When is a constitution actually a phonebook?

The rotating 6-month EU presidency will be going to Germany with the start of the New Year. One of the stated goals of the German government (and specifically the German Chancellor Angela Merkel) is to revive the European Union constitution. This follows a contentious and failed effort to get European voters to approve the constitution two years ago. The draft text aims to consolidate and streamline the operations of governing a club of 27 sovereign states. Germany wants to save as much of the original text as possibly. Yet this same text failed when both Dutch and French voters rejected the treaty in May and June 2005. If anything, the mood of skepticism among Europeans has deepened since then. Something has to be done, but a re-run of 2004-5 is not a good idea.

To appreciate the importance of the issues at stake, it helps to look at history. The entire European Project grew out of the violence of European history, especially the first half of the 20th Century. That period saw the current stable of EU Members deeply enmeshed, yet again, in what amounted to a protracted European civil war. This was not the first century of Europe-wide war, of course, but it was the first to truly harness the wonders of modern industrial technology as part of the game. In living memory, entire European cities were firebombed and turned to rubble, whole European ethnic groups were forced into slave labor or death camps built on Henry Ford's assembly line innovations, European colonial empires were completely squandered, and European civilian populations were deliberately targeted by all sides. Europe's scientific infrastructure was all but destroyed, with a generation of Continental intellectuals (and entrepeneurs) either voluntarily fleeing to America or forced to serve behind the Iron Curtain. (All of these practices, realized with more primitive technologies, have of course been part of European warfare throughout its history. Instead of fascism vs. communism vs. socialism vs. republicanism, in earlier centuries much of this instead involved battle between competing Christian fundamentalist camps.) The modest goal of the European Community (now the EU) has been to finally stop this destructive competition between and within nation states by deepening political and economic ties across the continent. Current political debate is over the inanities of EU economic policies, and the labor market impact of enlargement. But this is really a sideshow. One could argue that such debates are actually an intended outcome of the European Project. It is far better that German, French, British, and Polish politicians and pundits argue vociferously, violently even, over the central bank, agricultural policy, and migration while squandering billions of euros on farm subsidies and regional support payments, than it is having them rattling sabers and squandering billions on tanks and warships instead. Indeed, for this reason, it really is important that Europe does sort out its voting rules, streamline its decision making process, and give its citizens a sense of ownership in the Project.

If the European Project is so important, why is it so unpopular? To start, one should lay the proposed EU constitution next to the U.S. Constitution with its Amendments. The U.S. Constitution, in modern typeset, is about 20 (double-spaced, big print) pages long, with another 15 pages of Amendments. The proposed EU constitution is 485 (single spaced, small print) pages long. In other words, it is the size of the phonebook for a typical mid-sized city (and over 25 times longer then the U.S. counterpart). You can read through the U.S. Constitution with your morning coffee and croissant, and have an intelligent conversation about it afterwards. You cannot do this with the EU constitution. The U.S. Constitution is shorter because it focuses, primarily, on how government will be structured, and on how member states can amend that structure in the future within the framework of the Constitution itself. The structures of government are considered sufficient to then establish law within the framework it defines. In contrast, the EU constitution is full of charters, protocols, exemptions, and existing elements of EU law. It is so long it requires a table of contents. An EU constitution that simply spelled out the rules for finance and decision making, with an article that "all existing elements of EU law as defined by its Members under treaty are subsumed into the body of this constitution unless modified here or by the governing structures defined herein" and a defined procedure for amendments could also have been about 20 pages long. Daily papers could have then run versions as a Sunday supplement, and Europeans could have read it over breakfast and carried on an intelligent conversation about it afterwards. In such a fantasy world, they probably would have even voted for it. If you were to give Americans their actual Constitution, combined with the volumes of (often crazy and special-interest driven) text that make up the body of U.S. Federal law, and asked them to vote for it as a single document, they would have rejected it as well. If the goal is to give European citizens a choice in defining their basic framework for collective self-government, then the task is to define a compact document that defines how rules are made, and not what all the rules actually are or might be.

More striking to me than the relative complexity of the documents (and the relative number of forests that must be felled to print each of them) is the text of the preambles. To appreciate the marketing challenge faced by the European constitution, simply compare the preambles. The U.S. Constitution starts out

"We the People of the United States..."

The proposed EU constitution starts out

"His Majesty The King Of The Belgians, The President Of The Czech Republic, Her Majesty The Queen Of Denmark, The President Of The Federal Republic Of Germany, The President Of The Republic Of Estonia, The President Of The Hellenic Republic, His Majesty The King Of Spain, The President Of The French Republic, The President Of Ireland, The President Of The Italian Republic, The President Of The Republic Of Cyprus, The President Of The Republic Of Latvia, The President Of The Republic Of Lithuania, His Royal Highness The Grand Duke Of Luxembourg, The President Of The Republic Of Hungary, The President Of Malta, Her Majesty The Queen Of The Netherlands, The Federal President Of The Republic Of Austria, The President Of The Republic Of Poland, The President Of The Portuguese Republic, The President Of The Republic Of Slovenia, The President Of The Slovak Republic, The President Of The Republic Of Finland, The Government Of The Kingdom Of Sweden, Her Majesty The Queen Of The United Kingdom Of Great Britain And Northern Ireland..."

These opening lines say an awful lot. In modern terms, the European document has a packaging problem. In the first case, the constitution is presented to us an expression of self-government by the citizens involved. In the other, the constitution is presented as a document of compromise among the monarchs and presidents involved, imposed from above by central authority. No wonder Europeans feel detached from the European Project. Europeans are not told that they have in effect built the draft constitution. They are told that monarchs and presidents did. The goals in the (rather long) preamble may be noble, but they are presented as the goals of the rulers, not the ruled. The tone of the proposed constitution preserves a distance to be kept between Europeans and Brussels. One almost gets the feeling average citizens cannot be trusted to organize themselves and make collective decisions themselves. They must instead go through layers of the Member States' power structures to reach Brussels.

At this point, most card carrying anti-American European readers will be fuming. The situations are different, they will say. A solution grown from European ideas is needed, they will say. The American constitutional experience is irrelevant, they will say. This is a shame. Ironically, the U.S. constitutional experiment has, in many ways, simply been an earlier run of the current European conundrum. An expanding set (initially of 13 sovereign member states) struggled to define common commercial and foreign policy under a set of rules (the Articles of Confederation) that worked even worse than the current governmental structure of the European Union. Its replacement, the current Constitution, is clearly a document born out of the ideas of Europe's Age of Enlightenment. It embodies an interpretation of Montesquieu's writings on the separation of powers (a concept that itself goes back to Aristotle), while also reflecting the writings of Harrington, Locke, and others from this era. It even draws on the experience of the pre-imperial Roman Republic (and Polybius' spin on mixed government). While the U.S. constitution pioneered the definition of a modern federal system of government, a number of EU Member States and associates (Germany, Austria, Belgium, Switzerland) have followed suit. In defining its Enlightenment-based constitutional system, the U.S. has struggled through its own Civil War, its own efforts to establish a central bank and common currency, the problem of balancing large and small state interests in the legislature (the Connecticut compromise), and subsidiarity (aka state's rights as embodied in the 10th Amendment).

Europe needs to sort out its management structure, and needs to give its citizens a sense of collective ownership. The European Project is important. Constitutions around the globe have been inspired by European thought. It would pay for Europeans to draw on their own intellectual history -- and its application around the globe -- in defining an elegant, streamlined (and more tree-friendly) solution that its citizens can read, understand and debate, and ultimately adopt as their own. A phone book is not the solution.

© JFF & Intereconomics, LLC 2006

Deficits and ... more deficits

The economics editorial debate in the U.S. has been focused lately on the Federal budget deficit. The U.S. now owes roughly $8.6 trillion in public debt. This continues to grow. In 2005, the Federal budget deficit was $319 billion. This dropped to $248 billion for the fiscal year ending September 2006. The projected deficit for 2007 is $423 billion. This is the apart from the additional accumulation of debt by state and local governments. (According to the Federal Reserve, state and local debt amounted to another $1.85 trillion in 2005). And of course, households also continue to accumulate debt. Much of this debt accumulation is funded by foreigners. Indeed, the exposure of foreign investors to U.S. debt and equity markets is now so large that they simply have to be getting nervous. A recent IMF working paper ('How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?' Francis E. Warnock; IMF Working Paper 06/170, July 1, 2006) examines just what this exposure means. By his estimates, a 10% decline in equity and bond markets, combined with a 10% drop in the dollar, would translate into a loss in foreign wealth equal to roughly 5% of foreign GDP. In the case of Canada, this is almost 6.25 percent of GDP. In contrast, in 1994 this would have been 2 percent. While attention in the U.S. has been focused on the budget deficit, tied to this debate is the ability of the U.S. to continue to finance its spending with foreign funds. Indeed, while the U.S. is borrowing more and more from abroad as a share of GDP, the prospects are not good. The bill for the retiring baby boomers has not yet come due. When social security payments and Medicaid and Medicare explode, things will get very interesting fiscally. Social security may be realtively well financed over the long term. Combined with the costs of Medicaid, Medicare, and the occasional optional war, however, the accounts are not so neat and tidy.

In retrospect, one gets the feeling that in the Clinton years, a (relatively) good faith effort was made by the baby boom generation to put the fiscal house in order for their looming retirement oblgations. This has all been squandered, of course, and there is no going back. Surprisingly, it looks like a number of editorial writers who have attacked Bush in the past for fiscal irresponsibility are now, for various reasons, instead rationalizing a shift in expenditures rather than restoring fiscal order. Paul Krugman ("Democrats and the Deficit," December 22 2006), for example, apparently does not now believe that the electorate is willing or able to support a fiscally responsible government. 'Rubinomics made sense in terms of pure economics, [but] it failed to take account of the ugly realities of contemporary American politics...'. If we are going to have deficits anyway, the logic runs, lets at least spend the money right.

The elephant in the room is the foreign lender. All of this hinges on the assumption that the Japanese will continue to print yen, the Chinese will continue to build up mountains of dollars, and the Europeans will continue to pour their pension savings into the U.S. debt and equities market. Can we really assume this will continue? If not, the budget pundits and apparatchiks are all in for a rude shock. We are in uncharted territory. According to the IMF, the U.S. current account deficit in 2006 was 6.6 percent of GDP. They project that this will be 6.9 percent of GDP in 2007. At this rate, foreign debt is accumulating faster than the underlying growth rate of the U.S. economy. By the standards of the last 100 years, these trends are simply unprecedented. Most likely, they are also unsustainable. They have implications for the dollar, U.S. asset prices, and "long-term" adjustments to the U.S. Fiscal balance that may not be so far away after all, if and when foreign investors change their collective mind. (See the CRS report 'Is the U.S. Current Account Deficit Sustainable?' for an overview of studies on how this might all play out.)

At the same time, with Krugman changing his tune, there has been a bit of bashing going on. Some examples can be found at the Marginal Revolution site. One post asserts that "Democrats resent me getting money that rightfully belongs to them..." Maybe Krugman is right that, in the current climate, serious discussion about fiscal responsibilty is not possible. To be honest, I resent everybody spending money that belongs to my kids (and grandkids for that matter...) Tax refunds in the face of continued borrowing does not mean no one will be paying the bill. I once tried to explain to my (then 12 year old) daughter how every American owes $28 thousand in public debt. She was not pleased.

© JFF & Intereconomics, LLC 2006

Illegal models

I have been been banned by the US Congress! Well, not quite, but one can always hope. I am coauthor of what I believe is the only economic model that has been banned in proposed legislation -- COMPAS. Many professional incarnations ago, I coauthored a set of rather simple calibrated trade models meant to help in the assessment of economic factors relevant in fair trade litigation and safeguard cases. The goal, naively, was to make the process more transparent vis-à-vis the winners and losers. Economic guidelines and indicators have been used for decades in antitrust litigation, and our intention was to introduce the same dose of scientific reason to trade litigation. Of course, this was before the surge in research on politics of trade policy, and before I had read Michael Finger's delightful JPE piece "Policy Research." Since trade litigation has less to do with scientific rationality and national interest than it does with lobbying by competing special interests (including efforts to obfuscate the impact on losers), the effort was not appreciated. Recently, it keeps surfacing in legislation. One example of the draft legislation is linked here (the proposed law) -- see pages 71 & 72. The current tone of proposed legislation is not really targeted at our simple models. Rather is it prohibit the Executive Branch from using economic analysis when formualting economic policy. Does this make sense? Of course it does. Just read Finger's article.

© JFF & Intereconomics, LLC 2006

Beginnings

I have been using my webpage to communicate with students, distribute datasets, and post course materials and such for years. While I manage to keep some parts up to date, my page only gets a real update every 6 months or so. I have promised myself I would to this more often, but things never work out as planned. Experiments with early webboards went badly, as I spent way too much time cleaning up advertisements and such posted by forces unknown. So, maybe this will work better, and will create the illusion that I am keeping up to date. My goal here is a periodic (bi-weekly?) post (musings on the global economy and such) with additional links and posts for my students and fellow travellers. As such, topics are likely to track what is going on in the classroom discussions.