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By William K. Black

The Wall Street Journal published an op ed by R. Albert Mohler, Jr. on July 1, 2011 entitled “Evangelicals and the Gay Moral Revolution.” This column discusses the economic implications of Mohler’s arguments about the consequences of ending legal discrimination against homosexuals.

Mohler heads a Southern Baptist Convention (SBC) theological seminary. He argues that the “Christian church’s” foundations are shaking due to homosexual rights – and they have no exit strategy to escape. He states that only “liberal churches” (which he implicitly defines as non-Christian) can refuse to discriminate against homosexuals because they believe that such discrimination is immoral and un-Christian. The “Christian church” must discriminate against homosexuals. The SBC argues that the Supreme Court decision (Lawrence v. Texas) holding that it was unconstitutional to criminalize adult, consensual homosexual sex was improperly decided. Homosexual sex is a sin and should lead to criminal penalties. The SBC argues that Christian business people in the private sector have a constitutionally protected right (under the 1st Amendment) to refuse to deal with homosexuals as customers and employees because homosexuals are depraved sinners. Indeed, the SBC, depending on the particular context, either urges or mandates that its members discriminate against homosexuals.

Mohler argues that the SBC cannot cease condemning homosexuals and urging or mandating that its members discriminate against homosexuals. That is not accurate. The SBC, of all entities, knows that it can cease discriminating for it has done so. The SBC was created for one purpose – defending the enslavement of dark-skinned people of African descent. The SBC claimed that the inerrant word of God in the bible mandated this policy. Even after slavery ended prominent SBC members took the political lead in discriminating against blacks for over 100 years. It took roughly 150 years for the SBC to admit that it had misread the bible. The SBC’s position became that the inerrant word of God prohibited slavery.

The thrust of this column is why law and economics will combine to push the SBC towards a similar reinterpretation of the bible – and in less than 150 years. The SBC’s pro-discrimination policies will be a nightmare for businesses and the U.S. military. This will make the states in which SBC members have decisive political power increasingly unattractive as sites for national and international firms. Consider first several examples that the SBC has already raised.

The SBC boycotted Disney for years. The resolution declaring the boycott cited two primary justifications. Disney provided health benefits to its employees’ domestic partners and gay groups organized nights in which large numbers of homosexuals would attend a Disney theme park. Providing benefits to employees’ domestic partners is a common benefit that corporations find useful as a means to recruit and retain superior employees. Disney did not organize the nights when gays met in large numbers at its theme parks. What was it supposed to do – demand to know whether the customer was gay and set a quota on how many gays it would admit?

Put yourself in the position of the President of Cox Newspapers while reading the following SBC resolution concerning another SBC action that seems to threaten or encourage another boycott.:

WHEREAS, The publisher of the Dayton Daily News in Dayton, Ohio, is a committed Christian and an active Southern Baptist; and

WHEREAS, The publisher, Dennis Shere, recently made a decision to refuse advertising by gay and lesbian groups due to their detrimental effects on the family and society; and

WHEREAS, The president of Cox Newspapers, Atlanta, Georgia, parent company of the Dayton Daily News, fired the publisher of the Dayton Daily News solely on the basis of the publisher’s decision as a Christian not to legitimize homosexuality by accepting advertisement from gay and lesbian organizations; and

WHEREAS, Cox Newspapers is national in scope, owning newspapers in many cities where Southern Baptists live, such as Austin, Waco, Longview, and Lufkin, Texas; Atlanta, Georgia; Miami and West Palm Beach, Florida; and numerous other communities across the country; and

WHEREAS, The action taken against the Christian publisher by Cox Newspapers has national ramifications since it sets a precedent for other newspapers to prohibit Christians from bringing their values to bear upon their profession.

Be it therefore, RESOLVED, That the messengers to the Southern Baptist Convention, meeting in San Antonio, Texas, June 14-16, 1988, express to Cox Newspapers, Inc., our outrage over the firing of a competent, highly professional Christian solely on the basis of the employee’s commitment to defend traditional moral and family values; and

Be it finally RESOLVED, That the messengers to the Southern Baptist Convention call upon all media to refuse advertising that promotes homosexuality or any other lifestyle that is destructive to the family.

Cox did not hire Mr. Shere so that he could “defend traditional moral and family values.” They hired him to run a profitable paper. Newspapers’ principal revenue source is selling advertising space. Refusing to sell advertising space to “gay and lesbian groups due to their detrimental effects on the family and society” harmed Cox’s business interests. It is also unlikely that Cox’s President believed that selling the advertising space would harm “the family and society.” Tens of millions of employees doubtless have idiosyncratic views that their employer disagrees with. Many American employees believe that “pagans”, Muslims, women, atheists, Latinos, blacks, people with diseases or sores, and Mormons harm “the family and society.” It is common for them to ascribe these discriminatory beliefs to their religious beliefs.

There is no evidence that Cox’s president “fir[ed] a competent, highly professional Christian solely on the basis of the employee’s commitment to defend traditional moral and family values.” Cox’s president fired him because he was harming the corporation.

Consider what would happen if Cox could not fire Shere as long as he held a religious belief in favor of discriminating against particular customers or employees. Assume that Shere announces he won’t take sell advertising to any homosexual, Muslim, or politician who is a member of the Democratic Party. This becomes the biggest story in Dayton. Competing media rush to mock the station. Tens of thousands of people cancel their subscriptions and their ads. Simultaneously, the SBC threatens a boycott of all Cox media if Shere is fired. The fired employees and excluded advertisers (who may have been sought to run anti-AIDS ads) and the EEOC begin to sue Cox and the Dayton paper. Jon Stewart features Cox and Shere on his show for three days. Cox will also face a nightmare in trying to hire future top employees if they can be fired at any time because a more senior officer felt that they were a sinner. Given the fact that everyone is a sinner the SBC “freedom to discriminate” doctrine would mean that bosses could now fire anyone with impunity because of their status or non-work conduct because they viewed that status or conduct as sinful. The SBC also claims that the employer should have the right to denounce the immorality of the customer or employee. These religious rants would harm employee morale and create extremely negative publicity for the firm.

The SBC made its demand for legal impunity for discrimination explicit in its resolution opposing the repeal of “don’t ask; don’t tell.”

WHEREAS, Homosexuality is immoral, contrary to the Bible (Lev. 18:22; 1 Cor. 6:9-10) and contrary to traditional Judeo-Christian moral standards, and the open affirmation of homosexuality represents a sign of God’s surrendering a society to its perversions (Rom. 1:18-32); and

WHEREAS, Open and avowed homosexuality is incompatible with the requirements of military service according to high ranking military leaders and most military personnel; and

WHEREAS, Homosexual conduct is inconsistent with the Uniform Code of Military Justice and is detrimental to morale, unit cohesion, good order, discipline, and mission accomplishment; and

WHEREAS, Homosexuality in the military would endanger the life and health of military personnel by the increased exposure to sexually transmitted diseases and by enhanced danger of tainted blood in battlefield conditions; and

WHEREAS, Open homosexuality in the military would have significant adverse impact on the Pentagon’s budget including medical, legal and social costs; and

WHEREAS, Southern Baptist and other evangelical military chaplains may be pressured to compromise the essential gospel message, withhold their biblical convictions about this sexual perversion and submit to sensitivity training” concerning homosexuality if openly declared homosexuals are permitted to serve; and

WHEREAS, Southern Baptists and other evangelical members of the armed forces will be placed in compromising environments which will violate their conscience if the ban is lifted and will discourage other potential evangelical recruits from serving in the armed forces; and

WHEREAS, Homosexual politics is masquerading today as “civil rights,” in order to exploit the moral high ground of the civil rights movement even though homosexual conduct and other learned sexual deviance have nothing in common with the moral movement to stop discrimination against race and gender; and

WHEREAS, Government should not give special legal protection and endorsement to homosexuality, nor impose legal sanctions against those who believe homosexual conduct to be immoral.

Therefore, Be It RESOLVED, That we, the messengers to the Southern Baptist Convention, meeting at Houston, Texas, June 15-17, 1993, affirm the biblical truth that homosexuality is sin, as well as the biblical promise that all persons, including homosexuals, can receive abundant, new and eternal life by repenting of their sin and trusting Jesus Christ as Savior and Lord (1 Cor. 6:11); and

Be it further RESOLVED, That we oppose all effort to provide government endorsement, sanction, recognition, acceptance, or civil rights advantage on the basis of homosexuality; and

Be it further RESOLVED, That we oppose lifting the ban on homosexuals serving in the armed forces, and that we support passage of any legislation before Congress which restores and enforces the ban; and

Be it further RESOLVED, That we deplore acts of hatred or violence committed by homosexuals against those who take a stand for traditional morality as well as acts of hatred or violence committed against homosexuals; and

Be it finally RESOLVED, That we express our profound pride in and support of those who serve in the United States military, and for our chaplains in the military as they perform their ministry based on biblical principles and moral convictions, in an increasingly tumultuous environment.

The first thing that the resolution demonstrates is the lack of candor in Mohler’s op ed.

“We have demonstrated our own form of homophobia—not in the way that activists have used that word, but in the sense that we have been afraid to face this issue where it is most difficult . . . face to face.”

No, the SBC repeatedly demonstrated the conventional form of homophobia. Service members with “tainted blood” are discharged. (The SBC has blamed the AIDS epidemic primarily on homosexuals and further blamed them for the spread of AIDs to “innocent” victims.) The clause in the resolution that begins by deploring attacks by homosexual members of the armed services on non-homosexuals – as if straight-bashing was the problem in the armed services – is vile. It is reminiscent of the May 1906 SBC resolution against lynching that blamed the problem on unduly stringent court protections for rapists in the South and called for the removal of protections for the accused: “so that innocent and good people may rely on the law for protection rather than rush into irregular and dangerous force under methods of their own.” The resolution, of course, made no mention of the race of those being lynched in the South by the “innocent and good people.”

The SBC deepened its conventional form of homophobia in a more recent resolution about the repeal of “don’t ask; don’t tell.”

On Homosexuality And The United States Military
June 2010

“WHEREAS, The Bible describes homosexual behavior as both a contributing cause (Genesis 18:20-21; Leviticus 18:24-28; Jude 7) and a consequence of God’s judgment on nations and individuals (Romans 1:18-32);”

It’s subtle, but it’s nasty. “Homosexual behavior” is a “consequence” “of God’s judgment on nations and individuals.” Homosexuality is a curse. God has found certain “nations and individuals” guilty of being intrinsically degraded and cursed them. At this juncture the SBC sinks to the depths of Westboro Baptist and reprises the shameful history that rested on the ludicrous (but purportedly inerrant) claim that blacks were a degraded race consigned by God to slavery because they were the seed of Ham, who God had cursed (for ambiguous reasons).

The SBC resolution on the military calls on the United States not to: “impose legal sanctions against those who believe homosexual conduct to be immoral.” Again, even if that seems attractive to you the particular reader consider how many things the SBC teaches are “immoral” (swearing, yoga, and women holding positions of power over men). Under the SBC’s logic virtually anyone could be fired with impunity by any private sector employer. Indeed, if the SBC freedom to discriminate logic were adopted every corporation should immediately hire the most ultra-fundamentalist SBC member they can locate to head their HR department. Everybody does something the SBC consider “immoral” and the HR head could fire them with impunity.

The SBC’s demands for the “freedom” of it military chaplains should concern both the military and private and governmental employers.

“WHEREAS, Southern Baptist and other evangelical military chaplains may be pressured to compromise the essential gospel message, withhold their biblical convictions about this sexual perversion and submit to sensitivity training” concerning homosexuality if openly declared homosexuals are permitted to serve;”

First, whether homosexuals are closeted or out does not change any employer’s compelling interest that employees not spend their work time vilifying their colleagues. Second, the question is why any military chaplain, after the senior officers have decided to end discrimination against homosexuals, would think it appropriate to sermonize about “this sexual perversion.” The SBC teaches that God will consign the vast majority of humans to a literal, eternal hell. The SBC teaches that it is unbiblical to permit women to have a position of power over men. What is the military, or Ford Motor, supposed to do if it promotes a woman or a homosexual and a military chaplain or Ford employee responds by giving a sermon to the troops or posting throughout the office a rant denouncing the newly promoted officer as a heretic or a sexual pervert because of her gender or sexual orientation? “Biblical convictions” aren’t any more privileged than personal convictions in this context.

Anti-discrimination laws, conventional military discipline, and the economic incentives of for-profit firms are the best hope for the SBC leadership. They will discover that homosexuals aren’t depraved and female managers do not threaten any legitimate male interests. The military was strengthened when it stopped discriminating against non-whites and it will be strengthened by the end of legal discrimination against homosexuals. California will soon, whether by court decision or the next proposition, join New York in adopting marriage equality. Larger firms will find that states that continue to discriminate against homosexuals pose hiring and relocation difficulties. Heterosexual marriages will continue to be unaffected by marriage equality. The economic and moral pressures on the SBC will grow. The SBC leadership knows that its youth increasingly oppose its position on homosexuals and fears the continuing loss of disaffected members. The SBC, particularly the current leadership, has shown that it can reinterpret the bible. It will ultimately be the economy, our anti-discrimination laws and embrace of the morality of non-discrimination, and the need to keep its young that will lead the SBC leadership to find an exit strategy. The SBC’s position on religious impunity for discrimination and attacking one’s colleagues would be a nightmare for businesses. That is the principal reason why it will not prevail and why, this time, it won’t take the SBC 150 years to find an exit strategy.

By Marshall Auerback

It may not have been the most felicitous choice of phrase, but Mark Halperin’s characterization of Barack Obama was not far off the mark, even if he did get suspended for it.  The President is a dick, at least as far as his understanding of basic economics goes.  Obama’s perverse fixation with deficit reduction uber alles takes him to areas where even George W. Bush and Ronald Reagan dared not to venture.  Medicare and Social Security are now on the table.  In fact entitlements of all kinds (excluding the myriad of subsidies still present to Wall Street) are all deemed fair game.

To what end?  Deficit control and deficit reduction, despite the fact that at present, the US has massive excess capacity including millions of unemployed and underemployed, a negative contribution from net exports, and a stagnant private spending growth horizon.  Yet the President marches on, oblivious to the harm his policies would introduce to an already bleeding economy, using the tired analogy between a household and a sovereign government to support his tired arguments. It may have been impolitic, but  “dick” is what immediately sprang to mind as one listened incredulously to the President’s press conference, which went from the sublime to the ridiculous.

Discussion of government budget deficits often begins with an analogy to a household’s budget, and the President continues that horrible pattern of misinformation. Obama challenged the view that the government might side-step the debt ceiling constraint by just paying “interest on the debt” and said:

This is the equivalent of me saying, you know what, I will choose to pay my mortgage, but I’m not going to pay my car note. Or I’m going to pay my car note but I’m not going to pay my student loan. Now, a lot of people in really tough situations are having to make those tough decisions. But for the U.S. government to start picking and choosing like that is not going to inspire a lot of confidence. 

Let’s state it again: households do not have the power to levy taxes, to issue the currency we use, and to demand that those taxes are paid in the currency it issues. Rather, households are users of the currency issued by the sovereign government. Here the same distinction applies to private businesses, which are also users of the currency.  There’s a big difference, as all us on this blog have repeatedly stressed:  Users of a currency do face an external constraint in a way that a sovereign issuer of its currency does not.

This key point, which is persistently obscured in these discussions, is that if a government issues a currency that is not backed by any metal or pegged to another currency, then there is no reason why it should be constrained in its ability to “finance” its spending by issuing currency.  Unfortunately, this elementary concept seems to have eluded the President and, presumably, the countless members of Congress involved in the debt ceiling negotiations.  Typical is this statement from the President:

I do think that the steps that I talked about to deal with job growth and economic growth right now are vitally important to deficit reduction. Just as deficit reduction is important to grow the economy and to create jobs — well, creating jobs and growing the economy also helps reduce the deficit. If we just increased the growth rate by one percentage point, that would drastically bring down the long-term projections of the deficit, because people are paying more into the coffers and fewer people are drawing unemployment insurance. It makes a huge difference.

New York’s adoption of marriage equality is the end of the beginning of the struggle on behalf of marriage equality.  Ultimate success is never certain, but it is now highly likely though it will take over a decade to attain.  The opposition to marriage equality has four crippling legal, social, and policy problems that I will briefly review.  This article emphasizes an economic problem for the States barring marriage equality that will become intense given New York’s adoption of marriage equality and near certainty that California will soon do so.

1. The brilliant strategy of “coming out.”  Instead of the sinister unknown, over a hundred million Americans realized that they knew homosexuals who were exceedingly, boringly normal.
2. Much of the history of the West since the Enlightenment has been the recurrent broadening of the concept of “us.”  We continue to transfer members of the hated and feared “other” into the category of “us” to whom we owe respect and care.  Increasingly, those who grew up in a Western culture include homosexuals as “us.”
3. The opponents of marriage equality have lost the young.  Overwhelmingly young conservatives are embarrassed and amazed at their older counterparts’ homophobia.  Strong majorities of younger people support marriage equality.  The present is already untenable for the opponents of marriage equality in many blue states – the future is terrifying. 

4. The opponents of marriage equality have no arguments that will convince the unconvinced.  Worse, their inability to come up with any convincing argument as to why marriage equality would harm society has led them to base their policy arguments on their prejudices – exposing and focusing attention on those prejudices.  This is why, when writing to friendly audiences, opponents of marriage equality have emphasized the vital need to avoid any trial at which they would have to make and defend a claim that marriage equality harms society.  They describe the effort to defend such a claim in Hawaii as a “disaster.”  Instead of the sin that dares not speak its name, we have the indefensible prejudice that dares not be tested in any court.  Here is the link to my prior column explaining this point.  

By William K. Black

(Cross-posted with Benzinga.com)

James Bovard of Cato wrote an article entitled “The Food-Stamp Crime Wave” on June 23, 2011 for the Wall Street Journal.

http://online.wsj.com/article/SB10001424052702304657804576401412033504294.html?mod=WSJ_hps_sections_opinion

Bovard shows no awareness of criminology, but what he described was the creation of a criminogenic environment. A criminogenic environment has such perverse incentives that it produces widespread crime in a particular field of activity. Non-criminologists frequently have difficulty believing that fraud can become common. They often believe that fraud can only arise among “a few rotten apples.” This view is naïve and crimionological research falsified the claim over a half century ago. Bovard is correct, therefore, that fraud can become common in an industry. This is particularly true if fraud produces a “Gresham’s dynamic.” George Akerlof explained this point over 40 years ago in his famous article on a market for “lemons” (1970).

“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”

Bovard purports to be a libertarian, yet he ascribes the creation of the criminogenic environment in food stamps to the three “de’s” – deregulation, desupervision, and de facto decriminalization. He is also upset that the federal government, in the context of food stamps, has failed to sufficiently distort consumer decision making. I address his substantive position on food stamps in another column.

This column explains his argument as to how the three de’s created a criminogenic environment in food stamps and shows how his reasoning would compel him to demand the end of the far more powerful and destructive criminogenic environments that drove the Great Recession (and the second phase of the S&L debacle and the Enron-era accounting control frauds).

The first element Bovard cites as producing a criminogenic environment is deregulation.

“Thirty-five states have abolished asset tests for most food-stamp recipients. These and similar “paperwork reduction” reforms advocated by the United States Department of Agriculture (USDA) are turning the food-stamp program into a magnet for abuses and absurdities.”

The second element he cites is de facto decriminalization due to the Obama administration’s near indifference to fraud.

“The Obama administration is far more enthusiastic about boosting food-stamp enrollment than about preventing fraud.”

Bovard argues that desupervision led to de facto decriminalization.

“The USDA’s Food and Nutrition Service now has only 40 inspectors to oversee almost 200,000 merchants that accept food stamps nationwide. The Government Accountability Office reported last summer that retailers who traffic illegally in food stamps by redeeming stamps for cash or alcohol or other prohibited items “are less likely to face criminal penalties or prosecution” than in earlier years.”

Bovard is implicitly raising the danger of a Gresham’s dynamic among retailers. Large, fraudulent retailers can obtain vastly more from food stamp fraud than can recipients. An honest retailer cannot compete against a large, fraudulent retailer. This turns market forces perverse and can drive honest retailers out of business. Fraud begets fraud.

Bovard appears to recognize that vigilant regulation is essential to successful fraud prevention and prosecution. When the regulators do not make anti-fraud efforts a priority the prosecutors are so overwhelmed that the criminal justice system breaks down. He cites the example of Wisconsin.

“The Wisconsin Policy Research Institute concluded: “Prosecutors have simply stopped prosecuting the vast majority of [food-stamp] fraud cases in virtually all counties, including the one with the most recipients, Milwaukee.””

In criminology, we refer to this as a “system capacity” problem. Bovard argues that the desupervision has effectively destroyed the capacity of the system to respond to the “crime wave” produced by the criminogenic environment. Bovard concludes that the criminogenic environment was inevitable because cheaters can profit with greatly reduced risk of prosecution.

Environments become intensely criminogenic when the federal government engages in the three “de’s” and preempts state anti-fraud efforts. This was an infamous feature of the Bush administration’s response to the fraudulent mortgage lenders, and Bovard argues that the Obama administration is intensifying a criminogenic environment in food stamps by following similarly fraud-friendly policies.

“The Obama administration is responding by cracking down on state governments’ antifraud measures. The administration is seeking to compel California, New York and Texas to cease requiring food-stamp applicants to provide finger images.”

So, how much does the food stamp fraud cost? Bovard does not provide the published estimates, but notes that 44 million Americans are recipients of food stamps at a total cost of $77 billion, or under $2000 per recipient. Individual frauds, therefore, obtain relatively small proceeds. Fraudulent retailers are the ones who are enriched by food stamp fraud. Bovard, however, concentrates entirely on fraudulent recipients and several corrupt public officials.

The GAO estimated, prior to the adoption of electronic benefit transfers (EBT) that food stamp trafficking represented 3.7% of annual benefits. Food stamps are now paid through EBT. This has greatly reduced the incidence of fraud by recipients, in some studies by an estimated 75-81 percent. Whitmore, Diane. “What are Food Stamps Worth?” (July 2002: p. 6 & n. 5).

https://www.msu.edu/~dickertc/301f06/whatarefoodstampsworth.pdf

Bovard missed the real food stamp crime wave (in terms of a much higher incidence of fraud) that peaked over a decade ago.

What we need now is to get Bovard and the Wall Street Journal to apply this same reasoning and passion about the dangers of the three “de’s” producing intense criminogenic environments to the three “de’s” that produced our recurrent, intensifying financial crises. My prior columns have explained at length how the three “de’s” produced the criminogenic environment that drove the “epidemic” of accounting, securities, mortgage, and appraisal fraud that hyper-inflated the bubble and led to the Great Recession. Bovard’s column was the most e-mailed WSJ article for two days. Food stamp fraud is important and Bovard’s rhetoric stirred the WSJ readership to rage. The accounting control frauds that drove the S&L, Enron era and ongoing crises are massively greater and more destructive and they involve our most elite CEOs becoming spectacularly wealthy at the expense of the public. The incidence of banking and mortgage fraud is far greater than food stamp fraud. The direct dollar losses due to these frauds are massively greater than food stamp fraud. The moral culpability and the financial gain of the CEOs who led the accounting control frauds are incomparably greater than that of a typical fraudulent food stamp recipient. The typical fraud consists of a recipient who is actually eligible for food stamps because she is impoverished selling some of those stamps to obtain income to purchase non-food items. Those non-food items can range from paying the rent and health care costs to illegal drugs. The systemic damage caused by the fraudulent CEOs – the Great Recession – has no counterpart in the food stamp context.

Bovard’s column allows us to test two rival theories. Hypothesis one: Bovard and the WSJ readers were enraged that the three “de’s” produced a criminogenic environment and led to a “crime wave” of fraud because they are enraged by fraud and the theoclassical dogmas that lead us to repeatedly adopt the three “de’s” despite the recurrent disasters they cause. Hypothesis two: Bovard and the WSJ readers were enraged by fraud by poor people and refuse to apply the same logic and moral outrage to the vastly greater and more damaging crimes led and generated by elite financial CEOs. Instead, they will blame “the government” and make excuses for the elite frauds. My bet is on the second hypothesis, but I hope to be proven wrong.

By L. Randall Wray

(Cross-posted with Benzinga.com)

It was obvious to those who understand Modern Money Theory that the set-up of the European Monetary Union was fatally flawed. We knew that the first serious financial and economic crisis would threaten its very existence. In a sense, it was from the beginning much like the US in 1929, on the eve of the Great Depression—with excessive lender fraud, household and business debt, and a boom that had run on too long. Anything could have set off the crisis that followed—just as discovery that Greece had been cooking its books sealed Euroland’s fate. And like the US post-1929, Euroland has struggled to understand and to deal with the crisis. Meanwhile, it is slipping into another great depression.

Many economists and policy-makers—even fairly mainstream ones—have come to recognize that the barrier to resolution is the inability to mount an effective fiscal policy response. And that is because there is no Euro-wide fiscal authority. Hence, the half-measures undertaken by the ECB and other authorities to put band-aids on the debt problem.

To be sure there is a conflict among authorities over the solution—given absence of a fiscal authority. Many want to impose austerity—equivalent to medieval blood-letting. These argue that the real problem is the lack of self-discipline in the periphery countries. Note that this view is shared by the elites in those countries! Many of them would be happy to throw their countries into deep depressions that wipe out all resistance to wage-cutting and slashing of all social programs that benefit working people. That is always the preferred solution of unenlightened elites. Through this method, wage costs in the periphery nations can be cut, making production more competitive.

This of course is also the position of the most powerful member of the EU. Prudent Germany had held wages in check over the past decade while ramping up productivity. As a result, it became the low cost producer in Europe and can even go toe-to-toe and win against Asia. Mind you, not in the production of cheap labor intensive output, but where it really counts in the high value added export sector.

And this view is also common among working classes in the central countries—that share the view of periphery populations as lazy and over-rewarded. While untrue, what is most shocking about this attitude is that if the blood-letting and crushing of wages in the periphery actually does work, the factories will be moved out of Germany seeking lower cost workers. In other words, success in the periphery would shift the burden back to Germany’s workers, who would have to accept lower wages to compete. That will be fueled by job losses if Germany cannot find sales outside the EU that will be lost as the periphery nations fall farther into depression. The result will be a nice little rush to the bottom, benefiting Europe’s elite. How nice.

To be sure, I do not think there is a snowball’s chance in hell that the EU will squeeze sufficient blood out of the Greeks (and Spanish and Italians and Irish and Portuguese) for this to work. What actually makes far more sense is to raise German wages—to achieve competitiveness within the EU by leveling up. But that snowball does not have a chance, either, because Germany is looking far outside the borders of Europe—and mostly in an eastern direction. As a result, it will remain focused on cutting its own labor costs—so the periphery nations will never catch Germany on the way down.

That leaves two alternative approaches. First, continued debt restructuring, ECB purchases through the back door (allowing central banks to buy the debt), guarantees, and lending. The hope is that the financial institutions holding all the periphery government debt can either move it off their balance sheets, or use the American method of “extend and pretend” to avoid recognizing the institutions are insolvent. The problem is that almost all the economic data in recent weeks are bad—almost globally—and that makes it likely there will be some financial hiccup somewhere that will spread as quickly through financial markets as it did in the Global Financial Crisis of 2007.

Many European banks will be recognized to be hopelessly insolvent—with PIIG government debt only adding to the problem. Further, the ECB legitimately worries about the “precedent” and “incentive effects”. This is not really a matter of rules governing what the ECB can do—it has leeway much as the Fed has to intervene in a crisis to essentially buy or lend against virtually any type of asset. It has to do with what the ECB sees to be its independence. Markets would view a US-style bail-out of the European financial system (and by extension, guaranteeing individual government debts) as a loss of its independence. In truth, the ECB already gave that up, but clings to the hope it can somehow get its virginity back.

The third approach is to create the necessary fiscal authority. This would allow the ECB to stick to monetary policy, while giving a European Treasury the purse strings to deal with the crisis. I’ve been arguing since 1996 that is really the only way to make the EU project viable. The economics behind that is simple, adopted in developed countries everywhere. Indeed, the US is effectively an American Monetary Union (AMU) but one properly set up with both a central bank and a treasury. However for political reasons, that ain’t going to happen in the EMU. We are actually further away from that than we were in 1996 because the crisis has increased hostility among the members. No one wants to cede power to the center.

Well, none of those is going to work. What is left? Exiting the union.

By Michael Hudson

The fight for Europe’s future is being waged in Athens and other Greek cities to resist financial demands that are the 21st century’s version of an outright military attack. The threat of bank overlordship is not the kind of economy-killing policy that affords opportunities for heroism in armed battle, to be sure. Destructive financial policies are more like an exercise in the banality of evil – in this case, the pro-creditor assumptions of the European Central Bank (ECB), EU and IMF (egged on by the U.S. Treasury).

As Vladimir Putin pointed out some years ago, the neoliberal reforms put in Boris Yeltsin’s hands by the Harvard Boys in the 1990s caused Russia to suffer lower birth rates, shortening life spans and emigration – the greatest loss in population growth since World War II. Capital flight is another consequence of financial austerity. The ECB’s proposed “solution” to Greece’s debt problem is thus self-defeating. It only buys time for the ECB to take on yet more Greek government debt, leaving all EU taxpayers to get the bill. It is to avoid this shift of bank losses onto taxpayers that Angela Merkel in Germany has insisted that private bondholders must absorb some of the loss resulting from their bad investments.

The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past. They are demanding privatization of public assets (on credit, with tax deductibility for interest so as to leave more cash flow to pay the bankers). This transfer of land, public utilities and interest as financial booty and tribute to creditor economies is what makes financial austerity like war in its effect.

Socrates said that ignorance must be the root of all evil, because no one deliberately sets out to be bad. But the economic “medicine” of driving debtors into poverty and forcing the selloff of their public domain has become socially accepted wisdom taught in today’s business schools. One would think that after fifty years of austerity programs and privatization selloffs to pay bad debts, the world has learned enough about causes and consequences. The banking profession chooses deliberately to be ignorant. “Good accepted practice” is bolstered by Nobel Economics Prizes to provide a cloak of plausible deniability when markets “unexpectedly” are hollowed out and new investment slows as a result of financially bleeding economies, medieval-style while wealth is siphoned up to the top of the economic pyramid.

My friend David Kelley likes to cite Molly Ivins’ quip: “It’s hard to convince people that you are killing them for their own good.” The EU’s attempt to do this didn’t succeed in Iceland. And like the Icelanders, the Greek protesters have had their fill of neoliberal learned ignorance that austerity, unemployment and shrinking markets are the path to prosperity, not deeper poverty. So we must ask what motivates central banks to promote tunnel-visioned managers who follow the orders and logic of a system that imposes needless suffering and waste – all to pursue the banal obsession that banks must not lose money?

One must conclude that the EU’s new central planners (isn’t that what Hayek said was the Road to Serfdom?) are acting as class warriors by demanding that all losses are to be suffered by economies imposing debt deflation and permitting creditors to grab assets – as if this won’t make the problem worse. This ECB hard line is backed by U.S. Treasury Secretary Geithner, evidently so that U.S. institutions not lose their bets on derivative plays they have written up.

This is a repeat of Mr. Geithner’s intervention to prevent Irish debt alleviation. The result is that we enter absurdist territory when the ECB and Treasury insist on “voluntary renegotiation” on the ground that some bank may have taken an AIG-type gamble in offering default insurance or bets that would make it lose so much money that yet another bailout would be necessary. [1] It is as if financial gambling is economically necessary, not part of Las Vegas.

Why should this matter a drachma to the Greeks? It is an intra-European bank regulatory problem. Yet to sidestep it, the ECB is telling Greece to sell off its water and sewer rights, ports, islands and other infrastructure.

This veers on financial theater of the absurd. Of course some special interest always benefits from systemic absurdity, banal as it may be. Financial markets already have priced in the expectation that Greece will default in the end. It is only a question of when. Banks are using the time to take as much as they can and pass the losses onto the ECB, EU and IMF – “public” institutions that have more leverage than private creditors. So bankers become the sponsors of absurdity – and of the junk economics spouted so unthinkingly by the enforcers, cheerleaders for the banality of evil. It doesn’t really matter if their names are Trichet, Geithner or Papandreou. They are just kindred lumps on the vampire squid of creditor claims.

The Greek crowds demonstrating before Parliament in Syntagma Square are providing their counterpart to “Arab spring.” But what really can they do, short of violence – as long as the police and military side with the government that itself is siding with foreign creditors?

The most effective tactic is to demand a national referendum on whether to accept the ECB’s terms for austerity, tax increases, public spending cutbacks and selloffs. This is how Iceland’s President stopped his country’s Social Democratic leadership from committing the economy to ruinous (and legally unnecessary) payments to Gordon Brown’s Labour Party demands and those of the Dutch for the Icesave and even the Kaupthing bailouts.

The only legal basis for demanding payment of the EU’s bailout of French and German banks – and U.S. Treasury Secretary Tim Geithner’s demand that debts be sacrosanct, not the lives of citizens – is public acceptance and acquiescence in such policy. Otherwise the imposition of debt may be treated simply as an act of financial warfare.

National economies have the right to defend themselves against such aggression. The crowd’s leaders can insist that in the absence of a referendum, they intend to elect a political slate committed to outright debt annulment. Across the board, including the Greek banks as well as foreign banks, the IMF and EU central planners. International law prohibits nations from treating their own nationals differently from foreigners, so all debts in specified categories would have to be annulled to create a Clean Slate. (The German Monetary Reform of 1947 imposed by the Allied Powers was the most successful Clean Slate in modern times. Freeing the German economy from debt, it became the basis of that nation’s economic miracle.)

This is not the first such proposal for Greece. Toward the end of the 3rd century BC, Sparta’s kings Agis and Cleomenes urged a debt cancellation, as did Nabis after them. Plutarch tells the story, and also explains the tragic flaw of this policy. Absentee owners who had borrowed to buy real estate backed the debt cancellation, gaining an enormous windfall.

This would be much more the case today than in times past, now that the great bulk of debt is mortgage debt. Imagine what a debt cancellation would do for the Donald Trumps of the economy – having acquired property on credit with minimum equity investment of their own, suddenly owing nothing to the banks! The aim of financial-fiscal reform should be to free the economy from financial overhead that is technologically unnecessary. To avoid giving a free lunch to absentee owners, a debt cancellation would have to go hand in hand with an economic rent tax. The public sector would receive the land’s rental value as its fiscal base.

This happens to have been the basic aim of 19th-century free market economists: tax land and nature – and natural monopolies – rather than taxing labor and capital goods. The aim was to keep for the public what nature and public infrastructure spending create. A century ago it was believed that monopolies such as the privatizers now set their eyes should be operated by the public sector; or, if left in public hands, their prices would be regulated to keep them in line with actual costs of production. Where private owners already have taken possession of land, mines or monopolies, the rental revenue from such ownership privileges would be fully taxed. This would include the financial privilege that banks enjoy in credit creation.

The way to lower costs is to lower “bad” taxes that add to the price of production, headed by taxes on labor and capital, sales taxes and value-added taxes. By contrast, rent taxes collect the economy’s “free lunch,” and thus leave less available to be pledged to banks to capitalize into debt service on higher loans. Shifting the Greek tax burden off labor onto property would reduce the supply price of labor, and also reduce the price of housing that is being bid up by bank credit.

A land tax shift was the primary reform proposal from the 18th and 19th century, from the Physiocrats and Adam Smith down through John Stuart Mill and America’s Progressive Era reformers. The aim was to free markets from the landed aristocracy’s hereditary rents stemming from the medieval Viking conquest. This would free economies from feudalism, bringing prices in line with socially necessary costs of production.

Every government has the right to levy taxes, as long as they do it uniformly to domestic property owners as well as to foreign owners. Short of re-nationalizing the land and infrastructure, fully taxing its economic rent (access payments for sites whose value is created by nature or by public improvements) would take back for the Greek authorities what creditors are trying to grab.

This classical threat of 19th century reformers is the response that the Greeks can make to the European Central Bank. They can remind the rest of the world that it was, after all, the ideal of free markets as expressed from Adam Smith through John Stuart Mill in England, and underlay U.S. public spending, regulatory agencies and tax policy during its period of take-off.

How strange (and sad) that Greece’s own ruling Socialist Party, whose leader heads the Second International, has rejected this centuries-old reform program. It is not Communism. It is not even inherently revolutionary, or at least was not at the time it was formulated. It is socialism of the reformist type that two centuries of classical political economy culminated in.

But it is the kind of free markets against which the ECB is fighting – backed by Treasury Secretary Geithner’s shrill exhortations from the United States. Mr. Obama says nothing leaving it all to Wall Street bureaucrats to set national economic policy. Is this evil? Or is it just passive and indifferent? Does it make much of a difference as far as the end result is concerned?

To sum up, the aims of foreign financial aggression are the same as military conquest: land and the public domain. But nations have the right to tax their rental yield over and above a return to capital investment. Contrary to EU demands for “internal devaluation” (wage cuts) as a means of lowering the price of Greek labor to make it more competitive, reducing living standards is not the way to go. That reduces labor productivity while eroding the internal market, leading to a deteriorating spiral of economic shrinkage.

The need for a popular referendum

Every government has the right and indeed the political obligation to protect its prosperity and livelihood so as to keep its population at home rather than drive them abroad or drive them into a position of financial dependency on rentiers. At the heart of economic democracy is the principle that no sovereign nation is committed to relinquish its public domain or its taxing, and hence its economic prosperity and future livelihood, to foreigners or for that matter to a domestic financial class. This is why Iceland voted “No” in the debt referendum. Its economy is recovering.

Ireland voted “Yes” and now faces a new Great Emigration to rival that which followed the potato famine of the mid-19th century. If Greece does not draw a line here, it will be a victory for financial and fiscal aggression imposing debt peonage.

Finance has become the 21st century’s preferred mode of warfare. It’s aim is to appropriate the land and public infrastructure for its own power elites. Achieving this end financially, by imposing debt peonage on subject populations, avoids the sacrifice of life by the aggressor power – but only as long as subject debtor countries accept their burden voluntarily. If there is no referendum, the national economy cannot be held liable to pay the debts owed even to “senior” creditors: the IMF and ECB. Assets that are privatized at foreign bank insistence can be renationalized. And just as nations under military attack can sue, so Greece can sue for the devastation caused by austerity – the lost employment, lost output, lost population, capital flight.

The Greek economy will not end up with the proceeds of any ECB “bailout.” The banks will get the money. They would like to turn around and lend it out afresh to the buyers of the land, monopolies and other properties that Greece is being told to privatize. The user fees they collect (no doubt raising charges in the process, to cover the interest and pay themselves the usual salary jumps on privatized property) will be paid out as interest. Is this not like military tribute?

Margret Thatcher used to say “There is no alternative” (TINA). But of course there is. Greece can simply opt out of this giveaway of assets and economic privilege to creditors.

What do Mr. Papandreou’s Socialist International colleagues have to say about current events in Greece? I suppose it is clear that the old Socialist International is dead, given the fact that Mr. Papandreou is its head, after all. What passes for socialism today is the diametric opposite of the reforms promoted under its name a century ago, in the era prior to World War I. Europe’s Social Democratic and Labour parties have led the way in privatization, financializing their economies under conditions that have blocked the growth in living standards. The result promises to be an international political realignment.

Economic austerity cannot secure creditor claims in the end

On Thursday afternoon the DJIA, having been down 230 points, leapt up at the close to lose “only” 60 points, on rumors that Greece had agreed to the IMF’s austerity plan. But what is “Greece”? Is it the cabinet alone? Certainly not yet the entire Parliament. Will there be a Parliamentary vote in opposition to the public interest, accepting austerity and privatization?

Only a referendum can commit the Greek government to repay new debts imposed under austerity. Only a referendum can prevent property that is privatized from being re-nationalized. Such a transfer is not legitimate under commonly accepted ideas of political and economic democracy. And in any event, a rent-tax can recapture for the Greek economy what the financial aggressors are trying to seize.

History is rife with instructive examples. Local oligarchies in the region invited Rome to attack Sparta, and it overthrew the kings and their successor Nabis (who may himself have been royal). The sequel is that Rome headed an oligarchic empire, using violence at home to murder democratic reformers such as the Gracchi brothers after 133 BC, plunging the republic into a century of civil war. The creditor interests ended up fully in control, and their own banal self-seeking plunged the Western half of the Roman Empire into an economic and social Dark Age.

Let’s hope the outcome is better this time around. There will indeed be fighting, but more in the financial and fiscal sphere than the overtly military one. The fight ultimately can be won only by understanding the corrosive dynamics of the “magic of compound interest” and the social need to subordinate creditor interests to those of the overall “real” economy. But to achieve this, economic theory itself needs to be brought out of its current post-classical “neoliberal” banality.

[1] Louise Story, “Derivatives Cloud the Possible Fallout From a Greek Default,” The New York Times, June 23, 2011, quotes Christopher Whalen, editor of The Institutional Risk Analyst, as saying: “This is why the Europeans came up with this ridiculous deal, because they don’t know what’s out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. They’re holding us hostage. The Street doesn’t want you to see what they’ve written.”