Greek crisis: euro's too weak, dollar's too strong

“That was Greek to me.”  These words, written by Shakespeare in 1599, means something is too hard to understand.

Now, it applies to Greece itself.  What’s all the fuss about and does it matter to us?

The answer to the second question: your job could depend on how the Greek financial crisis is settled.  The answer to the first question reveals a high stakes story of the games countries play.

Greece financed both government and private sector expenses with a lot of borrowing to cover shortfalls in domestic taxes and company income.  In its most celebrated problem, the Greek  government turned a blind eye to tax evasion by the wealthy.

The country uses the euro as its currency.  The euro is the common currency of 19 member countries of the European Union.

But the euro does not work like the U.S. dollar, which is backed by the ability of the Congress to raise taxes to pay off federal debt.  The American currency is backed by the whole country. 

The euro’s strength depends on support from each participating country.  They pledge to keep their economies strong and avoid excessive debt, which in turns creates confidence in the common currency. 

Each country using the euro must report on the amount of public debt, but Greece intentionally filed false reports.  It borrowed much more than it should.

When it could not longer keep up with payments on its debt, Greece turned to other euro countries to be bailed out.  It asked for new loans from them to pay off older loans.

Here’s the key difference with the dollar.  In the U.S., the federal government raises its own funds and determines tax and money policies.  In the euro zone, each country acts independently.  Germany, as the richest country, must raise from its citizens a big chunk of what goes to Greece.

In return for new loans, Germany and others asked Greece to cut back on public spending, increase tax collection, trim pensions, and take other measures to reduce debt.  The International Monetary Fund also made loans to Greece with the same conditions.  The U.S. contributes 18 percent of IMF resources, so it has a stake in the crisis.

To obey the loan conditions, Greece cut spending back so far that it fell into a deep recession with high unemployment.  That made it even more difficult to repay its loans.  Now, it needs more bailout help to avoid defaulting on the first bailout loans.

The more it gets into debt and struggles to make payments through cutbacks harming its economy, the more Greece seems to be in a downward spiral.  As a result, it is really wants bailout funds that don’t have to be repaid.  Other countries and the IMF refuse and insist that Greece make tougher moves to put its house in order.

If this seemingly impossible situation cannot be resolved, Greece will default on its debt to European countries and the IMF.  Then, it would no longer use the euro as its currency – causing the so-called “grexit.”  It would return to its national currency, the drachma, worth little in international finance.

Because Greece is a relatively small country using the euro, the European currency would survive its departure.  But the world would have been put on clear notice that the euro is backed only by good intentions, not by mutual commitment.

The euro has taken on the characteristics of a true international currency, accepted in trade and 

finance as a so-called “reserve” currency.  The U.S. dollar has played that role for decades.  The grexit could cause a loss of confidence in the euro, making the dollar more valuable in world commerce. 

In fact, that has already begun to happen, and each euro equals fewer dollars.  The U.S. stock market seems befuddled by the twists of the Greek crisis story and swings with the latest news from Europe’s negotiations.

A “strong” dollar sounds better than it really is.  If the dollar becomes expensive in other currencies, meaning its takes more local currency to buy a dollar, American exports become more expensive in that currency. 

The U.S. wants and needs more jobs, and many will come from producing goods and services for export.  A stronger dollar not only will undermine efforts to create more export-related jobs, it can cost American jobs now dependent on sales abroad.

American industry and labor have a major stake in the Greek crisis and the euro’s revival.  For now, the U.S. waits on the sidelines as the crisis plays out.

Maine, U.S. sacrifice reputations amid political battles

Appearances matter.  But recently the images projected by the Maine and U.S. governments have contributed to a loss of the positive reputation Mainers and all Americans consider their birthright.

Maine has a reputation of being populated by hard-working people with their own sense of humor and a serious, if not dour, demeanor.  Mainers are often considered calm and solid with a strong sense of community.

The state’s politics have been conducted in a civil and respectful manner, even when there were sharp differences between the parties.

Take the election of Edmund Muskie as governor in 1954.  He was the first Democrat to be elected governor in decades, and he faced an overwhelmingly Republican Legislature.  Yet Maine government was able to produce results with minimal acrimony to the point that both Muskie and GOP legislators were sent back to Augusta after the next election.

These days, Gov. Paul LePage is not getting along nearly that well with the Democrats, who control the House, or with many Republicans, who control the Senate.

After winning only 39 percent of the vote in his first run for governor, he sought to prove his popularity.  His opposition, once again split, allowed him to boost his vote nearly to a majority.

His re-election proved his first victory was no fluke.  But LePage seems to believe that it meant Mainers were giving him a blank check to run state government, and legislators ought to fall in line.

He charged, “the Democrats are going to disenfranchise the Maine people,” meaning the other party would not roll over for him in light of his electoral victory.  He would retaliate he warned, by vetoing any bill “with a Democrat sponsor.”

LePage had made the bold proposal to abolish the state income tax, but this keystone of his legislative package ran into opposition from both Republicans and Democrats.  With three more years in his term, he might have chosen to negotiate on measures moving in his direction and pressed for more later. 

Instead of using the political process and the urge to compromise, LePage went to war.  Beyond making good on his veto threat, he heatedly labeled his opponents as “bums.”

If you are a LePage supporter, you might have hoped he would advance his program as far as he could instead of slamming the door on any possible cooperation, creating a crisis.

Under LePage, the slogan has been “Maine is open for business.”  Almost everybody recognizes the 

need for attracting new business and new jobs, but corporate chiefs look for consistent and rational government before they invest.

A state government in turmoil cannot present that desired appearance.  In waging his political battles, LePage apparently ignores their effect on business development and acts with indifference, as he did when he chased Statoil, one of the world’s largest companies, out of the state.

The political conflict that has come to Maine already exists in Washington.  In an interview earlier this year, former U.S. Sen. Bill Cohen, a Maine Republican, said that the “dysfunctional system” there had become “an embarrassment to me as I travel around the world.”

The world’s greatest power, supposedly a model of open, democratic government is almost paralyzed by its inability to find compromises that gain enough support to produce results.  That comes across as an abandonment of a leadership role that many want it to play.

“Compromise is a word you can’t use any longer,” Cohen said.  Without the willingness on either the extreme right or the extreme left to make concessions, there can be no compromise.  And without compromise in a country this size, decisions become impossible.

In the same interview, former Sen. George Mitchell, a Democrat, found we want competition between the parties, but we also want them to reach compromises.  The difficulty, he said, is in striking a balance.  But you cannot do that if you don’t try.  Or, as in LePage’s case, if the prime dealmaker prefers conflict.

Congress did manage to find a compromise on the USA Freedom Act, which allowed continued N.S.A. searches through telephone data, but added a requirement for court supervision.  An overwhelming majority was achieved in both the House and Senate after members of both parties, concerned about personal rights, moved away from insistence on secret, broad-scale government surveillance.

Both Maine House members, one Democrat and one Republican, and independent Sen. King voted for the compromise.  But GOP Sen. Collins stuck with her party and strongly opposed added protection from government data sweeps.  Though an advocate of compromise, she missed her big chance.

Why the GOP scrambles, Clinton seen as inevitable

It is definitely too early to be paying much attention to the 2016 presidential campaign, with the election 17 months away. 

But Washington seems blocked by partisan deadlock with the conflict between a Democratic president and Republican Congress as the focal point.  So we naturally focus on the future.

Without handicapping the candidates, it may be worth putting the campaign in perspective.  Here are some questions and possible answers.

Why are there so many Republicans in the race?  

There are now more GOP presidential candidates than anybody can remember there ever being in either party.

Perhaps they believe the conservative wave will crest in 2016, making it the best time to be a conservative candidate.  Each candidate wants to seize the opportunity.

With so many candidates, it may not take much support in an early primary to gain traction.  The candidate, who wins with only 10 percent in New Hampshire, could overnight be transformed into a strong frontrunner.  In theory at least, a Republican moderate could hope for this result.

Possibly, some candidates want simply to increase their standing to enhance their chances for a cabinet appointment by the eventual winner.  Or to gain visibility when seeking a lobbyist or television job.  And a strong finisher with an identifiable constituency could even hope to get on the ticket as the vice presidential nominee.

Finally, some of the senators obviously have little interest in their current office and have always viewed it as the route to a quick shot at the presidency.  For them, it’s a matter of now or never.

As for holding early debates, they are unworkable.  It would be better to allow each GOP candidate five minutes to answer the same question than to stage a “debate.”

Why is Hillary Clinton seen as the inevitable Democratic nominee?

All the obvious reasons apply: high name recognition, experience as senator and secretary of state, good funding, extensive political network from her 2008 run, a woman.

But here are some problems: yet another Clinton, not honest about contributions to the Clinton foundation, keeping official emails and probably deleting some, no common touch.

Voters have already given her a negative rating.  But she remains the frontrunner, thanks to her air of inevitability, her attractiveness as a female candidate, and some buyer’s remorse about her not having been picked as the 2008 nominee.   

Is Hillary Clinton in fact inevitable?

No, there’s plenty of time for her to make a mistake that could fatally damage her campaign.  She may seek to avoid damage by saying as little as possible, like Richard Nixon for whom that strategy worked when he was a frontrunner. 

And it is too soon to know if the appeal of Sen. Bernie Sanders or former Gov. Martin O’Malley will ignite support.  She has something to lose; they don’t.  Sanders can promote his agenda; O’Malley may really want to be the vice presidential nominee.  Maybe Secretary of State John Kerry will be a late choice.

Why isn’t Jeb Bush the frontrunner for the GOP nomination?

In 2000, his brother got to be frontrunner by amassing so large a war chest early that he simply scared everybody else away.  Jeb is helping fund a huge political action committee before he formally announces and then will have to keep it at arm’s length.  Though of dubious legality, that may work, but unlike brother George, he has allowed the rest of the pack to get a good head start.

Where does the GOP presidential campaign lead?

The Republican candidate must find a way to be nominated by conservatives, who largely control the selection process, and appeal in the general election to both conservatives and voters who are more moderate than much of the GOP.

In the Republican field, there is a great deal of agreement on limiting the role of government, reducing regulation of the private sector, cutting entitlements, and on social issues like abortion and same-sex marriage.  In short, the candidates mostly share views on what they are against.

The successful candidate, while conservative enough to appeal to conservatives, must find a way to having a broader appeal.  Experience in government could prove to be essential.

In the field, though barely registering at this point, a candidate possibly filling this bill is Ohio Gov. John Kasich, the two-term GOP governor of a key swing state.  He also served nine terms in the U.S. House. 

In 2016, the Republican National Convention will be in Cleveland, which could produce the rare scene of a host state’s governor being the party’s nominee.

Income gap, tax policy closely linked

People are becoming increasingly aware of the income gap – the growing spread between incomes at the top and the bottom.

Proposed solutions range from levying a higher income tax on the wealthy to raising the minimum wage to doing nothing in the belief the market take care of the problem.

The gap would be even wider without the effect of the tax system, according to a new study by Federal Reserve economists.  It focuses on the federal and state income tax and levies on consumer purchases.

Income taxes are usually designed to impose higher rates on upper income people, those with the ability to  contribute to government revenues, and lower rates on people with modest incomes, whose ability to contribute is limited.

The study finds that federal taxes cushion the impact of the growing income gap while state taxes on average make the gap even greater.  But the performance varies from one state to another.

Without a sales tax, much of the effect of federal taxes on households comes from work-related taxes.  Lower income people may pay little or no income tax, though they are likely to pay payroll and gasoline taxes.  The Earned Income Tax Credit, which can be paid to lower wage workers, also cuts the gap.

At the state level, both income and sales taxes affect the gap, as does the gasoline tax.  Some states, including Maine, have their own EITC.

State tax systems provide greatly varying results.  At one end is Minnesota, which increases by more than 18 percent the federal tax effect in compressing the income gap, and at the other is Tennessee, which counteracts the federal gap-narrowing effect by 33 percent.

Maine adds 3.5 percent to the federal gap reduction effect.  One positive aspect of the Maine system, 

according to the study, is that food is not subject to the sales tax.  Exempting clothing would also reduce the gap as it does in some states.

Perhaps the most significant tax falling more heavily on lower income people than the wealthy is the gasoline tax.  Like food, gasoline can be a necessity of life.

Interestingly, the increase in upper end incomes has some influence on reducing the gap.  As more people move into the top federal tax bracket thanks to their gains, they pay a higher percentage of their income in taxes.

The tax system could have an even more significant effect on reducing the income gap.  At the federal level, the income tax on the wealthiest could be increased.  French economist Thomas Piketty, one of the most well-known experts on the gap, advocates a drastic levy at the top. 

Investor Warren Buffett, one of the wealthiest people in the world, favors increasing the EITC, which would bring up the bottom and, because it is paid to workers, would encourage people to seek employment.  He opposes merely increasing the minimum wage, which he says would cut employment.

Some current proposals to modify the income tax would have the effect of increasing the gap   between lower income people and those at the top.  Abolishing the income tax, as proposed by Maine Gov. Paul LePage, would clearly increase the income gap.  State taxes do that in all nine states that have no general income tax. 

While eliminating the income tax may have little effect on those at the bottom end of the income scale, who pay little even now, it would allow incomes of those at the top to increase.

Even the seemingly more modest proposal to impose a so-called “flat” tax, under which the same rate applies to all, would have a similar effect.

Are there possible changes to federal and state taxation, even without increasing the rates, that could have a more impact on reducing the income gap?

At the federal level, a tough reform of loopholes, so-called tax expenditures, could have a major effect.  The more they are eliminated, the more the wealthy pay, but it might even be possible to lower everybody’s income tax rates.  

That’s less drastic than Piketty’s proposal, but would have a somewhat similar effect.  But reform discussions now seem to focus more on rates than on the loopholes protected by well-funded lobbyists.

Right now, none of the states without an income tax offers workers an EITC.  Without imposing a new income tax, they could cut the gap by adding such help for lower income workers.

Sales tax exemptions for non-essential items could be eliminated in many states.  And states tagging onto the federal system could close some of its loopholes.  Both could be done in Maine.