Author: George Papaioannou

Americans like to talk derisively of European socialist ideas and practices.  The irony is, though, that the American economic landscape has some remarkably important examples of socialist arrangements.  Take, for example, Social Security, Medicare, and Medicaid, instituted by law and very popular with Americans.   And then there are implicit socialist arrangements that are popular with business, principal among them the “too large to fail” doctrine.  It was that doctrine that helped bailout the insurance firm AIG, Citi Group, Wall Street and the auto industry in Detroit. I call these arrangements socialist because, while they allow the private appropriation of profits by shareholders they socialize the risks, meaning they spread them over all taxpayers.

Interestingly, there has been an important socialist experiment in the US directly related to the 2008 crisis.  I don’t know whether you are aware that if you moved to Europe and wanted to finance your new home, you would have difficulty finding a long-term fixed rate mortgage.  And such mortgage would cost you more (after other factors are accounted) than in the US.  Why?  Because the US has applied some innovative socialism in the housing market that Europe never did and still doesn’t.

If a bank gives you a fixed rate mortgage loan for 15 to 30 years it faces the risk the borrower might default on the loan or interest rates might rise in subsequent years.  In the latter case, the bank would have to pay higher rates to attract deposits but wouldn’t be allowed to raise the mortgage rate.

Part of Franklin D. Roosevelt’s initiatives to restore the US economy after the Great Crash, the National Housing Act established the framework through which the US government would promote housing financing.  These institutions are the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac).  These agencies guarantee the interest and principal payments of mortgage loans that conform to their guidelines and gave rise to an innovative financing instrument, the mortgage-backed security (MBS).  An MBS is a bond whose interest and payment are backed by the interest and principal payments on the mortgage loans that back up the MBS.  To issue MBSs, Fannie and Freddie buy thousands of mortgage loans from banks and credit unions and then issue bond as MBSs.  Turning loans into securities is called securitization.  By selling its mortgage loans to these agencies, a bank passes the default (credit) risk and the interest rate risk to the buying agency.  More importantly, the mortgage loan issuer recovers its money and uses it for new mortgage loans while earning fees from the origination and servicing of the mortgage loans.  On top of that, the created MBS can be resold many times in the capital markets and generate trading fees and profits for traders.  Because banks don’t have to commit capital for the long-run and the agencies (Fannie and Freddie) can sell the MBS to others, interest rates on mortgage loans can be lower than absent such an arrangement.  Lower mortgage rates mean more affordable housing to the public.  So, voila.  You have an all-around wonderful win-win innovation for the agencies, the banks, the home buyers and the Wall Street traders who sell and buy MBSs.

So, where is the socialist ingredient in this recipe?  By US law, Ginnie Mae is a Government Agency backed by the full credit and faith of the US government, i.e., backed by the US tax payers!  Fannie Mae and Freddie Mac, which are considered Government Sponsored Enterprises (GSE), do not enjoy the same privilege, but are implicitly assumed to carry the backing of the US government.  The implicit US guarantee was given by the Reagan Administration Treasury Department in a letter to the rating agency S&P in 1982 when Fannie Mae had run into trouble.  The letter said that S&P should consider the special status of Fannie Mae.  Special status? Yes, because Fannie Mae, in 1968, had been turned from a government agency into a publicly traded stock corporation that could potentially go belly up.  That letter was enough to lull investors into the belief that Fannie Mae (and also Freddie Mac) deserved less scrutiny of their assumed risks given the implicit backing of the government.  In capital markets, when investor monitoring and scrutiny decline, expect bad things down the road.

On the road to 2008, other government initiatives, meant to do good, were distorted by political expedience and greed, and turned the arrangements aimed to facilitate home ownership into a destabilizing force.  One such noble initiative was the Community Reinvestment Act (CRA) of 1977.  It came as a result of evidence of neglect of economically depressed neighborhoods by banks.  Banks would take the deposits of these neighborhoods but would not reinvest them locally in home or business loans.  The Act required that a substantial portion of mortgage loans sponsored by Fannie and Freddie come from low-income households.  Later during the Clinton years, the government allowed Fannie and Freddie to extend sponsoring to mortgages of lower (subprime) standards in discharging their CRA obligations.  As it turned out, opening the door to lower standards had unintended consequences.

The government arrangements to help home financing worked with great stability until the early 2000’s.  However, starting in the 1980’s, deregulation had opened the market of mortgage-backed securities (MBS) to private investment banks (like Goldman Sachs) and gradually to commercial banks (like Citi Bank).  In 1999, Clinton signed an Act, enthusiastically backed from both aisles of Congress, that gave commercial banks full powers to act in the securities business just like investment banks.  This deregulation greatly increased competition for the creation/issuance of MBSs for all players, including Fannie and Freddie.  The competitive advantage of private banks was that they could buy and turn into MBSs any type of mortgage loans whereas Fannie and Freddie were restricted to loans conforming to their standards.  The pressure by the shareholders of Fannie and Freddie to produce sufficient returns pushed both agencies to further lower their standards in order to expand the pool of eligible mortgages for purchase and securitization.  At the same time, mortgage loans of good and bad quality were created by mortgage companies and investment and commercial banks at a frenetic rate pushing house prices to unsustainable levels.  Around 2005, the Republican-controlled Congress sensing the impeding housing bubble and disaster attempted but failed to reform Fannie and Freddie and the housing financing market in general.

In 2008, Fannie and Freddie came unravelling.  The US Treasury gave each a life line of $100 billion, fired the top executives and cancelled dividend payments.  It also obtained capital stakes in both agencies. The shareholders of both agencies lost their money, as they should have.  To the surprise of many, by 2017, the government had spent the sum of $191.4 billion backing these agencies but had received back $279.7 billion in dividends.  Not a bad bail out!

Presently, no one knows what to do with Fannie and Freddie.  Some argue they should be converted to fully independent private firms.  Many experts, though, believe that without government backing they will not be able to sustain their mission.  Nonetheless, both sides are very leery of what would happen to home financing and the industries it supports under either alternative.  It is for this reason that private business enthusiasts are not very eager to see these agencies operate as independent private intermediaries without any government backing.  I am tempted to quip there is no government program that businesses don’t like if it lines their pockets.

The lesson is that back in the 1930s and the ensuing years, the US created an innovative – call it a socialist – solution to serve home ownership, but erosion of shareholder scrutiny and underwriting standards, and unregulated (prior to 2008) private firm activity converged to stoke the 2008 crisis.  Also, mixing private ownership and the inherent profit motive with an implicit government guaranty mitigated shareholder exposure to risk and undermined investor vigilance.  And one more thing: don’t let arguing about the housing crisis of 2008 sour your mood toward your Democratic or Republican friends.  Both parties did their best to contribute to it by corrupting good government programs.

In February 2002, in the aftermath of the scandals committed by the executives of Enron, Andersen and other companies, BusinessWeek printed a brief letter to the editor in which I argued that those who had the most to benefit from the function of markets should have the interest and honesty to protect the markets’ integrity.

When I composed the letter, I had in mind the proposition of moral philosophers that human actions ought to be guided by some sense of what is the highest good or summum bonum.  In a political system, a Church, a market economy, or any institution, maintaining the integrity of that entity ought to be the highest good instead of pursuing one’s self-interest.  This ethical obligation is all the more binding for those who profess to believe in the value and mission of the cause they serve.

With this in mind then, how should judge Kavanaugh act?  I start with the premise that he is dedicated to the justice system and its integrity.  He has labored to further the cause of justice and make a personal contribution to this cause.  That he would be loath to allow his personal interests or limitations to sally the integrity of the justice system.

Much more than ordinary citizens, judges inform their decisions by the historical experience of humanity, looking for examples of honesty and honor, and are mindful how their decisions might affect the integrity of institutions and our collective sense of fairness.  I would expect, therefore, judge Kavanaugh to reflect how his actions would affect the institution of justice he serves and how he will measure up to those who before him faced the dilemma of whether to pursue their self-interest or act honorably and stand up for what they considered worth defending.  What could such examples be?  Here is my list, and you may have lots more to suggest.

Socrates refused to escape Athens and spare himself of the death penalty, because, he told his students, his loyalty to his city compelled him to obey its laws even when they turned against him just like he obeyed them when they protected him.

Cicero stood up to Mark Antony and eventually paid with his life for exercising his right to speak critically of a ruler.

Thomas More was beheaded because he upheld his loyalty to the Catholic Church and refused to take the Oath of Supremacy and capitulate to Henry VIII.

Dietrich Bonhoeffer, a German pastor and theologian, was executed because he stood up against Nazism and Hitler in defense of human rights and dignity.

I am sure that judge Kavanaugh was exposed to these historical examples of courage and honor during his studies in the very fine schools he attended.  How should then Judge Kavanaugh convince his American fellow citizens that he is loyal to the cause of justice and he is honorable enough to serve it at its highest level?

He doesn’t have to withdraw his nomination.  What an honorable person would do though is to tell the Judiciary Committee of the Senate that he does not wish his nomination to go forward without a full investigation and vetting and without his accuser being heard properly and not expeditiously.  And, of course, he should tell the truth even if that means confirming the accuser’s story.

There was, in classical Athens, a speech writer who wrote speeches for defendants.  His name was Lysias.  In one of the speeches, Lysias has the defendant start by giving thanks to his accuser for bringing the accusations to the court because this would give him (the defendant) the chance to prove that justice was on his side.  Similarly, judge Kavanaugh, a man of the Courts, should proclaim that he welcomes the opportunity to defend himself and subject himself to full scrutiny just like any of the defendants that sat before him in his court.  That may carry the risk of being disqualified for the Supreme Court but it would secure his place as an honorable servant of the institution of justice.

I may be reaching for a pie in the sky, but it is worth reminding ourselves that courage and honor at the cost of a lot more than a seat on the Supreme Court is humanly possible and part of our historical experience.  Defending one’s honor is not alien to human nature.

Advice from the Past

In 1820, Thomas Jefferson expressed his opposition to the doctrine of judicial review and pointed at the perils of life appointments to the Supreme Court:

You seem … to consider the judges as the ultimate arbiters of all constitutional questions; a very dangerous doctrine indeed, and one which would place us under the despotism of an oligarchy. Our judges are as honest as other men, and not more so. They have, with others, the same passions for party, for power, and the privilege of their corps…. Their power [is] the more dangerous as they are in office for life, and not responsible, as the other functionaries are, to the elective control. The Constitution has erected no such single tribunal, knowing that to whatever hands confided, with the corruptions of time and party, its members would become despots. It has more wisely made all the departments co-equal and co-sovereign within themselves.

Note:  T. Jefferson, the author of the Declaration of Independence, was not one of the writers of the Constitution.  It would be interesting to know his views about the life tenure of SC justices around 1787 and whether he would have recommended for finite terms had he been involved in the framing of the Constitution.

In a previous piece on this blog, I had presented information suggesting that a large part of corporate liquidity freed up by the tax cuts is being directed to stock buybacks.  Today (9/17^th) the WSJ reported that repatriation of foreign profits is proceeding in a slow pace and the bulk of money is used for stock buybacks.  The newspaper estimates the repatriation rate is so slow that puts in doubt the Trump administration’s expectation for the repatriation of $4 trillion.  Siphoning repatriated profits to stock buybacks is consistent with the argument that in a full-employment economy business opportunities for massive new real (factory, equipment, R&D) investments are limited and the best policy is to return the excess cash to shareholders.

The numbers I have in mind are economic performance numbers for the US economy.  One of the cognitive biases supported by behavioral economics is the confirmation bias.  Human brains are wired to seek validation of preconceived notions in observed reality.  Economic numbers represent an observed (through measurement) reality.  Thus, we are more likely to interpret economic numbers as supporting the economic policies of our favored political affiliation, while the reverse is true if we support an opposite party.

Last week, the government published various economic results for 2017. One set of news is below:

• Median household income rose by 1.8% to $61,372 in 2017. This is the third consecutive year of positive growth.
• More people were employed full-time in 2017 than the previous year and people overall worked more hours.
• The poverty rate as percent of the population, declined from 12.7% to 12.3%. The poverty rates for blacks and Hispanics, though still higher than that of whites, dropped to their lowest levels since 1972 (to 21.2% and 18.3%, respectively).  Poverty rates also have declined over the last three years.

Another set of numbers is as follows:

• The 1.8% growth of median household income in 2017 was lower than the growth rates of 5.2% and 3.2% realized in 2015 and 2016.
• The median household income of $61,372 in 2017 was statistically indistinguishable from that of 1999 and 2007 (the latter being the year before the financial crisis erupted in 2008).
• Average annual earnings declined in 2017. Therefore, household incomes have increased because more household members work or the same members work more hours and possibly more jobs.
• Between 2007 and 2017 the GDP increased by 16% (after inflation) but the median household income has not changed. This means the bulk of the economy’s growth has benefited the upper-income people.
• Income inequality persists. Household income at the 90^th percentile rose by 7.5% from 2007 to 2017 while that at the 10^th percentile declined by 4.5%.  (Loosely speaking, a household at the 90^th percentile is part of the top 10% of all households in income terms and a household at the 10^th percentile is part of the bottom 10%.)
• While the median income of black Americans in 2017 is still below that of 2007 by 2.9%, that of white Americans is greater by 1.5%. Hispanics have enjoyed the greatest growth, 6.7%.

So, how would we interpret these results?  Confirmation bias suggests that Republicans and conservative economists will concentrate on the top set of numbers and Democrats and liberal economists on the bottom set.

Predictably, the editorial page in The Wall Street Journal focused on the good numbers of the top set.  The New York Times did not editorialize on the economic numbers but its reporting over several days brought attention to the stagnate earnings of American workers and the persistence of economic inequality.

The WSJ editorial further claimed that the promise of tax cuts and deregulation announced by President Trump in 2017 “unshackled animal spirits while tax reform has boosted capital investment,…”  The problem is that deregulation proceeded incrementally through 2017 and the tax cuts did not become law before the end of 2017.  It is not certain whether it was the initial steps toward deregulation and the prospect of tax cuts or it was the momentum from previous years that powered the economy forward in 2017.  If the driving force were the promises of the Trump administration, how do we explain the decline in the growth of median household income?  Why didn’t the business animal spirits and new investment boost worker’s earnings?  It seems to me there is a selective attribution with regard to the consequences of the current economic policies.

There is also the claim that Obama’s economic policies generated a rather weak growth compared to the higher GDP growth rates observed in 2017 and thus far in 2018. Writing in the NYT, Paul Krugman reminds us, though, that the Republican majority first in one and later in both chambers of Congress in the years after the 2010 mid-term elections refused to support more generous spending (as for example on infrastructure projects) for fear of aggravating the federal deficit.  I checked and found that the budget deficits started to decline after 2012 and, as a result, the government’s stimulus weakened significantly over Obama’s second term.  The budget deficit dropped from over $1 trillion in 2012 to $0.585 trillion in 2016.  Republican preoccupation with federal deficits was, of course, a non-issue in approving tax cuts and increases in the federal budget deficit at the end of 2017.  Therefore, comparing growth rates under the Obama and Trump administrations, each operating with asymmetrical constraints on fiscal policy, is disingenuous.

Furthermore, the faster economic growth powered by public debt is not free of costs and future risks.  As reported by the WSJ, the federal deficit grew by 33% to $898 billion in 2018 over a similar period in 2017.  And, so far, spending is up by 7% while revenue (after some adjustments) is down by 4% (with lower corporate tax revenue being a significant drain).  Eventually the current and future generations will have to pay the debt one way or another.  As they say: “there is no such a thing as a free lunch.”

We all admire the Founding Fathers for the wisdom and foresight they exercised as they laid down the Constitution and the basic rights that, after two centuries, still define political governance in the U.S.   Yet, this system of governance has started to produce outcomes that leave large swaths of U.S. citizens to feel less represented in the various branches of the state.

The Senate over-represents states sparsely populated and under-represents heavily populated states, like California and New York.  The rather moderate differences in population across the founding states that existed at the birth of the Republic have by now become huge.  California’s almost 40 million population is 40 times larger than Montana’s 1 million.  And yet each state sends two senators to Congress.

Since the electoral votes are the sum of the 435 House seats plus the 100 Senate seats, this also skews the electoral congress in favor of less populous states.  No surprise then that it is possible to elect as president the candidate that wins the majority of electoral votes but not the majority of nation-wide votes, as it happened in 2000 and 2016.

The Supreme Court has always been a non-representative body from many standpoints.  Prior to the 20th century the appointment of Catholic jurists was rare in the other-wise Protestant, male and white Court.  The 20th century saw a significant trend toward greater representativeness with the appointment of more Catholics, and for the first time Jewish-Americans, one African-American, and women, all at the expense of Protestant jurists.  The current Supreme Court of eight (excluding Kennedy), consists of 5 men and 3 women of which 4 are Catholic, 3 are Jewish and 1 is Protestant (but raised as Catholic – Neil Gorsuch).  With the likely appointment of Brett Kavanaugh, the number of Catholics will go again up to 5 and that of Christian-affiliated jurists to 6.

Beyond the obvious gender gap, this demographic breakdown is out of sync with present U.S. demographics in relation to religious affiliation.  A survey conducted by Pew Research and cited in a recent article in the Wall Street Journal of Sept. 10, 2018 (“Nonbelievers Seek Increased Political Power”) reveals that by religious affiliation, the U.S. adult population breaks down to about 25% Evangelicals, 21% Catholics, 14% Mainline Protestants, 16% Non-Christians (i.e., Jewish, Muslims, Hindus, others) and 24% Unaffiliated (i.e., atheists, agnostics, and non-denominationals).  Even more important is the trend in these groups.  Whereas the share of all three Christian groups has declined between 2000 and 2014, the share of Unaffiliated has increased by 10% and that of Non-Christians by about 2%.

Related to this growing discrepancy between the composition of the Supreme Court and the general population is the following article posted on CNN: How Brett Kavanaugh will collide with a changing America
CNN Politics.  Read the full story

In an ideal world, candidates for the SC would be selected on the basis of their legal knowledge, experience, and objectivity.  Instead, appointments to the SC have reflected, in the distant past, protestant bias against other religious or ethnic groups, and since Roe v. Wade the opposing views about abortion and, more recently, gay rights.  From the Republican side this leads to a preference for candidates with known religious bona fides and affiliation with denominations that stand opposed to abortion and gay rights and who are likely to favor religious over secular rights.

At the same time, we are witnessing an intensifying and systematic effort by the Christian right (spearheaded by Evangelicals) to erode the separation between church and state established by the First Amendment.  The nomination of one more candidate, like Brett Kavanaugh, who has undeniable strong religious affiliation and feelings, cannot, therefore, meet the rights to representation of those who are part of the 24% of Unaffiliated and the 16% of non-Christian U.S. citizens.  Nor can it meet the views of religious Americans, who, nonetheless, support the separation of church and state. Although it is premature to say how judge Kavanaugh will decide on the above issues, his religious credentials are such that raise justifiable concerns among secular Americans.

Given the life appointments to the SC, it follows that any future realignment of the composition of the SC will lag many years – most likely a whole generation – before currently less-represented or unrepresented segments of Americans find their voice in the Supreme Court.

In some of its issues, the journal The Atlantic asks its readers various questions.  For example, a recent question was “What book or article would you make required reading for everyone on Earth?”  First came Fahrenheit 451 with 42% endorsement followed by Silent Spring with 22%.  https://en.wikipedia.org/wiki/Silent_Spring

In this September issue, the question was “Whose untimely death would you most like to reverse?” Some of the answers included: Abraham Lincoln’s; Yitzhak Rabin’s; and Martin Luther King’s.  Two figures not mentioned would have been my likely choices:  Alexander the Great and Jesus Christ?  Both died at about the same age, around 31-33 years old.  They also died in the Middle East, Alexander the Great in Babylon and Jesus in Jerusalem.  Their deaths were separated by 1,181 km. in distance and 356 year in time.

Had Alexander the Great lived into a mature age, he might have turned direction and campaigned westward into Italy, the Gaul, and even Spain and Britain.  That could have forestalled or at least delayed the ascendancy of Rome and produced a much different Hellenistic world after his death.  The fractured empire of Alexander, due to his premature death, gave us new intellectual centers, like Alexandria with its Library and Museum.  Would this be possible under Alexander’s concentrated and capricious rule?  Or Alexander might have resumed his advance to the East and after crossing India, his armies could have made contact with China and its vast land and populations.  That would have accelerated China’s interaction with the Western world by 1,600 hundred years instead of waiting for Marco Polo to reach China at the end of the thirteen century CE.  The globalization process of the then known world would have been more complete and no one knows what the cross-fertilization of the West and Far East would have meant for human history all the way to our times.

Christian theology teaches that Jesus’s life and death were preordained by God’s will – part of God’s plan to establish a second Covenant with humans.  Therefore, from a theological standpoint, a “what if” question about Jesus’s death is a mute question.  Setting this belief aside, however, it is worth speculating what might have happened had Pontius Pilate (or Pilatus) had spared Jesus’s life.  Would Jesus go on teaching his moral parables or instead interest in him would have eventually waned and he would have retired to a quiet private life?  Around the time of Jesus, the Middle East was a fertile ground of self-proclaimed prophets and messiahs, some of them meeting violent deaths. But none of those pious people captured the imagination of their followers the way the life, teaching, and death of Jesus did for his disciples.  Had Jesus lived longer we would have a better idea whether he meant to be another Rabi to his contemporary fellow Jews or the founder of a new religion.  And if, after a life of moral teaching, Jesus had died as a common man, would his teachings carry the same weight with men as they do now under the belief he was divine, God’s Logos (Word)?  Which confronts us with Socrates’s question: “Is the pious loved by the gods because it is pious, or is it pious because it is loved by the gods?”  Or put differently, “Is what is morally good commanded by God because it is morally good, or is it morally good because it is commanded by God?” (This is the Euthyphro dilemma in Plato’s dialogue Euthyphro.)

The answers I read in The Atlantic, just like my own, highlight our tendency to choose known historical figures.  What if someone had answered instead that his or her choice of an untimely death to be reversed was that of an anonymous young father or mother who never had the chance to see their kids grow.  We can never know whether the child of  an untimely lost parent would have grown to be someone as important as anyone like those in The Atlantic’s answers had his or her parent lived long enough to nurture them.

In the US, Labor Day weekend marks the end of the summer season.  So here is my farewell to the summer of 2018.

Yabanaki is a beach in Varkiza, a coastal suburb about 23 miles south of Athens.  Translating Yabanaki into English is an interesting exercise.  To Greeks, yabanaki means “for little banio” where banio, as used in modern Greek, means bathroom and bath as in its original Italian word banio or Spanish bano.  But in modern Greek, when you say “let’s go for banio” you can also mean swimming.  And if swimming is mostly in your mind, you can also say “let’s go for kolymbi” meaning for swimming.  My daughter who knows some Greek and is a stickler for literal precision wants to know when exactly you invite someone to go for banio as opposed for kolymbi.  I try to explain the difference, but how do you convince a non-Greek speaker that an invitation to go for banio does not mean to bring shampoo, just in case.   I suppose the godfather of Yabanaki wanted to leave it up to the bathers what they wanted to do in the water and chose Yabanaki instead of Yakolymbi.

When we are in Greece for summer vacation, my family likes to go to Yabanaki.  While they situate themselves in the long chairs under the umbrellas, I take my place under the best and most durable shade I can find in the outdoor cafeteria about 30 feet up from the sandy beach.  The horizontal burlap-like shade that stands between relief from the scorching sun and unbearable discomfort, is not sun ray proof.  There are holes and gaps here and there to allow the air and breeze to circulate.  Unfortunately, the sun in Varkiza doesn’t stay put in the sky.  It likes to move. And as it moves, your shady spot becomes a sweat-yielding hot plate.  I know, I know, to be cosmologically correct I should have said, Varkiza has the nasty habit to orbit around the sun.  But some poetic license, please.

Finding a nice, lasting shade isn’t easy.  If you go around 11 o’ clock in the morning all the prime spots have been taken by the senior citizens of Varkiza.  Better wait until 1 o’ clock, when most of them return home for lunch and siesta. Once I claim possession to the best table I can find, I buy my frappe, sit comfortably in my chair, open the newspaper, or, more often, my summer reading book and enjoy the lazy summer time.  Frappe, for those who are not familiar, is coffee added to an inch of water and beaten up to a frothy liquid to which you add more water, ice cubes, and if you like some cream or milk and sugar.  True coffee aficionados stay away from it.  To them, it’s straight out of a witch’s brew recipe book.  But to Greeks – and me – it’s the best summer beverage modern Greeks have invented to go head to head with the nectar of Olympian Gods.

So here I am, frappe on the table, seated with one leg or both stretched and propped up by another chair, and with book or newspaper in hand.  A good Greek man needs at least three chairs to feel comfortable: one to put his heinie down, a second to prop his leg(s) and a third to rest his (usually) left arm.  After many years of living in America I have become a bit more westernized in my seating habits and I can do with two chairs.  Thus situated, I can enjoy my time in Yabanaki.  It takes a strong will and attention to just concentrate on reading.  First, there is the loud music blared out of two powerful speakers.  The selection includes party versions of pop hits  – you know, those with that rhythmic drum beat.  Actually, it’s not bad.  It adds a care-free celebratory air.

Then it’s the crowd of bathers.  I look at the new arrivals.  Their faces have an anticipatory optimistic look.  They can’t wait to throw themselves into the sea and relieve their discomfort from the nearly-100-degree temperature microwaving their bodies.  I look at those leaving the beach and I see a resignation on their faces that tells me no matter how many times they splashed into the water they realized it was all in vain, an ephemeral break, and now they are returning to what they hoped to escape.  By seven o’ clock in the evening, more bathers leave Yabanaki than arrive.  Actually, late comers have it the best.  The water is still comfortably warm and the heat on the beach is quite friendlier to the human body.

The more interesting and educational diversion, however, is the swimwear of the crowd.  If you are serious about studying the diversity in which human self-image comes, I recommend you spend time in an airport, the New York City subway, or in Yabanaki (or any other beach).  It’s all in how people dress.  In Yabanaki, it’s about what parts of the body bathers choose not to cover.  A friend of mine likes to say “Merciful God gave us clothes for a good reason,” starting, of course, with the fig leaf.

When it comes to swimwear, it seems to me men and women have followed opposite trajectories.  Men’s swimming suits have gotten longer over time while women’s suits have gotten skimpier.  Ever since NBA players switched from real shorts to down-the-knee shorts, men around the world have followed suit (not pun intended) and cover more of their thighs.  (That’s just my own theory.)  The trend for women has been a whole different story.  Except for parts of the Muslim world, where beach fashion has been stuck in the Abbasid Caliphate period, women in the rest of the planet decided several decades ago to save fabric and throw the yarn producing industry in irreversible decline.  A modest exception to that trend are American women.  If you are in a beach frequented by tourists you can tell which of the women age 40 and over are American; those in one-piece suits.  Damn those Puritans. They still have a hold on modern America.

I don’t exactly know how women in other countries switched to bikinis and less, but I have my theory regarding Greek women.  (OK, I know I am committing a big mistake; a man trying to explain female habits.)  When I was growing in Greece, I would spend my summers in my mother’s village.  Back in the fifties and sixties swimming was not popular among the grown-ups.  It was less so for women.  Many middle-age and older village women that ventured into the water wore a black light fabric robe over undergarments, resembling the Muslim women’s dress of abaya.  You could tell the female city vacationers from their regular one-piece swim suits.  But then two things came to the Greek countryside: TV and contact with the rising number of foreign tourists.  Greek women were never the same again.  Of course, there were movies that offered a window to foreign cultures, but movie theaters were practically not existent in small towns and few people had cars.  Besides, TV offers a sharper, more direct look into everyday contemporary life than movies.  Once Greek women saw how women lived and dressed in Europe and America, they embraced liberalization in earnest. First came smoking.  My otherwise socially conservative aunts were early adopters.  Second, came more fashionable clothes and quick following of western trends – the mini skirt being one of them.  Next came dating. No more strict curfews and nagging from parents.  No more match-made marriages.  By the late seventies, foreign tourists had established de facto nudist beaches in several Greek islands, like Mykonos.  Predictably, showing more skin was the next step toward the full liberalization of Greek women.  It also had to be an equal opportunity liberalization.  Not only for young but for older women as well.  I have kept going to the village in the summer.  The abaya-like swim wear is a faint distant memory.  Hardly any young females wear one-piece suits anymore.  Even older women, in their seventies, sometimes in their eighties, wear two-piece swim suits.  Body shape seems to be the least of their concern.  I remember what my friend says about God and clothes, but I personally say, Bravo.  How you look is your business. If you feel comfortable, screw what others think.  After all, we are in Greece, the ancient land of nude statues and nude athletes (gymnasium was where naked (gymnoi) male athletes practiced and competed).  That’s the land that gave us Aphrodite of Milo in all her glorious semi-nude beauty.  If not in Greece, where else are the women of the world supposed to declare their self-confidence in their bodies?

I wonder whether it is the exposure to western swimwear styles and habits that explains why Greek women gave themselves so unreservedly to their no-holds-barred beach fashion.  Could it be a subconscious re-connection to ancient Greek norms about nudity though now with an egalitarian approach across the sexes?  Maybe, maybe not.  What about the opinion of Greek social commentators that Greeks are avid imitators of foreign life styles?  There is no part of western life style (especially European – with Italian and French having the greatest impact) that Greeks don’t like to adopt.  I had read that in 2008 (just before the Greek debt crisis erupted) Nielsen ranked Greeks second to Hong Kong consumers in the relative consumption of brand items.  Reportedly, one area in Thessaly (in central Greece) had the highest number of Porsche Cayenne vehicles relative to its population, more than what you could find in Germany.

By now, you have an idea what the crowd looks like in Yabanaki.  At the sight of some female bathers, my wife leans over and whispers “They don’t leave much to the imagination. Do they?” I roll my eyes and retort: “You mean there is more?”  Beaches can have an egalitarian order, and Yabanaki is not different.  Besides Greeks, there are quite a few foreign bathers, most of them from East Europe.  You cannot tell, though, from the swimwear.  Even more, you cannot tell who is rich, who is not.  Or, who is famous; who is ordinary.  All you see is one swim piece for men, and one or two for women, that’s all.  The beach obliterates so many differences in social status.

After three or four hours, my family decides they have had enough sea, sand, and sun.  We pick up towels, sunscreens, water bottles, books, cell phones, Kindles and leave.  The last day at Yabanaki, I took stock of my accomplishments there besides enjoying frappe.  Between reading, observing and reflecting I had learned a lot.  I finished a book (the now familiar to you Factfulness), a book on the history of modern Greece, and Calypso by the humorist David Sidaris.  Not bad, given all the movement, the noise, the music, and the bathers.

The sunset in Yabanaki, when it comes, is beautiful.  The bright white sun turns into a huge orange pancake.  If there is a moon, it stretches the reflection of its elongated silhouette on the calm sea across the bay.  Yabanaki falls asleep.  The next morning, the party music will blare again, the frappe will flow, and hordes of bathers with bring their bodies in all their many different shapes and swim covers for another day of escape from the heat and the worries of the day.

You may have noticed that since before and after passage of the new tax law last December there has been an unusual frequency of news media articles on stock buybacks (also called repurchases).  Critics of the tax law have argued that most of the money corporations would save in taxes (especially on taxes of repatriated profits) would be used to distribute cash to shareholders instead of making new investments.  Hence, the growth potential of the tax reform would be much lower than that estimated by Congressional Republicans and the Trump administration.  The critics’ argument is based on the case of an earlier tax relief on repatriated profits given in the G. W. Bush years which was indeed consumed mostly in stock buybacks.  The conservative economists have answered back by saying that tax relief money allocated to stock buybacks is fine because they redistribute money to the economy, and are in fact a good by-product of the new tax law.

Thus, a politically neutral corporate decision, like stock buybacks, has become a political football.  Here, I will try to disabuse current opinions about stock buybacks so we can better understand whether they deserve to have an oversized role in the tax law debate.

Point one.  Stock dividends do not make shareholders poorer or richer by themselves.  In a stock repurchase a corporation simply buys back its own shares.  The price paid is what any investor has to pay to execute a trade in the stock exchange.  Actually, corporations strive to pay the stock’s fair price and no more.  Paying more reduces the price of the remaining outstanding shares held by the non-selling shareholders; and paying less hurts the selling shareholders.  Not all shareholders participate in a stock buyback.  Those who have confidence in the future of the corporation do not sell while those who are less optimistic are more likely to sell.  Selling shareholders simply trade their shares for cash.  Before the buyback, their wealth (in relation to the corporation that executes the buyback) is comprised of shares in the corporation.  Afterwards, it is comprised of shares (if they still own some) and cash.

Point two.  Notwithstanding point one, stock buybacks can indirectly create value.  When a corporation buys back its own shares it uses idle cash or borrows money.  In either case, the effect is an increase of the size of debt relative to equity.  Plenty of empirical evidence shows that rearrangements of debt and equity that increase a firm’s debt-to-equity ratio are viewed by the market as signals of management’s confidence in the firm’s future and result in an uptick of the stock’s price.  This stock price increase favors both selling and non-selling shareholders.  Even when the intent is not to restructure the firm’s liabilities (i.e., debt and equity), distributing idle cash the firm cannot invest profitably is better than keeping it within the firm earning a sub-optimal rate of return.  Another motive with strong empirical evidence is that stock buybacks are undertaken when managers believe the stock is underpriced.  Because of the positive signal described above, the stock repurchase restores the market’s confidence and the price goes up.  Despite these academic (and empirically supported) hypotheses, the news media keeps repeating that the price uptick is due to reduced supply of shares.  Academics call this the price pressure hypothesis; in the case of buybacks, though, it has not received any appreciable currency in academia.  Besides, price changes due to temporary disturbances of demand and supply are just that, ephemeral.

Point three.  Taxes do affect the decision to execute a stock buyback.  The alternative and traditional way to distribute corporate money is to pay dividends.  Corporations favor one distribution method over the other depending on the tax rates individuals have to pay respectively for capital gains (that may result from selling shares in a stock buyback) and ordinary income (like dividends).  If capital gains are taxed at a lower rate than dividends, shareholders prefer to receive cash through a stock buyback.  The new tax law left the tax rates on long-term capital gains unchanged while it lowered the tax rates on regular income (including dividends).  As a result, stock buybacks, if anything, became a bit less attractive to shareholders than dividends under the new tax law.

Nonetheless, the corporate tax savings due to the new law made stock buybacks more likely because they put additional cash in the firms’ hands, money many firms may not be able to invest profitably.  In that case, it is economically optimal that firms distribute the excess funds to shareholders and let them find ways to allocate these funds to other (presumably better) investments or to consumption.  And this is what is happening.  The Wall Street Journal has reported that by this August the volume of stock buybacks had already surpassed the record volume of stock buybacks (since 2012) recorded for the whole year of 2016.  Therefore, we can safely predict that the critics’ expectation that the bulk of tax savings would be taken up by stock buybacks (as in the early 2000s) was valid.  Some news media articles refer to the distribution of the tax savings to shareholders as if it is the wrong thing to do.  But let’s remember that profits left after the payment of taxes belong to the shareholders – new tax law or not.  It betrays poor understanding of how business works to expect firms to share the higher after-tax profits with workers.  If the architects of the tax law wanted part of the corporate tax savings to go to worattain such an outcome.  But they didn’t, despite the warnings of economists and business experts that stock buybacks would consume a large part of the tax savings.  Therefore, the writers of the new tax law are to blame, not the corporations.

Point four.  The fact that the new tax law has unleashed a wave of stock buybacks across corporations may not be good news for the sustainability of economic growth in the US.  This point seems to have escaped the attention of conservative economists.  Although a stock buyback that distributes excess funds is a value-added decision when undertaken by an individual firm, a tsunami of stock buybacks across corporate America may signify that executives as a whole are not confident the current higher than usual growth rates are likely to continue.  Hence, they distribute the tax windfalls to shareholders for better use.  The counterargument to this pessimistic interpretation of the high volume of stock buybacks is that executives are instead confident and believe they don’t need as much equity to support their firms’ operations.  That is, strong future growth will generate the funds to enable businesses to support their relatively high indebtedness.  Time will tell.

Point five.  Massive stock buybacks have the potential to hurt the overall stock market.  The reason is that, if executed at a large scale, they remove a lot of shares from the public markets and leave investors starving for shares.  Fewer shares prevent all shareholders from forming the type of portfolios they like in terms of risk and return.  Also trading costs go up as the stock market becomes less liquid.  We must add that the number of publicly traded stocks has declined from around 7,000 in 1995 to less than 4,000 by August of this year.  At the same time the number of listings of new stocks through Initial Public Offerings (IPOs) has also trended lower.  Fewer public stocks along with fewer shares available from the remaining stocks are a sign of decline of the public capital markets.  Conservative economists who are market enthusiasts par excellence must loathe these developments.  I find it, therefore, puzzling when they sugarcoat the massive wave of stock buybacks because they feel the need to defend the new tax law.

Point six.  Conservative economists have asked: “What’s wrong if corporations are left with more money because of lower taxes which they then pass through buybacks on to their shareholders, that is, back into the economy?”   Firms with growth potential will use the excess cash to make investments.  Others with no such potential will distribute (as we currently see) the excess cash to shareholders.  But because it is richer Americans who hold most of the stocks and, hence, will receive most of the money from stock repurchases, the impact of the redistributed excess money through stock buybacks cannot have the save impact on consumption and economic growth.  Rich investors are more likely to save the money than consume it since they have a lower propensity to consumption (the economic term that denotes that a lower fraction of one’s income is consumed).  Economic growth and economic inequality could have been addressed more effectively if more tax savings had been allocated to middle and lower income families than ending up as funding sources for stock repurchases.

Bottom line.  Stock buybacks do not make shareholders really richer as some liberal economists seem to imply.  And stock buybacks at the current massive rate are not as good as the conservative economists present them to be.  Finally, the unusually high volume of stock buybacks validates the expectation that the corporate tax savings would be used for distribution of corporate wealth to the shareholders than for investments.

CORRECTION:  In the previous posting “Human Progress We Fail to Notice” the correct average number of years in school for 30 year old women is 9, not 10 which applies to men.  That’s why I wrote women’s education was in near parity with that for men.

If you are like me, you like to get up in the morning and, while you sip your coffee or tea, read or hear something good about the human experience and condition.  A new recognition for the town schools, a new medical discovery, a fair election held somewhere in the planet.  Some mornings are full of good news.  But even if you find no news to lift your spirits, don’t feel that things are bad or, even worse, they are heading south.  While you have tried to stay abreast of the world’s everyday developments, you have most likely missed the much bigger stories about the humanity’s advance for better, fairer, and healthier living.  But don’t feel bad about yourself.  Equally ignorant and unaware are some of the most learned and best-positioned-to-know people of the world.

So I want to bring to your attention, in case you have missed it, the most up-lifting and heart-warming book I have read in long time.  It’s titled Factfulness: Ten Reasons We’re Wrong About the World-and Why Things Are Better Than You Think.  It’s written by Hans Rosling, a Swedish medical doctor, who spent his life caring for the underprivileged people of Third World countries and amidst all the deprivation and despair discovered that the human race has been making progress.  Progress that matters for the health, education, and the rights of billions of people.  To spread the good news, he decided to compile the evidence, using mostly United Nations statistics and tell humanity’s tremendous progress to audiences across the globe in more than a thousand presentations.  Unfortunately, this remarkable human being died last year but not before he was able (with the assistance of his son and daughter-in-law) to leave us his findings in this book.

Here is some of the encouraging facts Hans Rosling’s data show about human progress:

1. Sixty percent of girls finish primary school in all low-income countries.
2. The majority of people live in middle-income countries.
3. In the last 20 years the proportion of the world population that lives in extreme poverty has almost halved.
4. The average world life expectancy today is 70 years (by the way it was less than 50 years in the 1950s).
5. The number of deaths per year from natural disasters has decreased to less than half over the past 100 years.
6. Eighty percent of the world’s 1-year old children today have been vaccinated against some disease.
7. Worldwide, 30-year old women have spent 10 years in school, on average, versus 10 years for men – almost a parity.
8. Today, 80% of the world’s population has access to electricity (which is the gateway to modern life).

These statistics are not driven by progress made in developed countries but mostly by progress made in developing countries.  They also suggest the pace of progress is significant over time and although the gap between the developed and developing world is still substantial, it’s not as devastating as usually perceived.  Especially improvements in health, female education, and family planning guarantee that the pace of convergence will accelerate as we move forward.

To his surprise, Rosling discovered that these positive developments were not known to supposedly knowledgeable audiences.  Ironically, the higher the level of education and prominence, the lower the percentage of correct answers (the full set includes more questions and facts).  Rosling attributed this ignorance to a variety of cognitive biases, but the main culprits are (a) the preference of news media to give more coverage to bad news than to positive developments, and (b) the pessimistic view of learned audiences from First World countries about the conditions in Third World countries.

These findings suggest that despite regional conflicts, national antagonisms, and flawed global policies, people are making progress and their living conditions are drawn closer and closer so that the gap between advanced and developing countries is becoming smaller.

So, when you get up in the morning and read or hear some lousy news, remember Hans Rosling’s hopeful and fact-based message: we are making progress.

Note: I will explore some of the implications of Hans Rosling’s findings in future postings.

The launching of this blog coincided with summer and time to take trips and vacation.

So this blog has been quite inactive and will go “dark” until late August.

I wish everybody a cool and pleasant summer.

George