They say that history doesn’t repeat itself but it does rhyme. The slow motion collapse of the euro allows Americans to observe what might have happened here if the Articles of Confederation had been allowed to prevail. A large free trade zone with a common currency but with different identities and loyalties. See Nouriel Roubini’s article in Slate:

For the last decade, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were the eurozone’s consumers of first and last resort, spending more than their income and running ever-larger current-account deficits. Meanwhile, the eurozone core (Germany, the Netherlands, Austria, and France) comprised the producers of first and last resort, spending below their incomes and running ever-larger current-account surpluses.

These external imbalances were also driven by the euro’s strength since 2002, and by the divergence in real exchange rates and competitiveness within the eurozone. Unit labor costs fell in Germany and other parts of the core (as wage growth lagged that of productivity), leading to a real depreciation and rising current-account surpluses, while the reverse occurred in the PIIGS (and Cyprus), leading to real appreciation and widening current-account deficits. In Ireland and Spain, private savings collapsed, and a housing bubble fueled excessive consumption, while in Greece, Portugal, Cyprus, and Italy, it was excessive fiscal deficits that exacerbated external imbalances.

It’s not as though this is a surprise: the euro has been operating as designed. I was in Germany when the expansion of the European Union beyond a handful of “core” countries and a few Scandinavian countries was being hotly discussed and even then it was quite clear that the whole idea was subsidizing German manufacturers and French farmers, a process that reached its fruition with the widespread adoption of the euro.

There was never a good reason for a common European currency or, more accurately, a distinct common European currency since there already was a common currency (the dollar), other than German nationalism.

The folklore is that the people in the countries of the “periphery” are dishonest, lazy, shiftless and looking for a handout from their more thrifty and industrious neighbors. I think the truth is more that the countries of the “periphery” are undercapitalized.

Ireland was an English colony until less than a century ago and parts of it still are. Italy was fractured and warring for a millennium, effectively colonized by Spain and then Austria, until a century and a half ago when it gained its independence and united (or vice versa). Greece was a Turkish colony until 180 years ago.

Spain was a colony of “the Moors”, North Africans of Arab and other descent, until 1492 (the other reason that’s an important date). I don’t know enough about Portuguese history to comment intelligently but I do know that the relationship between Portugal and Brazil has been peculiar to say the least. I’m not certain who was colonizing whom.

My point in this historical litany is that the situation is more complex than the folklore admits. The number of hours worked by the average Greek is greater than those worked by the average German or Frenchman. I think there’s a better argument that the Greeks and Italians do not have adequate economic freedom than that they are shiftless, lazy, and grasping.

BTW, from whose language was the word “provincial” derived? From whose language “core”? From whose language “periphery”? Hint: it wasn’t German.

I didn’t post anything special for Veteran’s Day (which I prefer to think of as Armistice Day) but you might want to take a look at this:

Like so many others of his generation, Harold Weir didn’t talk much about the war. Whatever pain he felt — from the bullets still in his back, to the images in his head — he did not share.

“He truly never slept through a night,” said Harold’s daughter Donna Weir. “My mom told me that. He would always wake up every night.”

Within the last 10 years or so, Harold did recount some of what happened to him, and his youngest daughter Donna pitched him on the idea of taking Honor Flight Chicago, the trip to Washington to visit the monument built in honor of the vets of World War II.

“Actually, I forged his signature on the application because he just didn’t want to do it,” Donna said. “He wasn’t interested, but then as soon as I’d told him what I’d done, he couldn’t stop talking about it.”

And so, a week ago Wednesday, Donna and her dad and over 90 of his contemporaries went to Washington — wheelchairs and walkers — to see and remember, to be thanked and cheered.

Read the whole thing.

Following up on my post yesterday a quote from Nobel Prize-winning economist Douglass North caught my eye:

In his 1993 Nobel Prize lecture, economist Douglass North said, “If the institutional framework rewards piracy, then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations — firms — will come into existence to engage in productive activities.”

Leaving the context in which the quote is used (more in the argument over whether the GSEs were responsible for the housing bubble and its collapse) aside, I think that crowding is certainly one explanation for why the rate of formation of new companies has declined.

It just became too profitable to be a pirate. Productive activities are a lot more work, not to mention riskier.

and too big to bail out? Mike Shedlock notes that California’s state budget director, Rosy Scenario, is doing well there:

California tax collections since the start of the fiscal year have fallen $1.5 billion behind projections, raising concern that the most-populous U.S. state will face automatic spending cuts.

Revenue was $810.5 million less than budgeted in October, bringing the total to 6.2 percent below expectations for July 1 through Oct. 31, according to figures released today by Controller John Chiang. Since the start of the fiscal year, the state has spent $1.7 billion more than it budgeted.

That shortfall is large enough to cause automatic spending reductions to be put into place:

The first tier of cuts, if the shortfall is $1 billion, would trim University of California and California State University budgets by $100 million each, increase community- college fees by $10 per unit and cut in-home services for the elderly and disabled who need help.

That should be popular with the “Occupy” demonstrators.

Make no mistake: California is in a pickle. There is really no revenue solution there, what they need is economic growth, and residential housing, a mainstay of the California economy for nearly a century, is unlikely to recover for the foreseeable future.

There’s an excellent post from John Robertson of the Atlanta Fed on employment, new businesses, and how they finance themselves. The long and the short of it is that new businesses provide a remarkable proportion of the new employment, maintaining a “pipeline” of them is vital to the economy, and they tend not to finance themselves using bank credit.

The rate of new business formation has declined notably over the last twenty years. I suspect that’s due to some combination of a change in generational attitudes, large established firms tightening their hold on the economy, the closing or at least narrowing of the business frontiers, and general discouragement with the economic climate.

The lower rate of new business formation can’t be attributed solely to low demand. It’s been going on for at least three decades. Dr, Robertson’s post suggests that the most recent policy approaches, which have largely been concentrated on demand and financial strategies, are unlikely to be effective.

Sometimes I just feel like I’m getting old. Other times (like today) I feel more like I’ve become the Sayer of the Law.

Not so much “Get off my lawn” as “Not to run on all fours—are we not Men?”

I see that Brad DeLong has come around to the point I made a couple of weeks ago, that we need to mitigate the risk to the United States of a European meltdown. Here’s his proposal for doing so:

The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip.

The Federal Reserve Needs to do so now.

The greatest merit in that, I think, is that it is something that can be done quickly. It is not without its defects. In particular, it will provide a bonanza for those who have gone long European debt.

I’m open to suggestions for measures that could protect the U. S. without unduly rewarding those who were betting on the rent-seeking. Ideas?

I don’t usually post on sports or sordid scandals here but the firing of football’s legendary coach Joe Paterno and Penn State’s president, Graham Spanier, over their poor handling of child-sex abuse allegations against assistant coach Jerry Sandusky has moved me to comment.

There are no heroes in this story. Only villains, victims, and bureaucrats. The Washington Post is quite right to draw attention to the victims of Mr. Sandusky’s abuse:

Of all the sins of omission committed by Penn State University in its alleged mishandling of sexual assaults, perhaps the most unforgivable was the failure to find the young boy who was seen being victimized in 2002. It seemed not to occur to anyone to try to identify this child or to consider that he might need treatment and protection. Apparently, shielding the university and its treasured football program came first, and so the boy’s alleged attacker was told simply to keep his activities off-campus.

Here’s their brief summary of the actions in question:

Most egregious was the 2002 incident in which a 28-year-old graduate assistant returning to the football facility was surprised to see the lights and shower on at 9:30 p.m. According to the grand jury, “he saw a naked boy…whose age he estimated to be ten years old, with his hands up against the wall, being subjected to anal intercourse by a naked Sandusky.” This would have been a good time to dial 911, but at no point were police or child welfare authorities notified. The graduate assistant told head football coach Joe Paterno, who told Mr. Curley, who brought in Mr. Schultz with the result that Mr. Sandusky was instructed — big deal — not to bring youth to the campus. Mr. Sandusky, his emeritus status at Penn State unchanged, continued his youth volunteer work, and in 2007, according to the grand jury, he victimized another boy.

This is clearly a pattern of behavior on the part of Mr. Sandusky:

A grand jury has indicted Mr. Sandusky on 40 counts, 21 of them felonies, involving the sexual abuse of eight boys, whom he met through his youth-services organization over a 15-year period starting in 1994.

What leapt out at me is how everyone at every step in this sordid episode failed to act with the courage not to mention outrage necessary, from the graduate assistant who witnessed the alleged violation to Mr. Paterno to the university administrators. Doing the minimum, doing the safe, following procedures and channels is not nearly enough.

Called 911? The grad assistant should have pulled the fire alarm. He should have yelled his head off. He should have intervened physically even at the risk of his own safety or career. Honor and justice required it.

But there were no heroes there, allowing the strong and powerful to continue to abuse the weak.

G. K. Chesterton once wrote that the purpose of fairy tales was not to frighten children into believing that dragons exist since every child knows that dragons exist but to convince them that there are heroes who will slay the dragons. We need heroes, not just in fairy tales but in real life and they are vanishingly hard to find.

My insurance clients are telling me that the persistent low/zero/negative interest rates are wreaking havoc on the insurance business. Expect rate increases.