration based on race. Racist immigration restrictionists may win elections in Europe, but they will be the kiss of death to any plans to institute a Canadian- or Australian-style immigration policy in America. Second, Republicans ought to point out that it is often minorities who are most harmed by the effects of our current immigration system. Let Democrats explain why we should import more unskilled immigrant laborers when, for example, 39.4% of African American teens are unemployed (Hat tip to Dr. Mark Perry for the chart below).



On energy policy, Republicans would be smart to continue advocating efforts to develop more domestic sources of oil, gas, and coal, while advocating an increase in nuclear power as well. Increasing domestic supplies of energy would create more high-paying jobs in the energy sector, and ensuring a large supply of relatively inexpensive energy would facilitate the creation of jobs in energy-intensive industries such as manufacturing (we noted the effect of lower energy prices on employment in a post last fall, "A Tale of Two States: Utah versus Rhode Island").

A third area where (some) Republicans may be able to draw a favorable contrast with Democrats, if they are willing to do so, is by running against Wall Street, or more accurately, running against the incestuous relationship between some major Wall Street firms and Washington. I suspect New Jersey's GOP gubernatorial nominee Chris Christie will try a version of this while running against our incumbent governor, former Goldman Sachs CEO Jon Corzine. Republicans would be smart to look for economic advisers from among the smart bankers and investors who haven't required government rescues. I don't know what John Hussman's politics are, but to the extent his policy prescriptions (e.g., making big banks eat some losses) have been ignored by the current administration, I bet Dr. Hussman would welcome a chance to advise a Republican candidate willing to listen to him. Another potential economic adviser might be Andy Beal, the self-made billionaire Texas banker who successfully navigated the credit bust.

An Economic Stimulus Idea That Seems to Work

One economic stimulus idea that has been proposed a number of times is for the government to spur auto sales by offering a voucher good towards the purchase of a new car¹ to owners of old cars. The first I remember reading of such a proposal was last summer, but here are a couple of more recent examples, from the Brookings Institution ("Refuel Economy with Cash for Old Cars") and from the chairman of Ford in the USA Today ("Cash in Old Cars for New Ones"). As the Brookings piece notes, Germany included this sort of voucher program as part of its stimulus package it implemented in January. The German version offers vouchers of 2,500 euros to citizens who scrap cars that are at least nine years old. According to an article in today's Financial Times ("Berlin hit by cost of car incentive scheme"), this German stimulus program is having a big effect, both in Germany and in other parts of central Europe. A few excerpts from the article make this point:

“In February and March, we made about three times the sales we had in the first quarter of last year,” says Bernd-Uwe Prochnow, sales director at a Volkswagen dealership in Frankfurt. “And the first quarter of last year wasn’t bad at all.”

Car sales nationwide rose 11.9 per cent in February, making Germany the world’s only bright spot for the car industry.

[...]

Car-scrapping incentive programmes introduced by Germany and other European Union countries² are having a dramatic impact on central European car factories, and could help boost the region’s slumping economies, write Jan Cienski in Warsaw and Thomas Escritt in Budapest.

The turnround at factories making smaller and cheaper cars has been striking. During much of November and December, the Dacia factory in Pitesti, Romania, stood empty, its workforce at home on 80 per cent pay. However, Dacia, owned by France’s Renault, produces the €5,000 ($6,600, £4,500) Logan, Europe's cheapest production car, which has become a winner thanks to Germany’s €2,500 government rebate available for new car purchases.

Recently François Foumont, Dacia's general manager, said surging west European demand meant exports would account for three-quarters of the company’s production this year, against two-thirds in 2008. Dacia said it sold 25,500 vehicles in Germany last year, and German orders this year already exceeded that number.

In the Czech Republic, Skoda, a subsidiary of Volkswagen, has seen its sales to Germany more than double to 11,000 in February, and the factory in Mlada Boleslav has gone back to full-time production after working only four days a week in January.

Petr Vanek, a spokesman for Hyundai, which has a factory in the Czech Republic, said the plant shipped 20 cars a month to Germany in January and February, but last month delivered more than 2,000. Hyundai is now hiring about 500 workers.

Fiat, which makes small cars in southern Poland, exported 47,417 cars in March, almost 10,000 more than in the same period a year ago.

The image above, of a welder working on a Logan sedan in the Dacia factory in Romania, comes from this ViaMichelin.com site

¹Some have proposed making vouchers good for the purchase of newer used cars too, which would indirectly boost new cars too.

²The article mentions that France offers a voucher program as well, but the French vouchers are worth only 1,000 euros.

"While Rome Burns"

John Mauldin's latest Thoughts from the Frontline newsletter, "While Rome Burns", includes the graphic above¹, from BCA Research. The column consists mainly of two sorts of gloom. The second sort, about the negative prospects for buy-and-hold stock investing when earnings are dropping faster than stock prices, so P/E ratios are high despite the recent market action, is generic enough that I won't excerpt it here. The first bit of gloom concerns the banking situation in Europe. From the newsletter,

Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)

The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.

Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.

¹The low ranking here of Australia is surprising to me, considering that up until last year the country had no net federal debt. It looks like the Australian government will run fiscal deficits in the short-term, as it attempts to stimulate its economy, but how that is supposed to make its sovereign debt risk higher than that over already heavily-indebted countries, I don't know. Given what Mauldin has written about Austria above (with public debt equal to about 59% of GDP, according to the CIA World Fact Book), for example, I'm surprised that Austria is considered less of a sovereign credit risk than Australia by BCA.