Ireland and False Promises

Anyone who has been watching the news over the last 4 years will definitely remember the case of Ireland. A very strong economy, booming at the time, faced significant constraints in 2008 due to the large exposure of banking institutions to sub-prime loans abroad, in addition to a housing bubble burst in the country. Thus, in order for the Irish to be able to save their banks, a joint IMF and EU loan of about €85 billion was granted to the nation. The terms were the usual: austerity and even more austerity.

The result: as of 2012, only 1% growth in GNP instead of the promised 4% in a 2009 forecast. Government debt is 120% instead of the forecasted 79%, investment fell about 4% instead of rising by 9% and the only reason unemployment has fallen is because 350,000 people have fled the country. (I am really beginning to wonder what the people behind the forecast were thinking when they calculated the numbers).

Protests against austerity measures. Source: William Murphy/Flickr under CC 2.0

The case of Ireland resembles the cases of both Spain and Cyprus: a housing bubble bursting and bank bailouts which forced the nation to assume extreme levels of debt. The result will also be the same: austerity measures, destroying any potential for growth over the next years, people facing extreme difficulties in their everyday lives as even though wages and pensions are falling prices do not follow the same route, and the "upper" class not having to worry about any of these.

Bank officials are still earning six-digit incomes every year, and politicians have seldom seen their wages diminishing over this period. According to the Irish Times, politicians most people have never heard of, are entitled of a €2.2 million pension. Had this occurred at any other period of time, we would have just thought it was because the economy is booming; at the present time it appears as a ridicule to the efforts of the innocent people bearing the cost of the banks' errors.

We are moving towards a pure capitalist society where money comes first and everything else second. At least that is how our leaders behave. We have to pay for the mistakes others have done. I heard a saying once that an insane person throwing a rock in a well will need 40 sane people to get it out. This is what is essentially happening in Europe now. We are paying for wrong decisions, poor judgement and false ideologies. Politicians cannot see the way we do because their incentives are different. In a discussion with Constantin Gurdgiev he stated that politicians face the same incentives as bankers; he was right. It does not mean anything to them whether 99% of the people are paying for the sins of the other 1%. Simply because they will get their money and benefits anyway. And if they manage to do something good for the country as well then even better; if they do not who cares?

The distinction between politicians and those who elect them is growing larger and larger. This inevitably leads to the former believing that they are masters of the game and the latter hoping that the game will someday change. The only way for this to change is to have the politicians more liable for their actions than they are now. I have already proposed a scheme for this, with the goal of aligning the politicians' and policymakers' incentives to those of the people who elect them. The issue is who would be brave enough to apply it?

We all know that having to suffer for the banks' mishaps is unfair. Yet, the banks should not have allowed us to spend so much in the first place. It all goes back to a vicious cycle of banking policies, supervision and the notion that the state will always be there as the lender of last resort. New banking supervision rules should be made so that no systemic collapse can occur when a banking institution fails. Given the size of the banks in the modern day a simple solution would be to split them into separate institutions. Yet, what politician or policymaker would be so determined to do so given that their incentives tell them a different story?

On Modern Democracy

Lately, I had the opportunity to attend a symposium on democracy, economics and ethics. While there, one of the orators spoke about how democracy had changed over the years and the ideas different philosophers, politicians or even economists had concerning it. In his conclusion, what struck me with great amazement was his lack of any alternatives or optimism on the future of what is generally perceived as the greater of all other forms of governance. The question that we have not seen anyone address is: What are the problems of representative democracy and what can we do about them?

To begin with, a representative democracy is founded on the principle of elected people representing a group of persons, as opposed to direct democracy in which people vote on policy initiatives directly. Now, although the latter would appear to be much better than the former, this would only occur in theory. In practice imagine that every person in every country would have to learn everything about every law, article or paragraph, each time a new law or an amendment to one was going to be passed. What would happen would be a state of sciolism: the quality of showing opinions on at least one subject of which the perpetrator has little or no knowledge, the practice of this, an instance of the practice of this. (definition by Wiktionary). You may only imagine the consequences of such practices. 

A common argument in favour of direct democracy would be that since they had done it in ancient Athens, with the notable example of Pericles, it can be done again. And since the internet would allow us to participate or vote in a subject without having to enter crowded rooms, this issue would also be resolved. Now one issue of internet voting would be the ability of the state to maintain secret ballots. Internet crime is very high during these time, and the state would have to select excellent system administrators of the e-election system so that no manipulation occurs. Nevertheless, if an impenetrable system would be devised, then that might be a good alternative to voting.

The development of such a system, would not necessarily mean that direct democracy is a great idea. One would remind the reader of the great mistakes the Athenian democracy had done like the execution of Socrates, the ostracism of Aristides or the wars against Sparta and other Greek city-states. Unfortunately, when many people are to cast an opinion on something, sciolism is almost always the consequence.

Obviously, no-one would dare to accuse people of sciolism in modern day societies, where a person has to work at least 8 hours per day, and there are indeed times where we would require more than 24 hours in a day just to be able to handle everything. A citizen in ancient times had all the time in the world to discuss and argue about state affairs just because he had slaves doing all the work for them (oh, and you had to be over 30 and male as well to be allowed vote). Now, imagine a working single mother, having to wake up at 07:00 to be at work at 08:00, drop her child at school, work until 17:00 or 18:00, return home, pick up her child from school, cook, shop for groceries, take care of the house and spend some time with her child; she will obviously be dead tired by 22:00 or 23:00 o'clock and at which time nobody would blame her if she had no appetite to read complicated laws which would demand her full attention. One may think of many examples like this one, and in our time, the reason we still choose to elect representatives is for them to do what we cannot. That is keep track with every development in both native and world affairs and have an opinion on it. And that is what they should be getting paid for.

In essence, representative democracy is, in a broad sense, a form of a technocracy; the latter signifying a form of government in which experts in technology would be in control of all decision making. The word has also been used to indicate any kind of management or administration by specialized experts ('technocrats') in any field (for example, the non-elected Prime Minister of Italy, Mario Monti is considered a technocrat, as are the Troika representatives visiting a country requesting a bail-out). Although it may sound as a good idea that a group of knowledgeable people to control power in a state, instead of politicians, a real-life application may prove otherwise.

The main problem with technocratic systems is that the leaders are not being democratically elected.This would lead to some sort of aristocratic or oligarchic system of governance where the people in power would not be willing to step off and they would be in full control of who would rise to power and who will be edged off. People in power are 99% of the time unwilling to let go of that power. We have witnessed in soviet Russia before its collapse, and the results were anything but spectacular. In addition, defining intelligence would be a difficult task: would a high IQ suffice, or would we require more than that? How about an ability to forecast consequences, or to understand diplomacy, politics and law? How can we measure someone's ability to make proper decisions? A high IQ person does not necessarily make a good politician or decision-maker. Many examples of academics who have failed in the real world can be found (for an economic-wise example have a look at the story of the story of the LTCM Fund).

As we have so far seen technocracy and direct democracy cannot function in real life as their consequences would be too adverse. This statement should at least hold under the current state of affairs; if the situation changes then the statement should also change. This would leave us with the only functional form of democracy in real-life: representative democracy. 

As with all other forms of governance, representative democracy also comes with several caveats: by giving the representatives the power to pass laws or proceed with other decisions, we are essentially granting them with powers over us. Powers, which if used correctly can promote the greater good and if abused they can be the cause of great pains to citizens. Thus, the purpose of a correct form of governance would be to find a way to prevent politicians from abusing their power. How can this occur one may ask if the representatives are allowed to pass laws even concerning their own salaries and allowances?

Democracy Tempted. Source: Wikimedia Commons

Although we would hope that the people we elect are wise enough to put the country's interest as well as that of their fellow citizens before their own, occasionally (not to say very often) this does not appear to be the case. When would man be so altruistic as to pass on more money offered in return for his services? And trust me, almost every one of us would do the same in their position... Thus, in essence what we would have to do is protect democracy from the representatives themselves. 

The big question now is how we are going to achieve that. The answer might actually be much simpler than what one would expect. Forbid the representatives from passing any laws concerning their duties or remuneration, and instead let the people decide about that via a referendum. This referendum, concerning representative remuneration, should occur no often than once every two years. This would allow the people to actually evaluate the work of the representatives and agree or not on whether they should get something for what they have done during that time. The two-year horizon would allow the people to correctly assess the work of the representatives over a significant time span, (in most countries this is approximately half of the representatives' incumbency) and give honest feedback about what they believe. Should the timing of the referendum coincide with elections, then the referendum should occur before the elections in order for the future representatives to prepare with what they are about to face.

On the referendum, a choice between whether people are happy with the current representatives or not should be accompanied with whether the people would like to see representatives' wages increased or decreased as a reward or punishment. In order to avoid vindictive or super-rewarding behaviour, the maximum amount of increase or decrease of a wage would have would be around 10% every 2 years. This would allow the citizens to have a more direct power over their elected representatives, other than the power to elect them every 4-5 years. 

The main issue with this proposal, other than the referendum on the representatives' evaluation, is how to distinguish between what would benefit the representatives wither directly or indirectly, and whether this would be important enough for a referendum. For example, a law which would grant more power to the representatives to alter the constitution without considering any judiciary decisions would be more important than one which would increase public allowances by 2%. This responsibility to examine all the possible effects of a decision should rest on the shoulders of the judiciary sector. In practice, the court would do nothing more than to examine whether a law can give too much power to politicians and thus the law's fate should be decided by a referendum. 

This policy would ensure five things:

1. People have more power over elected representatives. Nowadays, the pubic can only monitor representatives by agreeing whether to re-elect them or not, something that does not appear to have much effect on the latter's decisions. Now, by being able to control how much remuneration they are liable to get, based on their activities, it would mean that people can have much greater confidence that their representatives will choose to do what is best for the common good. In addition, people should be allowed to decide whether they would like to see the powers of the representatives increased or not, and not just watch helplessly on what the elected ones are doing.

2. The power of the representatives is greatly diminished. By not being able to make decisions on themselves, and having their performance evaluated every two years it would mean that greater care should be taken on whether they are indeed promoting something that is good for the society and not something that is just good for them.

3. People can just evaluate the performance of the representatives based on what they have shown them so far. This would be a form of a direct democracy, yet one which would allow citizens to process a much lesser amount of information than the one needed in a real direct democracy. In addition, the referendum concerning a direct or indirect increase in representative power should allow them to be specific on the knowledge they should acquire, something which should be much easier than practically learning about everything.

4. Judiciary power is not increased. This would not lead to some sort of increased power of the judges, as the courts would only be able to express an opinion on whether the decision about to be made should be considered as increasing the power of the representatives and nothing more.

5. Technocracy is avoided. Since power is still in the hands of elected representatives and not other non-elected officials, and now the people have more power over them, no need for imposed experts would be present.

In conclusion, securing a better system for the future does not require any extensive changes in governance. Just very few are needed for a far more democratic system than the one we are currently living in. All it takes for us is to be innovative enough to implement them and think of more.

Do we have the politicians we deserve?

In 1811, Joseph de Maistre, a philosopher, writer, lawyer, and diplomat stated:

Joseph de Maistre. Source: Wikimedia Commons

Every nation gets the government it deserves

Was he right or not? The fact is that no-one can know for sure. Nevertheless, his aphorism has some elements of truth. For example, in Greece corrupt government officials were succeeded by corrupt government officials, with the public knowing everything about what was going on. Yet, nothing was done (and yet still almost nothing is being done) about it. The same situation holds in Italy where politicians were found celebrating themselves and their families in Caribbean cruises and yet, except from the momentary public anger and disdain nothing else occurred. The same politicians and policymakers returned to their office after the end of their luxurious journeys and assumed work like everything was right in the world.

Obviously, one cannot state that corruption does not exist in the other Member-States of the EU, or other parts of the world. Corruption has always existed and will always exist. The problem is that we cannot tolerate it. People who steal money from the government, who are tax evaders or who take bribes to perform their work correctly should be sentenced to jail and have their properties confiscated. Instead, in many countries these persons and tactics are considered the norm and those who wish to live in that country need to respect these norms themselves.

Who or what is to be blamed then for this situation? The answer is simple: nothing else than mentality should be pinpointed for this. The mentality, mostly presented in older persons who in their turn try to pass it on to their children, that if you want to succeed in the system you have to accept it. A friend once stated that if you wanted to change them system then you had to become a part of it first. However, becoming a part of it means that you have to change your ideas and notions about it if you are to succeed in it. Thus you risk becoming just the person you swore you wouldn't become.

How can change be achieved then? Protesilaos Stavrou in one of his latest articles states that change can only come form the Greeks and not from the Troika. The same holds for the Italians, the Spanish, the Cypriots and the Portuguese. Change only comes from within. And as many of the older generation feel the anxiety that the status quo it had guarded for years is about to collapse, many of the younger generation feel confident that all those which had been tormenting them all these years are about to disappear.

Change is hard to endure, more so if you are used to something else through your lifetime. It has been documented in economics that the labour force changes its skills much rarely than every other factor of the economy. As a generalization the same holds in politics as well as ideologies.

The situation cannot change if we cannot change ourselves. If we demand more democracy, more transparency and less corruption then we are going to receive it. Change will not come in a day nor in a week. Yet, it will come soon if we all decide we are fed up with the situation.

Theories of Destruction

While the Eurocrisis is still raging many have found the opportunity to promote their own ideas of new world orders, new forms of government or economic systems. To this day, I have yet to found an alternative to the current situation which would provide stability and prosperity.

Most people's ideas are focused on the "injustices" of the current economic system. By injustices we mean the fact that companies and certain individuals have an income of multiple times the average one. Why should Mr A earn 1 million euros per year and Company B 100 million a year when Mrs C earns only 25,000? Isn't that injustice to the poor? Under other forms of government or other economic systems (the critics declare) things would be better for the common citizen. Hmmm, let me think for a minute. We are trying to find a perfect system, which would not promote either education or public health or something similar, but, it will have than monetary consequences to the ones who adhere to it!

Most importantly, the critics intend to do this by not even acknowledging the fallacies of human nature. First of all consider jealousy (although this is not the formal term for this phenomenon): if my neighbour earns 25,000 a year I would prefer to earn at least 26,000 to be happy. At the same time the neighbour would prefer me to earn less than 24,000 in order for him to be happy! If you do not believe that this is true read this, this or this. Thus, all forms of government which state that people should earn the same wage or benefits are in fact violating this principle. This would mean that these forms of government would not be sustainable in the long run.

I have to admit that capitalism has flaws. It not a perfect system, although I do not believe that we will ever have a perfect system. Systems are as good are the persons who create them, and our basic quality as people is that we are very far from perfect. Thus, having a perfect system is like looking for a perfect man or woman. You will never get something perfect, but what you should get is someone whose faults are such that are not of such significance. Unfortunately, the same holds for democracy. However, in the words of Winston Churchill "Democracy is the worst form of government except for all those others that have been tried."

Now let's think about the following scenario:

Mr A is a person who goes to a 9-5 work every day, works enough to keep his job but not so much as to earn a raise. He has an average house, with a small family and he saves enough of his salary to go for a vacation each year.

Mr B is a person who works the same hours as Mr A, but his overall productivity is lower since he does not work hard enough. He earns a slightly lower salary than Mr A and although he does not have a family, he spends so much that he never has any savings in the bank.

Mrs C, is a person who puts extra hours on her work daily, her superiors are extremely happy with her and she gets a raise almost every year. She saves enough for her to buy a new house and a new car while still maintaining a family.

Given the above scenario would Mr B. or Mr A. have any right to complain if Mrs C gets a raise? Obviously not. However, in real life, we do not understand that most of the people who earn substantial amounts of money, have to work extremely long hours, be very devoted to their work and at times put their personal or family life in second place for a number of years. I heard a story once from a person who at the time of interview was a millionaire, stating that he realized that he had a son when the boy was 18 and leaving to study.

Another thing that most people do not realize is that it takes some kind of ability to become an entrepreneur. Out of millions of small cloth companies, Zara has managed to become a worldwide brand and its founder a very rich man. The same happened to furniture giant IKEA. Why has this not happened to every other furniture or cloth store? I am guessing that it has to do with the manager's ability to work wisely towards achieving what needs to be done. It needs a lot of luck too. In John D. Rockefeller's words: "All it take to be rich is luck, luck and luck."

As for companies, which appear to be making millions of euros every year and use them at their own will, let me remind you that a public company usually has thousands of shareholders, which benefit from those millions, either directly, through dividend payments, or indirectly through increases in share prices. This would mean that public companies are in essence beneficial to an economy as they raise the income level of their shareholders and boost consumption.The only companies which promote accumulation of debt by very few person are private companies, which to be fair, are much cheaper to form when a company is young. What should happen, is that companies which reach certain levels of income or employees, should be taken public so that the regulators have a better grasp on them and their practices.

There are, unfortunately, those who manage to get rich, one way or another, not through work but through other mechanisms. These are plain crooks and should not be compared to people who devote more than 12 hours a day to their occupation. It is the idle we must not accept in society, not the hard-working ones. And trust me, most of those who inherit large sums of money do not hold their money for too long. What we should not accept is unfair and illegal gains. Those who choose to devote their lives to their careers to earn money, are obviously going to come short in another aspect of living. 

Start-ups, Democracy and Growth

While the economic climate is deteriorating rapidly in South Europe what seems to raise our expectations about the future is the fact that in Spain, with unemployment reaching 25% and youth unemployment more than 50%, young people have began creating start-up businesses as a response to the economic crisis in the country. (for more information concerning start-ups in Spain read this).

Europe, especially in the South, does not have the same mentality or maybe not even the same resources when it comes to start-ups and establishing new businesses, as countries like the US or Israel do. The only nation in the EU that comes near this mentality is the technology-oriented Estonia which in 2005 it became the first country to offer Internet voting nationally in local elections. The feature itself is very impressive and something I would love to see in all countries. This will bring a new era in democracy, allowing citizens to have a direct opinion on many aspects of national affairs through courses of action like referendums. For those who love numbers 1.9% of the Estonians (approximately 9,300 people) voted online in 2005 whilst the percentage rose to an impressive 15.4% (150,800 persons) in the 2011 parliamentary elections.

Returning on the start-up discussion, with a simple visit to the EU grants website the reader may observe how many grants are targeted in  start-ups. Exactly none. Entrepreneurship is left to be promoted by individual countries and not at the EU level. Nevertheless, whilst in the UK (and to a much lesser degree in Germany), entrepreneurship attracts a rather significant amount of young talent, the South European mentality states that a job at a large corporation or in the government sector is a much more prestigious one. This is rooted in genes of all South European people, maybe a fact which derives from the instability in governments over the last century and has resulted in a need for a stable job, salary and life. (remember that Italy, Spain, Portugal and Greece suffered through dictatorship regimes over the last century, with all of them experiencing terrorist attacks over time and Cyprus had been prone to rough civil disputes and a Turkish invasion in 1974). These experiences lead to a risk-averse society, with the specific mentality passing on to the next generations.

However, when talking to today's youth, this mentality seems to be changing. This might be the result of the economic catastrophe the aforementioned countries are facing, where the most stable of organizations of the past, the banking institutions, are proposing layoffs and shrinking of business activities to survive. It seems that the most prestigious employers have lost their reputations.

My hope for the future is that EU governments understand the importance of start-ups in the economy and provide financial assistance, in the form of subsidies or state-owned Venture Capital (VC) firms to aid individuals get the funding needed to start their business. This need only be done for a short period of time, since after the initial phase, more and more privately held VC firms and angel investors will emerge. The cost of funding a start-up is also very low as most of them require less than 100,000 euros to function. Given the amounts each country spends on foolish expenses each year sparing 10 million a year for start-up funding is infinitesimal. On the contrary, the outcome of such policies will be extremely beneficial as the now deteriorating economies will be able to bounce back, create thousands of jobs and restore confidence in the nation as a whole.