Of Bureaucrats, Politicians, and Statesmen

How to Right-Size the American Dream

by

©Alexandre Muns Rubiol

©Editorial Aresta

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About the Author

Alexandre Muns Rubiol is a Professor at EAE Business School in Barcelona, writer, consultant, editor, and regular contributor to media. He has served as Speechwriter and Assistant to three presidents of multilateral development banks: to the President of the European Bank for Reconstruction and Development in London (1998-99), and to the President of the World Bank Group and the President of the Inter-American Development Bank in Washington, D.C. (2009-2011).

Alexandre has also served as Head of the CIDOB Foundation's (Spain’s second think-tank) Europe Program, Director of Studies of the American Chamber of Commerce in Spain and Director of International Relations at Barcelona-Catalonia Logistics Center.

Alexandre has been a Lecturer at several Spanish universities since 1997. He has taught courses on European Integration, International Economic Institutions, International Economics, European Economics and Culture & Business in Europe at the undergraduate and graduate level at Pompeu Fabra University (1997-98, 1999-2009, 2011-2013), International University of Catalonia (2008-2009), Rovira i Virgili University (2004), and ESADE Business School (2008-2009).

Alexandre has authored books on the break-up of the USSR (in Spanish, De la perestroika a la CEI), the post 9-11 world order and U.S. Foreign Policy (in Spanish, ¿USA, Quo Vadis?), German reunification (The End of the Cold War: German Reunification), and the global economic crisis (in Spanish Conversaciones con Marx: Diálogos en torno a un liberalismo ético and Ethical Capitalism: What it can do for you). He has also published more than 250 articles in the main Spanish newspapers and newsmagazines on international and national economic, political and security topics, as well as several academic articles. He is a frequent analyst on European, U.S. and transatlantic affairs on Spanish radio and TV.

He has been a consultant for the Spanish bank Bankpyme, to the Catalan government (in 2000-01 and 2012), and indirectly for the Spanish government in a development project in Equatorial Guinea and another related to Spain’s presidency of the European Union in the first half of 2010. Alexandre holds a Bachelor’s degree in Geography and History and a PhD in Contemporary History from the University of Barcelona. His doctoral thesis described and analyzed the international negotiations that enabled German reunification in 1989-90.

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Contents

Acknowledgements 4 Introduction by Dr. Lothar de Maizière 6 Foreword by Prof. Horst Teltschik 7

Chapter 1. Recommendations for navigating bureaucracies 11

1a. Examples of successful complaints against bureaucracies 17

1b. Which country has the most efficient bureaucrats? 19

1c. Flawless system for quickly clearing security legally at airports 21

1d. The “Idiocrat Award” 23

Chapter 2: Introducing the post-BRICS TIDE challenges 24

Chapter 3. The terrible legacy of Zapaterismo 27

Chapter 4. John Maynard Keynes to the rescue? 32

Chapter 5. Working the Barcelona-Madrid axis 37

Chapter 6. Merkel and the European Central Bank 44

Chapter 7. Chloe, SSS and matters of the heart 54

Chapter 8. Germany, austerity and the inevitable burn-out 64

Chapter 9. Euromediterranean cooperation and Nuba 80

Chapter 10. Back to Poland 89

Chapter 11. The U.S. government shutdown of 2013 110

Chapter 12. Final Thoughts on how to Right-Size the American Dream 130

Chapter 13. A Conversation with Dr. Juan José Daboub about Latin America’s reforms 131

Chapter 14. How today’s VIPs would tackle the post-BRICS TIDE challenges 134

Howard Bloom. Author, scientific thinker and publicist 140 Aaron Brickman. Deputy Director, Select USA, U.S. Department of Commerce 141 Daniel Griswold. President of the National (U.S.) Association of Foreign-Trade Zones 143 Orhan Güvenen. Professor of Econometrics and Strategic Decision Systems, University of Bilkent 145 Gary Litman. Vice President for Initiatives, U.S. Chamber of Commerce 150 Michael Maibach. Senior Fellow, Aspen Institute 152 Mark Notturno. Interactivity Foundation 156 Sven C. Oehme. President and CEO, European-American Business Organization 160 Alfred Pastor. Professor, IESE Business School. Former Deputy Economics Minister of Spain 163 Víctor Pou. Professor, IESE Business School. Former Counselor for Foreign Affairs, European Commission 164 George Ward. U.S. Ambassador (ret). Former Vice President of World Vision 167 Xu Xiaonian. Professor of Economics and Finance, China Europe International Business School (CEIBS) 170 Bibliography 171

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Acknowledgements

I owe a great debt of gratitude to Àngels Viladot and Lluís Montagut. They have been trailblazers as the creators of Aresta in publishing books by leading European and American scholars on a wide range of topics whose common denominator is their effect on our evolving society. Whether they deal with psychology, women’s rights or health sciences, Aresta’s authors endeavor to provide readers with fact-based analysis that enables them to better comprehend the dizzying speed with which our society is changing. Aresta’s books are read by academic and non-experts alike, as they stay away from excessive technical detail and instead explain complicated phenomena in a plain language that the reader can enjoy. When I began to question my unwavering support for unfettered free markets as a result of the beginning of another -- this time global -- crisis in 2007, I reached out to Lluís, Àngels and their son Bernat with the idea of a brief chronology of the XXth century and a deeper description and analysis of the 2007-2010 crisis conducted through a conversation with a resurrected Karl Marx. Given capitalism’s crisis as venerable banks went bankrupt in 2007-2008, I submitted the idea in a brief conversation to Timothy Garton Ash, one of the world’s foremost historians and political scientists. He liked it. I used Karl Marx as a sparring partner. Despite Communism’s utter failure, the resurrected Marx failed again to understand that restricting freedoms can never be accepted in the pursuit to empower the weaker and poorer and to reduce inequality. While Marx teamed up with Hugo Chávez and Vladimir Putin, I presented my proposals on how to improve and reform capitalism by making it more ethical, social and environmentally sustainable. Àngels, Lluís, Bernat and I worked feverishly in the middle of 2010 and managed to publish “Conversations with Marx: Dialogues about a more ethical capitalism” without having a single meeting. Aresta subsequently published my “Ethical Capitalism: What it can do for you”, an updated (to March 2011) English version of Conversations with Marx. Aresta again accepted my proposal to describe and analyze the recovery (2011 to the present), on this occasion through a conversation with John Maynard Keynes. As almost all governments and international institutions have embraced Keynesian policies to some degree, I had the thankless task of questioning Keynes’ refusal to entertain the notion that stimulus must be coupled with austerity in the wake of the mountains of debt incurred by governments, businesses and families. I have deep gratitude for Prof. Horst Teltschik, one of the most decisive officials who negotiated German reunification, for authoring the foreword to this book, as well as to Lothar de Maizière, East Germany’s only democratically-elected Prime Minister in history, for drafting an introduction. I also thank all of the VIPs who have taken time to provide input for the book Dr. Kimio Kase, Vice President and Dean at the International University of Japan for endorsing its contents. The book would not have been completed without my mother’s support. Julius Gwyer has behaved like a brother to me since my return to Washington, D.C., in October of 2013. Despite his heavy workload at the World Bank, Julius always finds time to include me in his activities and has introduced me to countless persons. His professional and personal commitment to the cause of promoting development and ending poverty is remarkable. I would be remiss in not thanking the people who work for or live in the Brookside Community in Oxon Hill, Maryland, where I have been living since November of 2013. And Bee and Mark Rossof from Best Buy’s Potomac Yard store saved me from a heart attack when they transferred all of my data from my one-year-old Toshiba laptop’s hard drive to a new Toshiba I had to buy. The NFL’s games have provided a needed distraction in the past year. Watching Payton Manning set the all-time record for touchdown passes in a career on October 19, 2014, was a poignant moment. Washington D.C’s Q107 radio station plays the music that keeps me going. 4

Don MacShane has played a key role in pushing me to work harder and not give up. The Bonangelino family has stood by me in trying times. I appreciate Katia and her family’s hospitality in the summer of 2013 allowing me to get away from the daily grind of work and enjoy a placid and inspiring few weeks in Poland. In the many hours I have spent by myself in the condominium at the Brookside Community in the past few months, CNN has continued to be the closest thing to a roommate. Its fearless and idealistic correspondents (Nic Robertson, Karl Penhaul, Diana Magnay, Arwa Damon) risk their lives to bring us live reporting from conflict- and disease-ridden countries. I am sometimes tempted to switch to MSNBC or Fox to get an alternative point of view. But I quickly realize that the former has a left-wing bias, whereas the latter mostly represents an angry right-wing ideology. So I quickly return to CNN, comfortably reassured that its anchors -- Brooke Baldwin, Wolf Blitzer, Erin Burnett, Anderson Cooper, Don Lemon, Richard Quest, Jake Tapper -- are not only outstanding journalists who ask tough questions and ensure fairness in the coverage of any story, but also individuals who passionately search for the truth, influence events and highlight the plight of the weakest and those who cannot speak out for themselves. It may seem odd that I have devoted an entire paragraph lavishing praise on CNN (both the U.S. and International versions), but in the past months I am sure I have spent more hours with CNN turned on (while I work, write and do other things in my apartment) than with any individual. In this “Flat World” I cannot imagine a world without Wikipedia and CNN, and we must all ensure their independence will never be compromised. Other news networks and sources whose reporting I consistently follow are Reuters, NBC News (especially “Meet the Press”), ABC News, CBS News, The New York Times, The Financial Times and the Washington Post. And I would not have acquired the knowledge to write this book were it not for years of reading The Economist. Alexandre Muns Rubiol Oxon Hill, Maryland. October 2014

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Introduction by Lothar de Maizière

Born in Thuringia in 1940, Lothar de Maizière earned his law degree from Berlin’s Humboldt University after playing in the Berlin Philharmonic Orchestra. A longtime member of East Germany’s Christian Democratic Union (CDU) party, after the fall of the Berlin Wall he led efforts to oust its Communist leadership. In December of 1989, he was elected Chairman of East Germany’s CDU. In the first (and last) democratic elections held in East Germany, de Maizière led the CDU to a resounding victory and became Prime Minister of a coalition government in April of 1990. He thus became the first (and only) democratically elected Prime Minister in East Germany’s history. He headed East Germany’s delegation in the 2+4 international negotiations that established the conditions under which West and East Germany would be allowed to reunify, and ended the four wartime Allied powers’ rights over Germany. De Maizière advocated a speedy reunification, which officially happened on October 3, 1990. After reunification, he served as Minister for Special Affairs for Germany in Helmut Kohl’s cabinet before returning to his law practice. A fluent Russian speaker, de Maizière heads since 2005 the German committee of the Petersburger Dialogue, a bilateral initiative that promotes engagement between the civil societies of Germany and Russia.

We live in a complex and constantly-evolving world. The downfall of Communism did not result in Professor Francis Fukuyama’s predicted “End of History”, whereby all countries adopted democracy and free markets. On the contrary, we face more challenges than ever. In the XXIst century we are witnessing a resurgence of nationalism, religious extremism, terrorism, old-fashioned wars over territory, an intensification of conflicts related to control and supply of energy, failed states and climate change.

Although the post-World War II order created many useful international institutions, they are struggling to cope with so many crises and their impact on the most vulnerable and poor. The global economic and financial crisis we are emerging from after six difficult years has complicated international relations even further. Ordinary people look to their elected (or non-elected) leaders for simple and immediate solutions. Some politicians behave like statesmen; they make decisions thinking about the next generations, not the next elections. To overcome these challenges, we need not just statesmen, but also greater international cooperation, global economic governance structures, and deeper regional economic integration in Europe and other continents.

“Of Bureaucrats, Politicians and Statesmen: How to Right-Size the American Dream” provides information, analysis and context about the crisis. It also presents different approaches to dealing with the crisis through a fictional conversation with a resurrected John Maynard Keynes. But it does not pretend to know which is the course of action that politicians should take. Other books want to convince readers that adopting certain measures would accelerate the recovery, job creation and prosperity. John Maynard Keynes espouses policies that increase government spending. Alexandre Muns suggests others, but leaves it up to the reader to evaluate the situation and decide what is best. After all, even if politicians behave like statesmen, they will not achieve their objectives without citizens’ active participation in policy debates and the political process.

Dr. Lothar de Maizière Berlin, July 2014

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Foreword by Professor Horst Teltschik

Born in 1940, Horst Teltschik studied Political Science, History and International Law at Berlin’s Free University from 1962 to 1967. In 1972, the then President of the German Land of Rhenania-Palatinate, Helmut Kohl, chose Teltschik as his chief of staff. He was promoted to head the office of the president of the CDU/CSU parliamentary group in Rhenania- Palatinate’s Parliament in 1977. When Helmut Kohl became Chancellor of Germany in 1982, he appointed Teltschik to the position of deputy director of the chancellory. For eight years, Teltschik was one of Chancellor Kohl’s closest advisers, effectively serving as his national-security adviser. In 1989-90, he played a key role in successfully and swiftly negotiating the conditions for Germany’s reunification with the four wartime allies that still held rights over Germany (U.S., U.S.S.R., United Kingdom and France). His discreet diplomacy enabled him to win the trust of both the George H.W. Bush administration as well as that of Mikhail Gorbachov and his top aides. Other than Helmut Kohl himself, Teltschik was probably the German politician that exerted the most influence and displayed more skill during the 2+4 negotiations that secured German reunification.

Teltschik turned to the business world and served from 1993 until 2000 as a member of the board of BMW. From 1993 until 2003 he was president of the Herbert Quandt Foundation, and from 2002 to 2010 held a senior position on the board of Roche. He combined these activities with teaching at the Technical University of Munich, where he became a professor in 2003.

Teltschik headed the renowned Munich Security Conferece from 1999 until 2008, and also served as President of Boeing for Germany. Teltschik is a member of the International Advisory Board of the Council on Foreign Relations, and holds similar positions at the Atlantic Initiative in Berlin and the Eugen Biser Foundation.

The global financial and economic crisis began in many developed economies in 2007. The collapse or nationalization of several well-known financial institutions in the United States, the United Kingdom, Ireland, and other western European countries in the second half of 2008 turned the slowdown into a full-blown systemic crisis which threatened the foundations of the international economic and financial system. Governments had to nationalize leading multinational banking groups or force them to merge with healthier rivals to avert runs on banks, which nonetheless did occur in some cases.

In the fall and winter of 2008, many feared a global financial and economic meltdown similar to the Great Depression of the 1930s. Fortunately, it did not take place. Central banks, government policymakers and international institutions knew the mistakes committed by their peers after the stock-market crash of 1929, and mostly acted swiftly and effectively. As opposed to what happened in 1929, central banks quickly reduced interest rates sharply, thereby preventing the credit markets from completely seizing up after the bankruptcy of Lehman Brothers in September of 2008. Governments also adopted stimulus programs to foster demand. Most importantly, they avoided the devastating beggar-thy-neighbor policies of the 1930s, when governments put up protectionist walls, hoarded gold and reserves, subsidized exports, blocked imports with steep tariffs and quotas and engaged in competitive devaluations of their currencies in a futile attempt to isolate themselves from the crisis.

We avoided a Great Depression. But the deep recession that began in 2007-08 nonetheless has been the worst crisis developed countries have faced since the two oil shocks of the 1970s and, in the view of others, since World War II. In 2014, most developed countries have emerged from recession and the recovery is strengthening despite bumps on the road. But this seven-year crisis has taken a terrible toll on the middle and lower classes of many developed countries. Many have lost a substantial part of their savings, their homes, jobs, and, in the worst-affected countries of southern Europe, have sunk into poverty.

The crisis was caused by many factors, which also varied from country to country. In the United Kingdom, Ireland, Iceland, Spain and several parts of the United States, gigantic real-estate and housing bubbles accumulated for several years – and then burst dramatically beginning in 2007-08. Without the housing bubbles, the aforementioned countries might have experienced a much milder recession, similar in magnitude to those of the early 1980s or early 1990s, which inevitably happen after long periods of growth. Banks, real-

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estate agencies and individuals convinced themselves that investing in housing was completely safe and immune to volatility.

Even the nature of the housing bubbles differed from country to country. In Iceland, which had reached a remarkable standard of living and quality of life, a government decided to turn its small public banks into private lenders that proceeded to lend recklessly to Icelanders, British and Dutch attracted by high interest rates and properties. In the United States, unscrupulous banks and real-estate agencies provided subprime mortgages to people who did not earn enough or have enough assets to be able to return the loans. In all of these countries, lower- and middle-class individuals and families took out mortgages which greatly exceeded their salaries in order to buy a primary or secondary residence.

At the height of the bubble, more housing units were being built in Spain than in Germany and France combined. Some people believed they could buy mansions. Others dreamed of owning a primary or secondary residence, and the banks lent them the money not only to purchase the home, but also loans to buy furniture and even a new car. There is nothing inherently wrong in wanting to achieve this kind of “American dream” of owning a house with a nice garden. But banks, real-estate agencies, mortgage lenders, regulators, politicians and ordinary people should have asked themselves whether these were realistic dreams. The American dream can sound like a cliché. But, if understood correctly, it is very reasonable and even inspirational: the idea that if you work very hard, save, play by the rules and invest wisely, your professional and/or personal dreams can eventually come true. And this American dream can be pursued and attained in Seattle, Lima, Vienna or anywhere in the world. Unfortunately, taking out mortgages for 150% of your salary without assets and no job security turned these dreams into nightmares for millions.

As millions lost parts or all of their savings, jobs and homes, they naturally and logically directed their anger at the banks and other private financial institutions. But central banks and governments had no choice other than to bail them out. Had they not done so, we would have faced a scenario like that of the 1930s: runs on banks, people placing their cash under mattresses, banks massively divesting their investments in other countries, trade coming to a virtual halt, no credit flow to companies, and serious social and political unrest.

Some well-known academics made doomsday predictions (and published best-selling books) by warning that the Great Depression had already arrived. During the Great Depression, the United States’ unemployment rate reached 23.6% (in 1932), the same year that GDP shrunk by 13.4%. Between 1929 and 1932, ten- thousand U.S. banks went bankrupt (40% of the total) and global trade diminished by two-thirds. In stark contrast, unemployment peaked at 10% in the U.S. in 2010, and has since diminished to 5.9%. The U.S. emerged from recession in 2009 and has registered annual growth rates of around 2% since then. There is no question that the middle and lower class in the U.S. has been impacted, but in the 1930s people were living in tents in Central Park, millions were standing in line to receive food or cash assistance from the government and industrial and agricultural activity practically stalled.

International coordination and cooperation between the main economic powers was a major factor that prevented a deeper recession or a depression in 2008-2009. But, beyond the initial bailouts and nationalizations, different countries have adopted different policies in response to the crisis.

The United States, the United Kingdom and Japan opted for a very loose monetary policy by gradually bringing interest rates down to almost 0. The U.S., China and to a lesser degree Germany also approved significant stimulus packages to finance spending on infrastructure and energy efficiency projects. But the United States and the United Kingdom complemented extremely low interest rates and stimulus packages with what has come to be known as quantitative easing. This is a practice whereby their central banks buy massive amounts of debt (bonds) and other assets issued or owned by governments and private or public banks. This practice seeks to keep interest rates low, clean up the balance sheets of financial institutions and stimulate lending. Most academics and policymakers in Anglo-Saxon countries feel that the quicker recovery, higher growth and stronger job creation in the U.S. and the United Kingdom prove that very accommodating monetary policy, stimulus packages and quantitative easing were and are necessary. On the other hand, countries predominantly in central and northern Europe -- Germany, Austria, the Netherlands, Finland, Luxembourg, 8

even Slovakia -- have resisted and objected to the calls for the European Central Bank to adopt the same quantitative easing as the U.S. Federal Reserve, the Bank of England and the Bank of Japan have undertaken.

These differences in opinion are caused by different historical experiences, institutional development and ideology. The United States national psyche is greatly influenced by the mass unemployment of the 1930s, whereas the German one is scarred also by the hyperinflation of the early 1920s in the Weimar Republic. Some analysts and historians would probably also point out that geography and religion have an effect on a society’s attitudes and practices -- and therefore on the decisions of their governments. After all, in German the word for debt (Schuld) is the same as the one for guilt.

Even if the influence of history, institutional development, geography, climate, and endowment of resources on society’s expectations as to how to respond to the crisis could be ignored, European integration and Economic and Monetary Union create a specific context within which EU member states’ governments can and must act. The global and financial crisis has revealed weaknesses in euro zone governance and institutions. But it is ridiculous to suggest that the European Union and European integration have somehow contributed to the crisis. The EU budget accounts for little over 1% of its GDP, a minuscule amount compared with most member states’ budget-to-GDP ratios of 40-60%. On the contrary, the EU, which is the world’s biggest economy and single market with 500 million inhabitants, has cushioned the effect of the crisis by, for example, enabling citizens of southern EU countries to freely move to and work in northern EU countries. The euro zone was not designed flawlessly. Yet it is demagogic to attribute the crisis to the adoption of the single currency, which is shared by more than 332 million people in eighteen countries and whose percentage of world reserves and value have actually increased since the onset of the sovereign-debt crisis.

It is however true that euro zone member states have had a more difficult task in grappling with the crisis because their currency union is relatively new and limits their freedom of action. Precisely because the euro zone brings together different countries, the European Central Bank’s independence must be strictly respected. Therefore, the effects of the global and financial crisis are more difficult to manage within a currency union of sovereign states such as the euro zone. To suggest that the euro itself is one of the causes of the crisis has no merit. Otherwise, there would be no way of explaining the strong economic fundamentals of Germany and other euro zone members. A favorite argument of the euro-skeptics is to attribute the excessive borrowing of southern European euro zone members to the lower interest rates brought about by the single currency. But many of these countries had chronic deficits before the introduction of the euro, and despite not being able to devalue as they did in the past, they (Spain, Portugal, Ireland) have regained competitiveness as their governments have bravely implemented austerity and structural reforms.

Nonetheless, it is true that Keynesianism in many forms has made a tremendous comeback as a result of the crisis. Higher deficits, stimulus packages, government borrowing, increased public spending and additional funding for social programs are all measures that John Maynard Keynes advocated as the best means of dealing with a crisis. These are the kinds of policies which most developed countries have pursued to revive their economies. And they are generally favored by the population. It is obviously more popular to increase spending on social programs and infrastructure than to cut investments, salaries and force the public sector to maintain its deficit below a certain level. Almost everyone wants higher salaries, bigger benefits and lower taxes. But governments have the responsibility to do what is in the medium and long-term interest of their countries, not what pleases voters and helps them win the next election.

Precisely because this is a complicated debate, Professor Alexandre Muns has employed the literary technique of bringing John Maynard Keynes back to life to analyze and debate the proper mix of policies that the international economy, Europe, the United States and other major powers need in order to straighten out their finances and deliver growth and prosperity. Nobody has the exact solution or formula to achieve this objective, as conditions vary greatly from country to country. Politicians have had to pursue a trial by error methodology to deal with the crisis. The lessons from the Great Depression reminded them of the measures they should not take. But there was no manual to instruct them on how to overcome this very complex crisis.

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Alexandre Muns starts his manuscript with a light-hearted and useful section that provides recommendations on how to deal with bureaucracies. He draws on his travel and experience living in different countries in order to describe how he has developed certain strategies to obtain a desired objective (passport, certificate, and other documents) from a bureaucracy. As citizens, we cannot get around dealing with bureaucracies. Neither can politicians, for that matter. They actually have to direct and manage them.

It is those politicians and their decisions between 2011 and 2014 that Alexandre Muns goes on to analyze. He has been a consultant to the Spanish and Catalan governments, and is thus accustomed to dealing with politicians. He has also served as speechwriter to the presidents of the European Bank for Reconstruction and Development, the World Bank Group and the Inter-American Development Bank, multilateral development banks which promote development and fight poverty. Alexandre’s service for presidents and management of these and other institutions has enabled him to draw some conclusions about the interaction between these institutions, countries’ governments, the private sector, and other actors.

Of Bureaucrats, Politicians and Statesmen: How to Right-Size the American Dream seeks to provide facts, analysis and context about the crisis. It also presents different approaches to dealing with the crisis. But it does not pretend to know which exact course of action politicians should take.

Despite the recovery, it is still too early to draw definitive conclusions about the crisis, and especially to claim that certain policy actions have been much more efficient than others. Americans may be buying more cars and homes, but at some point they will have to consider how to bring down their deficit and debt. Germany’s austerity may be unpopular and has caused hardship in the short term, but it might have established the groundwork for sustainable growth in the mid- to long-term. Americans and Spaniards prefer to own their homes, whereas in Germany and France the percentage of home ownership is much lower and renting is more common. There is no one-size-fits-all solution to overcome the crisis given the idiosyncrasies of different countries. As much as globalization and voters might expect it, there is no easy panacea that will bring about immediate and robust growth.

Alexandre Muns thus presents the facts and lets the reader decide which governments and politicians have done a better job of coping with the crisis. Those politicians who have sacrificed short-term personal popularity and adopted what is best for their countries in the medium to long-term are statesmen. They have thought about the next generation, not the next election. History will eventually be the judge. We still need some time to have a better perspective. Yet Alexandre Muns, in his conversations and debates with Keynes between 2011 and 2014, paints a picture full of detail, color, impressions and shades. It is up to the reader to view it and reach conclusions. Where some might see light, others might see darkness, or shades of a certain color.

We would all like to think that given the right conditions, an ever increasing percentage of the population of developing countries can not only overcome poverty, but achieve and consolidate the comfort of a middle- class existence and live in countries that deliver efficient services. And that many people can fulfill bigger dreams. As Erich Fromm put it, it is hard to push oneself hard every day if one does not have a vision of what one wants to accomplish. However, in the uncertain times we live in, visions that are not implemented and fail can become hallucinations. It is therefore wise to try to adapt one’s dreams to the reality of the present. This may require scaling down and even sacrificing some dreams. But there may also be a way to find the right scale and size for one’s dreams, or to right-size the American dream, in whichever country one may live.

Alexandre presents his own set of recommendations for right-sizing the “American dream” at the individual level. While we elect the governments that hopefully chart the right path forward, we also have the right to pursue our individual dreams, and to try to help others achieve theirs.

Professor Horst Teltschik Munich, July 2014

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Chapter 1. Recommendations for navigating bureaucracies

I am quite sure that you will have to deal with some bureaucracy and civil servant in the next couple of weeks, and probably before you finish reading my book. Bureaucracies are inevitable and necessary. Most civil servants are professional and do a good job. But I have compiled a list of recommendations for the minority that is not. Hence, in the next four chapters, I provide helpful advice -- I call them rules to instill mental discipline when following them -- when dealing with bureaucracies that I hope will be of service to you. Note that bureaucracies do not just include public institutions. They also encompass private-sector companies (usually big ones with little competition) that do not operate efficiently. Rule 1: A bureaucrat is always right. Rule 2: A bureaucrat is always right, even if you are 100% sure he/she is wrong (see rule 1). Rule 3: When you approach a bureaucrat to resolve a matter or initiate a procedure, he/she will invariably ask you to come again after telling you that an additional document(s) is/are needed. Rule 4: Due to rule 3, before initiating a procedure with a bureaucrat, ask for a very precise and complete list of the items needed and obviously write them down. Ask the bureaucrat to be very specific, and kindly ask if you need any additional documents or items after he/she finishes listing them. A missing document will mean another trip home for you, even if the bureaucrat’s memory is to blame. Rule 5: Even if you think you have brought all of the required items when you return to see the bureaucrat a second time, the bureaucrat himself/herself might have forgotten in your first visit to tell you all of the documents he/she needs in order to do his/her work. If you ask in advance on your first visit and the bureaucrat still forgets an item, you will still have to go back and get the document. But the bureaucrat will hopefully feel some guilt and cut you some slack the next time you have to deal with him/her. Rule 6: In exceptional circumstances, a bureaucrat who makes a mistake might try to make things right and simplify a procedure. This usually happens when the customer/consumer can artfully display genuine grief over the additional time he/she will have to put in to complete the procedure. Pointing out that kids are alone and crying at home or that a close family member is very ill helps. That the region you are living in is suffering under extreme weather conditions – snowstorms, polar cold, flooding, etc. – can help in cases where the bureaucracy’s physical infrastructure (buildings, telecommunications) are impacted. If the adverse weather is affecting you but not the bureaucracy, it is a much harder mountain to climb. If the bureaucrat develops some rapport with the customer or wishes to impress him or her for professional or other reasons, he/she might also be helpful. Rule 7: Bureaucrats take many days off. Several weeks every year. If you are waiting for a bureaucrat to do something, take into account and factor in that he/she might take a vacation at any time, and will usually complain about having a lot of work and hundreds of emails in his/her inbox upon returning. Rule 8: A bureaucrat has many bureaucrats working below and above him/her. The bureaucrat usually feels his/her life has been very hard. Even if the bureaucrat works 9 to 5 or a shorter schedule, (depending on the country, and with all due respect at embassies and consulates they work fewer hours), takes a month off or more per year, takes a long lunch break and has job security for life, he/she believes his/her life has been hard when he/she entered the bureaucracy. He/she might have had to put up with a difficult boss. The bureaucrat will hence have no compunction in making life difficult for you. He/she may feel his/her life as a bureaucrat has been very hard. Do not expect any kindness or compassion. If you get it, feel lucky.

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Rule 9: When assembling documents needed for a procedure, make sure they are all in a good condition. Bureaucracies will turn down a crumpled form. When it comes to pictures, several countries and international institutions require for their paperwork that you hand in a recent picture (not more than a few months old) and whose specifications (number of pixels, usually white color background, head shot, format of file) are pre- determined. When applying for a visa or a passport, a bureaucrat might take it for granted you know a picture is required and will not list it among the items to be assembled. In addition, it is very practical to keep several standard pictures in your wallet. You never know when you might need them to apply for something. Some bureaucrats will occasionally show mercy when they realize the customer is not in a position to furnish a picture without incurring in a big loss of time. For example, my Spanish passport was deemed unfit for travel to the U.S. in June of 2011. It was alleged it was in bad condition and that U.S. immigration would refuse it. It is true that it was not in perfect shape, but bureaucracies handling my passport had partly caused the wear and tear. A Spanish police officer did try to use a larger picture I had with me so as to expedite the process. He realized I needed to get the passport and rush to Madrid’s T1 terminal, 3-4 miles away, as soon as possible in order not to miss my flight. Alas, the bigger picture did not do the trick. I had to have smaller ones taken at an automated photo-shop. I wound up missing the flight, even though I arrived back in the terminal with plenty of time. A corollary of Rule 9 is that if you have the possibility of having dual citizenship, and hence legally issued passports from two countries, seize it. Having two passports makes travel and requests for visas (which sometimes take weeks to process and leave you with no passport) a lot easier. Rule 10: In the spring (March) and autumn, be aware of the change to daylight savings time. This change does not take place on the same day everywhere. It does occur on the same day in all European Union countries, but there is a one or two-week lag with the U.S. shift (in 2014, for example, the U.S. adopted daylight savings time first). There are thus a few weeks in the year when, for example, Eastern Standard Time (EST) in the U.S. and Central European Time (CET) in Europe are only five hours apart, as opposed to the usual six. The change is done on a Saturday night to minimize work disruptions. Beware if you have to take a plane or train the day after the time change and you forget about it. Rule 11: Even when a bureaucracy has treated you very unfairly, be wary of taking it on. Although customer service still exists, different companies and different countries have varying standards when it comes to customer satisfaction and service. You should take on a bureaucracy or file a complaint with a company if you feel your chances of proving negligence are high and the time and the money you will have to spend and invest to draft and file the complaint will not be excessive. Rule 12: When renting a car from a rental agency, always inspect the car closely for any dents or damage it already had. Although purchasing full coverage and liability probably gets you off the hook if the rental company tries to place blame on you for pre-existing damage upon returning the car, it is best to point out the damage beforehand to the rental-car employee. Major rental-car companies will have a drawing of the car and mark the existing damage as you point it out. If the employee is uncooperative, take pictures of the pre- existing damage, ask to speak to his/her supervisor or just look for another rental agency. Rule 13: When dealing with bureaucrats, use all of your emotional intelligence. Make the bureaucrat feel that he/she is very powerful and his/her work is essential and of great value to society. Bureaucrats are sometimes frustrated individuals with low self-esteem and insecurity, despite their perks and job security. Talking down to them will only make matters worse, as they will turn their bitterness against you and make your life even harder. If necessary, behave slavishly and allow the bureaucrat to put you down. Remember that what ultimately matters is the result: that you get the certificate or document as quickly as possible. If you have to grovel and humiliate yourself, accept it as the necessary price for getting what you need from the bureaucrat.

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Rule 14: Show great empathy when you deal with a bureaucrat. Even if you are a businessman/woman with extremely long workdays, frequent travel, you rarely take vacations and have to deal with red tape constantly, make the bureaucrat feel you empathize with his/her hard life. Make comments like: “Hope things are not too busy” or “Hope you have the chance to take some days off soon”. Rule 15: When dealing with a particularly difficult bureaucracy or one that you often need to engage with, try to identify individuals within the bureaucracy who are friendly, understand the system and are willing to make life a little easier for you. These persons are capable of independent thinking, or thinking outside the bureaucratic box. But even if they can think outside the box, they have to operate within the bureaucracy, and are accountable to higher-ups in the bureaucracy. So do not take it for granted that they can always vouch for you. Try to remember these helpful bureaucrats’ life circumstances (family members, their occupations) and even their birthdays. If they are extremely helpful, send them a gift such as a bottle of champagne, wine or a box of chocolates for Christmas (as long as there are no rules banning even small gifts to such individuals) A case in point. When I moved to Washington, D.C., in November of 2009 to take up my position as Speechwriter to the President of the World Bank, I had to get a Washington, D.C., driver’s license as soon as possible. GEICO was going to terminate my insurance policy unless I obtained an in-country license (meaning from the U.S.) to supplement my Spanish one. I had fifteen-hour workdays and often had to work on weekends as well. After gathering all of the necessary documents and studying for the knowledge test, I called the Washington, D.C., Department of Motor Vehicles (DMV) regarding one particular item I could not obtain. They either wanted me to produce a letter from the State Department confirming that I did not need a Social Security Number, or to actually have a Social Security number. Getting the letter was going to take weeks, especially because Washington, D.C., was going through the blizzard, the winter with the biggest snow accumulation in more than 160 years (since they started keeping records). The federal government had had to shut down several times because record snowfalls made driving impossible, even on the main avenues. People living in the suburbs were stuck in their homes, and needed days to shovel the snow in front of their doors and on their driveways. This extraordinary situation did not exempt me from the obligation of obtaining my Washington, D.C., driver’s license within the given deadline. DMV was also closed because of the snow, and its closure prevented me from taking the knowledge test. I had already applied for a Social Security number (SSN). After talking to several robots who parroted the same line about the need to either have the Social Security number or the letter from the State Department, I found one of these gems in a bureaucracy who is capable of logical and intelligent thinking. His name was Travis. He understood my situation and told me I could go ahead and take the knowledge test and obtain my license without the letter or the SSN. Travis was a supervisor at the Washington, D.C., DMV. After passing the knowledge test and submitting all of the required documents, I was asked to go to another counter. I was on the verge of getting my license. Then the bureaucrat popped the question about the Social Security number. I kindly explained the situation and added that the supervisor had cleared me to take the test. The bureaucrat actually accused me of having framed the question to the supervisor in a way that I would get the answer I wanted. I respectfully disagreed, and again explained all of the circumstances, including my need to get a driver’s license in order not to lose my insurance, 15-hour workdays, the snowstorms that had shut down the MVA, my recent move from Spain, etc. The bureaucrat knew we were going through the blizzard, that I could not take time off from work because of my responsibility, and that I needed the license soon to maintain my insurance. But she could not care less. She was out to enforce a rule, which did not make much sense. I clearly was going to get the Social Security number as I had applied for one,

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so it made no sense to write to State so they would confirm I did not need one1. Yet it really seemed like the bureaucrat was going to turn me away and not allow me to get my license. In one last desperate attempt, I told her that the supervisor -- Travis -- had left a voice mail on my Blackberry telling me that I could take the test. I asked the bureaucrat if she could listen to it. We actually had to step outside the DMV office into the mall in Georgetown where the DMV was located (I found out in 2014 it is no longer there) because there was no cell-phone coverage inside the DMV office. The bureaucrat listened to Travis’ message and finally decided she would allow me to get my license. She did so in a very grudging way. Lesson: keep any cell-phone messages or emails from friendly bureaucrats. Do not delete them! Bureaucracies of developed countries can sometimes be frustrating, but they are not corrupt. Dealing with inefficient and corrupt bureaucracies in non-democracies over prolonged periods of time can lead to post- traumatic stress disorder, other mental problems or even insanity, which will then require you to apply for treatment in a medical bureaucracy. Rule 16: When a VIP grants you an interview (this also applies to high-ranking officials in bureaucracies), regardless of whether he or she is in the private or public sector, be sure to prepare and research for the meeting. Moreover, show up for the interview ahead of time, but not more than 15-20 minutes. VIPs are busy. If you get lucky and the VIP’s previous meeting has ended ahead of time or he/she is not too busy, he/she might welcome you into his/her office ahead of your originally scheduled time, thus possibly adding to the total time you will be able to spend with the VIP. Rule 17: If you nail down an interview with a big VIP or celebrity, try to avoid having to provide contact information to their assistants. If they ask you for it, you will have no choice but to furnish it. But do not volunteer it. They will request the contact information in order to let you know they have had to cancel or postpone the interview should something come up. If they do not have your contact information, they cannot let you know and therefore are less likely to cancel the meeting. If your meeting with a VIP requires that you travel to meet him or her, you should purchase your plane/train ticket and some kind of insurance along with it. Should the VIP cancel or postpone your meeting, you will get most of your money back. Some airlines do not insure flights or return your money under any circumstance, even if you become seriously ill. Most major airlines will return your money if you can genuinely prove through a doctor’s letter that you are indeed ill or have broken a leg, for example. I was able to get a refund from Easyjet in 2013 after being treated at a hospital due to the many bruises that resulted from a mugging and assault. If you have not been able to ensure your flight and the VIP postpones the meeting, you might be able to pay a small penalty to change the date of your flight in case there are seats for your fare class on the day you want to change to. It is best to ensure flights, which is usually possible if you buy a ticket of a higher fare. Business travelers with thousands of points or miles usually have the right to change date without paying any penalty. Rule 18: Do not throw away or shred your expired ID documents, such as passports, drivers’ licenses, national identity cards (outside of U.S.) and others that have a photograph. They can come in very handy when you least expect it. You may be able convince bureaucrats with an expired ID that has your picture. Let us take a real-life example. Irina, who is originally from Moldova but now a Spanish citizen, was not given a letter at a postal office in a posh neighborhood of Barcelona, Spain, because she had changed her last name and was unable to prove her identity. They told her she would have to send a letter to the Interior Ministry. This was

1Staff or consultants on a G4 visa working for international institutions located in the U.S. like the World Bank, International Monetary Fund or United Nations do not need a Social Security Number. Yet having a Social Security number in the U.S. is actually essential, and I eventually did get it. It fortunately never expires and I still have it. Applying for it therefore was a smart idea. 14

no ordinary letter. After a decade-long nightmare to get her Moldovan nursing degree certified in Spain, the letter contained the Spanish authorities’ final verdict. She was obviously excited at the prospect of the official certification contained in the letter. The bureaucrat was not swayed by Irina’s decency, kindness and appeals to logic. But the combination of producing an official picture ID with her old last name plus a dose of sucking up and expressions of helplessness did the trick. She was able to get the letter without having to draft and send another one to a ministry in Madrid, and await a response, which would have taken months. Even if you think you may never need old picture IDs and passports, it is best to keep them. They may get you out of a tricky situation when traveling in another country. In any event, they are nice mementos with visas of countries you have visited stamped on their pages. Rule 19: Stay on top of current events that affect the lives of civil servants/bureaucrats. As part of Spain’s attempts to bring down its budget deficit from a high of 11% of GDP in 2009, civil servants’ pay was frozen in 2010 and 2011 (and in some cases cut) and their bonuses were cancelled in 2012. Most people do not get an extra month’s pay. It is rather ridiculous when properly analyzed. Why should we pay civil servants an extra month’s salary? Years have twelve months, not thirteen or fourteen. Yet many countries have maintained this practice, even in the private sector. As hard-pressed governments in the euro zone had to cut spending, civil servants’ perks were an obvious place to start. As I collected the required documents to renew my Spanish passport in April of 2013, I was mindful of the terrible ordeal civil servants were going through in Spain. They have lifetime job security. But they were livid about their pay cuts and loss of their bonuses. As I entered the police office on Barcelona’s Balmes Street that handles passport renewal, I scrambled for a strategy. I had arrived almost two hours ahead of my appointment. Several people had pointed out to me that this police station is particularly efficient and staffed with kind and productive civil servants who work quickly. This means that you are able to obtain a document without wasting much time. I was wearing a business suit. This always helps. It gives the appearance that you are busy and have other important things to do. I quickly realized that the other people waiting in the room where in one of three categories: the first category featured people whose appointment preceded mine. The second one consisted of people who had an appointment at a time after mine. The third group were those who had no appointment and were hoping to cut in and be assisted. I obviously could not expect the civil servants to assist me before people whose appointments preceded mine. Yet I did hold out the hope that all of those with appointments before mine would be processed before new people arrived, whose presence in one of the aforementioned three categories I would have to ascertain. I certainly could reasonably expect to be assisted before someone whose appointment preceded mine but who had not yet showed up. In essence, my presence was predicated on my confidence in those civil servants’ efficiency, which is a low-probability event. If they managed to process the papers of all those with appointments before mine in a short amount of time – before more people with appointments arrived – I would be rewarded by not having to wait too long. I visually sought out the civil servant who had the kindest face and made eye contact with him. At one point, he asked those of us who had appointments before 1 pm to raise our hands. Mine was at 2 pm. I obviously did not raise mine. But I did point out that I had brought all of the necessary documents and papers. I was signaling that I had done my homework and deserved to be processed as soon as possible. An administrative deity answered my prayers. They called me in fully ninety minutes before my appointment. The efficient civil servants had processed every person with an appointment before mine. As soon as I sat opposite the civil servant, I brought up the topic of their hardship. I was trying to bond with the man and show empathy with the fact that they had cut his pay, eliminated some of his bonuses and increased his working hours. But this man needed no comforting or sucking up to. He was clearly a dedicated civil servant. He smiled and was courteous. As it turned out, there was a 25 euro fee for processing the passport. I had 24 euros and fifty cents in cash. They did not take credit cards. I offered to go to the nearest ATM. But to my utter 15

amazement, he told me it was not necessary! He was letting me off the hook! I did not have to pay the fifty cents! This is unheard of! A bureaucrat who did not ask you to pay the full fee! I was speechless and felt like hugging him. It was not the fifty cents. It was the fact that he was sparing me a trip to the ATM on a very busy day for me. They processed my passport in about fifteen minutes. It does not expire until 2023. I was proud of Spain’s civil service. I unfortunately forgot to write down this exemplary civil servant’s name, but you can locate him at the Spanish national police office on Balmes Street in Barcelona, which leads me to the last rule: Rule 20: Write down all of the contact and personal information of efficient and kind civil servants/bureaucrats who have helped you and expedited processes. They are likely to behave in the same manner if you need their assistance again, which is a near certainty. Paraphrasing General Douglas MacArthur, “Old bureaucracies never die, they just fade away”.2

2 In his farewell address at West Point after being relieved of his command of UN forces in Korea by President Harry Truman, General Douglas MacArthur famously said: “Old soldiers never die, they just fade away”. 16

1a. Examples of successful complaints dealing with bureaucracies While taking a very brief vacation on the Greek island of Crete in 2002 or 2003, the hotel told me the night before my morning departing flight back to Barcelona through Athens that the staff of Olympic Airlines, the Greek flagship carrier, had gone on strike. Olympic had cancelled my flight from Iraklion to Athens and there were no other flights with other airlines. Olympic Airlines had a dreadful reputation, and it was finally privatized in 2009 by selling it to the Greek investment fund Marfin Investment Group. It ceased all operations at the end of 2009 after being Greece’s flagship airline for almost four decades. The first available flight would leave the next evening. As this would entail an extra night at the hotel and additional hours of using the rental car (which I needed to drop off at the airport), I began my slow and determined campaign to be compensated. The hotel and Olympic staff that I first complained to asserted that in the case of a strike, force majeure is at play and the customer has no right to compensation. I paid the extra night. I then called the rental car agency, which is a well-known international multinational. Their local representative expressed sympathy and offered that I pay only for the additional hours I would have the car. What was he expecting? That I pay for two days or a week when I was only extending the rental from the morning until the evening and would not even use the car? Yes, that seemed like a concession to him. When I arrived at the Iraklion airport in the evening, I again took up my case with an Olympic employee. She again invoked force majeure because of the strike and curtly told me to forget about compensation. I was of course boiling with anger and upset that nobody was willing to give me some sort of form to fill out. But for Olympic Airways staff, customer service was an alien concept. I thought antagonizing Olympic Airlines at Iraklion would get me nowhere, and maybe even get me bumped off the flight. You have to know how far you can push a matter. After our plane landed in Athens’ international airport, I headed to the customer service office. I was not surprised they had one since this was the capital of a country that would soon -- 2004 -- host the Olympics, but my hopes were soon dashed. The woman at the customer service counter again rudely brushed off my complaint invoking force majeure. I asked to have a form given to me. You should always write down what employees tell you (and their names) during such bureaucratic ordeals. In any event, it is always best to follow the standard procedure and obtain as many forms as possible before filing a complaint. I believe the lady at Athens airport reluctantly did give me a form. I made one last attempt at getting some kind of on-the-spot compensation. I suggested to the woman that I at least receive a voucher for a meal with which I would take my Greek friends (who had come to greet me at the airport) to dinner. When this very token and minimal request was rejected, I snapped at the woman that Greece and its airports needed to get their act together unless they wanted the upcoming Olympics to be a flop. At the time, there were press reports that the International Olympic Committee’s concerns about Athens’ woeful preparations were serious enough to ponder an alternative site for the games. My comment thus hit a raw nerve. I questioned the employee’s patriotism. She barked at me that never again would the U.S. take the Olympic Games from Greece. People often think I am American, despite the fact that I am not. I have no accent. Only sophisticated people in major U.S. cities can notice that my enunciation is not that of an American from the mid-Atlantic area. The Olympics Airlines employee was referring to the fact that Atlanta had edged out Athens for the 1996 Games, which Greece passionately pursued as they marked the 100th anniversary of the first modern Olympiad, also held in Athens. Having made nil progress (bar assembling documents and names), I took up the case with my travel agency back in Spain. I furnished many documents and drafted a long document with the narrative of the events. Much to my surprise -- and that of the travel agency -- Olympic Airways actually compensated me. The 17

amount was not high, but not negligible either. There are successor Greek airlines to Olympic Airlines. If any of them offers me a good deal to fly to an interesting Greek island (preferably avoiding three stops along the way) I have never visited, I will return the amount I received as compensation. In addition to Cyprus, which is an independent country but obviously under Greece’s protective umbrella, I have been to Crete, Rodos, Symi and Lesbos but would very much like to visit Santorini or Ithaca – which my school class at Barcelona’s AULA School was named after. If the IMF/EU/ECB joint bailout cannot ultimately avert Greece’s default on its debt3, I will consider returning the money – or trading it in for a Greek government bond, which pretty much amounts to giving it away! Fortunately, a deal on Greece’s debt sustainability and refinancing under the second bailout led by the IMF, the ECB and the EU was reached on November 27, 2012. After Chancellor Angela Merkel’s comfortable re- election in September of 2013, the German government and EU officials have accepted that Greece will need a third package of financial aid in order to avoid a default, pay its bills and continue to implement structural reforms and further cut its deficit. Greece has miraculously avoided full-blown civil upheaval despite suffering the worst recession of any industrialized country since World War II. Maybe the Greeks are more stoic than we give them credit for. Stoic is a word with a Greek origin after all. Greece was going to run out of euros needed to pay civil servants and suppliers by the end of November of 2012 if no deal had been struck. The Olympics Airlines personnel staff I dealt with during my stay in Crete have probably retired by now. Many Greeks were retiring at age 55 and even 50. I like Greece and have visited it on many occasions. My criticisms of Olympic Airlines’ performance does not intend to humiliate Greece, which is enduring extreme economic and social hardship. I believe that even the most patriotic Greeks would admit that Olympic Airlines was not exactly a model airline. I also believe that most honest and smart Greeks would admit that it was not just the politicians that are to blame for their crisis. Major causes of their crisis include having lived beyond their means for many years, very low retirement ages, an inefficient civil service, prematurely adopting the euro and the mismanagement of the Olympics in 2004. Yet I sympathize with the pain they are enduring since 2009.

3 There have been several restructurings of Greece’s debt, which amount to investors absorbing losses but still getting some of their money back. Greece will likely avoid a formal default but has endured brutal austerity and will take many years to recover. 18

1b. Which country has the most efficient bureaucrats? Most rankings carried out by institutions such as the World Bank, the World Economic Forum or Transparency International tend to measure the ease of doing business, or the cost of corruption and bad governance. For instance, Liberia is now ranked as the world’s most corrupt country. But is there a ranking of the countries with the best public servants/bureaucrats? If it does exist, I am certain Germany and the Scandinavian countries would rank in the first places. The following experience highlights my claim. On a flight from Munich’s Franz-Josef Strauss International Airport to Barcelona on September 5, 2011, I forgot my belt after taking it off to go through security. It was obviously my mistake, although with all of the security procedures at airports, one can be forgiven for such a mishap. I realized I had forgotten my belt after I entered the toilet fifteen minutes after I lost sight of the belt. I returned to the security area, but wary of the strict controls, peered into an office with two relaxed employees rather than try to talk to the security employees who were hard at work inspecting carry-ons and people for violations to the strict air travel rules. A brief aside on the air travel rules. They are completely necessary and I would not relax any of them. They have prevented not just another 9/11, but several major airplane hijackings and suicide bombings since 2001. This is a statement of fact documented by many scholars and experts. I cannot stand people who moan and complain about the tightened security, having to take off their shoes and security personnel subjecting them to pat-downs. I always say to these people: would you rather take off your shoes, forego the right to carry liquids onto planes, have to turn off your cell phones and laptops, etc. or be blown up when a terrorist sets off a hard-to-detect explosive device? Just like driving, flying is a privilege, not a right, which entails responsibilities. At any rate, the employee at the Munich Airport advised me that my missing belt would probably have made it back to the Lost & Found section of the airport. His assumption was not absurd. Germans are very efficient. Given the short time that had elapsed, I pleaded with him to check with the security employees in the line where I had undergone the control. He obliged, and nothing came up. He then very politely explained the directions I had to follow in order to reach the Lost & Found office, which in the Munich airport is located in the so-called Service Center. I still had about thirty minutes until boarding time, so I decided to pursue my search for the missing belt, despite the fact that it involved changing terminals and going through security again. One should view these situations as opportunities, not something to whine about. I did not have much time, so I had to run. I can always use a good run, especially as I rarely go jogging on the day of a flight. The one major drawback is that I always wear a suit when I travel, so any running in airports inevitably leads to a big sweat for me. That is no big deal in and of itself. But my suit needs to be dried and taken to the dry cleaners upon arrival. After a five-minute sprint, I arrived at the Lost & Found office. I asked about a black belt, and the bureaucrat told me that none had arrived on that day. He unhelpfully remarked that maybe someone had taken it, which in a highly developed and rules-oriented country like Germany -- and in its richest region, Bavaria -- is usually not the case. I remember how many Germans (in southern Germany) used to leave their cars unlocked and with their sunroofs open, even when they left objects inside. And my belt was not exactly a top-of-the-line crocodile leather model. Upon my arrival at the airport a week later, I headed to the Lost & Found section again. Unless you have an extraordinary memory, it is best to write these things down in your PDA or Smartphone. I greeted the employee at the Lost & Found with a cheerful smile and a Gruss Gott -- the equivalent to “Hallo” in Bavaria and Austria. You should always make a point of being nice to bureaucrats -- except in cases where you have run out of options and after careful consideration decide that a confrontational course is necessary. In this 19

case, the employee proceeded to tell me that they had several belts, and repeatedly asked me what my belt looked like, the color, the make, the color of the buckle, etc. I must admit I do not spend much on clothes for myself, and belts are something I pay little attention to. Other than the fact that my missing belt was black, I could not provide my inquisitor with much information. I did my best to explain this circumstance and reassured the woman that I would only take a belt if I were sure it was mine. She again asked about make, color, buckle, etc., and I told her it was a very normal belt, black in color. She then produced one that was clearly not mine. I immediately said it did not belong to me. She then turned up with one that looked like the one I had lost. I remarked that it looked like mine. She then quipped that I had to be sure. I decided it looked very much like the one I had lost. I assured her it was mine. It was not some fancy belt, mind you. Just a plain-looking thing. She gave it to me and I walked back to the gate with the pleasant experience of having been helped by the Lost & Found department at Munich’s airport. The aforementioned incident helped me on July 5, 2013, at the El Prat airport when my Wizzair flight to Katowice was delayed and I headed back to the Wizzair counter outside the security perimeter to try to reschedule my flight (which wound up being delayed for over six hours and for which I have not been compensated by Wizzair despite a ruling in my favor by the Spanish authority that governs passengers’ rights in accordance with EU regulations). My fare allowed for a free change of date, but Wizzair claimed I had waived this right by checking my luggage on-line (Wizzair routinely flouts EU regulations). This was ridiculous but I could not risk losing the money and the flight. I therefore had to go through security again. When exiting the security perimeter of any airport to talk to employees at counters with the intent of accessing the gate later, follow this strategy: approach the security area. Employees working at security are understandably stressed patting down people and checking X-ray screens and should not be bothered at all. You should approach a contractor who does simpler work at the security area and explain your situation, namely that you need to go back through security and then clear it again for whatever reason. They will explain the path you must follow to go back through security as you can only go through certain doors. After you have completed your operation at the check-in counter, it is back to security. But make sure you do not forget anything at the security area. I once did forget a bag while placing my items on the trays and was lucky that a helpful employee was able to retrieve it. So concentrate when you place your different items on the trays and conveyor belt at security checkpoints.

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1c. Flawless system for clearing security legally at airports for men who are not Super-VIPS

Super-VIPs are usually -- although not always -- allowed to bypass security screening at airports with their entourage. My system for making it through security is almost flawless. I insert all of my metal objects into my laptop bag or carry-on I travel with. If all of my metal objects fit into my suit’s pockets, I place them in the pockets. This variation has the advantage of not requiring a search for your objects in your bag after you have cleared security. You simply put on your suit and reach into your pockets to retrieve your belongings after your jacket has been checked by the X-ray machine. I place the laptop on a tray as instructed. I also place the belt and my jacket on a separate tray. My shoes have no metal and do not beep, but at some airports with tighter security I have to put them in a tray as well. I always go through the arch or full-body scanner without triggering a beep. You have to make sure you do not forget anything with metal on your trousers, other clothing, or pockets such as coins, a pen or any small electronic device in order for this procedure to work. On the subject of retrieving clothes at events, try if possible not to have to leave your coat at the cloakroom. Sometimes it is mandatory for security reasons. At other places they simply need an excuse to take your money. If you absolutely have to, make sure you remember where you put your token. I attended a high-level event at the U.S. Chamber of Commerce on January 13, 2014 with Spanish Prime Minister Mariano Rajoy4. After leaving my coat at the cloakroom, I took the token, which has a number on it. The luncheon was extremely well organized, featured fine food, a packed auditorium made up primarily of U.S. and Spanish executives, Spanish Embassy personnel, U.S. government officials and members of business associations. The formal part began with a witty and intelligent presentation by Tom Donohue, President of the U.S. Chamber of Commerce. Rajoy followed with a description of Spain’s reforms and their positive results. It allowed for a little networking before and after the event and was not too long. My kudos to my good friend Gary Litman, Vice President for Initiatives at the U.S. Chamber of Commerce, and his staff for their work in doing such a fantastic job, in cooperation with the biggest Spanish business association, CEOE. I had the opportunity to have a meaningful conversation over lunch with people seated at one of the tables not reserved for VIPs. As I was scrambling to speak to a few more VIPs in the course of the frantic head-for- the-exit dash that most people do when the VIPS are leaving the premises, I asked about my coat at the cloakroom. At first, I could not find my token. The employee kindly allowed me into the room to search for my coat. It was not there and I was obviously not going to take someone else’s coat, despite the fact that I only had one in Washington at the time. I finally found my token, which I had put in my pocket (the briefcase would have been smarter). But my coat was not hanging anywhere in the cloak room. For a few minutes, I stood at the entrance of the U.S. Chamber building as the employee searched for my coat with token number 322. I stood near the entrance, located in a position designed to allow a polite approach of departing VIPs without being in the way. The very professional employee came back to the entrance with my coat. I do not know why it was not in the cloakroom, and whether the employee had to carry out the unpleasant obligation

4Note to bureaucrats organizing events regarding Spanish VIPS: if everyone wants to ditch the traditional Prime Minister (standard for the head of government in a parliamentary monarchy), our head of government should be referred to as President of the Government of the Kingdom of Spain, which is the correct and complete description of the position, not President of Spain. Spain still has a monarch as its head of state. The Prime Minister is obviously more powerful than the King, but Juan Carlos I and the new king, Felipe VI, are no figureheads. The Spanish king is the commander-in-chief. I actually favor a republic for Spain. This looks unrealistic in the near future. 21

to tell someone that he or she was wearing my coat. Whatever the case may be, the lesson is clear: try to prevent having to leave things of value at cloakrooms as others can take them and the process of recovering them takes up valuable time. If you must leave some things, make sure you keep the token in a safe place you can easily reach.

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1d. The “Idiocrat Award”: The award for the all-time most stupid bureaucratic certificate request5 I have ever heard of Sandra Costras, a former student at ESCI-UPF, where I taught for seventeen years, applied for Spanish citizenship in the early 2000s in Madrid at the appropriate Ministry. She and her parents, who have been living in Spain for 22 years, submitted all of the appropriate paperwork and documents. Sandra’s father is a well-respected water-polo coach and businessman. A faceless bureaucrat denied Sandra citizenship because she did not have a Romanian document certifying that she had not committed any crimes from birth to age 3! Maybe this bureaucrat should be required to prove that he/she has not committed any crimes or that his IQ is high enough to enable him/her to hold a job. Sandra is now happily married to Joan, a Catalan, and will hopefully get her Spanish citizenship soon.

5Hereafter referred to as “The Idiocrat Award”. More entries are encouraged. I hope to secure funding for the victim of the “Idiocrat Award of the Year” from a business association that empathizes with hard-working professionals who are not executives and have to deal with such intelligence-insulting requests. So keep them coming! 23

Chapter 2. Introducing the post-BRICS TIDE challenges

I will resume the narrative about the international, European, U.S., Spanish and Catalan political and economic situation I developed in my previous book, Conversations with Marx (published in October of 2010 in Spain by the publishing house Aresta), or its more updated English version, Ethical Capitalism: What it can do for you (published in March of 2011 by Aresta). Miguel Roca Junyent, one of the drafters of Spain’s 1978 Constitution and a former leading Catalan parliamentarian and secretary-general of Catalonia’s Convergència i Unió party, presented Conversations with Marx at a renown Catalan institution named SEBAP in October 2010. He has been a very successful corporate lawyer for several years in his post-political career. He remains a very influential voice in Catalonia and Spain. I will always remember the ping pong games I played with him when he and his wife visited Bethesda in the early 1980s. I owe him a debt of gratitude for presenting my book. During his presentation, Roca repeatedly urged me to continue writing. He must have repeated at least ten times that I should continue to write a lot. It was not just a passing reference. I took it as a compliment, in the sense that what I write is hopefully of merit. Hence, the sequel to Ethical Capitalism. At the time of writing, Miquel Roca is busy -- among other tasks -- defending the former Spanish King’s daughter, princess Cristina, from an indictment related to her husband’s alleged fraudulent business activities. Princess Cristina’s husband, Iñaki Urdangarín, has been indicted, ordered to pay a hefty bail and deemed guilty by public opinion in Spain. Neither Cristina nor Iñaki have been found guilty by a court at the time of writing. They currently reside in Switzerland. As a kid in Barcelona, I remember the excitement when Cristina and her older sister Elena visited my school (AULA) for a few days. I have never met any member of the royal household personally, but indirectly did some work for Juan Carlos I, the former King of Spain, through the organization of the meeting of Charlemagne laureates in May of 2004 in Barcelona. Juan Carlos I’s attendance and speech at the event required liaising extensively with people in charge of protocol for the Royal Household. I oppose monarchies and want Spain to be a republic. Yet our democratic transition in the late 1970s was a model of compromise by political forces from the far right to the far left. Having a king as head of state was a very good idea that the drafters of the Spanish Constitution of 1978 (including Miquel Roca Junyent) agreed on. I hence reluctantly accept the need to retain the monarchy in Spain in the larger interest of the country. My acceptance of the monarchy in Spain stems from the need to maintain political and economic stability, especially when the public is outraged over the role that banks and many politicians played in the real-estate bubble and subsequent crisis. If a majority of Spaniards turns against the monarchy, and Spanish society can agree on a smooth mechanism to transition to a republic, I will wholeheartedly back ridding us for this feudal vestige. King Juan Carlos abdicated in June of 2014 in favor of his son Felipe, who will reign as Felipe VI. Anti-monarchy demonstrations in Spain at the time of the royal succession did not draw big numbers of people. Felipe is very well-qualified and a good father and person. I simply oppose the principle of monarchy in the XXIst century. I really wrestle with the concept of maintaining monarchies. On the one hand, some (in developing countries) arguably prevent their countries from plunging into civil strife, war and becoming failed states. On the other, the concept that a country should be headed by someone on a hereditary basis runs counter to the principle that we are all equal. There are not very many monarchies left in the world. The only ones that exist in addition to the countries where the United Kingdom’s monarch is the symbolic head of state are the United Kingdom itself, Andorra, Bahrain, Belgium, Bhutan, Brunei, Cambodia, Denmark, Japan, Jordan, Kuwait, Lesotho, Liechtenstein, Luxembourg, Malaysia, Monaco, Morocco, the Netherlands, Norway, Oman, Qatar, Saudi Arabia, Spain, 24

Swaziland, Sweden, Thailand, Tonga and the United Arab Emirates. That is 29 countries out of over 195 independent sovereign states in the world. Between 2011 and the summer of 2014, I have had the privilege of maintaining conversations in different parts of the world with John Maynard Keynes. I of course mean this metaphorically. We all know that John Maynard Keynes died in 1946. Since 2011, I have had extensive conversations and meetings with economists, sociologists, politicians, bankers, philosophers, journalists, writers, civil servants, diplomats and people from all walks of life in several countries. Many of these people have taken up support of Keynesianism in one way or another. After my return to Europe in 2011, I defended the need to cut budget deficits and debts. This was not popular. I knew it would not be. Nonetheless, I feel my duty as a professor, writer and analyst is to tell people the truth – and not what they want to hear so they will feel better. Paraphrasing Margaret Thatcher, most people want to be asked about their feelings, or want to express them. It makes more sense to know what people think. As Thatcher said, “Watch your thoughts for they become words. Watch your words for they become actions. Watch your actions for they become habits. Watch your habits for they become your character. And watch your character for it becomes your destiny. What we think, we become”. Real statesmen do what is necessary for a country’s citizens, regardless of the opposition, rejection, hostility and negative electoral consequences they may have. I have had the privilege to interview, meet, befriend or even work for real statesmen: James Baker, Egon Bahr, Jan Krzysztof Bielecki, Lothar de Maizière, Miklós Németh, Mariano Rajoy, Helmut Schmidt, Brent Scowcroft, Horst Teltschik and Bob Zoellick. All of these statesmen are admirable. I am honored to have met, interviewed or worked for them. They have and continue to influence events for the better at an international level. I want to briefly acknowledge James Baker’s accomplishments, as he was the first (Houston, 2003, as well as Horst Teltschik, whose career is described in his kind foreword) who agreed to see me in a non-professional capacity (meaning I was not working for the institution when I first met them) and was very generous in sharing his time. Secretary James Baker is the most senior U.S. politician and public servant with whom I have ever had the privilege of having an extended conversation and stayed in touch afterwards (in addition to General Brent Scowcroft). He is arguably one of the best Secretaries of State in U.S. history. He managed and led the U.S. role in the successful and swift reunification of Germany in 1989-90, assembled a broad coalition of countries (including traditionally hostile Arab countries such as Syria) to take on Saddam Hussein in the first Gulf War after Iraq’s invasion of Kuwait, and succeeded in bringing Israel and the Palestinians to the negotiating table for the first time in history. This significantly facilitated President Bill Clinton’s work in actually delivering the agreement whereby the Palestinian Authority was created in exchange for its recognition of Israel’s right to exist and its endorsement of a two-state solution. And he accomplished all of this and more in less than four years (1988-92)6. My attempts to turn Marx and Marxists into social democrats (staunch capitalists was not realistic) were futile in my previous book, which covered the 2008-2011 period. Keynesianism has certainly made a comeback because of the Great Recession. I expected hostility to austerity and structural reforms in Europe in 2011. But I expected that the elites would nonetheless push them through. And they mostly have managed to do so, as

6 Secretary Baker had already played a key role in solving the Latin American debt crisis of the early 1980s as President Reagan’s Secretary of the Treasury, for whom he also served as Chief of Staff. He managed President George H.W. Bush's successful presidential election in 1992, and served as his Secretary of State and Chief of Staff. He also later served, among other positions, as the UN’s Special Representative for the Western Sahara conflict and co-chair of the Iraq Study Group’s influential recommendations in 2006. The title of his memoirs’ “Work hard, study…and stay out of politics” is the best advice for those seeking a long life in public service.

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the dramatic drop in the peripherals’7 borrowing costs and increased competitiveness reflect. Yet many reformist governments have had understandable difficulties in explaining the need for reforms and austerity. I have done so in the cases where I think there was no alternative and as long as the pain was shared by all – and more so by the wealthy. This has not made me popular. As I found myself trying to justify and explain the need for reforms that enhance competitiveness and growth and an austerity that cuts debts, I interacted with people from all walks of life who basically defended Keynesian views. They espouse more stimulus, government borrowing and spending to revive demand, higher temporary deficits to prevent recessions and extensive social safety nets. I support many of these ideas, but also favor a balanced approach that is admittedly hard to strike and varies from country to country. This book is therefore an enlightened and hopefully informative conversation with persons who defend, encourage and justify Keynesian policies. As I have talked to hundreds of persons in 2011-2014 and it would be impossible to summarize their thoughts and turn them into a book, I have opted to turn a resurrected Keynes into their spokesman.

At the end of the book, living VIPs (academics, businessmen, politicians, high-ranking officials from international institutions) from several countries will provide input on the four challenges that I believe countries must address going forward in the post-BRICS era, meaning in the next twenty years. These challenges are:

1) Technology: Designing, inventing, patenting and successfully selling products with a high degree of technological value added – driverless cars, biometric passwords, a vaccine for Ebola and malaria, etc. as opposed to just cars, televisions and smartphones. Which countries will be able to do so and how can they achieve this goal?

2) Inequality: No serious policymaker disputes that inequality has increased in developed and emerging countries. The conference on a more inclusive Capitalism in London in the spring of 2014 featured a Who’s Who of VIPs from the establishment. How can we reduce inequality without excessively taxing the rich and discouraging entrepreneurs?

3) Demography: Increased life expectancy, lower employment rates and generous entitlement programs are generating a perfect storm which threatens not only developed countries. Trillions in unsustainable benefits hang in the balance, with the resulting potential for social, political and generational clashes. What can countries and the business community do to avert this crisis?

4) Energy Security: The U.S. is on the road to energy independence, having become the world’s top producer of natural gas and matched Saudi Arabia in oil production in 2014. The European Union, on the other hand, relies on foreign suppliers for more than 50% of its energy – a share that will rise to 70% by 2030 on current trends. China, India and Japan all face challenges in securing affordable and sustainable technologies. How can leading economies best secure a sustainable, secure and affordable energy supply and mix?

7 Peripherals refers to the countries most affected by the euro zone debt crisis: Spain, Portugal, Italy, Ireland and Greece. 26

Chapter 3. The terrible legacy of Zapaterismo

Before I turn to my encounters with Keynes, I need to provide some background and context on what has happened in my native Spain and Catalonia since March of 2011, when I finished my fictional conversation with Marx. In Spain’s case, it entails describing the mess Zapatero’s government left Spain in and the reforms that the current government has carried out since January of 2012. After seven years of terrible mismanagement, great incompetence and graft, Spain’s voters finally sent the Socialist Party into opposition in the general elections held on November 20, 2011. The Socialists’ disastrous policies left Spain with the highest unemployment rate in the EU (24%), a youth unemployment rate over 50%, an astronomical budget deficit (8.9% of GDP) and a combination of public and private debt high enough to give investors reason to bet on the need for a bailout for the Spanish economy. The bursting of one of the biggest real-estate bubbles in the world (between 1 and 2 million unsold or unfinished housing units) had brought the Spanish economy to a screeching halt by 2011. Unfortunately, some of the Spanish Socialist Party‘s (PSOE) former ministers also revealed their true colors – self-serving underqualified individuals with no vision who abused their office. I have worked and know many Socialist and Social Democratic politicians, although I am not a Socialist and describe my ideology as conservative on defense and security matters, free-market moderate on economic ones and mildly liberal on social and values issues. I have no ill will towards the few examples of unqualified and/or unethical ministers listed below, but do want readers to remember the situation Spain was in after almost eight years of Zapatero at the helm. Most independent observers – and many Spanish Socialists – admit that the Zapatero governments were a disaster. Some of the more egregious examples of underqualified and/or corrupt ministers. As of the time of writing, I describe their current legal situation. In alphabetical order:

 Magdalena Alvarez, a minister of Public Works in the Zapatero government, was charged with abuse of office in a scandal involving the PSOE’s Andalucian wing. She was indicted in 2013. A court in Sevilla rejected her appeal of the indictment in March of 2014, confirmed Alvarez’s indictment, and ordered her to pay bail of €29.5 million. The court decreed an embargo of six properties owned and five bank accounts held by Alvarez. She resigned from her post at the European Investment Bank in June of 2014.

 José Blanco, Spain’s former Public Works minister and government spokesman, oversaw and fostered the expansion of Spain’s very advanced and extensive high-speed AVE rail network. On a monthly salary of about 6000 euros, he and his wife somehow financed the construction of a 3 million euro mansion in an upscale suburb of Madrid (Las Rozas), and another house in the northwestern region of Galicia. A businessman in the pharmaceutical sector allegedly paid Blanco 400,000 euros in return for the minister’s assistance in obtaining permits from a ministry. The businessman was charged and has accused the minister of accepting the kickbacks. Blanco denied all charges, and asked for the proceedings of the investigation to be made public. As Spain’s Parliament was dissolved ahead of the November 2011 elections, Blanco avoided testifying before the relevant committee or even answering the opposition’s questions. When asked for an explanation about the affair, he asserted that he and his wife have an amazing ability to save. It is worth pointing out that he and his wife take their children to a private school and obviously have high expenses. Blanco has also invoked his Christian values to convince Spaniards of his innocence. Spain’s Attorney General until the end of 2011, appointed by the Socialist Party, did not order an investigation into Blanco’s dealings. As the Socialist Party ensured his re-election to Parliament by

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assigning him to a safe constituency, his parliamentary immunity after the November 2011 elections slowed down the investigation and possible trial. The prosecutor finally sent the result of his investigation to Spain’s Supreme Court. In Spain, only the Supreme Court can handle a trial against sitting members of Parliament. Blanco is trying to make a political comeback in his native region of Galicia. Spain’s Supreme Court has ruled that there is not enough evidence to proceed with a trial. Blanco is a college dropout who joined the Socialist Party at age eighteen.

 Spain’s Health and Equality Minister under Zapatero, Leire Pajín, approved extravagant professional travel for her and her closest aides at a time when more than one-fifth of Spaniards were out of work and the government (under U.S. and EU pressure) cut public-sector wages and froze pensions. Pajín, as was the case with almost all Socialist ministers under Prime Minister Zapatero, speaks no foreign languages. She also dropped out of college. The Socialist Party placed her high enough on the party list to ensure her election to Parliament in November of 2011. Looking ahead, the Socialist Party in Spain seeks to make a comeback. The following individuals are and will be their leaders. They are listed and described in alphabetical order.

 Carme Chacón, a former lecturer in Constitutional Law, was perceived as being underqualified when Zapatero appointed her Defense Minister. She has many qualities, but knowledge of Spain’s military did not seem like one of them at the time. Her appointment came at a time when she was pregnant. Her trips to Afghanistan, Lebanon and other countries where Spain had deployed troops took place towards the end of her pregnancy. The trips seemed risky but did prove she is quite tough. Chacón is married to a powerful businessman. She did a reasonable job until the Socialists were voted out of office in November of 2011. She campaigned for the post of Secretary General at the Socialist Party Congress that followed the PSOE’s defeat in November of 2011. Most independent observers feel the leadership contest was rigged against her by the head of the Socialist Party at the time, Alfredo Pérez Rubalcaba, a former deputy prime minister and Interior Minister under Zapatero and senior government official in earlier Socialist governments. Chacón left Spanish politics to teach at a Florida university but is now back in Spain and was elected to a high position in the Socialists’ July 2014 party Congress. Rubalcaba did a good job taking on ETA, the Basque terrorist group, as Interior Minister. Analysts feel the Socialist Party needs new blood as it has slumped badly in every election since Zapatero’s defeat in November of 2011. Rubalcaba held on as head of the Socialist Party despite the shellacking his party suffered in the regional elections in Galicia, Catalonia and, to a lesser extent, the Basque Country in 2012. Many Socialist Party members and power brokers wanted to see him go. His inability to improve on the Socialist Party’s results since 2011 in the elections to the European Parliament in May 2014 finally prompted him to announce that he would step down as Secretary General of the Socialist Party in a Congress in July of 2014.

 The president of the regional government of Andalucía, Susana Díaz, is another potential Socialist candidate for prime minister. Spain will hold its next parliamentary election in November of 2015. Díaz will face reelection in early 2016. She has to put in a good performance as president of the region of Andalucía until mid-2015 to be in a position to secure her party’s nomination.

 The mayor of Toledo, Emilio García Paje, is also an appealing candidate for the Socialists, as he has a track record of efficient management of a relatively big city in Spain.

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 Pedro Sánchez, a handsome Socialist Member of Parliament from Madrid, was elected Secretary General of the Spanish Socialist Party on July 13, 2014, and thus replaced Rubalcaba. But the Socialists have still not settled how they will choose their candidate for the general elections in 2015. Primaries are a possibility. What is certain is that Rubalcaba will not be the candidate. Anyone who served in senior positions for an extended period under Zapatero is tarnished.

Many in the PSOE are pushing for a primary to settle the matter of who will lead their party into the next election. The Socialists are dealing with several cases of corruption and fraud committed by elected officials and there is a growing and bitter split between the nationalist and non-nationalist wing of the Socialist Party’s Catalan branch concerning the current Catalan government’s push to secure a vote on self-determination on November 9, 2014. The Socialists have run the regional government in Andalucía since Spain’s transition to democracy in the late 1970s and have done everything within their power to block or slow down the broader investigation into the so-called EREs scandal, a process that allows companies to fire workers under certain conditions. Several institutions run by the Socialist Party in Andalucía also allegedly obtained gifts or favorable treatment from businesses whose permits they expedited. For example, a company called Fitonovo allegedly paid civil servants in Sevilla’s City Hall in order to secure public procurement contracts. Many companies bribed politicians at all levels during Spain’s real-estate boom in order to obtain construction permits. This allowed political parties to supplement their official financing. Not all parties nor regions were involved in these corrupt practices. But with the bursting of the bubble and unemployment at 24%, many Spaniards tend to tar all politicians – honest and dishonest – with the same brush, which of course damages Spain’s democracy. The Council that oversees the work of justices, magistrates and prosecutors in Spain (Consejo General del Poder Judicial) has struck a useful agreement with Transparency International whereby a data base of corruption cases will be accessible to the public and regularly updated. Andalucía is one of the regions that has registered more corruption cases. It also has one of the highest unemployment rates in Spain. The current Socialist president of Andalucía, Susana Díaz, cannot blame another party for her region’s economic malaise as the Socialists have run the regional government of Andalucía since the restoration of Spain’s democracy – almost 40 years. Susana Díaz therefore has a tall mountain to climb to prove herself. The center-right Partido Popular actually won the last elections to the Parliament of Andalucía, held in early 2012, but was not able to reach an absolute majority, enabling the Socialist Party and the former Communist Izquierda Unida to forge a coalition agreement. The Partido Popular’s leadership was counting on a victory in Andalucía and the region of Asturias (located in the north) after its landslide victory in the November 2011 general elections. Party leaders dreamt of running 13 out of Spain’s 17 regions – a circumstance which would have greatly facilitated the central government’s implementation of its reform program and fiscal consolidation. The Partido Popular did not achieve an absolute majority in Asturias and was unable to form a government there either. It nevertheless runs 11 out of Spain’s 17 autonomous regions. With 24% unemployment and 55% youth unemployment in 2011, Spanish professionals were emigrating in droves in search of work or better-paying jobs. Many fear a lost generation and a brain drain. The Socialist Labor Minister, Valeriano Gómez, downplayed in September of 2011 the horrendous jobs report and asserted that the fact that young professionals were leaving Spain actually benefits the country. Note that he is a Member of Parliament who lectures the current government. Maybe someone should have forced him to seek work abroad. Despite the embarrassing and shameful Zapatero era, it was not a foregone conclusion that the right-of- center Partido Popular, which governed effectively from 1996 until 2004, would obtain an absolute majority in the elections that had to be held by March 2012 at the latest. Zapatero at least had the dignity to call early

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elections in order not to prolong Spain and his party’s agony. Under the circumstances, Zapatero’s only option was to call early elections in November of 2011. The PSOE lacked a majority in Parliament and no party wanted to support additional unpopular measures that Zapatero had put off for years and only reluctantly adopted after the first Greek bailout in May of 2010 under pressure from the European Commission and the U.S. In fact, phone calls from President Barack Obama and European Commission President José Manuel Durao Barroso were necessary to overcome Zapatero’s resistance to enact meaningful measures. In May of 2010, I was serving as speechwriter to the president of the World Bank. At the 8AM daily meeting of senior management (with the President chairing, and Managing Directors and Vice Presidents in attendance), the euro zone’s and Spain’s situation was often discussed in the context of how it affected the international economy in general and the World Bank’s operations in particular8. After being kicked out of office, Zapatero earned (as every former Spanish prime minister) a cozy position earning 150,000 euros a year in the Consejo de Estado, an institution that formally must approve certain draft legislation enacted by the government before it can be submitted to the Parliament for final approval. One of Zapatero’s ineffective Deputy Prime Ministers, Maria Teresa Fernández de la Vega, allegedly tweaked legislation to secure her appointment to the Consejo de Estado. The aforementioned description of the Zapatero government and its ministers is necessary. Unfortunately, some people have short memories and forget who drove the Spanish economy into the ditch. Instead of harassing9 the current elected officials, who are doing a good job of steering the country out of the crisis, maybe they should send letters to Zapatero and his former ministers demanding that they forego part of their cozy salaries or pensions and thus share in the joint sacrifice that Spaniards have been enduring. As the date for Spain’s defining election of November 20, 2011, approached, many polls were predicting a landslide for the PP that would guarantee it an absolute majority – 185 MPs in the Spanish legislature’s lower chamber. Some even projected it could garner 193. I was skeptical about the absolute majority for several reasons. First, there was a risk of complacency. Polls had been predicting a PP absolute majority for months, so maintaining PP supporters’ enthusiasm was a tough task. Second, the Basque terrorist group ETA announced in late October that it was definitively ceasing armed attacks. Although this development had been widely expected, it nonetheless provided a fillip to the Socialist Party’s candidate, Alfredo Pérez Rubalcaba, whose tenure as Interior Minister in Primer Minister Zapatero’s last government contributed significantly to ETA’s demise. Although ETA’s defeat has many fathers, Rubalcaba was able to cash in on his strong leadership as Interior Minister. Third, in two key Spanish regions – the Basque Country and Catalonia – the PP’s anti- nationalist message turned off some middle-of-the-road voters who felt unnecessarily aggrieved by the PP’s positions on language and other non-economic issues. For instance, bullfighting was banned in Catalonia after its Parliament voted in 2010 (with 68 votes in favor, 55 against and 8 abstentions) to outlaw an almost extinct practice in the region as of the beginning of 201210. But some in the PP pandered to those voters in most of

8 Developed countries with a large economy such as Italy and Spain are major shareholders and donors to the World Bank Group’s different units, thereby contributing to development and the mission to end poverty. 9 It has become popular in Spain since the Partido Popular came to office in late 2011 and has implemented tough but necessary cuts in spending for crowds of people to assemble in front of the private residences of government officials. These crowds often insult them, surround them, force their bodyguards to protect them, and disturb their private lives as much as possible (a practice dubbed “escrache” in Spanish). No minister or politician has been hurt, but this constitutes political harassment as protestors already have ample opportunity to demonstrate (and bring traffic and business to a halt) in all Spanish cities. 10 The Catalan Parliament was forced into voting on the matter because of a “popular legislative initiative” whereby if enough signatures are collected, a matter (that a region has jurisdiction over) has to be put to a vote in the Parliament. The members of Parliament who voted in favor belonged to the pro-independence ERC, the right-of-center nationalist CiU coalition and the IU (Leftist Alliance of former Communists and Greens). The main Spanish opposition party at the 30

the rest of Spain’s regions that portrayed the vote as an attack on Spain’s heritage and culture, rather than ignore the issue and focus entirely on the economy. This electoral tactic by the PP may have been necessary in Spain, but diminished its support in Catalonia. Fourth, many independent voters perceived the PP as only blasting the Socialist government but not providing enough specifics about what it would do in power. The PP’s strategists felt that telling voters that austerity and cuts would have to take place under a PP government would alienate many voters. I understood that they not detail all of the harsh measures needed to liberalize and revive Spain’s economy, especially as the Socialists would use any announcement during the electoral campaign to scare voters about the PP’s supposed desire to dismantle the welfare state and privatize services. With unemployment hitting 24% in the third quarter of 2011, and 1.4 million families with everyone out of work, Spaniards were gloomy and downright depressive. Lambasting the Socialists for having wrecked the economy, in my view, was not enough. The PP eventually did produce an election manifesto with detailed measures they would undertake and did obtain an absolute majority in the general elections of November 20, 2011. I was thus proven wrong.

time, the PP, voted against, as did the Socialist Party and a populist right-wing offshoot of the PP (Ciutadans). Catalonia thus became the second autonomous region in Spain to ban bullfighting after the Canary Islands. Catalonia’s vote spurred a similar campaign to outlaw the practice in Ecuador. 31

Chapter 4. John Maynard Keynes to the rescue

A year before the Spanish general election of November 2011, something remarkable occurred on the other side of the Atlantic. John Maynard Keynes returned from the dead in order to discuss world events and instruct politicians and policymakers on what to do in order to overcome the crisis. He did so during a conference given by Joseph Stiglitz at the World Bank in 2010. Stiglitz’s prestige and knowledge of economics is undisputed. He received the Nobel Prize for Economics and served as Vice President and Chief Economist of the World Bank. As the crisis worsened, he veered to the left and published anti-establishment books -- such as Globalization and its discontents -- that turned him into a celebrity and best-selling author. The auditorium at the IFC building on Pennsylvania Avenue the day of his presentation was packed – standing room only. The sheer magnitude of the brain mass accumulated in the auditorium that day produced a miracle. Stiglitz’s profound remarks, delivered passionately, to an audience made up of highly intelligent professionals from many countries contained such cosmic energy that it enabled Keynes to awake from his tomb. The fact that Stiglitz had adopted Keynesian economics was a major cause of the resurrection. Hopefully my presence there also contributed marginally to ignite this intellectual-cosmic spark. Working for Bob Zoellick certainly made me a more intelligent and efficient person. During his tenure as president of the World Bank Group (WBG), I had the opportunity to witness his successful reforms and launching of new initiatives that transformed the WBG. On the one hand, Zoellick had to ramp up investments and projects in most developing countries to help them cope with the consequences of the global economic crisis. He pushed through a very time-consuming increase in the WBG’s capital, which entailed a realignment in the voting power of some of the WBG’s shareholders (China replaced Japan as the WBG’s second shareholder). Moreover, Zoellick undertook or promoted key initiatives: the STAR initiative to help countries recover stolen assets from their former corrupt dictators; the Arab World Initiative to foster inclusive growth in Arab countries; and the Open Data Initiative, which made most of the WBG’s data and statistics available to the public at no cost. In addition, Zoellick’s stewardship of the WBG enabled the attainment of several of the UN’s Millennium Development Goals, which stakeholders extensively analyzed and debated in 2010 (the final target date for their accomplishment is 2015). Zoellick also scaled up programs and funds to help developing and emerging economies mitigate and adapt to climate change, often by teaming up with UN institutions or programs such as REDD+ (Reducing Emissions from Deforestation and Forest Degradation) or developed countries (Norway might invest in a project to finance reforestation in Guyana, for example). The sustainable development portfolio of projects was greatly enhanced. And Zoellick found time to promote smaller initiatives, such as a multi-country program aimed at preventing the extinction of tigers (the Global Tiger Initiative). Zoellick is one of the most intelligent, hard-working, and forward-looking VIPs that I have had the honor of working for. He prodded the WBG’s staff – which like any public institutions can be resistant to change – to adapt to a global economy where emerging and developing countries generate about 45% of GDP. This meant leveraging middle-income countries’ expertise and know-how in order to promote South-South cooperation. Zoellick managed to advance this agenda at a time when the world economy was undergoing and later recovering from a profound recession in the developed world, and rich-country governments were cutting development funding. Zoellick has an incredible memory, an amazing attention to detail, and had the humility to allow VIPs that contributed to development and teamed up with the World Bank to take center stage (John Kerry, Bill Gates, Shakira, Pierce Brosnan) when they came to the World Bank to take part in events. He is a strategic thinker, always looking ahead to warn policymakers to adapt to and address challenges and trends that others only try to tackle when it is too late. And he has an innate capability -- which I have tried to practice -- to seek and team up with individuals in international institutions, governments and corporations 32

who are willing to push for change, often at the expense of clashing with entrenched bureaucracies. This might be likened to “forging coalitions of the willing” made up of individuals capable of teaming up to advance global governance issues and other matters. After his resuscitation, Keynes remained in hiding until October of 2011. Marx’s abrupt and chaotic return from the dead in 2009 had taught all of us a lesson. Keynes’ friends advised him to stay under the radar for months. This time allowed a distinguished group of Keynesian economists to brief Keynes on the most significant international political, economic, social and scientific developments that took place since he passed away in 1946. Robert Skidelsky, a leading economist and Keynes’ biographer, led this group. The preparation for Keynes’ return onto the world stage also included crash courses on how to use information technology, modern transportation, travel, social media and other everyday aspects of life that have significantly changed since 1946. After a year of reclusiveness and study, Keynes was ready to return to make a big splash, especially considering the fact that the world economy was still recovering from the Great Recession and just about every politician and policymaker had embraced Keynesianism or some of its methods as necessary to jump-start the economy. On a scientific level, Keyes’ return to life is even more plausible than that of Marx with a combination of more advanced DNA and cloning and the shorter interval between his death in 1946 and his resurrection in 2010. In early November, 2011, I was introduced to Keynes at a private meeting held in Barcelona’s Círculo Ecuestre by some members of the Cercle d’Economia, Catalonia’s most prestigious economics think-tank. Those in attendance at the secretive meeting to welcome Keynes to Barcelona were: Josep Piqué, former minister in PP governments who was the president of the Cercle and a major Spanish airline at the time; Salvador Alemany, Chairman of Abertis and a former president of the Cercle; Joan Mas i Cantí, one of the founders of the Cercle; and my good friend Víctor Pou, whose distinguished career as a senior civil servant in the Catalan Government and the European Commission (Directorate-General for Trade) has been followed by a frenzy of teaching at IESE, UIC, delivering conferences and writing of books about Andorra. Víctor had called me to inform me of the miraculous story of Keynes’ return, his year of reclusiveness and his visit to Barcelona. At the private meeting, the Catalan VIPs introduced me to Keynes and gave me the opportunity to summarize my career and work. He agreed to meet me periodically in order to give me advice and his take and analysis on world events on the condition that I update him on political and economic developments around the world. The aforementioned Catalan VIPs were too busy with their day jobs and careers. Since I am a news junkie, I was the natural choice to keep Keynes updated. The United Nations organized an international high-level conference series for Keynes. He would deliver presentations to big audiences around the globe. Keynes also appreciated my efforts and my attempt to moderate Marxists and radical Socialists, contributing to his decision to meet with me over the following months. I would have to travel to some of the cities where he would hold conferences in order to interview him. He would make his policy recommendations on how to overcome the crisis on his conference tour or through the media. My second meeting with John Maynard Keynes, however, also took place in Barcelona, in a bar called Kinkes, near my flat, on November 20, 2011, a historic date in Spain for two reasons: Franco died on that day in 1975, and the Socialists suffered their biggest defeat since the Spanish transition in a general election on November 20, 2011. The PP trounced them at the polls and did obtain an absolute majority, the second-biggest absolute majority since Spain’s democratic transition (Felipe González’s 1982 absolute majority being the biggest). Keynes was curious to know how I managed my transatlantic life and was ready to query me extensively. I had bet my good friend and Madrid insider Deep Throat (employed in a Spanish ministry) a dinner that the PP would not obtain an absolute majority. As I lost the bet, I had to invite him, his wife and a friend to dinner on one of my trips to Madrid. After returning to Barcelona, Keynes and I met at the Kinkes bar. 33

--Alex, what are you up to?

--I got back to the apartment late last night. I watched the news, got my stuff ready for Monday’s classes and radio program. I had a bite to eat, washed the dishes, and watched the news coverage --Thai floods, Qantas grounding of airliners and the reaction to the euro zone debt deal.

I published another article on the euro zone debt crisis on Saturday, November 12. Natalia Sanmartín11, Cinco Días’ editor, had asked me for an op-ed on Thursday, but I had not checked my university email account. I have written 5-6 op-eds for Cinco Días, (owned by the PRISA Group), which is having to let staff go because of PRISA’s debts. I wish I could revive their fortune on my own, but that is obviously beyond my reach. I am just a professional, not a wealthy person. John, maybe you could help them? You are making lots of money with your conferences. --Alex, you cannot imagine how many institutions and people ask me for financial help! I am a philanthropist in this life as I was in my previous one, not a development bank!

--All right, all right. I understand. Cinco Días is after all Spain’s oldest financial newspaper and regarded as left-of-center. It would therefore make sense for you to fund them.

Well, today is a great day. I do have to work -- preparing my lectures, drafting a teaching plan for a course next quarter, reading and arranging meetings in Madrid for next week-end. However, I do not intend to let anyone spoil my joy over Zapatero’s historic defeat. Out with the old and in with the new! --Alex, the PP’s leader, Mariano Rajoy, will preside over a wrecked economy. And he will take orders from Brussels and the IMF on major economic matters anyway. It will be a winter of discontent.

--That is what CNN just called it. Fifty percent of Spaniards between 16 and 24 are unemployed. The Lost Generation. Well, I was expecting you to say that Rajoy has his work cut out for him. You are just repeating what many in Spain’s left-wing media are saying. And you are…well, Keynesian. But I do not hold it against you.

While I was writing today, I listened to Candy Crowley interview guests on CNN’s State of the Union. Condi Rice just ruled out returning to public life even if a Republican (GOP) wins the presidential election in 2012. She seemed candid, underlining that she is very happy as a university professor at Stanford. I can relate to that. She mentioned that she opens doors for young people. Nice line. Now it is on to Newt Gingrich’s resurrection…good grief. If the GOP nominates Gingrich, they deserve to lose. He is extremely smart and knowledgeable, but the way he treated a sick (who had cancer) wife he was divorcing shows little compassion he has. I agree with Rahm Emanuel, Obama’s former Chief of Staff and current mayor of Chicago, when he described the GOP field as a “bunch of turkeys”. Herman Cain actually said that Americans want someone who can lead, not read. Painful. His meltdown when asked about President Obama’s policy on Libya was sad to watch. Texas Governor Rick Perry has come out with an ad that describes Obama’s policies as Socialist. But he could not even name during a GOP primary debate the three departments he would close if elected. Someone said that if you wanted to see God cry, you only needed to

11Natalia Sanmartín has since published a best-selling novel in Spain titled El despertar de la Srta. Prim, which has been translated into other languages. I am very happy that a hard-working, kind and good person such as Natalia who had been unable to publish her thoughts in recent years because she is in charge of the op-ed department at Cinco Días is now getting the recognition and fame she deserves. I admire her intellect, value her judgment and tenacity, and share with her a worldview based on a social free-market economy that should go to war if necessary.

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show him the GOP field of 2012. Ed Gillespie, former chair of the Republican National Committee, just blasted Obama for saying that Americans had gotten lazy when it came to attracting foreign investors… --Alex, where did Obama say that?

--At an APEC summit. He was not calling Americans lazy, just saying that they had let down their guard in the global race to attract FDI. It would of course help if the U.S. would lower its corporate tax rate, which is one of the highest in the developed world.

--We need a strong leader in Washington who will stimulate demand.

--John, President Obama is certainly trying to do that….but the Tea Party fanatics will fight him every step of the way. At any rate, you can take solace from the ongoing debate about how to resolve the euro zone’s debt crisis.

--How so?

--Well, everyone except Chancellor Angela Merkel, the Bundesbank and other German government officials and governments in some northern European countries supports the need for the European Central Bank to step in and buy substantial amounts of Italian and Spanish bonds. Many are even demanding that the ECB issue eurobonds. It cannot get more Keynesian than that! Almost everyone agrees that governments, central banks and international organizations should increase aggregate demand in order to prevent unemployment from rising to an even higher level. But they disagree on how to do so.

-- I will keep this in mind as I reflect in the coming weeks on what the world economy needs. Alex, did you watch Syrian President Bashar al-Assad’s interview with the Sunday Times?

--Quite remarkable.

--What do you make of it?

--Bashar al-Assad is smart enough to understand he cannot bomb, kill and torture all of his people into submission. He has seen what happened to (former Egyptian strongman) Hosni Mubarak, (Tunisia’s former ruler) Zine El Abidine Ben Ali and (and former Libyan dictator) Moammar Gaddafi since January of 2011. His carrot-and-stick approach is useful and wins him time.

--But the Arab League suspended Syria’s membership on November 12 of 2011. The rebels have created the Syrian National Council, and the Syrian Free Army has carried out brazen attacks inside Syria, including at a military base. Turkey is threatening to cut off electricity supplies to Syria.

--Yes, but many Arab countries’ denunciations of Assad are meant for internal consumption. Nobody wants to be seen as defying the Arab Spring and the Arab street. The fact is that Syria has one of the biggest armed forces in the world. The rebels are currently no match for Syria’s armed forces. Assad, with his mild-mannered and soft-spoken English, can scare Western leaders who know an unstable Syria is the last thing the region needs. Russia and China will never back tougher sanctions at the UN Security Council, let alone a no-fly zone of the kind that doomed Gaddafi. Once bitten, twice shy, say the Russians and the Chinese. They are still smarting over their support for the resolution that enabled the West to support and arm the rebels (a French

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and UK-led NATO mission with significant U.S. involvement) and overthrow Gaddafi. Assad has promised parliamentary elections by February 2012, followed by the creation of a new government. Believe me, Assad is not going anywhere. People in Homs, Aleppo, Hama and other rebellious Syrian cities are heroes and extremely brave. Yet the facts on the ground are hard to ignore.

Syria’s Christian and Alawite minorities, each of which make up about 10% of the population, are very wary of the rebels, who are Sunni and could usher in a religious regime that would undermine their freedoms or even force them to flee. They will support Assad to the bitter end. The situation in Egypt is troubling. Field Marshal Mohammed Tantawi and the other generals on the military council are doing a reasonable job, but the population is understandably impatient. They have taken to the streets in significant numbers, prompting a police and military crackdown. People are fed up with the increase in crime, want to see Mubarak convicted and sentenced, tourism revive… --Alex, is Egypt holding elections?

--Yes. Next month. Let us hope the wheels do not fall off the cart. Egypt’s transition has been quite smooth so far, especially considering the country’s poverty and lack of development. The military should let people vent their frustrations in Tahrir Square, and the generals need to correct their mistakes. The military and police need to avoid a crackdown and bloodshed at all costs. Two people were killed and 600 injured on Saturday, November 19. If people feel their revolution is being taken away, things will get ugly.

It is hard to keep track of everything going on in northern Africa and the Middle East, especially on week-ends because many protests take place after Friday prayers. Dozens were also hurt after clashes between protesters and police in Bahrain. We should have just one international channel devoted to news coverage in the region. CNN International does a great job, has magnificent correspondents and analysis, but they have to report the news from other parts of the world, too! --We already have Al-Jazeera.

--True.

--Alex, I am already extremely famous and well known. The Economist regards me as the most famous English economist of the XXth century. In addition, Time magazine included me in their list of the one- hundred most important and influential people of the 20th century in 1999. I received a hereditary peerage as Baron Keynes of Tilton in the County of Sussex. How would you like people to remember you?

--As someone who did his job and worked very hard. Someone who was not afraid to speak truth to power. Someone who always followed the rules but expressed unpopular views. Someone who did his duty with honor and integrity and helped others. By the way, do you know who topped Times’ list of the one-hundred most influential persons of the 20th century you just referred to?

--No, I had not returned to life by 1999.

--Time magazine deemed Albert Einstein as the most influential person of the XXth century. Mahatma Gandhi and Franklin D. Roosevelt tied for second place. It is quite a coincidence that all four of you died (or were assassinated, in Gandhi’s case) within a short time period. Roosevelt passed away in 1945, you

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died in 1946, Gandhi was shot and killed in 1948, and Einstein died in 1955.

Chapter 5. Working the Barcelona-Madrid axis

On January 14, 2012, Keynes and I met up on a breezy, cold but sunny Saturday morning in Barcelona. S&P, the credit-rating agency, had downgraded the sovereign-debt rating of nine European countries, among them Italy and Spain. S&P had stripped France and Austria of their coveted triple-A rating. Only four euro zone members retained their triple-A rating. Analysts had been expecting the downgrade. It therefore turned out to be pretty much of a non-event in terms of its impact on the markets. However, the news gave journalists and pundits something to fill the airwaves with. Keynes wanted to know my take on the downgrade. --Alex, what do you make of S&P’s downgrade?

--S&P had been warning it would downgrade many European countries’ debt ratings for weeks, so markets took it in stride. CNN gave it some coverage, even labeling it “Black Friday”. Well, it was Friday the 13th!

--Yes, and these mediocre ratings agencies could not have picked a worse day to announce their downgrade if you are superstitious. I am not, and neither are markets. In fact, I do not expect this move to spook investors. Interest on 10-year Treasuries actually dropped after the U.S. suffered its first- ever downgrade in August of 2011, and has remained at lower levels since. The credit-rating agencies have lost a lot of legitimacy in the wake of the subprime crisis in the U.S.

--Will Rajoy’s government increase excise taxes in Spain?

--John, I do not think so. Rajoy campaigned on a pledge not to raise taxes. The Socialists are already launching their predictable tirades against the tax rises. Rajoy on numerous occasions has stated that he opposes tax increases and that he will reverse some of the hikes when the economy revives. I believe him on the first point. But it will take years before he can deliver on the second promise given Spain’s high deficit and debt and the recession we are enduring.

After the Zapatero government lied about Spain’s budget deficit, Rajoy had no choice but to slash spending and raise taxes. The budget deficit reached 8.9% in 2011, instead of the 6% the outgoing Socialist government announced and promised to the European Commission and international economic institutions. Every additional percentage point in Spain’s budget deficit entails the need to generate savings of approximately 10 billion euros. Most of the press, the opposition, and the labor unions have already lashed out at Rajoy for the government’s income-tax increases. I think the government will avoid hiking VAT or excise taxes unless the initial measures fail in cutting the budget deficit. Consider that the rise in income taxes will dampen demand. Increasing VAT and/or excise taxes would only make matters worse. Personally, I am not affected by higher excise taxes because I do not smoke, drink and drive my car rarely (fueling my motorcycle is another matter). That is why I advocated a rise in excise taxes in my latest Cinco Días op-ed. --Alex, you would make a cruel politician! Those poor smokers and drinkers! Do you have to punish them? They need something to quell their sorrow with or ease their stress.

--What about the millions of us who work hard and manage to lead healthy lives?

In late January of 2012, Keynes and I met again in Barcelona, at the restaurant “Els Quatre Gats”. Keynes was still traveling in Western Europe as part of his world tour. ”Els Quatre Gats” has a fascinating history. It was a 37

hostel, cabaret, pub and a restaurant. It became one of main centers of Modernism in Barcelona. Ramon Casas i Carbó, an artist, financed the bar on the ground floor of Casa Martí, which was finished in 1896 and designed by the Modernist Catalan architect Josep Puig i Cadafalch. “Els Quatre Gats” was rebuilt in 1978. Pablo Picasso and his artist friends met at “Els Quatre Gats” often. Picasso designed the restaurant’s menu. I have eaten at “Els Quatre Gats” on other occasions. The last time was the summer of 2013, when a U.S. businessman from New York, Bill Strong, was on vacation in Catalonia and Barcelona. Bill founded Equinox Partners LP in 1994. It is a very successful hedge fund whose headquarters are located on Manhattan’s Fifth Avenue.

--Alex, did you make much professional progress in Madrid over the holidays?

-- Well, I was not really expecting to land a job to add to my already heavy workload. Maybe some consulting. But even on theoretical work days between Christmas and New Year’s a lot of people are on vacation, and most civil servants take a couple of weeks off at least.

--Civil servants could set a better example for the 5 million unemployed Spaniards, the hard-working entrepreneurs, small business owners, families struggling to make ends meet…

--I am pleased to hear you say that, and especially coming from you! You were a civil servant. What you say especially applies to highly paid civil servants, who get a lot of time off during the year, Christmas bonuses and have lifetime job security as you point out. Mariano Rajoy’s government has announced that civil servants will have their pay frozen in 2012 (after having their salaries cut in 2011 by 5% in some cases), and Spain’s regional governments (Comunidades Autónomas) are having to do the same or will be forced to do so. In my own Catalonia, for example, the courageous leadership of president Artur Mas has been slashing away at civil servants’ pay and benefits, cutting unnecessary spending on health care…

--Wait a minute. That sounds very tough. You cannot make ordinary people pay for the financial crisis. Make the rich pay more taxes!

--I fully agree that very rich people should bear a bigger burden. But Catalonia’s government does not get to fully control all taxes (it does control the so-called wealth tax on peoples’ assets), let alone decide the rates for the different types of taxes. Mas is hence doing what he needs to do: trim Catalonia’s civil service, health, education and other devolved services of unnecessary waste, perks, shutting down little- used hospitals in remote locations that are extremely expensive to maintain…

--How is this going down with the public?

--Some polls show majorities rejecting the cuts in health services, but not exceeding around 55%. Many people do moan and the newspapers and media are full of complaints. Yet in the November 20, 2011 general elections, Mas’ CiU party actually increased its share of the vote and beat the Socialists in Catalonia in a general election (as opposed to one for the Catalan parliament) for the first time since the advent of democracy in 1977. Mas was very brave to enact this austerity since he took office after winning the elections in November of 2010 because his party, CiU, does not enjoy an absolute majority in the Catalan parliament.

--You sound like his spokesman….

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--I have a track record of speaking my mind and being critical of politicians, especially because I have had the privilege to speak with and interview some statesmen, those who make tough and unpopular decisions with full awareness that they will pay a price at the polls. I did some speechwriting and drafting of articles for media publication for Artur Mas for an entire year in 2000 as a free-lance professional.

--What was Mas doing at the time?

--He was the Catalan Minister of Finance at the time, and was the natural candidate to succeed President Jordi Pujol, who had been in office since 1980 and had managed to win a record number of elections. Mas’ chief of staff at the time asked me to read Al Gore’s book, The World according to Al Gore, give him my take, and determine whether most of Gore’s positions were aligned with those of Mas…

--Were they? Sorry to cut you off, but get to the point…

--Ok, ok, I have to provide context. I want to characterize the work I did, without neither exaggerating nor diminishing it. I care about my record, and hope and believe the politicians and international officials I have written for also appreciate that I give myself credit without exaggerating my role.

Anyway, yes, except for a few things like supporting the death penalty and unfettered use of guns, which we obviously do not support in Europe, Mas and Gore’s positions were very similar. So I was asked to draft Mas’ forward to the Catalan- and Spanish-language version of “The World according to Al Gore”, which I did. I am grateful for the opportunity I had to write for Mas back in 2000. I did get paid well and on time for my work. --Was he elected?

--Unfortunately, he was not. Despite finishing first, CiU was not able to form a government because the Catalan Socialists (PSC-PSOE), former Communist/Green party (IC) and the pro-independence Esquerra Republicana de Catalunya (ERC) joined forces to elect Pasqual Maragall as President of Catalonia. Maragall is a decent person and was a good mayor of Barcelona. He will go down in history as the mayor who secured the Olympic Games for Barcelona in 1992. Yet he was rather ineffective as President of Catalonia in two terms, largely because of the incompetent, inexperienced and semi-corrupt coalition partners he chose. His second term in particular was a disaster. I have met Maragall on several occasions and think highly of him as an economist. Maragall regards himself as a free-market “liberal” in the European sense and he is staunch in his defense of America (unusual for Socialists in Spain). I recognize his service to Barcelona and Catalonia. However, he chose the wrong coalition partners in the Catalan government. His wife, Diana Garrigosa, was my IT teacher in high school. They are still active in politics, although he has been suffering from Alzheimer’s for several years.

Artur Mas, therefore, had to endure two terms in opposition despite winning both the 2003 and 2007 elections. He finally trounced the Socialists in late 2010 and became president of Catalonia, the fifth (after Josep Tarradellas, Jordi Pujol, Pasqual Maragall and José Montilla12) we have had since the Generalitat,

12I met Montilla when I was working for Narcís Serra and he was not yet president. He was kind when I asked him for a picture at a Cercle d’Economia conference in June 2013 in Sitges. Although I did not agree with his policies, Montilla is at least a polite Socialist. He was the first president of Catalonia in contemporary time to have been born outside of Catalonia (in Andalucía). He is currently a member of Spain’s Senate. 39

Catalonia’s government, was restored during Spain’s transition to democracy. I am privileged to have worked for Artur Mas, to have three very nice letters from him (with hand-written notes) congratulating me for my latest book on Ethical Capitalism, and to know both Maragall and Pujol. Tarradellas passed away many years ago. I did stray a little bit in answering your question. I feel that Mas is governing like a statesman now. He even doubled-down on austerity after CiU beat the Socialists on November 20, 2011. --To me doubling-down on austerity is not something to boast about. Is there anything you disagree with Mas on?

--I am opposed to Catalan independence. I do not know what he feels deep down. I would have to speak privately with him to find out13. Many respected professionals back independence. I might even do better professionally if Catalonia were independent, but I believe achieving independence is a legal and political nightmare and have always opposed it. --Why can’t Catalonia become independent?

--Unless Catalonia wants to violate the Spanish Constitution of 1978, amending it to enable a referendum on self-determination is required. The main Spanish parties, the PP and PSOE, will not amend the Constitution to include the right to self-determination for a particular region. The Constitution states that national sovereignty lies with all of the Spanish population, and a region cannot therefore decide on its own to hold a vote and secede.

--But they just amended the Spanish constitution this year to insert the so-called Golden Rule, which limits the structural budget deficit to 0.4% of GDP by 202014? I think is a terrible idea as I have always advocated that governments incur higher deficits in order to kick-start economic activity. So why not also amend the Spanish Constitution to enable a vote on self-determination? Kosovo broke away from Serbia, as did Montenegro. The Czech Republic and Slovakia parted amicably in January 1993…

--John, all of these examples are accurate. However, in none of these cases did an existing part of an EU member state secede unilaterally and remain in the EU. Mas has to convince all EU member states to allow Catalonia to remain not only in the EU, but also in the euro zone. France and other countries do not want to

13I actually had a one-hour private conversation with President Artur Mas in June of 2013 at the Generalitat. He was kind and considerate and was interested in my experience in Washington working at the World Bank and Inter-American Development Bank. He asked me about my opinion regarding Catalonia’s independence. I gave him my take and he was blunt in his views. I told Mas that Prime Minister Rajoy, as opposed to Zapatero, had never fooled him or promised something he did not deliver on. Mas agreed. I added that Mas’ victory in the 2011 elections was a milestone he achieved despite enacting tough austerity measures. He agreed. I observed that Rajoy’s government is made up of very competent ministers. I also told him that many in Spain and Catalonia had lived beyond their means before the crisis, an assertion he shared. I remarked that after November of 2015, the PP would not have an absolute majority and he would therefore be in a better negotiating position. For good measure, I pointed out that no Catalan politician came close to matching his charisma and record, and that the next Catalan elections would not have to be held until November of 2016. I had the nerve to tell him politely that a divorce -- meaning Catalonia seceding from Spain -- should be sought from a position of strength. He agreed with most of my statements. At one point, however, he passionately remarked that he felt the government in Spain humiliated Catalonia. He said that the might tire of his attempts to achieve a better deal for Catalonia within Spain. I was not ready to fake support for Catalan independence as I have always opposed it. I am not an opportunist, and people know that I have never favored independence anyway. 14 In September of 2011, the Spanish Senate approved an amendment to article 135 of the Spanish constitution which caps the structural deficit of all public administrations (central, regional and municipal). The amendment will come into force in 2020. Germany and Austria have included similar clauses into their Constitutions, which are equivalent to the U.S. notion of having a balanced-budget requirement. U.S. states by law have to have balanced budgets, 40

set precedents for their own regions. Several EU member states’ governments, including Spain’s, have still not recognized Kosovo’s independence15. --But Catalonia is much more powerful, economically advanced and prosperous! Kenneth Rogoff, a former IMF chief economist and prestigious Harvard professor, pointed out that Catalonia would be one of the world’s richest countries if it were independent.

--Look, I do not want to continue debating this topic. I respect the feelings of those like President Pujol, who believe it is Catalonia’s priority to press ahead with independence. I disagree with them. I do not know what Artur Mas thinks privately16. I know that publicly and in terms of his decisions as President of Catalonia, fixing the economy was at the top of his agenda at the beginning of his term in late 2010. I believe we need to strengthen Catalonia’s economy. Restore it to its traditional dynamism. Investors and hedge funds are speculating on the demise and break-up of the euro zone as we speak, so Catalonia’s independence at this point is a dream. A respectable dream but not one that I share. My worry is the millions of unemployed Spaniards and Catalans. By the way, John, I mentioned your name today to Enrique Iglesias, the current head of the Secretaría General Iberoamericana, an institution based in Madrid that organizes summits involving Latin American countries, Spain and Portugal, among other tasks. It was founded in 2005 and Iglesias was named its first head. Iglesias was born in Asturias but moved to Uruguay, where he served as head of its central bank before heading the UN’s Regional Economic Committee for Latin America (CEPAL). He later served as president of the Inter- American Development Bank, where he was succeeded in 2005 by Luis Alberto Moreno, for whom I served as consultant and speechwriter in 2011. Iglesias very kindly saw me in his office at the SEGIB, on Madrid’s Paseo de Recoletos, 8, on a sunny but wintry Wednesday, December 28, 2011. He has a wonderful office. I gave him a copy of my latest article in Cinco Días. I had already given him a copy of my book on Ethical Capitalism in Washington, D.C. We discussed politics and economics in Spain, Europe, the U.S. and emerging countries.

--Alex, how did my name come up? Did you not ask him for something specific? Did you make any proposals. That is what your friend, Joan Rosàs, the executive at La Caixa, always recommends in professional meetings where you are striving to obtain more work.

--I did. But I had only met him briefly twice before. The first was a brief encounter, when Narcís Serra briefly introduced me to him at a Madrid hotel, and the second in Washington, D.C., a 3-minute conversation after he spoke at a conference and Bob Berg introduced me to him. I could not ask for consulting work right off the bat. I had to discuss my work as a professor, writer, columnist, which he actually said was of a higher level than the speechwriting for presidents of the WB, EBRD and IDB….

--Is that true?

--Well, I am paid significantly less as a professor than as a speechwriter for senior VIPs, but academia allows for a higher profile than speechwriting, where you are not supposed to take credit for the writing you do. As for your name, Iglesias complimented me on the book and its creativity. He was very charming. I remarked that it is tough to get a book to be a best-seller, and that the Spanish version, the one titled Conversaciones con Marx: Diálogos en torno a un liberalismo ético, has an intellectual title with a reference to Marx that

15 By 2013, France had recognized Kosovo’s independence. Spain still refuses to do so, along with Cyprus and Greece. 16 I did not know his private thoughts on the matter in 2011. I do now after the aforementioned meeting with him in June of 2013. Revealing them is appropriate because at the time of writing Mas has already publicly made his intentions very clear. 41

comes across as puzzling to some.

--For example?

--My mother’s good friend Mari Paz from Madrid. She almost rejected it because it contains the word “Marx” in the title, despite being a good friend of my mother’s and having known me since I was a kid. But Iglesias retorted that having “Marx” as part of the title is appealing.

--Why did he say that?

--Well, he is left-of-center and he rejects the kind of tough austerity governments are imposing in Europe. In that context, he found Marx’s “resurrection” a useful counterweight. Maybe he wanted to cheer me up because I explained that a best-selling book needs a simpler, less intellectual title. At any rate, I pointed out that I would rather see you resurrect than Karl Marx.

--Alex, maybe we do need Marx back. Have you heard that according to the latest statistics, one out of every three Americans is either in poverty or close to the poverty line?

--Yes, and millions of Americans are saddled with personal debt. It is common to hear about undergraduate students who will graduate with up to $90,000 in debt. I am hopeful about the Rajoy government’s stated wish to crack down on Spain’s underground economy. It has announced a campaign to root out the underground economy, which they obviously want to tax. They are forecasting they can generate about 6 billion euros in revenue this way. It is a good idea in principle, but tricky to execute.

--Why?

--Some bosses and small business owners might prefer to sever their informal labor ties to their employees rather than come clean and put them on the payroll. That would add to the number of people not making anything. I am not sure how the Rajoy government plans to address this matter. In my view, reforming Spain’s outdated and rigid labor market is urgent, as it will give employers new tools and contracts with which to hire workers. Right now, it makes more sense and is much easier for employers to lay off workers than to readjust their working conditions.

The labor unions have steadfastly for years refused to accept that indefinite contracts are a barrier to job creation. They protect only the interests of those workers who do have indefinite contracts, and are quite hard and expensive to fire. In order to pay a lower severance subsidy, the employer must prove there is a specific and serious reason to fire the employee, such as the commission of fraud, stealing from the company or harassing a fellow employee. Otherwise, firing an employee -- say, for low performance -- would be deemed an unjustified firing if taken to court and require the employer to pay a hefty severance package, which amounts to 45 days’ salary for each year that the employee has worked. In practice, if bosses and their employees get along reasonably and the company has to lay them off, they mutually agree to an unjustified firing, which enables the employee to receive the lump-sum 45-days-of-salary per year worked payment and collect unemployment benefits. Employer and employee basically settle out of court. Although the employer pays for the compensation, society as a whole bears the bigger burden through the financing of unemployment benefits, and the employer avoids the costs and time of going to court.

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The laid-off person stays at home and in many cases drops out of the labor force. I am not advocating an American-style labor market without any protection for employees. In northern Europe, where labor markets are not as rigid as in Spain, unemployment rates hover around 5-8%, whereas in Spain we have reached the 24% mark. Germany’s unemployment just dropped to a post-reunification low. Germany’s labor market affords its employees much protection but does not stifle job creation and entrepreneurship.

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Chapter 6. Chancellor Merkel and the European Central Bank

As global business and political leaders gathered in Davos for the annual Global Economic Forum in early 2012, Keynes and I met up in Barcelona’s Nuba, a fantastic and luxurious restaurant that caters to the well-heeled Barcelona elites. It transitions from serving food and drinks to a disco around 1am, has a beautiful design (the entrance looks like the one to a Caribbean resort) and attracts an older crowd than the places frequented by young university students or even those in their early thirties. It is only a five-minute walk from my apartment.

--Alex, Nuba is splendid. I love the neon lights, private and comfortable seating areas…

--Yes, indeed. President Obama will soon deliver his State of the Union speech, his last before his re- election attempt in November of 2012. He is expected to emphasize that all Americans should pay their fair share of taxes so the most vulnerable are not left behind and everyone has a chance to pursue the American Dream.

Meanwhile, Mitt Romney, the Republican Party front-runner to take on President Obama in November, has revealed his tax returns. He made $42.5 million over the past two years and paid $6.2 million in taxes, an effective tax rate of 13.9%, below what most Americans pay.

--That is outrageous!

--John, to be fair, Romney has consistently given away a lot of money to charities for many years. However, I agree that he and millionaires in the U.S. pay too little in taxes. Obama will push for comprehensive tax reform and advocates repealing Bush’s tax cuts for the wealthy when they expire at the end of the year. Higher taxes for millionaires poll well with Americans. The Occupy Wall Street have found a slogan: “We are the 99%”.

--How do Republicans defend their opposition to raising taxes for millionaires?

--They basically make three points. First, they argue that many millionaires are owners of small businesses who have worked extremely hard and would have to lay off some employees if their income tax was increased. This point is rebutted by Democrats, which claim that the number of small business owners who file for and benefit from lower income taxes is very small. Second, Republicans argue that the concept of raising income taxes, even on the very rich, sends the wrong signal about the need to take risks, create a business and hire employees. In other words, that it discourages the entrepreneurial spirit that has made the U.S. the world’s leading economy and one of its most competitive ones. Third, Republicans imply that income taxes in the U.S., even for the rich, are not very high.

--Is this true?

--The nominal income tax rate for the very rich is over 30%. This contrasts with northern European countries (Scandinavians, especially) and others, which apply rates of over 50% and clearly act as a disincentive to wealth creation. The problem with the U.S. top income tax rate is not the rate itself, but the fact that the tax code is so riddled with loopholes, which millionaires and their tax lawyers take advantage of and bring down the effective rate they pay to 10 or 14%, just as Warren Buffett has pointed out on numerous occasions. That millionaires can use the tax loopholes in the code to pay 10 or 15% is outrageous, because they wind up 44

paying more than the middle class. Finally, Republicans chide Obama for generating “class warfare” because of his insistence that the very rich pay more. The more extreme Republicans then accuse Obama of creating an entitlement culture, whose beneficiaries will always vote for the Democrats. This is a ridiculous assertion in a country where millions of hard-working Americans cannot afford health insurance or go bankrupt or cannot get treatment because they lose insurance if they are laid off. Obamacare will take care of these people.

It is true that approximately 47% of Americans pay no federal income tax. This 47% is the voting block that Romney alluded to in his worst mistake of the election campaign, when he was caught telling a group of fundraisers that there is no way this 47% would vote for him because they depend on the government. These people may not pay federal income taxes, but they still pay a number of state and county taxes – sales taxes, property taxes, inheritance taxes and numerous fees for use of public services. The solution is comprehensive tax reform, whereby the corporate tax rate would be lowered (it is one of the highest in the world) and the nominal income tax rate for the middle class could be lowered if a range of tax deductions are eliminated from the tax code. This would generate more tax revenue. The problems is that both the rich and the middle class benefit from these deductions: they range from ones that can be scrapped without much public outcry (deductions for buying a corporate jet) to ones that the middle class has become accustomed to and an army of lobbyists will defend.

--Give me examples of the latter.

--Well, John, there are numerous. There are tax deductions for the interest paid on a mortgage when you buy a house; for parents paying for their kids’ college education; for charitable donations; and many others. It is a complicated topic, but there is no solution that does not involve having millionaires pay more, the elimination of tax deductions for the upper middle class and reforms to the U.S.’s entitlement programs – Social Security, Medicare and Medicaid. President Obama has tried extremely hard to negotiate such comprehensive tax And entitlement reform with Republicans. At one point he and House Speaker John Boehner (a Republican) were apparently close to the deal. But the Tea Party stranglehold on the GOP caucus in the House and many Republicans’ hate for Obama mean that there will be no comprehensive tax reform for years. I doubt there is a chance of it happening even if the Democrats hang on to the Senate in the 2014 mid-terms.

For its part, the International Labor Organization reported that 1.1 billion people are out of work globally and an estimated 600 million jobs need to be created over the next ten years to sustain growth and reduce poverty and inequality. Unemployment has increased by 27 million since the beginning of the crisis. At the World Economic Forum, CNN’s Richard Quest performed his appealing mix of analysis, comedy and prop-filled interviews. He is asking Klaus Schwab, Olivier Blanchard and other VIPs whether policymakers and markets are ahead of the curve or behind the curve in terms of overcoming the crisis. EU Finance Ministers met to discuss Greece’s compliance with its bailout conditionality and private-sector involvement. Agreement between creditors and Greece is necessary to avoid a disorderly default. If they do not reach an agreement in the next few weeks, disbursal of an 18.5 billion euro tranche of a total of 130 billion euro bailout package would not take place and Greece would default by the end of March. The EU will stop importing oil from Iran at the end of January. Saudi Arabia’s announcement of higher production and an increase in Libyan production should make up the shortfall. The Spanish Treasury today sold short-term bonds for 2%, down from 5% in November. It placed all bonds and demand was high. Ten-year bond rates have also eased in the last weeks for Italy and Spain, but the Greek impasse is worrying investors.

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Many banks are borrowing from the ECB at 1% to buy higher-yielding bonds instead of lending to businesses and individuals. The ECB injected 500 billion euros into the financial system in December of 2011 by lending to banks (the first of the two so-called Long-Term Refinancing Operations, LTROs). This is the closest the ECB will come to being the lender of last resort markets are clamoring for. Japan, for its part, will double its sales tax to plug holes in its finances. The Japanese debt-to-GDP ratio remains among the highest in the world, approximately 200%. Japan likely recorded a trade deficit last year for the first time in three decades. Its government had to increase energy imports due to the Fukushima nuclear power-plant catastrophe and the shutdown of most of its nuclear reactors. At Davos and elsewhere, everyone was discussing Keynesianism in the context of what to do to revive the international economy. Given the euro zone’s crisis, IMF Managing Director Christine Lagarde had warned of a possible plunge into a 1930s Depression. Except for Chancellor Merkel, the Bundesbank, most senior German government officials and those of the Netherlands, Finland and Austria, just about everyone was calling for more public spending and investment to prevent the weak recovery from stalling. The Czech Republic had joined the UK in its opposition to the fiscal pact, which among other things enshrines the 0.4% budget deficit limit into the EU member states’ respective Constitutions, the so-called Golden Rule. The Golden Rule is part of the Fiscal Pact Germany and some of its northern European allies are pushing on the rest of the EU. UK Prime Minister Cameron remarked that accepting the Golden Rule amounted to “banning Keynesianism”. All kinds of free-market politicians, businessmen, practitioners and policymakers are calling for a relaxation of the excessive austerity that is being applied in Greece, Portugal, Ireland, Italy, Spain and other indebted countries. The wise and sensitive are advocating a better balance between austerity and structural reforms that would boost growth and competitiveness, and that entails reducing the cuts in government spending. Keynesianism is back to stay. I persuaded Keynes that we meet at the “La Botiga” restaurant on Diagonal Avenue (in Barcelona’s uptown) on Wednesday, February 1, 2012, at midnight. I had some good news to deliver to him.

--John, I am afraid the restaurant is closing at half past midnight. The food they serve is delicious and it is not expensive. Their service is excellent and all of their waiters are extremely kind and polite. My good and very busy friend from La Caixa, Joan Rosàs, has often invited me to dinner here, as it is located near La Caixa’s headquarters. Since they are closing, let us go to the next-door bar so we can talk. We can on another occasion. --Ok, Alex, so what is the good news you want to tell me about?

--That stock markets have surged in January.

The S&P is up over 4% in January, the highest increase since 1997. The Nikkei is up 4.4% in January, the biggest rise in January since 1997, although the strength of the Japanese yen, lackluster earnings of Japanese companies and the impact of the Thai floods on the results of several Japanese companies make it somewhat hard to explain. The cause is that some stocks in the Nikkei are undervalued and there has been an improvement in sentiment not just in Europe, but in financial and equity markets worldwide because of the ECB decision to inject liquidity. The euro has rebounded and is trading at about 1.30 to the dollar.

--What exactly did the ECB do?

--On December 21st, 2011, it injected liquidity into the euro zone banking system to the tune of 500

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billion euros. The ECB is doing this by extending 3-year loans at 1% to banks, which are in turn investing the money in higher-yielding assets (including Italian and Spanish bonds). But is lending to businesses and families increasing? Not much.

Banks are parking their money with the ECB and using ECB loans to invest in higher-yielding sovereign debt, thereby cleaning up their balance sheets as they have to in order to reach a Core Tier 1 capital ratio of 9% by June 2012. The ECB is therefore close to practicing Keynesianism. Are you happy?

--Yes, tell me more. Alex, what about the EU moving towards a fiscal union?

--At the European Council on January 30, 2012, the Czech Republic joined the UK as the only EU countries that do not want to join the fiscal pact or union, which will require EU Member States to embed the Golden Rule (maximum structural budget deficit of 0.4% of GDP) in their Constitutions. Germany and Spain have already done so. The Fiscal Pact will also require countries to submit their draft budgets to European institutions for supervision and apply stiff semi-automatic penalties for countries that exceed these limits.

The Czech decision was expected, as it has an extremely Euro-skeptic president, Vaclav Klaus17. He refuses to have a flag of the EU in his office. The Czech population is also opposed to joining the euro zone. They are influenced by Klaus’ relentless attacks on European integration, but also claim their economy is doing well and that the Czech crown’s exchange rate with major currencies has been stable. These claims are largely true. It does not help the popularity of the euro in the Czech Republic that next-door neighbor Slovakia’s adoption of the euro in 2009 has resulted in higher prices and stagnant wages. An agreement between Greece and its creditors seems to be within reach, and it appears creditors will accept a 70% write-down on their bonds.

--So, Alex, what are Catalan leaders saying?

--I can tell you the following. After delivering my two hours of lectures at ESCI-UPF, I attended an event at the Ateneu, a very prestigious Catalan institution in Barcelona. I am giving a conference of my own at the Ateneu on February 9, 2012. I wanted to talk to some of the organizers about my conference and meet Catalan leaders attending the event as well. Five well-known Catalan leaders were making a joint declaration calling for Catalonia to receive a better fiscal treatment from Spain. According to the nationalists, Catalonia’s net transfer of resources to the rest of Spain has reached 9% of its GDP. All of the speakers acknowledged the need for Catalonia to have solidarity and compassion with the poorer regions of Spain. Yet they -- and many Catalans -- feel they are getting ripped off.

The speakers were Miquel Roca Junyent, one of the founders of Spain’s 1978 Constitution, long-time CiU parliamentary speaker, head of SEBAP (a Catalan institution founded in the XIXth century) and high-powered corporate international lawyer. Moreover, the leaders of the Catalan branches of Spain’s two main labor unions took part and spoke. Mr. Joaquim Gay de Montellà, the head of the Catalan business association, Foment del Treball, gave a good presentation. In 1898, the heads of these same institutions had petitioned the Spanish government for Catalonia to receive a better fiscal treatment from Spain. The point was to do the

17 The Czech Republic’s current President, Milos Zeman, is not a staunch opponent of European integration. But he has only been in office since 2003. President Vaclav Klaus was in office for ten years (1993-2013) and he influenced the national psyche with regards to opposing EU integration. It remains to be seen how events will unfold with Zeman. 47

same today. Although I do not like the labor unions, their presence added legitimacy to the call, as Roca remarked. All of them gave interesting presentations, but Roca was clearly the star. While I was listening, I was thinking of how I would approach the VIPs at the end of the event. It started at 7:30 PM and finished at 8:30 PM sharp. I expected there would be a Q&A session after their presentations, but it did not take place. I dashed to the main auditorium from the overflow room where I had been watching as soon as the moderator wrapped up the event. When I arrived, the VIPs were mingling with some of the attendees. The Vice President of the Catalan government, Joana Ortega, the current Economics Minister of the Catalan government, Andreu Mas-Colell and the former President of Catalonia, Jordi Pujol (1980-2003) were in attendance. I had the chance to speak to some of them. On February 16, 2012, Keynes returned to Barcelona after a 2-week swing through Europe. He had been traveling on a fact-finding mission and meeting with academics and government officials to discuss the euro zone crisis, and the deteriorating situation of the peripheral countries – Greece, Ireland, Portugal, Italy and Spain. We met up again at Nuba, my favorite haunt during the 2011-2012 winter.

--John, I have good news. General Motors (GM) just posted good numbers. Its revenue rose by 10.8% in 2011. Its sales also boomed, and they skyrocketed in China. This is vindication for the Obama administration’s bailout of GM in 2009. At the time, the move was widely criticized. Obama set up a task force and cleverly and efficiently ensured the survival of GM without getting the government involved in its day-to-day operations. Obama knows how to delegate, which is a great quality in a president. I believe President Clinton does not get enough credit for what he accomplished during his two terms in office. He famously micromanaged almost every issue and got into the habit of pulling all-nighters and getting into the weeds of all topics. Obama, on the other hand, seems to have struck a better balance between being hands-on but letting his officials and advisers do their jobs.

--How do you know that? Have you spoken to people who have worked for Obama?

--Yes, I know a few people in the federal government (not cabinet-level) and watch the news all the time. And I read Jonathan Alter’s book on president Obama’s first year in office. It makes for good reading and details the inner workings of Obama’s White House. At any rate, even prestigious economists within Obama’s inner circle such as Larry Summers were second-guessing the government’s bailout strategy for GM. GM has turned things around and become leaner and meaner. Thousands of workers lost their jobs, many plants were shut down and production of brands such as Pontiac and Hummer was discontinued. But GM is back18. It is selling well in the U.S. The government still holds 30% of GM’s shares, which have been rising in value since the IPO. If GM’s stock continues to climb, the government might be able to sell its stake and even turn in a profit for the taxpayer. That would be a real coup for the Obama administration and make fools of everyone who accused the president of being a “socialist”. And, obviously, it is further proof that Keynesianism works very well.

--Alex, I have the feeling you are starting to suck up to me because Keynesianism is back in vogue.

--No, I remain a proponent of free markets. I just try to judge every situation on its merits. In the U.S. in 2009, stimulus and selective bailouts were needed and worked. The proof is in the pudding. The labor

18 In 2014, however, GM had to recall millions of vehicles spanning different models because of faulty mechanics, such as dangerous ignition switches. GM drew criticism because of its massive recalls. Many Americans continue to prefer Japanese and South Korean models, which they deem more reliable. 48

market continues to improve. Today, jobless claims dropped to their lowest number in nearly four years. The good corporate figures and confidence that Greece’s squabbling politicians are getting their act together pushed the Dow Jones Industrial Average to its highest close in four years. On the other hand, in Spain in February of 2012, liberalization is required.

--Alex, can you update me on what has been happening in Spain during the past couple of weeks? I have been too busy with my conferences and meetings to keep track of developments.

--The government has enacted a much-needed and long-overdue labor market reform. Among other measures, it lowers and caps the compensation packages that corporations have to pay employees with indefinite contracts who are fired, whether for a justifiable or non-justifiable cause. It also fosters part-time work (which is very low in Spain); combats fraud in collection of unemployment benefits (people working on the side and collecting unemployment benefits), and absenteeism; it promotes that retirees work part-time and continue to draw their pensions. The labor reform also creates a part-time indefinite contract and loosens the collective-bargaining rules that labor unions manage to wring out of employers. The weakening of collective bargaining is decisive because it gives both employer and employees more independence to negotiate wages, benefits, and other conditions on a case-by-case basis and not with unions that demand the same conditions for all employees working for companies in the same sector. The labor market reform also awards tax cuts to companies that hire population groups (the young, the young with only high-school or less education, the long-term unemployed) with an especially high unemployment rate.

A separate education reform will adopt Germany’s vaunted apprenticeship system, because in Spain (as in other countries) studying a profession and becoming a good electrician, plumber, or heating technician is regarded as second-class to getting a university education. The result is that we have a lot of university graduates, but many of them are unemployed. And electricians and plumbers (many of whom are foreigners) wind up making more money that university graduates in the humanities!

But these reforms need time before they lead to job-creation. The Netherlands started fostering part-time work in the early nineties.

--What you describe is awful. They will just make it easier and cheaper for companies to fire workers!

--Well, John, in the short term there might be some needed churn. But Spain’s labor-market legislation needs revamping. The labor reform that was in place was adopted during Franco’s dictatorship. It treated workers in a paternalistic way in the context of an economy that was not integrated in the world economy. Spain can decide to shield itself from competition and maintain its structurally high unemployment rate or accept that we compete in a globalized economy with free flows of capital and design legislation that increases our companies’ flexibility and also helps those in society with the most trouble finding a job. The previous system actually protected insiders who had been employed for many years, as opposed to those on short-term contracts, which were always the first to be fired when the economy experienced a downturn. This reform actually removes some of the disincentives to hiring. In the short term, there will be more lay-offs and wages will decline. Thousands of Spaniards took to the streets of Madrid on Sunday, February 19, 2012, to protest the labor-market reforms. The Spanish Prime Minister, Mariano Rajoy, quipped that these reforms would prompt a general strike. Labor unions, left-wing parties, a big part of the media, many academics and others will continue to lambaste the reforms because they either have a vested interest in maintaining the status quo or are just misinformed or manipulated. The Sunday protests got coverage in the international media, including CNN. 49

--Alex, can you blame Spaniards for criticizing reforms that you acknowledge will cause wage reductions?

--No, I understand their frustration. However, most people do not seem to understand that severance pay is not a God-given right, something that workers are entitled to. People who are unemployed, are honestly looking for work (and not turning down job offers) and do not have assets should continue to receive unemployment benefits. The government’s labor-market reform package is bold by Spanish standards, but certainly not that radical. It is not trimming or even conditioning unemployment benefits, as Germany’s Social Democratic Party (SPD) did in its Agenda 2000.

--And that cost German Chancellor Gerhard Schröder his re-election bid in 2005.

--Yes, John, it was one of the reasons the SPD lost the election. But Germany’s economy and particularly its manufacturing sector benefited greatly. Wages were frozen and labor unit costs decreased. After being the “sick man of Europe” in the years after reunification, the reforms allowed Germany to become the world’s biggest exporter for a few years, until China surpassed it in 2009. But Germany still ranks second, and its unemployment rate is below 6%.

Speaking of China, there are mounting signs that the Communist Party is coming under increasing pressure. Some academics claim up to 300,000 protests -- some of them violent -- took place in 2011. The urban population is fed up with pollution. Inequality is higher than in the U.S. --Where are you getting these figures?

--A U.S. academic of Chinese origin, Chang, who published a book titled China’s looming collapse. He wrongly predicted that China’s Communist Party would collapse in 2011. Now he is asserting his prediction will be on cue for 2012. I dislike the Chinese government because of its neo-colonialist pillaging of Africa, other developing countries, and internal crackdown on any form of dissent. In addition, the Chinese government does not cooperate in addressing the most pressing current geopolitical security challenges, such as Iran’s nuclear-weapons program and North Korea’s lunatic leadership. China bullies other Asian countries over rival claims in the East and South China Seas and recently rejected a U.N. Security Council Resolution condemning Bashar al-Assad’s brutal repression in Syria, which has been shelling the city of Homs for two weeks and killed up to 6,000 Syrians since the uprising broke out almost a year ago.

While sympathizing with Chang for his very public criticism of China’s leadership, I do not believe his prediction for 2012 will prove accurate, either. Yet even the more China-friendly panelists that Fareed Zakaria assembled on his GPS program on CNN shared his analysis that the Communist Party is facing increasing difficulty in setting the narrative for what takes place in the country. Another example of trouble in China is the public’s disgust with corruption. The attempted defection of a province’s police chief to the U.S was a big scandal. Bo Xilai19, a high-ranking Communist Party official and the province’s governor, had worked closely

19 Bo Xilai’s corrupt practices (abuse of office, acceptance of gifts, promoting family members’ business interests) and his wife’s role in the murder of a British businessman in China allowed Xilai’s rivals in the Communist Party leadership to first purge him of all his positions (Governor of Chongqing province, member of the Politburo and Communist Party), and then sentence both Xilai and his wife to life imprisonment. Xilai had served as mayor of Dalian, Minister of Commerce and was secretary-general (in effect governor) of Chongqing province at the time of his downfall. In this latter position, Xilai endeared himself with many of his constituents by promoting welfare plans and tackling corruption. He also sought to bring back Maoist traditions, and became the beacon of the “New Left” disappointed with China’s freewheeling capitalism. Despite being one of China’s princelings (sons of Revolutionary leaders), Xilai’s ambition and corruption 50

with the police chief, Wang Lijun, in an anti-corruption campaign. But Gu Kailai, Bo’s wife, had poisoned and killed a British businessman, Neil Heywood, something Wang was helping to cover up. But Wang and Gu became embroiled in a dispute, endangering Gu’s situation. Sensing his downfall, Wang sought refuge and applied for political asylum in the U.S. Consulate at Chengdu. He was persuaded to leave the Consulate, jailed, tried and convicted to 15 years in jail. Many details about Bo Xilai and his wife’s corrupt practices were revealed during Wang’s trial. --Fascinating political soap opera. But, changing gears, what is the update on the situation in the euro zone?

--Well, the growth numbers for the last quarter of 2011 are dismal. Greece’s economy shrunk at an annual rate of 7%. Portugal, Spain, the Netherlands and even Germany recorded negative growth. France, on the contrary, managed meagre growth in the last quarter of 2011 on the back of increased exports.

All of the hype and exaggeration about the euro zone’s imminent collapse that the Anglo-Saxon media indulged in during the second half of 2011 has given way to a rally in financial and stock markets. The overwhelming consensus among analysts is that the ECB’s injection of 1 trillion euros into the banking system has stabilized the situation. The ECB is lending the money at 1% interest to Europe’s banks, who in turn are investing the money in higher-yielding assets and cleaning up their balance sheets in anticipation of their need to have a 9% core Tier 1 capital ratio. But Spain’s banks, for example, are neither hiring anyone nor lending at all. Greece’s squabbling politicians appear to have allayed the concerns of EU officials in committing in writing to staying on course. Greece will hold legislative elections in April. New Democracy, the center-right party, leads in the polls but is unlikely to obtain an absolute majority. The Socialist PASOK party will probably suffer one of its worst results ever. I am worried about the resurgence of far-left (Communist and others) and extreme right-wing parties in Greece. There will be many elections in 2012. Vladimir Putin will romp to victory in Russia’s presidential election in March. François Hollande will probably defeat incumbent Nicholas Sarkozy in the French presidential election in May. I am hoping that Henrique Capriles might do the same to Hugo Chávez in Venezuela in October. In addition, Barack Obama will probably win a second term in November. John, you have traveled extensively in Europe. I think you should now visit other parts of Spain. I would like you to get to know first-hand how people in Andalucía, Castilla, Galicia, Valencia and other parts of Spain live and think. Our discussions on the crisis in Spain will be more grounded in reality after your Spanish swing.

On March 4, 2012, Keynes and I arranged a meeting in the restaurant Ca Susana, a new, comfortable and customer-friendly restaurant that serves delicious food and is located near the apartment where I live, on Ganduxer Street.

--Alex, I am relieved to hear that the Spanish Prime Minister, Mariano Rajoy, has announced that Spain will not try to meet the EU’s budget deficit target of 4.4% by the end of 2012. With the deficit at 8.9% at the end of 2011, the 4.4% target was unattainable. It was completely unrealistic. It would have been sheer madness for Rajoy to cut the deficit to 4.4% by the end of the year in the midst of a recession.

provided China’s leader, Xi Jinping, with the perfect opportunity to eliminate a popular potential rival. Xi Jinping has since embarked on a far-reaching anti-corruption campaign and is arguably the most powerful Chinese leader since Deng Xiaoping. 51

It would have amounted to what some Spaniards call an “austericidio” – meaning death because of excessive austerity.

--Indeed. Experts expect Spain’s GDP to drop by between 1% (European Commission) and 1.7% (Spanish government projection). Given events in Spain, most analysts will back the Keynesian -- meaning your -- view that a big fiscal consolidation in the midst of a recession would exacerbate the situation. Rajoy has stated that his government will cut the deficit to 5.8% by the end of this year and to 3% by the end of 2013. While this decision to soften fiscal consolidation is politically and socially popular, it pushes back to next year the pain that Spain will have to endure. Given the PP’s broad mandate in the elections last November (the biggest majority in the Spanish Parliament since 1982), and the fact that the PP also runs 11 out of the 17 autonomous regions in Spain, I believe it could be bolder. If something is painful but necessary, I believe in getting it over with as soon as possible.

--Do you expect them to commit political suicide? Unemployment in Spain stands at 25%, and is close to 40% in some parts of Andalucía! Youth unemployment is 55%!

--I know. But many Spaniards have lived beyond their means for many years, and Rajoy and his government need to level with people, not coddle them. Labor-market reform should have been more aggressive. The government needs to overhaul the ridiculous holiday system, rationalize the workday and workweek, and cut unaffordable subsidies to a myriad of public bodies, companies, political parties, labor unions and foundations.

--This will only cause more misery and lay-offs in the short term.

--Not necessarily. If Spaniards want to have salaries similar to those Germans enjoy, they need to work, behave (and save) like Germans. Spain needs shock therapy. Many young Spaniards are drawing unemployment benefits and turning down job offers because they would rather stay at home and live with their parents. They do not need to pay rent and can lead a reasonable life cashing unemployment benefits. Some of the unemployed receive benefits that are higher than the minimum wage. Labor mobility is increasing but is still low. The underground economy has expanded greatly. We need to increase Spain’s labor participation rate. The more people that work, the higher government revenue will be. It is as simple as that. Too many Spaniards still prefer to live off of the state.

--Alex, how did markets and European leaders react to the Spanish government’s announcement?

--Well, stock markets dropped somewhat on Monday, March 4th, but the spread on Spain’s ten-year bonds over German bunds hardly budged. Chancellor Merkel and the EU Commission’s President, Jose Manuel Barroso, issued vague statements that generally supported the Spanish government and expressed confidence that Spain can lower its budget deficit to 3% by the end of 2013. The Commission’s Economics and Monetary Commissioner, Olli Rehn, was much more critical. His spokesman happens to be a Catalan. He was interviewed recently by COM Radio, where I do a weekly segment on Mondays. He is sticking to his boss’s tough stance that Spain must meet the 4.4% budget deficit target by the end of 2012 or face potential penalties.

There is no way that Spain’s government can save more than 40 billion euros this year in the midst of a recession in Spain and its main European trading partners. The labor unions have already called a general strike for the end of March. Marches, demonstrations and strikes are becoming routine. The austerity that

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would be required to meet the 4.4% budget deficit target would be of a magnitude that Spanish society would not tolerate. But I do believe that the government should raise taxes on alcohol and tobacco. There will now be a tug-of-war between the central government and the autonomous regions over their distribution of the burden of cuts. I fear a confrontation between Rajoy’s government and the government of Catalonia. I think both are doing a good and thankless task and should not fall out. The autonomous regions run by the PP will moan about the cuts but will fall into line. Andalucía is a basket case and we will only know how bad its finances are until the Socialist government in Andalucía is booted out of office someday. Shifting to another part of the world, I am very pleased that authorities in the Caribbean country of Antigua & Barbuda have convicted Allen Stanford of several crimes. He ran a huge Ponzi scheme for many years and swindled thousands of people out of their lifetime savings. He will spend the rest of his life in jail. Getting white-collar criminals like Bernie Madoff or Stanford behind bars will not solve excessive speculation – I believe greed is inherent to human nature – but at least justice is done for Madoff’s and Stanford’s victims. On a short vacation to Antigua & Barbuda in the summer of 2010, I got a first-hand glimpse of Stanford’s largesse towards the Caribbean island. Although Stanford’s indictment was already public at the time, many locals remained loyal to him and expressed gratitude for the investments he had undertaken in Antigua & Barbuda. --Alex, stop being so politically correct. What makes you tick?

--It is definitely not being very wealthy. Being very rich generates all kinds of problems: hiring people to manage your assets, to look after your homes, cars, boats. Lawyers that will take your money in order to find loopholes in the tax code that cut your tax bill. The fact that I am not obsessed with being very wealthy does not mean that I do not like to make money.

I have known very wealthy people and they are not all tremendously happy individuals. Many wealthy businesspeople generously fund charities, foundations, and their pet causes in the U.S. and other countries. Warren Buffett has been trying to convince rich people in America to pay more taxes by pointing out that the U.S. tax code is riddled with loopholes and that top rates on wealthier Americans are so low (in comparison to most western European countries) that he pays less taxes than his secretary. When he recently insisted once again that the richest pay their fair share, another billionaire told Buffett to put his money where his mouth is and write out a check to the IRS. --Has he done it?

--Not that I am aware. I have a good opinion of Buffett, who is trying to highlight the fact that rich Americans’ share of national income has been growing in the past decades, whereas the middle class is clobbered with taxes and shrinking. Undoubtedly, the Oracle of Omaha (as Buffett is known) is legendary in terms of the billions he has earned for his investment fund, Berkshire Hathaway, and continues to make sound long-term investments in companies whose business model is easy to understand and tend to be in traditional sectors (although he has also invested in high-tech). I wish he could invest in Spain.

The latest unemployment figures in Spain are harrowing. Twenty-four percent unemployment and more than 55% youth unemployment. Even young and bright people with technical university degrees are seeking work in other countries. Greece has reached an agreement with its bondholders. They will swap their existing bonds for new ones with longer repayment periods, lower interest rates and accept losing up to 70% of the value of the current bonds. It is a lousy deal for bondholders, but better than not getting anything back. The agreement will enable the troika to disburse the first tranche of the 130 billion euro bailout, without which Greece would default.

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Chapter 7: Chloe, SSS and matters of the heart

On March 12, 2012, Keynes joined me during my 90-minute walk around the Turó Park. I had spent a nice four hours the previous Sunday in the park. Chloe, who was three and half months old, needed to get outdoors often. She had received her final vaccine about three weeks earlier. My heavy workload made it impossible to walk her three times a day every day. So I tried to make up for it by spending more time on those days when I had some free time. I had been talking to owners of several dog breeds. Many of them had gone through the kind of experience I was enduring. Extremely agitated and playful puppy that, despite intensive training, would relieve itself anywhere in the apartment. The conventional wisdom of dog owners was that shitting and peeing outside of the puppy trainer box could last until the dog reached the age of five months. Some owners had not managed to avoid accidents with dogs that were a year old. They all kindly offered useful guidance and advice, but 80% of what they told me I had already either read online or heard from Dogking’s trainer. There was also a dog trainer making the rounds in the Turó Park and offering expensive dog-training sessions. By this time, I had taught Chloe to sit, lie, roll over, retrieve an object, give a high five with her paw, and extend her paw. This was quite an accomplishment I was proud of. I had spent dozens of hours – mostly early morning hours – practicing and training her. Golden Retrievers are the second-smartest dog breed. They can be trained to guide blind people. Unfortunately, when I took Chloe out to the park, there were too many things competing for her attention. She displayed the usual attention deficit disorder that one should expected of a puppy. So I had to put in an extra effort to get Chloe to focus and thus show people what I had taught her. People of all ages were attracted to her. She was indeed a very cute and adorable Golden Retriever puppy. Some likened her to a teddy bear. Mothers asked if their children could pat Chloe. Some older children wanted to walk her. Some even wanted to have a picture taken with her. She was becoming a celebrity dog in the Turó Park. I was keen to take up their offer and be rid of Chloe for a few minutes. Her hyperactivity was disrupting my life. She was constantly chewing and swallowing objects she found on the ground, pulling on the leash, and wanting to head in a certain direction. I discerned from my multiple conversations with dog owners that almost none were single professionals like me. I was taking on a big challenge and perhaps biting off more than I could chew. A dog can indeed be a man’s best friend. But Chloe was still a puppy. I was spending countless hours feeding her, changing her water, washing her, cleaning her ears, cutting her nails, training her, cleaning up after her messes, walking her and giving her a pill to keep parasites away. Dogking even pushed me to get medical insurance for her. I do not have private medical insurance myself! As I met up with Keynes at the entrance of the Park, Chloe was her usual self. She pulled on the leash (a long one, as the rules prohibited walking dogs without a leash), ran in different directions and got most people’s attention. I engaged Keynes with a few thoughts. --John, a hedge-fund owner named Ray Dalio has come up with very interesting theories about business cycles and debt cycles. The price of a barrel of oil could rise to as much as $145 per barrel if Israel attacks Iran. Twenty percent of the world’s oil exports cross the Strait of Hormuz, which Iran could block if the U.S and/or Israel attack it. The US’s armed forces would eventually overwhelm the Iranians, but not after serious disruptions to oil markets. Other producers are not exporting at full capacity. South Sudan’s continuing military skirmishes with Sudan are preventing the export of its oil. Violent clashes between militias in Libya are also constraining its exports of oil.

--Why do you worry so much about geopolitics? Enjoy life. It is much too short.

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--Yes, you are right. Walking Chloe considerably facilitates the task of striking up a conversation with people. In fact, many people spontaneously ask me about her age and name and remark how cute she is. This is all wonderful. But after ten minutes I try to change the topic. We cannot just talk about dogs all the time! I am going to get her a nametag that will also display my website and the title of my book.

--You are going to use our dog as a marketing tool! Clever but shameful.

--Why? Taking care of her is like having another job. Why should I not have the right to pitch my book and ideas after I finish discussing dog training with other owners?

--I guess so. Yet this reminds me of the criticism Mitt Romney has come under because of the way he transported the family dog on a long road trip. He put it in a box on top of the car. Animal-rights advocates and just about everyone has deemed it cruel treatment of an animal.

--John, I want to tell you about my latest project. The EU and the euro zone are at a crossroads. The only way to preserve and strengthen the euro zone in the long term is to move to a fiscal union. The heads of state or government of 25 of the 27 member states of the EU signed a deal committing their countries to a change in the Lisbon Treaty that will enhance the EU institutions’ ability to monitor and punish countries that breach deficit and debt levels. All experts agree on the need to harmonize taxes at the EU level. There has been some harmonization of special taxes and VAT. The tax base for these two types was harmonized in the 1970s. For special taxes, the EU sets a minimum, and member states set the actual rate. With VAT, the EU is supposed to set the minimum and maximum for the three VAT types, while the member states set the actual rate. Corporate taxes are the area where more harmonization is most urgent. Some EU member states have exceptionally low corporate tax rates – such as Ireland, Slovakia and other Eastern European countries – which amount to unfair tax competition.

Spain’s nominal corporate-tax rate stands at 30%, which is quite high by international standards. Germany, France and the U.S. also have a high corporate tax rate (around 30%, while Ireland’s stands at 12%). But in Spain and the other countries companies pay a lot less because of the many deductions they can use. Most are paying around 20 or 21% after deductions. But this creates a complicated tax system. The Spanish government will eliminate some of these tax deductions in order to increase revenue as it seeks to cut Spain’s budget deficit from 8.5% to 5.3% by the end of 2012. It unveiled its budget for 2012 in late March. The government smartly discarded raising indirect taxes, which would choke an economy already projected to shrink by 1.7% this year. It announced drastic cuts in spending. On average, ministries will have to slash spending by 16% this year. Some ministries will have to make savage cuts. Almost $600 million in development assistance will not be disbursed, which could affect Spain’s position at the World Bank and the regional development banks. --This is sheer madness! Spain will plunge into a severe recession! Don’t these people in the Spanish government know about my work?

--They do, John. But markets are forcing them to generate savings worth at least 43 billion euros in 2012. Otherwise Spain’s borrowing costs will spike again and it might need a bailout, the fate that befell Greece in May 2010 and Ireland and Portugal in 2011. The adjustment is indeed brutal. But at 8.9%, Spain’s budget deficit is among the highest in the euro zone, only surpassed by Greece. Those 43 billion euros in savings amount to 1,166 euros per Spaniard.

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I believe the EU and Germany will cut Spain some slack later on this year if they ascertain that Spanish society commits to and accepts belt-tightening. First, they want to see that Spain’s government is committed to the cuts. --Nonsense. This extreme austerity will plunge Spain into a downward spiral of more lay-offs, reduced revenue, and the government will not meet its deficit-reduction targets. Mark my words.

--You might be right. I am just telling you that the EU and especially Germany want to see some harsh austerity in the next months. I suspect they will ease up if Spain enacts the measures. On the other hand, Spain’s Deputy Prime Minister, Soraya Sáenz de Santamaría, asserted that Spain in fact wanted to be a model of austerity for other countries in the euro zone. The governing PP no longer has any electoral calculations to ponder. There will not be any elections in Spain during the rest of the year.

On another matter, the World Bank Group’s stakeholders will soon decide who will become its 12th president. For the first time since the founding of the Bank, a naturalized U.S. citizen may be at the helm. Three candidates are vying for the top job. You should be delighted. You played a role in the creation of the Bretton Woods institutions and criticized the fact that the U.S. did not follow your advice. Well, for the first time ever, a non-banker American not born on U.S. soil will be President of the World Bank Group20. The new President - - Jim Yong Kim -- is a Korean-born U.S. professor (and former President of Dartmouth University) whose specialization is health care. President Obama has nominated him. In my view, it is a smart move on his part (I have not confirmed my hunch). Aware of the fact that he cannot nominate a white U.S. banker, he has chosen someone originally from South Korea, a staunch U.S. ally with whom Obama has strengthened ties in the past months as part of his pivot to Asia. Secretary of State Hillary Clinton has been executing a pivot in U.S. foreign policy towards Asia, and South Korea is a key link. A free-trade agreement between the U.S. and South Korea has been ratified. The apparent willingness of North Korea to stop its nuclear program for a few months has opened the door to the possibility of a resumption of six-party talks. But South Korea’s hardline president, Lee Myung-Bak, who is more skeptical than the Obama administration about Kim Yong Un’s intentions, needs some prodding. Appointing a U.S. citizen originally from South Korea to head the World Bank is a smart move. Many feel that Ngozi Okonyo-Iweala, currently Nigeria’s vice president and finance minister, would also be a good president of the World Bank. She already did an outstanding job in an earlier stint as finance minister of Nigeria. She bravely took on corruption in what is one of Africa’s most corrupt countries. She served as Managing Director of the World Bank (there were three managing directors at the time, who are the highest- ranking officials after the president). I had the chance to hear her insights into the World Bank’s work and its countries of operations on a daily basis during my tenure as speechwriter to the President of the World Bank. I had the opportunity and obligation to attend the 8:00 AM daily meeting with all of the World Bank’s Vice Presidents. She was very often the most respected voice regarding the World Bank Group and development in general. She usually chaired the 8:00 AM meeting when Bob Zoellick, the President, was on travel (one of the other managing directors could also perform this function). Her strength also impressed me. She once contracted malaria while on a long business trip but still came to work and did not complain. The U.S. jobs number for March came in at a disappointing 120,000. Analysts had been expecting more than 200,000 new private-sector jobs. President Obama tried to put a brave face on the numbers, pointing out the jobs created in the past two years. Interestingly, the manufacturing sector continues to rebound and adds jobs. General Electric has invested billions in new plants -- for example in Kentucky -- and employees have

20 James Wolfensohn, who served two terms as President of the World Bank with much distinction, was originally from Australia, but he had banking experience. 56

responsibly accepted lower pay. Manufacturing is making a comeback in the U.S. The unemployment rate actually dipped to 8.2%. The U.S. economy is clearly on the mend and has been adding more than 200,000 private-sector jobs each month for the past four months. I still think the unemployment rate will dip below 8% by the beginning of November, when President Obama will square off against Mitt Romney in the U.S. presidential election. This past Easter fewer Spaniards traveled abroad or even within Spain. The crisis is taking a toll. I also stayed at home in order to finalize the proposal for the project I have submitted to Catalonia’s foreign minister. I hope Senén Florensa, Catalonia’s Foreign Minister, will be impressed by my 10-page document, approve the project and allow me to seek financing from institutions and business associations during my trip to Madrid on April 17-20th. The markets are getting skittish again. Several emerging-market economies are slowing down. U.S. job numbers for March were very disappointing. The markets feel the 700 billion euro firewall (the European Financial Stability Facility) to prevent contagion to Spain and Italy is not enough. They want it scaled up to one trillion euros. I do agree with the criticism the Anglo-Saxon press has been hurling on a daily basis since the outbreak of Europe’s sovereign-debt crisis in May 2010 to the effect that Europe has not been speaking with a single voice. But I do not share its apparent desire for the euro to fail and the euro zone to break up. Well, I would be more upbeat if the world’s biggest problem were the appropriate size of the euro zone’s bailout fund. Unfortunately, just listening to the BBC or CNN while I write can be painful. The lunatic leadership of North Korea is planning to launch a rocket that will fly near South Korea and land north of the Philippines. South Korea and Japan have already announced they will shoot down any part of the rocket that comes close to their territory. --Alex, do they have the technology to do so?

--Japan has Patriot surface-to-air batteries that can intercept a rocket and destroy it. They were deployed and used quite effectively by Israel when Iraq’s Saddam Hussein launched rockets into Israel during the first Gulf War. The Patriot system cannot shoot down several missiles fired simultaneously but it can knock out a single one. At any rate, both the Japanese and South Korean governments need to show their populations that they are taking measures to protect them. Hence the muscle flexing by Tokyo and Seoul. It is likely that any military response by either of the two countries to the launching of the North Korean missile will prompt Pyongyang’s leadership to conduct a new underground nuclear test. If this occurs, the recent agreement concluded between the U.S. and North Korea would unravel. A resumption of six-party talks to deal with North Korea’s situation would be off the table.

Pyongyang’s behavior does not make much sense. They behave erratically in what has become a pattern for their leaders since the 1990s. It was only a few weeks ago that they had convinced the U.S. administration to send them food assistance in exchange for a moratorium on missile launches and enrichment of uranium. The only rational explanation is that Kim Yong Un, the late Kim Jong Il’s son and heir, wants to shore up his power. He may not command the full support of North Korea’s military and feel he needs to show off his ability to employ his country’s military hardware to reassure his backers in the leadership that he is fully in charge. He may also be testing how far he can push the U.S. and South Korea and still get the humanitarian assistance his country desperately needs21. And the North Koreans always want to be the center of attention. They behave like a toddler who throws a temper tantrum to get attention. North Korea is celebrating the 100th anniversary

21 Subsequent events (especially the execution of Kim Jong Un’s uncle, who wielded a lot of influence in North Korea’s military-industrial complex) probably confirm the theory that Kim Yong Un’s provocative behavior towards Japan and the U.S. stemmed from his need or obsession to push aside any perceived challenges to his leadership. 57

of Kim Il Sung’s birth, and the launching of the rocket is a gift to their beloved leader that we all have to watch blast off from North Korea. Consider the array of crises that are unfolding. Suicide bombings in Nigeria conducted by the Islamist terrorist group Boko Haram claimed dozens of lives. Boko Haram’s terror only adds to Nigeria’s woes, which include widespread corruption, an armed insurrection in the Niger Delta and fierce opposition to the government’s attempts to eliminate costly fuel subsidies. Syria’s regime continues to bomb civilian areas of cities that defy its rule and kill dozens of people every day, and more than over 50,000 have died since the beginning of the uprising, which is now a civil war. The opposition reports that 140 civilians were killed on April 9th. --How is the rest of the world reacting to the slaughter in Syria?

--The UN and Arab League’s envoy, Kofi Annan, was taken for a ride. His much-publicized visit to Syria yielded a supposed agreement that would entail a cease-fire, the withdrawal of Assad’s heavy weaponry from cities, the cessation of hostilities by the rebels and the creation of humanitarian corridors to enable civilians to flee the fighting. But Assad has repeatedly made similar promises in the past that he has never honored. He is just buying time. Assad took advantage of the UN and Annan’s good intentions. He has no intention of negotiating or making any concessions. His regime is waging a battle for its survival. He commands the support of about 30% of Syria’s population. He is not liked, but the 30% is terrified that the rebels are radical Sunnis who would repress Syria’s (Shia) Alawite and Christian minorities should they overthrow Assad. Today, the fighting spilled over Syria’s borders for the first time. Assad’s forces pursued and fired on Free Syrian Army soldiers in Turkey and Lebanon. The internationalization of the conflict now seems inevitable. And, finally, several killers are making headlines in the U.S., France and Norway. I think the media should not report so extensively on mass murderers and their victims. They give psychopaths ideas and thus facilitate copycat killings.

--Any good news to report?

--Well, you will be happy to know that The Economist, in its issue of April 14th, 2012, discusses the U.S. presidential election that will take place in November between Barack Obama and the now presumptive Republican nominee Mitt Romney.

--All of Romney’s challengers have pulled out?

--Well, Rick Santorum, who was a distant second to Romney in the number of delegates needed to clinch the nomination (1,144), cut his losses and made a graceful exit. Romney was closing in on him in Santorum’s native Pennsylvania. Many prominent Republicans had not only endorsed Romney but also politely but forcefully called on Santorum to concede in order not to extend Republicans’ fierce primaries. Extending the primaries would help Obama as Republicans continued to bash each other with barrages of negative advertisements and stinging criticisms instead of aiming their sights on the President. Newt Gingrich and Ron Paul have not yet officially suspended their campaigns. But Gingrich has had to fire much of his staff as his main financial support – billionaire Brenton Adelson – has threatened to pull the plug. I do not expect Gingrich to stay in the race after the Pennsylvania primary on April 24th. Once Gingrich bows out, Ron Paul’s candidacy will make no sense.

At any rate, you again managed to divert my train of thought. I hope my analysis of the GOP primary season is of interest. --Of course it is. Otherwise, I would not have asked you.

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--Yes, but you are an intellectual, economist and philosopher, one of the greatest of all time. Readers want blood and gore when they read a book, as a Catalan-American friend and university professor often reminds me.

At any rate, in one of its lead op-eds, The Economist sizes up an Obama vs Romney campaign. I have a feeling from reading the op-ed that if Obama tones down some of his bashing of big business and proposes meaningful entitlement reform, The Economist will endorse him. It has become disenchanted with the Republicans’ move to the right on taxes and social issues. You will be especially pleased that The Economist, which is not exactly a leftist or even left-of-center publication, praises the use of Keynesianism (through Obama’s big stimulus package at the beginning of his presidency) as an efficient and fruitful mechanism which prevented the Great Recession from turning into a Great Depression. --That makes me feel good.

--John, that was the point of me telling you.

--How are things in Spain?

--Wobbly, to use The Economist’s adjective for the Spanish economy. The ECB’s second LTRO has run its course. Banks are not buying as many Italian and Spanish government 10-year bonds with the ECB’s three-year loans at 1% as they were from December of 2011 until the beginning of March of 2012.

--Why not?

--There are differing views. One is that as yields on those bonds have come down (from 7% in November for Italy to around 5% a few weeks ago), the price of those bonds has increased to a level that makes them relatively pricey. So investors have dumped them or bought fewer.

--What about the Spanish government. Has it been adopting the right reforms?

--Yes, and they are bold. But the biggest deviation in Spain’s budget-deficit target in 2011 was with its seventeen autonomous regions. The central government announced a very austere budget for 2012, which cuts spending on average for the ministries of the central government by 16%. But the autonomous regions have to cut savagely, and markets are skeptical that they will be willing and able to do so.

--Can’t the central government force them to?

--The ruling Partido Popular governs in 11 of those 17 regions. It will impose austerity and the budget- deficit reduction targets in those regions where it governs. But in the ones where it does not -- especially Andalucía, a bastion of the Socialist Party where it has ruled for more than 30 years -- it will be much harder. The markets know that cutting Spain’s budget deficit from 8.9% to 5.3% by year-end is a Herculean task. Many are calling it mission impossible. This cut of 3.6% of GDP is the biggest that is taking place in any country in the OECD this year. Markets are skeptical that Spanish society will be able to stomach such austerity and question the wisdom of such a draconian adjustment.

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Many orthodox voices in the business world are opposed to the hard austerity that Germany is preaching. So you and free-market types have something in common. You both reject extreme austerity and believe in pump-priming, boosting demand, Keynesianism, whatever you want to call it. The New York Times is essentially espousing Keynesianism for Europe.

--What do you think Europe needs?

--I am flattered that you ask me such a question. Nobody has the answer. Nobody can know the precise balance that each country needs between austerity and pro-growth measures that boost job creation in the short term. Germany, with a budget deficit of less than 1% of GDP, obviously does not need additional austerity. On the contrary, it has been running a huge current-account surplus and would do well to stimulate internal demand, which would obviously help its southern European trading partners as it would import more of their products.

Other countries do need austerity, but a “selective” one that does not harm the economy in the short term, and does not turn a mild recession into a profound one. I certainly agree with what you wrote last century: “For Government borrowing of one kind or another is nature’s remedy, so to speak, for preventing business losses from being, in so severe a slump as to present one, so great as to bring production altogether to a standstill”.

Yields on Spain’s 10-year bonds have risen to about 6% in the past few weeks and now are slightly higher than those of Italy. --Alex, do you believe Spain will need a bailout?

--The government and all European economic officials are ruling it out. I think Spain will muddle through this year. The PP government will enforce the necessary austerity and cut the deficit to close to the 5.3% target. As long as markets and European officials see a positive trajectory in terms of significantly reducing the deficit to something close to the target, they will be lenient with Spain. I hope they will, in any case. They must be mindful that the previous Socialist government left the country in a shambles after almost eight years of mismanagement and the current government cannot do miracles in a few months. The government has already enacted the most meaningful labor-market reform in decades, is pushing through a tough plan to crack down on the underground economy and is fostering a consolidation of Spain’s financial sector. Moreover, it is cutting red tape, moving to harmonize regulations that are too disparate in the 17 autonomous regions, cracking down on the abuse of unemployment benefits, and rationalizing spending on health care and education.

--That sounds awful. They cannot cut health care and education!

--Not core health care or education. But there are a lot of inefficiencies, especially because the autonomous regions run health care and education and some have inflated them for political purposes. Taxpayers should not have to pay for sex-change operations, for instance.

The new Education Minister, José Ignacio Wert, has created a commission of highly regarded academics from different parts of Spain, ideologies and fields to determine what should be the appropriate size of Spain’s tertiary education system. As the minister pointed out, Spain has 79 universities. California, which has the same population as Spain, has ten. Spain has one of the highest percentages of university graduates (as a share of the total population) of any country in the OECD. But we also have a university drop-out rate double 60

the EU average, many university graduates out of work and a very high percentage of high-school drop-outs, meaning people who do not have at least a secondary education. Spain’s Education Ministry is examining Germany’s very successful and much-admired vocational training and apprenticeship program. It may not be politically correct to say so, but society cannot finance that everyone attend university, because many university students do not graduate with the skill-set needed to find employment. Universities cannot churn out unemployable graduates, who also are often unwilling to move to another town or take a job that is not in the field they have studied in. --Alex, are you asserting that Spain’s young unemployed are lazy?

--No, you put those words in my mouth! I am sure most genuinely want to work, and unfortunately many have had to emigrate to find work in other countries. But there are some who would rather draw unemployment benefits of up to 900 euros monthly than work in jobs they do not like. The other day a businessman in the Turó Park who runs a mid-sized nutrition-food company told me he has trouble hiring motivated personnel. Some take up the position on the assembly line and quit after one day because they find the work boring.

I hear many similar stories, and have personally met young people who acknowledge they will live off unemployment benefits as long as they can and not take any job that is offered to them. I am not saying these are bad people. But they should have their unemployment benefits slashed or even withdrawn if they are unwilling to take available jobs. Keep in mind that people cannot find the jobs or field where they have a comparative advantage if they do not try different jobs. You cannot stay in your labor comfort zone all of your life. I have worked as a professor, speechwriter, radio and print correspondent, editor, media analyst, at a Chamber of Commerce, at a think-tank, and I do not even have a technical degree. In fact, I am seriously considering taking up that job on the assembly line! Deep Throat in Madrid has been giving me juicy tidbits again. He has again confirmed that the deputy secretary-general of the PSOE, Elena Valenciano22, has no university education (finished degree) and lists having completed some courses at the university as part of her academic CV. The former Spanish Health Minister, Leire Pajín, had at least finished two years of Sociology, which hardly qualified her to be Health Minister!

Spain’s net investment deficit – the money owed to foreigners by the government, households and companies – is 93% of GDP, approximately the same as that of Ireland and Greece. Scary. Deep Throat quotes some serious sources in Madrid who firmly believe that Spain will need a bailout later this year, in September or October. I am confident that this will not happen, but the Spanish economy is in very dire straits. --Alex, do not worry. This is not the Great Depression. Trust me. I lived through it and it wiped out most of my assets.

--I am constantly encouraging people to watch movies (if they do not like reading) that depict the Great Depression precisely to drive home the point that today’s troubles, although serious, cannot be remotely compared to the Great Depression. In 1932, U.S. unemployment reached 23% (8.2% now), and GDP dropped in 1932 by more than 13%. Dozens of millions in the U.S. not only lost their jobs and lifetime savings but also the ability to feed themselves, and in Europe, Germany (and other countries) experienced hyperinflation and mass unemployment. Serious economists and good journalists know that the current woes are not anywhere near the calamity of the Great Depression. But many others

22 The post of Deputy Secretary General of the Spanish Socialist Party (PSOE) was abolished in the Congress held in July of 2014 that resulted in Pedro Sánchez replacing Alfredo Pérez Rubalcaba as PSOE’s Secretary General. 61

who are quite influential have become used to referring to the current crisis as a depression, or stating things like: “We could be headed towards another Great Depression”, “We are undergoing the worst crisis since the Great Depression” and so on. There is a danger this will become a self-fulfilling prophecy, especially if we continue to experience a recovery in the U.S. with weak job creation and the high unemployment level in the EU (about 10%) continues to climb.

I will surely not write books that will mark contemporary economic thinking the way you did. But like you, I am an ethical person. Although you were a successful investor and your net worth was estimated at $16.5 million (in 2009 dollars) when you passed away, you always refused to sell an asset if you deemed that doing so would cause a sharp fall in its price. In other words, you shunned the investing technique of shorting. Well, in a somewhat similar fashion, I eschew resorting to predicting doom and gloom in order to make headlines. Many mediocre economists and journalists are making fortunes by scaring people with apocalyptic visions of a long depression. As was your case, I always remain confident that policymakers will find the tools to steer the world economy in the right direction and that the middle classes, although bruised, will not succumb to populist politicians’ demagoguery. I think Spanish and Catalan society has the wherewithal and capacity to overcome the crisis. But there is a general sense of resignation, dejection, pessimism and lack of confidence in the political class. I have spent many hours talking to people in the Turó Park while walking Chloe since mid-February. This owners of the apartments in the neighborhood are upper-middle-class. Most people have little or no faith in what the government is doing. I cheer them up, in some cases manage to persuade them that the new government has the talent, ideas and determination to turn things around if we all work hard. But it is a hard slog. Spain’s current Deputy Prime Minister, Soraya Saenz de Santamaría, is someone whose work ethic, intellect and determination I greatly admire. I have done some reading about her life and she is truly inspirational. Born into a middle-class family, she worked extremely hard, finished first in her class at Law School and went on to ace a state examination. She got involved in politics after sending her resume to Mariano Rajoy’s chief of staff at the time. She is now the most powerful woman in Spain (and probably the second most powerful person after Rajoy) and arguably one of the most powerful women in Spain since the XIXth century. She is the only Deputy Prime Minister and holds the positions of Minister of the Presidency, government spokesperson and head of the Spanish intelligence services, the CNI. When she briefs reporters on Friday after the Council of Ministers, there is no question of who is in charge, even if senior ministers – like Cristobal Montoro of Finance – are present and provide details on the reforms the government is undertaking. I do not think anyone will dare challenge her authority because everyone knows that Rajoy completely trusts and -- to a certain extent -- depends on her. --Alex, tell me more about Spain’s Deputy Prime Minister, especially about her background. Soraya was born and raised in Valladolid, where people speak the purest form of Castilian. My grandmother (on my mother’s side) was born in Valladolid, and I have some family there. My grandmother was obsessed with saving. Valladolid is located in Castilla-León, a big Spanish region with no natural resources and a dwindling population of 2 million (Barcelona’s metropolitan area exceeds 3 million). People from Castilla-León hence tend to be very frugal and passionate about saving. My mother’s parents did not have a university education, but they both passed examinations and joined Spain’s Treasury as civil servants. They were hard workers, but whereas my Catalan grandfather was jovial and fond of giving out big tips, my grandmother was tough and very thrifty. She may have been stingy, but I would not have the opportunity to live in the Turó Park if my grandfather’s investment savvy had not been complemented by my grandmother’s discipline. Both of my grandfathers had to leave Spain at the end of the Civil War (1939) due to their Catalan nationalism. --Alex, what happened to your grandfather’s career?

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--My mother’s father spent several years in northern Argentina. He was reinstated to the Spanish Treasury after almost ten years of exile. But my maternal grandparents were tough workers. By the early seventies they had made some foreign trips and lived in a house with a garden near Diagonal Avenue, one of Barcelona’s main boulevards. As their house (and others) obstructed real-estate developers’ plans to open up the Diagonal to bigger buildings, my grandparents were forced to sell their house in the early seventies. The money they were compensated with – and their intelligence – was sufficient to purchase the apartment where I can now live. It has become an upscale neighborhood in the past fifteen years. But I continue to behave like my grandmother. If I can take the bus or public transportation, I do so. My maternal grandmother took buses until the year 2000, when she passed away at age 91. I hardly benefited from my maternal grandfather’s humor, intelligence and kindness because by the late 1970s he was very sick. A life-long smoker, he suffered from artheriosclerosis and emphysema. My only recollections of him outside the apartment are of a coughing man needing a cane to slowly walk up 50 yards to the nearest bar. I did what I could as a little kid but his health deteriorated dramatically. My grandmother spent many years paying a strong maid from El Salvador who literally had to carry my grandfather around the apartment. His last years were full of suffering and painful operations as he gradually lost all memory and the ability to perform the most basic functions. He passed away in 1985. I am now lucky to have the opportunity to live in a good neighborhood due to my grandparents’ work ethic, investment smarts and ability to save. I have never made enough money to have a family and live in the neighborhood (I have earned enough to live there alone) that my grandparents bequeathed to my mother and I. So whenever I do take a cab to head home instead of riding my motorcycle, I tell the cab driver that I can live in that neighborhood due to my grandparents’ very hard work and ability to save. Back to international events. I need time to follow international and national events. For example, the ongoing situation and transition in North Korea from Kim Jong Il to Kim Jong Un. As was expected, the U.S. has cancelled the food aid shipment it had promised to North Korea in exchange for the Hermit Kingdom freezing its ballistic missile and nuclear program. A few days ago, North Korea launched a long-term rocket. It thus broke its pledge to the U.S. --But North Korea’s hungry population is a victim of the regime. The U.S. should not inflict further punishment on them by withholding the food aid.

--That is a valid argument. The U.S. and the international community have been feeding North Korea’s hungry and in some cases starving population for many years. The regime in Pyongyang holds its population hostage and allows it to starve because it believes it can blackmail the U.S. and other Western countries indefinitely. The U.S. had to signal that North Korea’s rocket launch, which miserably failed, has consequences. I am sure the U.S. will resume the food aid soon. The U.S. has a history of feeding hungry people in countries whose regimes are openly hostile to the U.S. But the State Department and Hillary Clinton cannot appear as suckers who will be constantly double-crossed and manipulated.

Pyongyang has spent hundreds of millions celebrating the 100th anniversary of Kim Il Sung’s birthday. They have pulled out all of the stops. Parades with hundreds of thousands of soldiers, showing off the latest military hardware, and mass mobilization of the population. It is one of the poorest countries in the world, where a substantial part of the population (especially in the countryside) is actually starving. The scenes in Pyongyang are reminiscent of the equally expensive and Stalinist celebrations the Ethiopian regime of Haile Mengistu Mariam put on in 1985 to mark its access to power while millions were starving across the country. Mariam’s regime was eventually overthrown. Let’s hope the same happens with the Stalinist dictatorship in North Korea. But they are very resilient, and China shores them up. 63

Chapter 7. Germany, austerity and the inevitable burn-out

On May 6, 2012, Keynes and I arranged to meet up at Nuba. I had been watching coverage of the French presidential election during the entire day on French channels. It was a close race and Sarkozy lost by a small margin. I was happy to practice my French but disappointed about Sarkozy´s defeat. I called Víctor Pou, who had been watching the coverage with friends. Victor took Hollande’s victory in stride, and correctly predicted that reality would force Hollande to abandon his interventionist and anti-rich electoral promises.

--John, I assume you will be very pleased with François Hollande’s victory in France…

--Aren’t you?

--No. I think Nicolas Sarkozy has been a good president. France has not been in recession since 2009, the only advanced country that can claim that. Since Sarkozy took office in 2007, France’s unemployment rate has increased, but at 10% is still relatively low by the standards of other European economies. Germany’s may be 6%, but Spain’s is 24%, and Greece’s is 18%.

Sarkozy successfully increased France’s retirement age from 60 to 62. He has trimmed the public sector in France, where it is still very bloated. In fact, France is second only to Sweden in Europe in terms of taxation. Its public spending is 57% of GDP, the highest proportion of any country in the euro zone. With France’s taxes and public spending at such high rates, the last thing we need is a Socialist bent on increasing them. I just heard Sarkozy’s acceptance speech. It was moving, humble, gracious, dignified and statesmanlike. He did not read from prepared statements. He urged his supporters to not criticize or whistle Hollande. I do not understand those who despise Sarkozy and cannot acknowledge his accomplishments. He only lost by a few hundred thousand votes. Marine Le Pen and François Bayrou were traitors. Marine Le Pen is a big threat to French politics. She really thinks she will lead a national (left- and right-wing) French movement against the EU. It is true that Sarkozy had alienated many, even among his supporters, because of his arrogance and some of the company he kept. He is a fighter, and I admire that. I thought a last-minute victory was still possible. For months, not a single poll predicted a Sarkozy victory in the second round. He was down by as much as 12 points to Hollande and almost pulled off an upset. He finally lost by less than four points, by 51.7% to 48.3%. He was unable to overcome the anti-Sarkozy campaign that the entire political establishment except his own UPM (Socialists, Communists, Greens, National Front, even the centrist Bayrou) and part of the media waged against him. He did not court the National Front to the extent that his detractors accuse him of having done. All of the left-wing European media is celebrating. The left wing in France is reveling in the international attention that Hollande’s victory has brought. It is a swan song for France if people think the discredited Socialist (as opposed to Social Democrat) left can claim any mandate to change things in Europe. The narrative of voters punishing those who have pushed for austerity is untrue. Each situation is different. Sarkozy’s personality did him in. But he accomplished much. Most analysts, myself included, believe that Hollande will not implement his irresponsible campaign promises. The markets would react very negatively. Yet he is so bland. His victory speech did nothing to assuage my worries. Too many references to the need to stand up to austerity (austerity is not a fatalism), to speak bluntly to Germany, references to Socialism…. --Alex, give the new President of France a chance! He needs to acknowledge his supporters!

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--I know. However, he acts and speaks in such a provincial manner. He has been a Member of Parliament for decades and Counsellor of the Corrèze department for many years. He acts and looks so provincial. I doubt he speaks any foreign languages. I do think he is a decent and honest man, but he does not know enough about economics. Do you know he promised to freeze gas prices for three months? By administrative fiat! Five-year plans are history. China only maintains them in a cosmetic way.

--Alex, when Helmut Kohl was the Ministerpräsident of Rheinland-Pfalz, Germany‘s pundits thought he was a county bumpkin, and mocked his supposed inability or unwillingness to speak Hochdeutsch. You remember, when Helmut Schmidt was Chancellor and Hans-Dietrich Genscher and the FDP were his junior coalition partners. As you know, the FDP bolted the coalition and turned the supposed county bumpkin into Chancellor in 1982. People ridiculed the way he spoke. Kohl turned out to be a great Chancellor who served from 1982 until 1996 and reunified Germany.

--I understand your point. But I listened to Lionel Jospin, the last Socialist Prime Minister (1997-2002) on the election night program. He has really aged. His sister called the right wing “the enemy”. He was much more moderate, pointing out the close result. Jospin appointed Hollande spokesman and later head of the Socialist Party. He was thus a mentor to Hollande as Mitterrand was to Jospin. According to Jospin, Hollande is an intelligent, self-effacing economist committed to public service. I do agree he is committed to public service, but I am not sure about him being a good economist.

You will also be pleased to know that Spain’s center-right government has had to nationalize Spain’s fourth- biggest bank, Bankia.

--Another bank bites the dust!

--Yes, Bankia was a bad idea from the get-go. The previous Spanish government, led by the incompetent Zapatero, pushed for a consolidation of Spain’s bloated financial sector. We had more than 45 savings & loan institutions. The government enticed several of them into merging. In Bankia’s case, seven troubled S&Ls with heavy exposure to real-estate merged. Bankia went public in July of 2011. It was badly run and poorly supervised. As Spain’s property bubble continued to deflate, its assets became more toxic and its non-performing loans increased. It finally had to be bailed out by the government on the week of May 14, 2011. The government converted a loan into equity and took over a majority of its shares.

I am tiring of the endless wrangling in the European Union. Spain and Italy will stay in the euro zone, but their banks will need more financing from the European Central Bank, downward pressure on the euro will continue, and the politics of austerity in both countries are very unpopular. Increasing numbers of Spaniards will transfer their savings to non-Spanish banks. This is already happening on a large scale in Greece. A few days ago, Greeks withdrew 700 million euros from their banks accounts. The euro zone can limp along for another year or so. If push comes to shove, the ECB will do another LTRO operation and lower Spain’s and Italy’s borrowing costs by injecting liquidity into their banks via 3-year-loans at 1%. Or Spain will have to access EFSF funding to recapitalize its banking system, as President Hollande has suggested at the G8 Camp David summit. These all are stopgap measures designed to staunch the bloodletting. The euro zone needs to mutualize its debts, create a really integrated banking and financial system and harmonize its taxes. That is the bottom line.

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I tend to sympathize with Germany’s stance because I am very austere myself. I have lived on two continents for more than ten years without taking out a single loan or owing anyone anything. I do not drink coffee, smoke or drink, and eat relatively little (I graze, as Australians call it). I rarely go out or dine out. I do not like to buy clothes and never buy sweaters, coats, scarfs or any winter clothing because I do not need them in Spain and only in severely cold weather elsewhere. As a teenager, I was looking forward to the day I would stop growing because I thought I would never have to buy clothes again in my life. Moreover, I take cold showers almost all of the time, thus lowering my heating bill. In fact, I never turn on the heating in the winter in Spain. I did not even do so when I lived in Washington, D.C., and endured the big snowstorms of the winter of 2009-2010. I have owned the same car in Europe since 1999. I have never gone skiing in my life. I use my running and work shoes until they literally have holes in their soles. I make a habit of turning off the lights whenever I leave a room, and turn off all of the lights when I leave the apartment. I have the lowest possible premiums on my car insurance since I have never had a car accident in my life. I do not have private health insurance in Spain (everyone has access to the public health system) and I have only visited doctors a couple of times for routine blood checks since I returned to Spain from the U.S. in September of 2011. --Any other household austerity tricks?

--Well, in the wintertime I think twice before inserting something I have worn into the washing machine, especially if it is not something I need to wear to work like a shirt. I also multi-task, which saves time and thus money. I do not buy print newspapers and instead check their online versions. But many young people do this. I obviously try to avoid long cell-phone calls, as many mobile telephony operators in Europe do not offer big amounts of free minutes – or provide the free minutes only if you call another number from the same operator. If I have to take my saving to an extreme during certain difficult phases, I dry my clothes quickly after washing them and thus save time by not having to iron my shirts. I have had the same three bathing suits for something like 10 years. I replace my tennis shoes when they literally have holes in their soles from my jogging. I do not need a drier for my hair nor many towels.

I have spent considerable amounts on travel. I have made a virtue out of necessity in some regards. In others, saving comes naturally, as I am not very focused on material things – with exceptions like household appliances, gadgets, books, newsmagazines and travel. I do not hold myself up as an example. I do not have to pay rent in Barcelona and grew up in a middle-class family that sent me to good schools. Most people in the world have endured much more hardship than me. But I do think some people who have lived way beyond their means could follow my example. --What helps you endure and persevere?

--Well, what I have accomplished in my life. Obviously, even if I live to be one-hundred, work hard, study, persevere, get some breaks and meet the right person to start a family, I will never achieve one percent of what you did in your lifetime. But I have a PhD, have published five books, none of which has been vanity press nor a best-seller, but some of which have sold relatively well. Moreover, I have published over 250 articles and op-eds in the media since 1992 in a wide array of (mostly but not exclusively) Spanish newspapers and newsmagazines and a dozen academic articles. I have served as Speechwriter to the president of the World Bank and to the president of the European Bank for Reconstruction and Development, as well as a consultant to the president of the Inter-American Development Bank. I have headed the Europe program of the CIDOB Foundation, a leading Spanish think-tank and served as Director of Studies of the American Chamber of Commerce in Spain and Director of International Relations at Barcelona-Catalonia Logistics Centre. Moreover, I have served as 66

radio correspondent for several Catalan radio stations, posted in Germany.

You, John, are the star. The entire world has embraced Keynesianism. President Obama just told his fellow G8 colleagues at Camp David that we need more growth-enhancing measures. He obviously advocates stimulating demand, as you favor in times of distress for economies. Although you also advocate repaying the debt after the economy resumes growth.

--How did Chancellor Merkel react?

--Well, I did not watch the entire news conference. I am getting a little weary of long press conferences with few specific outcomes, even if they feature politicians I respect, such as president Obama, Chancellor Merkel, Italian Prime Minister Mario Monti, Canadian Prime Minister Stephen Harper, Japanese Prime Minister Noda and British Prime Minister David Cameron.

--You left out Hollande and Medvedev.

--Hollande continues to play with fire in repeating his demand to renegotiate the fiscal union. Three euro zone members have already ratified it and will go into effect as soon as two-thirds of euro zone members ratify it. The Irish will hold a referendum on the fiscal union on May 31st. The “Yes” will probably win. Both main Irish political parties, Prime Minister Enda Kenny’s Fine Gael and the opposition Fianna Fail, back the fiscal union. Irish people are aware that if they vote against the fiscal union and it nonetheless goes into effect, they will not be able to access funding from the European Stability Mechanism’s $700 billion. They cannot return to capital markets yet and need to continue tapping the funds from the EU/IMF bailout they obtained, despite the progress they have made in cutting their deficit and their very slow return to moderate growth. The Irish are tough, hardworking, and disciplined. They will make it, unless the euro zone falls apart23. I wish the other peripheral countries’ populations would behave like the Irish. Spanish people are hardworking too. But they are also more inclined to complain.

I must admit that Hollande has struck a chord with many in Europe by cutting his salary and that of his ministers by 30%. It is symbolic, but shows he gets voters’ pain and frustration and partakes in the austerity he will have to ask of his countrymen and countrywomen. As for Medvedev, whom you asked me about, he is just Putin’s stooge. Merkel’s reaction to Obama’s insistence on short-term stimulus is that she favors measures that boost growth and job-creation in the short term but opposes efforts to relax fiscal consolidation and budget cutting. She dislikes big stimulus programs such as those passed at the beginning of the crisis by the U.S., China and other countries. Obama has a point, and he is understandably worried that a still unlikely implosion of the euro zone before November could cost him re-election. --Paul Krugman asserted that Spain’s plunging economy could put Obama’s re-election at risk.

--Well, I think he was referring to a general worsening of the situation in the euro zone, with Greece exiting and Spain and Italy needing partial bailouts, additional financing from the ECB and/or a recapitalization of their banks. A Grexit is growing likelier by the day. Greeks have been withdrawing

23 Indeed, in early 2014 Ireland successfully exited its bailout program and returned to private financial markets in order to obtain financing. The spread on its bonds over the German bund has narrowed to pre-crisis levels. 67

deposits in euros from their banks in record amounts. No bank runs or wholesale panic yet, but depositors are transferring substantial amounts to other banks or placing them under mattresses. In the last few days, as it became apparent that pro-bailout parties would be unable to muster a majority to create a coalition government, Greeks withdrew huge amounts from their banks. President Karolos Papoulias estimated the withdrawals on May 14th at 700 million euros. Other sources put the figure at 1.2 billion euros on May 14th and the following days. According to The Economist, Greek residents’ domestic bank deposits have dropped from almost 240 billion euros in early 2010 (the first Greek bailout was signed in May of 2010) to a little over 160 billion euros now. Moreover, big companies are taking some of their money out of peripheral banks and countries. Some British local-government bodies are taking their pension funds or money out of Banco de Santander’s British subsidiary.

Merkel does not have to hold general elections until the fall of 2013, and her popularity rankings remain high. Her CDU has taken a beating in most of the regional elections held in 2011 and 2012, but at the federal level the CDU’s support has held steady at around 35%. The SPD will make life hard for Merkel in the Bundesrat (the upper house of Germany’s Parliament, where she does not have a majority) and will extract concessions in return for their parliamentary support for passage of the European Stability Mechanism (the successor to the EFSF) in the Bundestag (it requires a two-thirds majority). The SPD, however, does not have a national leader of Merkel’s standing and experience. Sigmar Gabriel, the current head of the SPD, is lackluster. Merkel already defeated Frank-Walter Steinmeier in the 2009 election. Hannelore Kraft, the popular and recently victorious SPD Ministerpräsidentin of North-Rhine Westphalia, is billed as a potential SPD Chancellor candidate. We shall see. At any rate, I miss the old spirit of the Plaza accords of the mid 1980s and other occasions when the G7 coordinated economic, exchange rate and financial policy. Obama and Merkel are extraordinary politicians and probably statesmen (future historians will have to judge), but they do have profound differences over the precise policy prescriptions needed to overcome economic and financial crisis. They are doing a great job under extremely trying circumstances. However, I think it would be naïve to believe that in addition to pulling their countries and the world economy out of the crisis, they do not keep an eye on getting re-elected. China and other BRICS’ spectacular growth is slowing. Brazil’s might not top 3% this year. Plenty of important economies are holding elections this year, which adds to the economic uncertainty. Mexico, where the PRI’s Enrique Peña Nieto will prevail. Possibly Japan, if Prime Minister Noda cannot push his increase in sales taxes through the Japanese Parliament. France will hold legislative elections on June 17, as will the Netherlands in September. Egyptians will choose their president on May 23 (I hope that Amr Moussa will win). The euro zone registered no growth in the second quarter. U.S. GDP will expand by 2-2.5% at best this year. The U.S. holds its presidential election in November, and China is renewing its leadership this fall. --Alex, I am very happy that my work and events on the ground have changed your ideology, that you are now Keynesian.

--Well, let me nuance that. I very much still believe in and advocate free markets and the need to unleash the creativity of entrepreneurs everywhere. I am, however, disgusted by the havoc the financial sector has created in the world economy and in the lives of hundreds of millions by speculating, lying, committing fraud and taking excessive risk. The UN estimates that more than 130 million people are malnourished in the world due to the unregulated speculation of financial markets. I do not think the answer is to clobber the private sector in general and the financial sector in particular with a lot of red tape and lots of regulation. We need smart and targeted regulations, and especially that public bodies and institutions at the international and national levels enforce them. Enforcement is the key.

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In Spain, prosecutors are investigating several managers of failed S&Ls. They terribly mismanaged the S&Ls, ruined them, costing taxpayers millions, forcing them to merge (and thus lay off thousands of employees) and were rewarded for their performance with bonuses. The public and taxpayers are understandably livid and outraged. The current PP government in Spain has enacted a groundbreaking law that will increase fines and even impose lifetime bans on holding public office on those that mismanage public funds. It will also increase the transparency of public-sector operations and civil servants’ behavior. I hope something will come of this. People are clamoring for accountability, especially as Spain has just registered its third consecutive quarter of negative growth, unemployment stands at 24% and a new UNICEF report has just concluded that the number of children in poverty in Spain has jumped substantially due to the crisis. Elsewhere, the NATO and G8 summits in Chicago and Camp David have not really produced groundbreaking developments. NATO allies have reconfirmed they will withdraw most of their troops from Afghanistan by the end of 2014. France’s Socialist President will however fulfill his campaign pledge to pull out French troops by the end of 2012. U.S. allies in NATO maintain their commitment to Afghanistan’s stability and support for Afghan security forces beyond 2014. I think the Allies need an exit date for political reasons, especially considering that war-weary NATO allies have been in Afghanistan for more than a decade and have suffered considerable casualties. The key in the coming months is to consolidate the gains produced by the surge in U.S. troops ordered by Obama in 2009, force Karzai to tackle corruption (a pipe dream, probably), and ensure that Pakistan cooperates fully in fighting the Taliban on both the Pakistani and Afghan side of the border. Islamabad has been especially difficult in the last months. They have prevented NATO, U.S. and ISAF troops from using the traditional border crossings from Pakistan into Afghanistan to supply their troops. They are opposed to U.S. drones carrying out strikes to take out Taliban and al-Qaeda leaders in north and south Waziristan…. --Alex, that is understandable given that a U.S. bombing a few months ago killed several Pakistani troops in a location near the Afghan border.

--Yes, Pakistan is demanding an official U.S. apology over the killing. I think the U.S. government should show its regret and apologize, but not give in to the outrageous Pakistani demand to hike tenfold the fee they charge for allowing the land supply of ISAF troops through Pakistani territory. That is tantamount to extortion, not acceptable treatment from a supposed U.S. ally that receives billions of dollars every year in assistance from Washington.

--Alex, back to economics. The ECB should immediately step in and purchase Spanish and Italian bonds.

--Not so fast. Yields on Spanish and Italian ten-year bonds have increased in the past weeks. They are now at about 6.3% for Spain’s 10-year bonds and close to 5.9% for Italian ones. But let me remind you of the following before you get carried away and join the chorus of those who want the ECB to throw all caution to the wind and undermine its independence. Greece’s ten-year bonds stood at 10% when markets forced Athens to seek a bailout in May of 2010, Ireland’s were at 8% and Portugal’s at 9%. Italy’s peaked at about 7.28% in November of 2011. At that point, as the yield was getting close to unsustainable levels, the ECB stepped in with its first of two LTROs, which eventually pumped 1 trillion euros into the European banking system. Since then, Italian Prime Minister Mario Monti’s government has taken bold, brave and tough measures to overhaul, reform, liberalize and modernize the moribund Italian economy, which has suffered four recessions and at the best of times managed only very sluggish growth since it joined the euro zone in 1999. Italy needs to be shaken up. On current trends, Italy’s population will shrink by 25% by 2050 due to its very low fertility rate.

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Monti is making progress. But at recent local elections, anti-reform parties gained a lot of ground. A populist politician named Pepe Grillo fared very well. The Italian media has given a lot of coverage to a spate of suicides prompted by economic hardship. A smart and kind Italian businessman I have met at the Turó Park (and fellow Golden Retriever owner) dismisses the very regrettable suicides as somehow proving the reforms are excessive. Spain will experience its first-ever strike of its entire public educational sector – from kindergarten to university. I understand the cuts are painful. Teachers are complaining about having to teach more hours for the same pay, and both teachers and students about swelling class sizes. But Spain needs to cut its budget deficit from 8.91% at the end of 2011 to 5.4% at the end of 2012. Some sacrifice is necessary. The International Labor Organization has just reported that 75 million young people (aged 15 to 24) worldwide are out of work, with 20% of young people unemployed in several European countries. It asserts that these young people are becoming detached from society and are at risk of becoming unemployable altogether. --And of course this problem does not exist in the U.S.!

--Oh, yes it does, although unemployment is much lower. But it is headed towards a very divisive presidential election.

Bill O’Reilly, one of the cleverest journalists in the U.S., is on a crusade to take on the Occupy Wall Street movement. He is cocky but extremely well informed and brave. He was provoked by Occupy Wall Street people. He claims that some of them have attacked police officers and are planning a bomb attack. To his credit, O’Reilly refused to tar the entire group with a broad brush. He said the more extremist people in the movement are dangerous, and if Obama does not take them on, he will. He was apparently taking his kids to a play in New York City when Occupy Wall Street radicals confronted him. --Alex, should Obama condemn the Occupy Wall Street movement?

--The more radical elements who are willing to or have already committed violence, absolutely.

--He might then alienate all of the movement.

--Well, John, there is that risk. Yet he is the President of the United States. He needs to ensure that there is no perception that he is friends with radicals willing to break the law. I like president Obama personally, and want him to be re-elected. I do not want the more radical people in the GOP to take over the Republican Party. If I were a U.S. resident or citizen, I would not be worried about a Romney presidency. He is a decent man. But I am worried about the influence the Tea Party people would have on a Romney presidency, especially if the GOP takes over control of the Senate and retains control of the House.

--So people are equating Occupy Wall Street and the Tea Party as being equally radical, the former to the left and the latter to the right?

--Yes, some analysts on Fox and elsewhere are.

--Fox, give me a break!

--Well, Spain needs such tough, independent journalists. 70

--Alex, O’Reilly is a Republican.

--Well, I am not sure things are that simple. O’Reilly is a principled man. He indeed prefers Romney to Obama. He is the only Fox anchor I can watch and respect. I only watch Fox once in a while (I do watch their NFL games), and only long enough to confirm that I should continue watching CNN as the world’s best source of international and U.S political, economic, financial and technology news24.

On June 24, 2012, John Maynard Keynes and I met up in Barcelona. --John, I have plenty of good news for you. Every important international economic institution and political leader – with the notable exception of Angela Merkel in Germany – is advocating more pro- growth policies and less austerity for the world economy in general and the euro zone in particular. Keynesianism, in various shades, is carrying the day. President Obama, the recently elected president of France, Hollande, the Italian Prime Minister Monti, Spanish Prime Minister Rajoy, the IMF and the OECD are urging Germany to soften up on its austerity message.

--I am glad everyone is being sensible. Are things that bad?

--The short answer is yes. The euro zone is in recession after registering zero growth in the first quarter of 2012. The Federal Reserve’s Federal Open Market Committee projects the U.S. economy will grow between 1.9% and 2.4% in 2012, significantly lower than the April forecast of 2.4%-2.9% growth. The growth rates of Brazil, India, Mexico and several other big emerging economies have dramatically slowed. China is forecast to grow at 8%, and the latest purchasing managers’ indices point to a sharp slowdown in Germany as well. Industrial production in Germany fell by 2% in April from March. It was the last major economy in the euro zone that had been performing well. France is barely growing, its trade deficit has ballooned and its competitiveness has eroded. Hollande’s new tax-and-spend policies are scaring the business community.

Spain has been in a recession since the last quarter of 2011, and its economy is projected to shrink by at least 1.7% in 2012, with many analysts expecting it to fare worse. Italy’s economy is also moribund. Smaller economies that had been performing well in northern Europe, such as Sweden, Denmark and the Netherlands, are also feeling the slowdown, as they are export-oriented. They may have sound finances and be competitive, but are too small to remain unaffected by the European and global crisis. Greece is experiencing its worst recession in its contemporary history. Its economy has shrunk about 20% in 5 years, which qualifies as a depression. Despite the victory of the center-right New Democracy (ND) Party and the cobbling together of a pro-euro and pro-bailout coalition between ND, the Socialists (Pasok) and the moderate left-wing Democratic Left Party after the June 17 election, most market analysts continue to bet on Greece having to leave the euro zone sometime in the near future. Its debt remains at 160% of GDP. Despite some expected softening of the bailout terms by its creditors (extending deficit-cutting goals by two years from 2014 to 2016, exempting social spending from the austerity package) it seems unlikely Greece can grow its way back to prosperity without another major restructuring of its external debt, something the troika continues to officially rule out.

24 Although the BBC International also has an attractive and fact-filled technology program, I was extremely mesmerized by the airing on CNN of “The City of Tomorrow”, on July 26, 2014. 71

Tourism revenue has fallen off the cliff as travelers cancel their vacations. Unemployment has reached 20%. One-third of all deposits in Greek banks have been withdrawn since May 2010. The Greek economy seems to be slowly bleeding to death. The euro zone’s woes are affecting many large economies, as their exports to the euro zone plummet. As President Obama has repeatedly said, if folks (he really likes to use that word) in Paris or Milan are buying fewer goods, that affects companies in places like Cleveland and Pittsburgh which are making and exporting goods to Europe. Many analysts consider the euro zone’s paralysis as one of the main threats to President Obama’s re-election chances in November. Although the U.S. economy emerged from recession in the summer of 2009, recent job numbers in May were dismal. Official unemployment has dipped from a high of 10% earlier in the Obama presidency to about 8.2%, but everyone knows this statistic is misleading. The many who have given up looking for work or are underemployed push the real unemployment rate to somewhere around 15-16%. With this jobless recovery, the last thing Obama needs is a severe downturn in the euro zone. Although the euro has held up against the dollar, it has been trending lower, thus making U.S. exports to the euro zone more expensive and euro zone exports more competitive. --What is the ECB doing about all this?

--Well, frankly, very little of late. It has not bought Italian or Spanish bonds in secondary markets in three months. It has refused another massive injection of liquidity -- an LTRO -- such as those it carried out in December of 2011 or February of 2012. It has eased some of the conditions for the collateral that banks can provide in order to receive financing from the ECB. But that is it. Many European leaders -- Hollande, Monti, Rajoy -- are pleading with the ECB to intervene. The Economist maintains a very gloomy line. It feels everything that euro zone leaders are doing is half-hearted and a short-term fix. It keeps calling for the ECB to be a lender of last resort and to backstop all European banks. I do feel the ECB should again purchase bonds in the secondary market. But I feel another LTRO will just provide markets with a short-term high and prompt some countries to backtrack on reforms and austerity.

Spain’s government will maintain its reform drive regardless of what the ECB does, but others will not. In some cases, such as Italy or the Netherlands, their governments are weak because they lack an absolute majority in Parliament. Monti’s reforms and austerity have eaten away at his popularity. His approval rating has slumped badly as austerity bites. Pierluigi Bersani’s left-wing coalition and Silvio Berlusconi´s right-wing Pole of Freedom coalition have been happy to let Monti do the dirty work since November of 2011 and have been supporting his technocratic government in Parliament, but they can pull the plug at any time if reforms get very unpopular. It still seems likely that they will not topple Monti until the spring of 2013, when general elections are due. But Monti has already had to slow his reform drive. Lacking a strong majority in Parliament is clearly hampering him.25 John, maybe you can travel to Frankfurt and convince ECB President Mario Dragui and its board to buy bonds in the secondary market. The ECB’s mandate forbids it from purchasing bonds directly from sovereigns. Yet the consensus is that it should be doing more. --Why is not it doing so?

--Its Securities Market Program already holds $200 billion in bonds. Even its buying of bonds in secondary markets is frowned upon by Germany, which feels the ECB is coming close to monetary financing of states, something banned under the treaties creating the euro. If the ECB lends directly to

25Berlusconi did pull the plug on Monti´s government and forced an election in early 2013 which led to the creation of a left-of-center government (PD) supported by Berlusconi’s center-right People of Freedom coalition in Parliament. 72

banks and these purchase Spanish and Italian bonds, on the other hand, the ECB gets around this legal problem. This is what it did with the LTROs.

The problem is that the main purchasers of Italian and Spanish bonds have been Italian and Spanish banks. The ECB provided three-year loans at 1% and they have been snapping up Italian and Spanish 10-year bonds, which currently yield almost 7% in Spain’s case and over 6% in Italy’s case. But other investors are not buying Italian and Spanish debt. So the link between sovereign and banking debt in Spain and Italy is being reinforced. Moreover, Spanish and Italian banks are hardly providing any loans to companies and households. As things stand now, the ECB will likely cut its main interest rate from 1% to 0.5% at its next meeting on July 5, in order to ease monetary policy and increase liquidity in the euro zone. Monti, Rajoy and Hollande tried to prod Merkel to allow the rescue funds (EFSF and ESM) to directly purchase bonds or to directly capitalize Spanish banks. Merkel rejected both options. --Why is the German Chancellor so inflexible?

--Well, when it comes to the European rescue fund (ESM) directly buying bonds of peripheral euro zone countries targeted by the markets, she points to the fact that the European Stability Mechanism’s rules do not allow it to purchase sovereign debt. It also cannot directly recapitalize banks. It must do so via the governments. There has been pressure on Germany to change the ESM’s rules. Merkel has not rejected such a move outright. But even if Merkel eventually gives ground, changing the ESM rules will take time. Hardliners also feel that, after committing 100 billion euros to the Spanish banking system and previous big amounts to the bailouts of Greece, Ireland and Portugal, the ESM has used up a significant amount of its funds and war chest.

--But Spain has not even borrowed one euro yet! This is madness.

--Many would agree. Look, the EFSF and the ESM do not have enough money to bail out both Spain and Italy. Italy’s total stock of debt is $2 trillion, and the combined funding of the EFSF and ESM is at most 700 billion euros, with part of it coming from Spain and Italy themselves. So the Germans, Finns, Austrians, Dutch, the ECB and fiscal hawks feel that peripherals need to suffer, cut their deficits further and proceed with structural reforms.

--But, Alex, people need to eat and survive.

--Yes, so European leaders agreed on a 130 billion euro stimulus package to boost growth and jobs in the short term. It will finance projects in transportation and energy infrastructure, energy efficiency, biotechnology, biomedicine, training and R+D. The money will come from unused EU budget funds, an increase in the European Investment Bank’s capital and the so-called project bonds. Hollande had requested 120 billion euros in stimulus. The question now is when the money will start flowing. Many will say the 130 billion euros is small potatoes considering the magnitude of the recession and high unemployment in southern Europe.

After announcing the agreement at a mini-summit in Rome on June 22nd, Merkel took an afternoon flight to Gdansk to watch the German soccer team defeat Greece 4-2 and make it into the 2012 Eurocup semifinals. She jumped up from her seat and cheered after every German goal. I did not want the Greeks to be humiliated on the soccer pitch. Anti-German sentiment has risen considerably in Greece. Its citizens resent what they regard as German high-handedness and the punishing austerity

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inflicted on their society. They were looking for payback on the soccer pitch. They managed to equalize at 1-1 after Germany took the early lead. They were feisty but Germany plays at a higher level. A late penalty kick allowed Greece to avoid a 4-1 blowout. Before Greece’s elimination, four southern European teams – defending champions Spain, Portugal, Italy and Greece – had a chance to make it into the semifinals and thus redeem southern Europe. Portugal bested the Czech Republic and Spain defeated France. In the final quarterfinal game, Italy outclassed England but was unable to score despite having several good opportunities and having almost 70% ball possession. They deservedly eliminated England in the thrilling penalty shoot-out. So three out of the four semifinalists are southern European teams, and all four semifinalists are euro zone countries. Spain and Germany were favored to reach the final, and FIFA currently ranked the Spanish side as the better team. Barcelona and its famed former coach, Pep Guardiola, can claim to have changed European soccer. The Spanish national team, which fields six Barcelona players in the starting lineup of eleven, plays just like Barcelona. German champions Dortmund and Bayern Munich also imitate the Barcelona playing style, thereby influencing the German national squad. Even Italy and France imitate the Barcelona style. Spain wound up winning the 2012 Eurocup, its third consecutive triumph – it also won the 2008 Eurocup and the World Cup of 2012 held in South Africa. Spain was on top of the soccer world. Merkel and all EU leaders have and will continue to shun attending any games in Ukraine, which is co-hosting the 2012 Eurocup with Poland. Germany played its first-round games in Lviv, in western Ukraine. Merkel did not attend any of Germany’s three first-round games. As Germany’s quarterfinal match took place in Gdansk, in Poland, Merkel attended. The EU political leadership is boycotting games played in Kyiv, Donetsk and Lviv (the Ukrainian sites) because in late 2011 former Ukrainian Prime Minister Yulia Tymoshenko was jailed after a political trial denounced by both the U.S. and the EU. A free-trade agreement negotiated between the EU and Ukraine has been put on ice. It was due to come into effect but the EU has suspended it. Some analysts expected Ukrainian president Viktor Yanukovich to persuade Ukrainian courts to give Tymoshenko a lighter sentence (on appeal) or maybe pardon her, but the apparent physical abuse she suffered while in prison has hardened the EU’s position. Tymoshenko, who is no saint, is becoming a political martyr. I cannot understand what Yanukovich is thinking. I assume his pro-Russian feelings have gotten the best of him and he would rather cozy up to Putin and Russia and be shunned by the West. On the other hand, he is very adept at playing off the EU and Russia to obtain benefits and concessions from both. At any rate, Spain and Portugal faced off in one semi-final of Euro 2012 while Germany played Italy in the other. One game was played in Warsaw and the other in Ukraine. They took place in Kyiv on July 1st, as the opener was held in Warsaw. Regardless of the countries that reach the finals, their leaders will not be in attendance as all semi-finalists are EU member states. There have been several political boycotts of major sporting events (U.S. and West European of Moscow’s 1980 Olympics, USSR of Los Angeles’s 1984 Games), but I cannot recall it ever happening at the European level after World War II. On June 29, 2012, Keynes and I decided that we needed to get away from the stifling summer heat of Barcelona. We headed for Llafranc, a pretty and picturesque beach village that belongs to the municipality of Palafrugell, in the Costa Brava. I was psychologically and physically exhausted after a long week during which we had endured a heat wave. Temperatures had surpassed 40 degrees Celsius in many parts of Spain, and the misery index -- heat and humidity combined -- easily topped 35 degrees in Barcelona. Spain had eked out a victory in the penalty shoot-out on Wednesday, June 27th, against Portugal to reach the Euro 2012 final. Spain had been the better side, in terms of ball possession and goal opportunities. But Portugal held their ground. I intensely disliked several of their players, especially Cristiano Ronaldo and Pepe, both of whom play for Madrid. Although extremely talented, they both epitomize arrogance and constant 74

complaining. I had been a fan of Portuguese soccer in earlier tournaments and admired the likes of Figo, despite the fact that he deserted Barcelona for Madrid. But the Portuguese side of 2012 played and behaved like Real Madrid. They were undoubtedly very talented, but unbearable as persons. Even the Spanish broadcasters, who could not disguise their rooting for Portugal for its likeness with Madrid, voiced their contempt for Pepe’s constant antics. He elbowed and kicked opponents routinely but never missed an opportunity to histrionically lie on the pitch, seemingly hurt, whenever an opponent merely touched him. In Portugal’s previous games, Pepe had actually behaved rather well. He was too smart and knew that European referees would not put up with the kind of behavior Spanish ones do in the Spanish league. I actually had to admit he played several excellent games. But in the semi-final he was his usual self. For Xiscu, the COM Radio editor of my Monday radio program, the only thing that mattered was clobbering Germany. He was not pulling for Spain despite my attempts to convince him that the Spanish victories in the 2008 Eurocup and 2010 World Cup had brought quantifiable economic benefits to Spain. I mentioned this fact on the air. I had read that the victory in the 2010 South Africa World Cup had brought in 14 billion euros for the Spanish economy. Xiscu even claimed that some of the sports press in Madrid were pulling for Portugal instead of Spain because the latter side had five starters from FC Barcelona, and in some games even six. I had no evidence to support his claim but could not completely dismiss it as he is well read. At any rate, I had correctly predicted -- although not with complete accuracy -- the outcome of the quarterfinal match-ups. Portugal had defeated the Czech Republic, Germany had beaten Greece, Spain had triumphed over France and Italy had bested England. The eight teams in the semi-finals were EU members, and six were in the euro zone. All of the semi-finalists were euro zone members. The euro zone was taking a beating and its crisis was far from resolved. I had always cheered for teams in international sporting competitions based on their politics. During the Cold War, I always rooted for any team squaring off against a Communist country. After the fall of the Berlin Wall, geopolitics and sports become more decoupled. Of the sixteen teams that reached the Euro 2012 finals, Russia and Ukraine were the only two non-democracies. Dictators have always manipulated athletes and used sporting triumphs for propaganda purposes. Beyond pulling for democracies, the assault on the euro prompted me to plump for euro zone members over non-euro zone countries. Keynes and I drove to Llafranc on Friday afternoon. During the two-hour drive, I remarked that most cars on the highway and many of the newer models were Spanish. Upon arriving in Llafranc I realized that tourism was not holding up as well as some claimed. We headed for the beach. Our conversation turned to tourism. --Alex, the Spanish national news reported that tourism numbers were robust.

--I do indeed hope they are right. Tourism is the one saving grace for the Spanish economy. If it falters this summer, our recession will be even worse.

It is quite hard to discern a pattern. This is my third visit to the Costa Brava this summer. Tossa looked positively half-empty. Sant Feliu did have a better feel in early June. Some towns are easier to reach than others. The receptionist at the Hotel Llevant pointed out that things were holding up but foreign visits had declined. Many Brits and Dutch had purchased apartments and homes and were not staying in hotels. --As long as they purchase something, whether an apartment or a hotel stay, they are contributing to the Spanish and Catalan economy.

--Indeed. John, the hotelier was just examining things from her industry perspective. On Saturday, the beach in Llafranc was positively crowded. It was a hot summer day. And my specialization is not micro tourism- counting. Pointed questioning of veteran locals and visual input is not tantamount to gathering of statistics. I

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do my best to get an insight, but I cannot quiz every employee.

At any rate, I jogged to Calella in the afternoon. I managed to trail a picturesque blaze along the Camí de Ronda, south of Llafranc. The seaside boulevard in Calella was teeming with people. I had to stop my run. I then accidentally discovered a gorgeous small beach called Cala Golfeta, not far from the Cap Roig gardens. Off the beaten path. Only a half-dozen locals were lying on the beach when I arrived around 7:45pm. I was elated to discover such a beautiful corner of the Costa Brava. It was the first new place I had seen in my three visits in the summer of 2012. Along the run, as I neared Calella, I was moved when I discovered a sign named after Carles Sentís. The renowned Catalan journalist -- whom I had met on several occasions in my life -- had died, aged 92, during my stay in Washington, D.C. in 2009-2011. The authorities have named a nice viewpoint on the Costa Brava near Calella after him. I had once visited Sentís’ sprawling estate in Calella, with its manicured lawns and splendid view of the Mediterranean. I had always wished a beach with a lawn preceding it. I cannot stand all of the time that goes into removing sand after you swim in the ocean and lie on the beach. As I enjoyed the Mediterranean at Cala Golfeta, conflicting thoughts crossed my mind. I shared them with Keynes after getting back to the hotel. --People often ask each other about the cleanliness of the sea. I just swim in it. But I obviously notice the trash. It was sad to ascertain that even Cala Golfeta’s waters are strewn with some rubbish.

--Alex, how did your jog go?

-- After my refreshing swim and conversation at Cala Golfeta, I was off for my return jog back to Llafranc. I jogged past the hotel, along the seaside, past the marina and up a small bluff. I dreamed up something for the euro. All Europeans who believed in the single currency should participate in some happening. A Flash mob. Something easy to organize. Yelling “Long live the Euro” or something along those lines. Some clever musician needs to compose a catchy tune about the euro. We cannot seem to pull off Parliaments simultaneously ratifying the Fiscal Pact, and most people do not know what it is anyway. The Bundestag approved the European Stability Mechanism with a two-thirds majority in its latest session in June. But a challenge before Germany’s Constitutional Court in Karlsruhe is pending. On July 12th, John Maynard Keynes was back in Barcelona, on this occasion as the keystone speaker at a high- profile event held at the Cercle d´Economia, a leading Catalan institution and the best economics think-tank in Catalonia. We hooked up after he delivered his speech.

--Alex, giving the conference felt good. I need to have more exposure. Be in the limelight more often. Make more headlines in Europe and around the world.

--So, suddenly you have become ambitious again!

--No, I am just fed up with all of the news items I read about the interviews that Paul Krugman is giving. He gets too much attention.

--But he is a staunch defender of Keynesian economics and is constantly making the case that policymakers need to be more pro-active in stimulating demand by increasing spending, even if deficits increase even further. You should be proud that one of your disciples won the Nobel Prize of Economics! On the other hand, I find some of his assessments too gloomy, especially when he warns of a Great Depression or even asserts that we are already in one. His words carry great weight. He is prestigious 76

and famous. He should be careful not to scare people. Otherwise, it will become a self-fulfilling prophecy. He was extremely critical of the latest austerity measures approved by the Spanish government, which seek to cut our debt by 65 billion euros over the next two and a half years.

I did three radio interviews this week, and in one was asked about Krugman lambasting the Spanish government’s measures. I naturally defended the government’s actions. They are indeed painful, but necessary. Civil servants will have their pay cut as one of the bonuses they receive at Christmas will be eliminated. They will also have to work longer hours. You know how I feel about bureaucrats. I am not shedding any tears over their plight. Moreover, people who lose their jobs now will have their unemployment benefits cut slightly after they have been out of work for six months. This is very reasonable. Two out of every three Spaniards who are out of work receive unemployment benefits. Many are still drawing around 900 euros monthly, and working in the underground economy on the side. The government is trying to cut down on this fraud, but it is hard to track payments made with cash to people under the table. There are still too many disincentives to work in Spain. Unemployment benefits last for two years. It is ridiculous. They should be limited to one year and only to people who have children and no assets. The most controversial measure announced by Rajoy today is the increase in the VAT. The intermediate VAT rate will climb from 8% to 10%, and the top one from 18% to 21%. Rajoy had hoped to avoid raising taxes on consumption such as VAT (taxes on tobacco were also hiked) but pressure from the EU had been building up for months. Spain has been granted a 100 billion euro credit line for its troubled financial sector by its euro zone partners. The European Commission has also given Spain more time to cut its budget deficit. We are supposed to cut it to 6.3% of GDP by the end of 2012, 4.5% at the end of 2013 and 3% by the end of 2014. This was a victory for Rajoy’s government. But it comes with strings attached from the EU, namely the aforementioned austerity measures and the increase in VAT. On July 23, 2012, I took two suitcases full of belongings and hit the road. I had wanted to leave Barcelona for some time. It had been a very rough year in every sense of the word, professionally and personally. I had suffered many disappointments and letdowns. I cannot bear the Spanish heat in the summer anyway. I was completely exhausted and suffering from a massive burnout. It was not an easy decision to pack several bags and head north. I had no invitations from friends to visit. I was setting off on an adventure, whose outcome I could not envision nor predict. This was not a planned vacation. Nor was it paid. I knew that I would incur in many costs. Gasoline prices were high, and they were even higher in other European countries. There were highway tolls to be paid. I would have to stay in hotels. I left very late on a Thursday. I only made it as far as Narbonne. The following day I was able to reach Besançon. I stayed at cheap hotels on both nights. I had contacted my old friend Stefan Meyer a month earlier. He had offered to put me up at his apartment in Kladno, near Prague. I knew that Prague was very far away. I had travelled long distances by car in my life on many occasions. My one-day record is Munich-Barcelona, 1500 km. I had driven the 1300 km between Stuttgart and Barcelona in one day on several occasions. But I was much younger, and even those solo drives had been risky and exhausting. I always wound up feeling dizzy upon my arrival after driving such long distances. French highway tolls had risen even further. I found them outrageously expensive. On Saturday, Stefan Meier encouraged me to drive to Dresden, where he spends his weekends. It was more than a nine-hour drive from Besançon. I had already driven about 800 km in a little over a day. Stefan would be driving to Kladno, population 70,000, located about 30 km northwest from Prague, on Sunday afternoon. He lives and works in Kladno and only spends weekends and some of his free time in the apartment

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in Dresden. In order to proceed with my work, my book and to search for additional consulting opportunities, I wanted to be in Germany, not in the Czech Republic. Stefan had offered to put me up in his apartment in Dresden. But I had to make it there during his presence. I could not drive and move into the apartment if he was in Kladno, in the Czech Republic. As I drove back onto the highway, I was frustrated that I would not be able to make it to Dresden. I looked for a pleasant town where I could spend the night. After exiting the highway, I drove into the small town of Neckarsulm, in Baden. It took me over an hour to find a small pension. All others were full. On Sunday, after getting a decent night’s sleep, it was off to Kladno. My hope that Stefan would drive south from Dresden to meet me in a German town near the Czech border did not pan out. I stopped at a couple of gas stations and called him, but he had switched off his cell phone. I had no GPS. I did not even know the route I needed to follow in order to reach Kladno, let alone his apartment. I had been in the Czech Republic on many occasions, but my last visit had taken place in late 2008. There were new highways and roads to take into account. At one of the last rest stops before the Czech border in Bavaria, I managed to get some meaningful information from a friendly Czech family that was driving home after vacationing in Spain. They had driven all the way to Andalucía, and we joked that their Seat Alhambra had been able to visit Granada. She was also a university professor. They advised me to drive on the highway to Pilsen and then on to Prague, and to exit the highway close to the airport in order to reach Kladno. At another rest stop, I had to purchase the highway vignette that is required on Czech highways. With my remaining strength, I drove on the highway and exited in Beroun, after seeing a sign with the word Kladno on it. As it turned out, I drove the long way to Kladno. It was a beautiful drive along the banks of the river Beroun through a thick forest, but on a slow road, which added another hour to the trip. After finally reaching Kladno, I followed the city center signs, and made a right turn onto a street near the city center. I was completely exhausted. I had driven 1800 km from Barcelona in three days. I called Stefan yet again, this time on my cell. He was still in Germany and I had actually beaten him to Kladno. An amazing thing had happened. As I told him that I was located on Purkinova Street next to Benes square, Stefan could not hold back his laughter. I had parked on the street where he actually lives. After so many worries, asking so many people for directions, no GPS, being unable to talk to him, I had managed to drive to the street where his apartment building was located. Kladno has a population of 70.000! It is a middle-sized city! I had been to Kladno once, in 2005, but I could not recall anything. Was it sheer luck? Not completely. I did look for the city center and figured that Stefan would live in a decent neighborhood. But it was still a big coincidence that I nailed the exact street. Unfortunately, I had to cool my heels for three hours as I waited for Stefan to arrive. I used the time to proceed with the preparation of the course, working on my laptop in my car. When Stefan finally arrived at 10 pm, he kidded me about my ability to find a place where free board and food were available. But we did not eat dinner. I worked on the course for another two hours. --What do Germans think about the crisis?

--A survey has just revealed the following results, which are a reason to be mildly optimistic. Eighty-four percent of Germans believe the worst of the euro zone sovereign debt crisis is still to come and more than half expect that it will negatively affect the German economy, which currently registers the third lowest unemployment rate in the EU at 6.8%. But 66% of Germans also think the euro will survive this crisis and continue to exist for many years. Sixty-five percent want Greece out of the euro zone. Chancellor Merkel and Finance Minister Wolfgang Schäuble are graded positively at 7 out of 10 in their management of the crisis. They are the two most popular politicians in Germany.

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--Is anyone doing anything to prevent a worldwide recession?

--John, the Federal Reserve is talking about a new round of quantitative easing. But so far it is only talk. The ECB did lower rates but it has not purchased Spanish or Italian bonds for 20 weeks. Markets and politicians are pleading for the ECB to intervene, and ECB president Mario Dragui did hint last week that the ECB would take some action to ease the pressure on the sovereign debt of peripheral euro zone countries. Stock markets rose sharply after Dragui’s strong comments regarding his commitment to secure the euro. We will see what the ECB is willing to do.

I have been talking to Germans from all walks of life. I am worried about their attitude towards the euro zone sovereign-debt crisis. I am a big fan of Germany. After all, I chose to spend part of my university studies in Germany, wrote my doctoral thesis on German reunification, and have travelled to and spent quite a bit of time in the Federal Republic of Germany. I have also spent much time and energy defending Germany and the Germans from criticism about the punishing austerity they are demanding and extracting from peripheral euro zone crisis. I therefore believe I have the moral authority to question some Germans’ attitudes.

--Get to the point. What do you want to criticize?

--Germans are very thorough in everything they do. They take pride in doing things well. They have a reputation for being very hard workers, and especially for their industrial, technical and engineering prowess. These virtues, however, also have their downside. They tend to become overly obsessed about things. They want to do things so well they sometimes take them to an extreme.

Austerity is undoubtedly necessary in Europe but some Germans are making it into a religion. Germany’s public debt-to-GDP ratio is 80%. Germany’s problem is not excessive debts, but its unwillingness to liberalize its product and services markets, and thus generate more competition that consumers can benefit from. Although German stores now open a little longer, it is still not an easy place to be a shopper. Germans have low levels of household debt. They could benefit from more competition. I am not suggesting they should all be purchasing Audis. However, in a city with a population of half a million like Dresden (the capital of Saxony) I will have to drive 14 km to find the closest laundry place to wash my clothes. There are not many movie theaters in Dresden. Paying to have the laundry done or go to the movies is something Germans can certainly afford to do. But they can’t if there are not enough places to do so! Italy’s Prime Minister, Mario Monti, did not help matters by calling for European parliaments to be voided of powers so that governments can have a free hand to manage the euro zone crisis. German politicians from all parties -- even from the euro friendly SPD -- pounced on these comments. Germany’s Constitutional Court recently ruled that the German government has to keep the Bundestag in the loop when it comes to negotiations on European rescue funds. The Constitutional Court feels that the German government is not properly consulting with the Bundestag when it comes to possible concessions -- including on transferring sovereignty to European institutions -- to resolve the euro crisis. There will be more challenges to the German government’s actions before the Constitutional Court.

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Chapter 8. Euromediterranean cooperation and Nuba

Keynes and I met up at the Kinke café near my apartment in mid-December of 2012. Keynes’ conference tour had taken him to the Middle East and Asia. Given my teaching at the university and my need to finish my report on Euromediterranean cooperation for the Catalan government, I could not leave Barcelona in the last quarter of the year. Keynes was eager to discuss events upon his return to Barcelona. --Alex, how are things?

--Professionally, they are looking up. I completed my lectures at the university this quarter. And graded all of the group presentations.

I had a good meeting last Monday, December 17, with Senén Florensa, the Catalan Secretary (Minister) for Foreign Affairs, who has supervised my consultancy for the Catalan government on Euromediterranean cooperation. I handed him a 56-page report. He asked some questions. I summarized my findings, conclusions and showed him the graphs and charts. He was pleased. We discussed Catalan politics. I thanked him for the opportunity and expressed my willingness to do similar free-lance work in the future for him or the Catalan government. --What are your chances of that happening?

--Very slim. Probably zero. Artur Mas, the Catalan president, has decided he wants a left-wing pro- independence party to be his coalition partner in the aftermath of the elections to the Catalan Parliament on November 25, 2012. They signed the agreement on December 19, 2012. I am grateful to Mas for the opportunity I had to write for him back in 2000, drafting articles and speeches, and the foreword to the Spanish and Catalan versions to Al Gore’s The World According to Al Gore. I occasionally greet him at public events and he always responds kindly. I sent him a copy of my Conversations with Marx book back in October 2010 and he replied with a kind letter and a handwritten note. He was still the head of the opposition back then. After I published the English-language version, Ethical Capitalism: What it can do for you, and sent him a copy, he also replied (he had become the President of Catalonia in the interim, resoundingly winning the elections in November of 2010) with a kind letter and a handwritten note. I also sent him my condolences when his father passed away, and he replied as well.

--He must have very efficient secretaries…

--Well, I am sure he does. But I would like to think that he appreciates the work I did for him, the fact that I defended the tough and unpopular cuts he has had to implement in the past two years in many radio and some TV interviews I did….

--How would he know you have been doing so?

--I mentioned it to him at the end of a public event held at the Palau de la Generalitat to thank and discuss the work of a Commission on Values his government has created. Volunteers carry out its work. I did attend the entire 2-hour event. At the end, I approached him and mentioned that I was doing my best to defend and explain his economic policies in the media. When I mentioned Intereconomía, an independent free-market radio station radically opposed to Catalan independence and quite hostile to 80

Catalan nationalism, Artur Mas thanked me and said: “Radio Intereconomía, that is heavy metal!” He meant that it is a hostile media outlet for the Generalitat.

On December 21, 2012, Keynes and I met up at Kinkos Café again to celebrate the fact that the world had not come to an end as a Mayan prophecy had predicted. We all knew it was just a Mayan legend, which anyway predicted a change of phase and not the end of the world. But the media was indulging in reporting on preparations for a possible end-of-the-world situation around the world. Turning to serious matters, the latest issue of The Economist has published a piece on Rajoy’s first year in office. As usual, it is unfair, unflattering and unbalanced. Zapatero’s disastrous handling of the economy for seven years is the cause of Spain’s travails. The Economist only makes a passing reference to the enormous mess he inherited. It fails to even mention the plethora of structural reforms the Rajoy government has pushed through in record time. They include a restructuring of the financial sector (through a bank bailout worth 50 billion euros), a liberalization of the labor market, simplifying the procedures needed to create a business, a tough corruption law that cracks down on negligent management of public finances, a simpler holiday calendar that eliminates some extended holiday week-ends (that turn into holiday half-weeks), a reform of the penal code, ensuring that businesses have to cope with one set of standards and regulations (by not allowing the regions to impose ridiculous local regulations) and rational cuts to the much-abused health- care system. All of the aforementioned structural reforms were long overdue. International institutions, think-tanks and academics had long warned that Spain’s brick-and-mortar real-estate bubble would burst and leave a terrible mess behind if structural reforms were not adopted. The Socialist government was in office for seven years. It inherited an economy with a budget surplus, a very low level of public debt relative to GDP (43.6%, second- lowest in the euro zone) and unemployment at 10%, which was the EU average at the time. When it was finally kicked out of office in November of 2011, the budget deficit stood at 8.9%, the debt-to-GDP at 70% and unemployment at 24%. The Zapatero-led Socialist government did not enact a single meaningful reform. It failed to diversify an economic growth model that was dangerously dependent on the real-estate bubble, tourism, household debt and low-value-added services. When the Zapatero government’s attempts to fool Spaniards about the severity of the crisis ran out of steam, Zapatero tried to blame the crisis on the international financial system, the U.S. and other favorite bête noires of the left. After that failed, it clumsily tried to buy off parts of the electorate. When Greece was forced to request a bailout in May of 2010, President Obama and EU leaders called Zapatero and made him adopt the first serious and meaningful cuts – freezing pensions and cutting public- sector pay. But even these half-hearted measures failed. The deficit was cut only from a record 11% to 8.9%, almost three points over the target Zapatero set for Spain for the end of 2011 and he promised to the EU and other international institutions. The Economist seems to have a short attention span. The previous PP-led government also inherited a disastrous economy from the last González (Socialist) government in 1996 and in three years managed to qualify Spain for Economic and Monetary Union. Spain was one of the founding members of the euro zone in 1999 and did not cook its books to do so. Its debt-to-GDP ratio did not exceed 60%. --Alex, well, I recommend you take a vacation. You are too passionate. And you deserve one.

--Thanks. I am flying off to the Caribbean on December 26th. I will be visiting the Dominican Republic for a fourth time and staying at an all-inclusive resort. Traveling in Europe in December makes little sense. The days are too short.

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On January 5, 2013 Keynes and I met up at Kinke café near my apartment. I had just returned from a week´s vacation in the Dominican Republic. --Did you finally take one week off?

--Yes and no.

It was actually five days. The flight to Santo Domingo was extremely smooth. One of the best I have had in years. I was not enthused with the idea of flying on Pullmantour Air. But it turned out to be a great airline. They are one of the few airlines that still use 747s on transatlantic routes. I got a seat on the top floor on the flight from Madrid to Santo Domingo. They used these seats in the past for first class. Now they are economy, but still provide a more comfortable environment and legroom than most non-business seats on the lower deck. We (my mother came along for her first and last visit to the Caribbean) landed in Santo Domingo at about 8pm local time. I had left the apartment at five in the morning. Everything had gone off without a glitch until the delivery of our suitcases was delayed by an hour. The conveyor used to unload the suitcases broke down. It took them an eternity to find another one and get the suitcases to the conveyor belt. We then sat patiently in the bus for another thirty minutes. By the time we reached the Gran Bahía Príncipe Bávaro hotel, it was 10 PM. The Soltour guide on the bus went over the schedules and pointedly said that the restaurant was open for dinner until 10:30 pm. After an unpleasant check-in, I rushed to the restaurant, only to be told that it had closed at 10pm. It was ten minutes after ten. After being on the road and plane for almost 24 hours, it was unacceptable to have to walk to the beach, 3 km. away, in order to get some food. I managed to get a clerk at the reception to order the delivery of food to my room. But the person and the food did not appear. After a brief jog the following morning, I dutifully reported for the compulsory lecture the tour guide provides and sat through it. John, turning to economics, I have some additional good news for you. Japan’s new Prime Minister, Shinzo Abe, has adopted a stimulus plan which is downright Keynesian. It is Japan’s most ambitious stimulus plan since the onset of the global crisis in 2008 and probably since the bursting of its financial and real- estate bubble unleashed decades of stagnation, recession and deflation.

Indeed, Japan is weathering its fifth recession in fifteen years. Its economy is contracting again, deflation persists, consumers are not spending, companies are not investing and public debt exceeds 200% of GDP. Abe has presented a $117 billion stimulus plan. The plan features spending on public works, incentives for companies to increase investment and financial assistance for small companies. Moreover, Abe is pushing the Bank of Japan to increase its inflation target to 2% and purchase government assets and debt. Quantitative easing Japanese style, and pure Keynesianism. --I am delighted. Japan needs such a jolt.

--It might definitely help in the short term. Japan needs to undertake structural reforms in order to promote growth. Japan’s ageing population is a serious concern. More than 20% of Japan’s population is over 65. Between 1950 and 2000, Japan’s population aged more quickly than that of any other developed country. Its fertility rate stands at 1.26 children per woman, one of the lowest in the world. There is a lack of competition in many sectors. The civil servants at many ministries really run the economy. They are specialists at stifling innovation and growth by creating and maintaining red tape and excessive regulation. There are too many barriers to entry for new companies and the bureaucrats protect the interests of the established companies, the keiretsu.

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Moreover, Japan has no energy resources and is very dependent on nuclear energy. In the wake of the Fukushima disaster in 2011, the Japanese government shut down most nuclear reactors and the population has turned against nuclear energy. The new LDP government will likely reopen some of the closed reactors. It has traditionally had close ties to Japan’s nuclear lobby. Japan’s corporations need to invest more in R+D. They have stopped churning out leading products. Sony, Sharp and Panasonic are accumulating big losses. There are no leading Japanese companies in the cellphone and smartphone sector, for example. --But, Alex, people in advanced countries have enough gadgets! It is one thing to inject stimulus to revive demand temporarily, but another to continue to foster this consumption-driven economy, which harms the environment, turns professionals into workers and increases the debt of many advanced countries.

--John, I agree to a certain extent. When I witness the outpouring of emotions that occur around the world, I realize that one of the great divides of our times -- as in other periods -- is between those who believe in something and those who do not. I still believe in the American dream. By American dream, I mean the idea that if you work hard, play by the rules, save and invest wisely you can achieve whatever goal you set for yourself. And your American Dream can be located in any country, not just the United States. I still cling to the hope of meeting a special girl who loves me for whom I am and with whom I can share my life while being a public servant working for people I admire.

When Piers Morgan asked Tim Robbins to choose between having money, fame or health, he replied that without health you cannot get anywhere. He then added that happiness comes and goes. We should strive for life, liberty and the pursuit of happiness, as the U.S. Declaration of Independence states. As the world becomes an increasingly complicated and conflict-ridden place, it is becoming more difficult to attain happiness. That your life has meaning is really the key. That you can truly feel that what you are doing is making a difference in others’ lives. That is the way Robbins put it. I fully agree. In order to lead a meaningful life, you need to have a vision. Erich Fromm talks about the vision and the need to have it in order to be able to keep pushing yourself hard every day. But every vision not implemented is a hallucination. Hence, one’s visions must be adapted to the reality of the crisis. For some or even many around the world, their particular vision of the American Dream includes owning a house or condominium and all of the material (appliances, furniture, cars) trappings that come with it. I do understand your disappointment with overconsumption, but after the downfall of Communism all attempts at creating a “Third Way” have failed. People continue to love to buy stuff, things, gizmos, gadgets, material possessions. The “less is more” movements that shun the global rat race are making progress. But globalization in its current form will take years to exhaust itself. On the first Friday in February of 2012, Keynes and I had dinner at a restaurant named Deseo, on Ganduxer Street, near my apartment in Barcelona. Deseo is a locale I knew from earlier visits. The new owners had renamed it. They have a clever new marketing strategy, which includes transitioning to a small disco after midnight, with live music, delivering cakes to birthday customers and filling out a form with three realistic wishes (deseo is the Spanish translation for wish). --I have some wonderful news for you, John.

In the next days there will be many announcements that will please you. The U.S. Justice Department will announce it will charge S&P, the credit-rating agency that downgraded U.S. sovereign debt in the summer of 2011 and provided inaccurate information for many years, with negligence and deliberately lying to its customers between 2004 and 2007. The U.S. government will sue for damages of up to $5 billion. It is another step on the road to a more ethical capitalism. S&P will of course reject the charges initially. 83

Moreover, President François Hollande and almost every other EU leader bar Angela Merkel will call for more spending and stimulus. EU heads of state and government will meet at an EU Council summit to thrash out the details of the 2014-2020 financial framework. The British want to slash the EU budget. Most other EU members are behaving rationally. --Don’t criticize my country!

--John, be consistent! Prime Minister David Cameron and his Liberal Democrat partners in the coalition have imposed brutal austerity on the UK. You believe in stimulating economies. The British government is doing the opposite of what you believe in.

--Yes, but it is my country. And Cameron is legalizing gay marriage. As you know, I am gay.

--Yes, what an irony that you praise the Tories. Well, you can always become a citizen of the world as many revolutionaries did. David Cameron wants to hold a referendum on EU membership for the UK in 2016. I like him personally and support his foreign and defense policies and most of his internal reforms, but he should have more backbone when standing up to the Euroskeptics in the Tory Party and in the UK in general. As for you being gay, this matter has aroused some controversy. In the obituary he wrote of you, Joseph Schumpeter stated: “He was childless and his philosophy of life was essentially a short-run philosophy”.

--What nonsense!

--I agree. But as you also remarked that “in the long run, we are all dead”, the fact that you did not have children prompted some to suggest that your analysis of economics was biased towards the short term, as you would not be passing on your genes to another human being.

--Well, I am back. I may not have had children, but I was very influential, and in my second incarnation, I am more determined to have an impact. I am flying around the world briefing policymakers and making a difference. Where is Schumpeter? He is dead, right. How disappointing that he would write something like that.

--Do not dwell on it too much. I also have no children. But I try to analyze examining the mid to long-term.

--John, another historical figure with a miserable private life was Abraham Lincoln. Actually, your private life was better than his. I very much enjoyed watching the movie Lincoln. Daniel Day Lewis does a masterful job. Some critics claim the movie exaggerates the role Lincoln played in convincing recalcitrant members of the House to amend the U.S. Constitution to make slavery illegal. --The 12th amendment. Lincoln was the driving force….

--Yes, he issued the emancipation declaration during the Civil War. But that would have left slaves in a questionable legal situation without the constitutional amendment. The declaration was helpful in terms of morale. It encouraged slaves to flee to the north and to enlist in the Union forces. Yet it did not outlaw slavery. A constitutional amendment requires a two-thirds majority in the House and ratification by the states. In the movie, most of Lincoln’s advisers try to block his efforts to push the 12th amendment through the House of Representatives. They finally caved in because of Lincoln’s perseverance.

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--Alex, any good news?

--Renault will create 3,000 jobs at its plants in Spain after 2014. The King, Spain’s Deputy Prime Minister and the minister of Industry toured Renault’s plant in Valladolid on February 5th, the sixtieth anniversary of the founding of the plant. Renault built many models at the Valladolid plant in the last decades. Nissan has also announced it will produce one of its models at its plant in Spain. So two announcements of important foreign investors increasing their production in Spain. In this case, in the automobile sector.

Unfortunately, unemployment in January has increased to almost five million in Spain. This is the level of unemployment registered at the employment offices. It is lower than the one that the EPA survey determines every quarter. The EPA unemployment number is close to 6 million and the rate exceeds 26%. The most pessimist, usually Spain’s opposition parties, are predicting a rise to 30%. We have the highest unemployment rate of any country in the EU and any member of the G20, even surpassing South Africa. Unemployment is increasing in many EU member states. There are 27 million unemployed in the EU. It is rising in Germany, Italy, the UK and France. Only Germany, Finland, the Netherlands, Luxembourg, Finland and Sweden are close to full employment. François Hollande and other EU leaders are calling for additional funding from the EU budget to foster growth and help cut the high unemployment rates, especially in southern European countries. That is pure Keynesianism. I hope you feel vindicated. The World Bank has just estimated the cost of corruption at between 20 and 40 billion dollars a year for developing countries. Dr. Jim Yong Kim, the new President of the World Bank, gave a long interview to Christiane Amanpour on February 5. He came across as extremely informed, engaged and knowledgeable in the interview. She asked him tough questions in several areas. On February 12, 2012, after getting a minor repair to my motorcycle, I rode home to watch the continuation of the State of the Union debate. After Rubalcaba’s first tirade of slogans, Rajoy tore him to pieces with reminders of his inability to enact any reforms during his tenure. Rajoy is a very gifted parliamentarian. His Galician wit and irony are very useful for parliamentary debates. And Rajoy had come to Parliament with reports full of useful facts and numbers. Siscu Baiges from COM Radio had called earlier in the day to request a short comment on Rajoy’s new economic proposals for the State of the Union address. I recorded it and watched Rajoy’s exchanges with Josep Antoni Duran Lleida, CiU’s parliamentary speaker. Duran criticized some of Rajoy’s policies harshly, especially regarding the treatment of Catalonia. He blasted the central government for its insufficient investment on infrastructure in Catalonia, its unwillingness to reform the Constitution to allow for a vote on Catalan self- determination, and the supposed recentralization bent of the education reform and single market legislation undertaken by Rajoy’s government. But Duran Lleida also praised Rajoy on some matters. As Rajoy and Duran debated, disagreeing without being disagreeable, I found myself longing for the days when Miquel Roca Junyent played the same role for CiU in Madrid. I could sympathize while not agreeing with some of Duran’s complaints. He remained polite and courteous. Rajoy reciprocated. Rubalcaba and his mediocre lieutenants do not have any manners, in addition to having no clue about economics or how to run a country. I could not help feeling that Duran’s critical but conciliatory tone generated the kind of debate that had attracted me to public service many decades ago. Duran Lleida and moderate voices seem to be a dying breed in Spanish politics. Rajoy faces an otherwise radical left-wing opposition that bears no resemblance to the PSOE of Felipe González, Narcís Serra, Javier

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Solana, Carlos Solchaga, Miguel Boyer, Ernest Lluch or other old-timers from the eighties and early nineties. Felipe’s PSOE was Socialist but capable of modernizing and adapting itself to new situations, and hence capable of delivering reforms to Spain as well. Rubalcaba is washed-up and can only resort to slogans, demagoguery, half-truths and outright lies. He maintains a Zapatero-like appearance of kindness. But his attacks were vitriol. I endured it just to enjoy Rajoy blow him apart in his measured and fact-filled response. Watching the Communists was too painful. I endured the Communist propaganda spewed out by Cayo Lara, Izquierda Unida’s parliamentary leader. They may have changed their name to reflect the downfall and total failure of Communism, but they still have the same worldview. After such an eventful day, I met up with Keynes and handed him my final manuscript. He read it and then told me the following: --Alex, from everything I know, the world is a very messy place. Stop trying to contribute to finding solutions to its many problems. Take care of yourself first. Continue to make the case for measured reforms that increase growth and employment whilst taking care of the poorest and most vulnerable. Stake your independent claim to being a social-liberal. Do not exhaust yourself. You need to relax and enjoy life. Continue to travel so you have a perspective on Spain from other countries. Be patient.

Many consider me the greatest economist of the XXth century. I wrote many books with complicated theories. I am very pleased that many governments in developed countries are adopting Keynesian policies, such as increasing spending on public projects, injecting liquidity into the economy and emitting bonds. The Obama administration, the IMF, the OECD, the new Japanese government and many other governments in the developed world advocate Keynesian policies and have approved stimulus packages since the onset of the global crisis in 2008. The ECB and Chancellor Merkel are more hostile to Keynesianism and too focused on cutting budget deficits. But even they concede that pro-growth measures are needed and that austerity has its limits. Keynesianism is contributing to the recovery of developed countries. Emerging and developing countries continue to grow at healthy rates. They now account for 45% of the world’s GDP. The slowdown in the developed world is worrying, but the emerging powers are now driving the global economy as well. We have to deal with long- term challenges such as increasing inequality, the ageing of population in developed countries and climate change. Global governance through the G20 must promote a more sustainable growth model. We cannot continue to inflict damage on our planet. Nine billion people will live in it by 2050. The EU and other developed countries need to convince and pressure emerging economies to adopt higher environmental and labor standards and tackle corruption and bad governance. China cannot colonize Africa in the same way the West did in the XIXth century. Nevertheless, humanity is much better off than the state it was in when I passed away in 1946. The middle classes of emerging countries want to consume and are doing so. --Thanks for your upbeat assessment, John. But the sovereign-debt crisis in Europe is now in its fourth year. We are making progress on a fiscal and banking union and the peripherals are cutting their budget deficits. There is a populist backlash against austerity in many European countries. Demagogues such as Bepe Grillo in Italy might make it impossible to continue to implement reforms.

I have been hearing predictions about Europe sliding into a protectionist spiral for many years. Many prestigious analysts have wrongly forecast that radical right-wing and left-wing parties would win elections or prevent mainstream parties from governing in a responsible way. That has not happened so far. The main European economies are ruled by moderate center-right (Germany, Spain, UK, Poland, Netherlands, Austria, Portugal, Greece, Sweden, Luxembourg) or center-left (France, Denmark, Belgium) governments which are 86

responsibly adopting reforms, cutting excessive deficits and committed to deeper economic and political integration in the EU and the euro zone. --The UK and Czech Republic will never sign up to deeper EU integration.

--Alex, the British are smart. They need the single market. Exports of Johnny Walker to Spain are bigger than those to China. Diageo, the British multinational that manufactures Johnny Walker, wants Scotland to remain in the UK and the UK to stay in the EU. Its exports to France are greater than to the U.S. The EU accounts for 30% of its sales. Scotch-whisky manufacturers want and need the EU’s common standards and regulations that set out how products are made, packaged, labelled and sold.

The Third World as we once knew it has disappeared. Humanity faces many challenges and there will be setbacks. The EU this year welcomes its 28th member, Croatia, and is the world’s biggest economy. Its 500 million citizens and its single market provide it with an influence and clout which is much bigger than many realize. We might have only 7% of the world’s population, but the world needs us. We will not become the irrelevant Disneyland of the world for Chinese and other emerging-country tourists that the pessimists are forecasting. Globalization is complicated. Social networks, 24/7 news and technology are wonderful instruments but also flood people with inaccurate and excessively pessimistic information, distract some students at school and some office workers at their jobs I am very pleased. The developed world is more Keynesian. The IMF, whose creation I negotiated as the British representative at the Bretton Woods conference in 1944, is promoting Keynesian policies for developing countries. Emerging countries are growing strongly. The euro is the world’s second reserve currency and is here to stay. So, Alex, tell me about the clash between Catalonia and Spain. What is the latest? --The Cercle d’Economia conference took place over three days, in June of 2013. President Mas delivered the opening remarks. He was quite blunt in ruling out the incremental negotiations with the central government that Catalonia has conducted for decades and have yielded greater devolution and tax-raising powers. Mas expressed strong skepticism about the second option. It is defended by the Cercle and free-market right-of- center Catalans who dislike Mas’ alliance with a left-wing pro-independence party. This option would entail an overhaul of Spain’s Constitution to turn the Senate into a real chamber representing the regions, amend the Electoral Law and regulate Catalonia’s transfers with the rest of Spain on a much more favorable basis for Catalonia. Mas asserted that the Socialist Party and the Partido Popular should negotiate such a revision to the Constitution (as they are Spain’s biggest parties by far) and submit the results to him. He clearly expressed no interest in getting involved in such negotiations from the outset. Mas got burned when a previous self- government charter (Estatut) approved by the Catalan Parliament and the Spanish Parliament was partially deemed unconstitutional by Spain’s Constitutional Court after the Partido Popular filed an appeal against it. This was a colossal mistake by the PP, which caused many moderate Catalans to come to hate it and fed the yearning for independence. The Estatut languished in the Constitutional Court for almost three years. The Estatut may have been unconstitutional and it certainly contained excessive regulations and opportunities for government meddling in the economy. But the PP should have allowed the Court to rule without appealing it. It made itself unpopular with middle and upper class Catalans who were conservative and only mildly nationalist. I was able to thank Mas for signing my testimonial letter.

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Carmen Reinhart, Dani Rodrik, Pérez Rubalcaba, Luis de Guindos, David Vegara and José Viñals were among the featured speakers. I gave Spanish Economics Minister Luis de Guindos a copy of my Ethical Capitalism book with a dedication and he sent a nice personal note the following week thanking me and telling me that he had started to read it. De Guindos is an extremely smart and hard-working minister who is serving his country with great distinction at a time of uncertainty. He manages to do so and remain a kind person. I am not writing this because he sent me a nice note. I remember attending an event in the Costa Brava when the Socialists were in power many years ago. De Guindos arrived during one of the presentations and happened to take a seat next to me. I recall remembering that he had been Deputy Minister in an earlier PP-led government and recognizing his face. We exchanged maybe two polite sentences. I get annoyed when people talk too much at events. De Guindos had already had a stellar career when I briefly met him at the Costa Brava event. Yet he was self-effacing and did not seek any attention, an uncommon trait for people who have held high positions in both the public and private sectors. Even Catalan nationalists who are pushing for independence respect De Guindos. A few days before the Cercle event, I had the honor of visiting President Mas at the Generalitat, and spending about an hour with him. I suggested some projects I would like to work on and submitted them to him. Rajoy handed Soraya even more economic power. She is the only deputy prime minister, is minister of the presidency, government spokeswoman, heads the intelligence services, chairs the meetings of deputy ministers and has now been given more control in coordinating economic policy. The workload does not seem to have an impact on her. She still smiles throughout most of the Friday press conference that takes place after the government meets.

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Chapter 9. Back to Poland

On June 7, 2013, I took a cab to the El Prat airport around 1pm. I was flying Wizzair, a low-cost airline established in 2003. It is registered in Hungary but has its main hub in Katowice and mainly flies to eastern European destinations. I had checked their website and was reassured by their new fleet of Airbus 320s. I had a brief encounter with Keynes at the VIP lounge at the Prat Airport. As I am a Citibank Gold customer, I can access the VIP lounges at most big airports. Keynes was about to fly off to Turkey for a round of conferences. We took some pastries and drinks from the buffet and settled into the lounges’ comfortable sofas. After its expansion, Barcelona’s El Prat remains one of the top ten airports in Europe. Pro-independence types still complain that Madrid’s Barajas has many more international connections -- which is true -- and that we deserve an even better airport. I remember the days in the late seventies and early eighties when El Prat resembled a Third World airport, with just one terminal and long bus rides from the gates to a few planes stationed on the tarmac. I tend to be a glass half-full person. I would like more direct flights to other continents for El Prat as well. I would be able to fly to Washington directly from Barcelona. But corporations make those decisions, not governments.

--Alex, you have to get over your fear of flying! You are flying in Europe, not in Siberia or sub-Saharan

Africa!

--I know, but low-cost airlines sometimes save on safety. The Spanish authorities lodged several complaints with the EU against Ryanair. Ryanair flights had to make several emergency landings in the first half of 2013 because their planes were diverted from their scheduled landing airports owing to bad weather and could not reach the secondary airport because they had not loaded enough kerosene.

The landing and arrival in Katowice, one of Poland’s most dynamic cities located in Silesia, was uneventful. The original plan called for me to take a cab from Katowice’s airport to the train station, where I would board a train bound for Kraków and then Przemysl. The cab driver was a smart businessman who spotted the chance to make a killing. Upon hearing that I intended to take the train to Kraków, he offered to drive me straight to Kraków. I took him up on his offer. At least I got a nice ride in a new Toyota and some useful information on Poland.

I was able to catch a glimpse of the Wawel hill (where the royal castle is located, and the late president Lech Kaczynski’s body is the newest addition to the crypt) across the Wisła river as we drove to the train station in Kraków. It had rained the previous days – without causing any flooding – and the downpour resumed as we entered the city. After exchanging euros for złotys, I proceeded to try to buy tickets at the counter of the train station. I later found out that the train would take four hours to make the journey. It seemed a very long time for a relatively short distance. Track maintenance and repair was the explanation. The boom in building related to Poland’s hosting of the 2012 European Cup apparently had not brought about tangible benefits for the average Pole, according to a young woman in my compartment. Poland has been trying to build a network of highways for 25 years. It had 40 km of highways when Communism collapsed. Not much progress on this front either.

There are highways to Kraków and Wrocław but the north-south highway axis is still not finished, a project I first heard about ten years earlier. The train from Katowice to Jarosłav passed near another stretch of highway that had not yet been inaugurated. I was told that children rode their bikes on them. I did see many new cars on the road from Katowice to Kraków, and smart shops and many renovated facades in Kraków itself. As I settled in for the long train trip to Jaroslav, I did have the feeling that it was traveling back to the future. According to

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the young woman in the compartment, it was business as usual in Poland. Hard-working and kind people were short-changed by their politicians and institutions. The minimum salary stands at 300 euros. Many workers are employed on short-term contracts. Corruption is still widespread at the political level, according to most Poles. But locals have a tendency to highlight the negatives when they interact with foreigners, or with a fellow Pole who is returning after a prolonged stay abroad. It turned out that the stadiums that were built for the European Cup were employed for many purposes, including concert events.

I was happy to be able to practice my very rusty Polish. Southeast Poland is an interesting region, bordering Slovakia, Ukraine and not far from Romania and Hungary, all countries I have an interest in. But the only way to make a good living in Poland is to work for a multinational. And getting a plump position at a multinational is a difficult task, even if they do not require knowledge of Polish.

On June 11th, 2013, Keynes and I arranged to meet in a pub in the southeastern Polish city of Jarosław.

--Dear John, I have to tell you about the time I have spent in Poland so far. It is my first real trip to Poland since 2006. I briefly drove through Poland on the way from Stefan’s house in the northern part of the Czech Republic to Leipzig on a cold and snowy January day in 2009. I did not visit anything, and my only exposure to Poland was a stop at a gas station on the highway to fill up. My previous trip to Poland was to Warsaw in 2007 when I was working for the American Chamber of Commerce in Spain. Today’s excursion was splendid. It included history, art, energy technology and plenty of information on cities and the countryside.

Przemysl is a real jewel, probably the most beautiful town in southeastern Poland. Its population is about 66,000. It was founded at about the time of the creation of the Polish state, around the VIII century. It blossomed and flourished on the banks of the river San (an affluent of the Wisła) as a trade route located at the crossroads between the Poland-Lithuanian empire, Ukraine and other powers. It was home to a big Jewish community. Casimir III ordered the construction of a marvelous castle in the XIVth century, on a hill overlooking the city. I visited its courtyard, theater, halls and ramparts. The view of the old town below is also beautiful. From the 14th to the 18th century, the city prospered and many churches, palaces, residences and other historical buildings were erected. The old town boasts a marketplace square (Stari Rynek) with a beautiful Renaissance façade. The Uniate cathedral, Franciscan church and seminary buildings belonging to the Catholic Church are located nearby. It is hard to forget that Poland is still a very Catholic country. Portraits of Pope John Paul II, Benedict XVI and Joseph I are ubiquitous.

I walked back to the old town square, visited the train station and then drove off to Solina, a resort and hydroelectric power plant about 100 km southeast of Radymno. Przemysl itself is located near the Ukrainian border. The giant hydroelectric power plant was built during the Communist period, between 1960 and 1968. It is the biggest in Poland. I took in a guided tour, most of which I did not understand as the guide was speaking very quickly in Polish and there were no foreign tourists. But it was still interesting. Big hydroelectric plants are making a comeback. The World Bank has reversed its previous opposition to big hydro projects. Brazil is building several. The guide made a good point about the difficulty of building such a giant plant in a democracy.

I walked across a bridge with a 75m drop to the left, the wall of the dam, and a giant lake to the east. The Solina area is a major resort that caters to summer tourists.

--How do Poles feel about adopting the euro?

--They are very skeptical and think it would increase prices without raising wages. The experience of nearby Slovakia in adopting the euro in 2009 is perceived as negative. There is not enough time in most 90

encounters to offer the average Pole more sophisticated arguments about fostering exports, monetary stability and other advantages that the euro will provide. The man on the street feels the euro will mean rising prices and stagnant wages.

My next stop was the ruins of Sobien castle, located 500 meters above sea level on a hill with a splendid view of the San valley, the pre-Carpathian Bieszczady mountain range beyond and the green pastures. The castle was originally built in the XIVth century. The stop featured a computer picture on a sign which allows visitors to download a link that provides information on the castle and surrounding area. This is a variation on my idea of an outdoor multilingual guide accessible via cell phone in a big city, a service which the town of Barcelona – or any other of significant size – could furnish in partnership with a major cell-phone provider. Such a service would generate revenue for the city government and proffer information to rich tourists with money but little time.

I made an additional stop on the winding mountain road back to Radymno. The final stop was a hill overlooking Przemysl that boasts a fortress built in the late XIXth century that was among the three biggest built in Europe out of 200 at the time. It features tunnels, bunkers and other remains of an impressive defensive system that was the site of major battles in World War I between Russia and the Austro-Hungarian empire. Przemysl belonged to Austria at the time when Poland was partitioned in the 1770s and only recovered statehood in 1918. The Russians were not able to take Przemysl in fierce fighting in 1914, but eventually did wear down the city’s defenders in 1915 and destroyed the fortress. The Russians were eventually pushed back in fighting that claimed more than 100,000 lives. Przemysl is the capital of a wojewudstwa, an administrative unit similar to a Spanish province.

On July 3, 2013, I had a meeting with Keynes at the Kinke café near my apartment after my return from Poland. June had fortunately been cooler than usual in Barcelona. But temperatures were starting to climb in Spain. Temperatures in excess of thirty degrees Celsius were expected in the coming days, and in southern Spain they were forecast to surpass forty degrees during the day and almost thirty at night. If you cannot stand the heat, get out of the kitchen. I have never tolerated the heat. So I was pleased about my upcoming return to Poland. I had not had to turn on the A/C in June and had only sporadically used the fan.

--Alex, you look wretched. What is the matter?

--I am flying to Poland on July 5th. It is simply too hot in Barcelona. I will take the Wizzair flight from Barcelona to Katowice. I know this flight as I have taken it twice already. After I land in Katowice, I need to take a cab or bus to the Katowice train station -- 40 km away -- and catch a bus. This bus replaces the regional train that is not in operation. It will take four hours to reach Jarosław. It may or may not stop in downtown Jarosław. If it does not, I will have to continue until it stops in Przemysl.

On July 7 at midnight in the Old Town Square of Kraków, I had a rendez-vous with the past and future. Kraków’s magnificent old town square -- Stary Rynek -- is a masterpiece of architecture. The square itself is extremely large, although this is common in central Europe. There are also many big old town squares in neighboring Slovakia or the Czech Republic. But Kraków’s is quite original in its inclusion of different buildings, from the soaring twin-tower church to the small chapel, from the wooden market stalls to the ramparts. Keynes had agreed to meet in one of the square’s posh bars.

--John, our encounters are getting more expensive! You choose expensive bars for our meetings! I am just a university professor and consultant, not a celebrity like you who can charge a lot to deliver a conference.

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--We are just stimulating the economy! Come on! Get off your austerity bandwagon! Even the IMF is admitting to mistakes in how it handled the bailouts of Portugal and Greece!

--Do not you use that against me! I am going to summon José Viñals, who heads the IMF’s Monetary and Capital Markets Division, and have him read you the riot act!

--Who on Earth is this Viñals?

--He is a bright, well-respected Spanish economist who has served in many key positions. He worked his way up to Deputy Governor of the Spanish Central Bank and has been at the aforementioned IMF position for several years. He is the Spaniard with the most senior position within the IMF staff. I have spoken to him over the years. When I was serving as Bob Zoellick’s Speechwriter at the World Bank, I occasionally saw Viñals in his office. They were short meetings. He has a very senior job and I was busy as well. We crossed paths on two occasions at Dulles airport, as he was flying back to Washington, D.C. with his family. I briefed him about my situation as we rode on the peculiar Dulles airport bus from the plane to the terminal, thus saving us time and the need for a formal meeting. He was kind and always cheerful.

I took the 1740 Air Berlin flight from Barcelona to Tegel Airport, with halls and equipment -- or lack thereof, such as fingers -- which still reminds visitors that it was a German Democratic Republic (former Communist East Germany) airport. I guess it has a kind of GDR charm, like a Trabant. Air Berlin and its low-cost airline, Nikki, have turned Tegel into their hub, while the entire world waits to find out how the debacle with Berlin’s new but unfinished airport plays out. Berlin still has Schӧnefeld, and it could re-open Tempelhof, although this is very unlikely to happen. The flight to Kraków was a fifty-minute jaunt.

The short and smooth flight from Berlin to Kraków was a welcome contrast to the heavy turbulence on the Barcelona-Berlin flight. The captain told us after ten minutes of bad turbulence that the Jetstream had generated humid air, leading to a build-up of a certain kind of clouds next to the Alps. These clouds were the vertical kind. They caused the turbulence and were difficult to get around because of their altitude. We could not fly higher – we were already at 36,000 feet – and the captain explained he had slowed down in order to minimize the impact of the turbulence. It was a great lecture, one of the best, on meteorology and flying, that I have received in the middle of turbulence, and certainly helped all of us feel better. The pilot was very confident and even a bit cocky. The entire turbulence episode lasted about 30 minutes.

After landing at Kraków airport, I exchanged 20 euros at the airport – they offer a terrible rate, 3.6 to the euro, like most airports – and took a new and high-tech bus from the airport to the train station. Poland features new airports, city buses, coaches, and obviously millions of spanking new cars, but its regional trains are not in good shape. There was no train connecting Kraków to Jarosław after 10 pm, so I had to walk with my 24 kg suitcase for about 2 km to the bus station, ascertain it was closed, purchase some juice…

--Alex, you actually spent money! I cannot believe it. You consumed! Have you betrayed your Lutheran conscience?

--I was actually in need of coins and was about to give up. I was exhausted and did not have the energy to walk the 2 km to Stary Rynek to meet you. I thought about waiting at the kebab place where I bought the juice. After using the kebab as a makeshift office and throwing useless papers in the garbage, I mustered the strength to carry the suitcase all the way back to the station’s safe-deposit metal boxes, spent 9 złotys to deposit it in one, and walked briskly to Old Town Square to meet you. I took a few 92

pictures and here I am.

--You see, Alex, actually consuming can be beneficial. You would have kept me waiting in vain were it not for your 2.5 złoty purchase of a drink!

--True, and I would not have called you to cancel the meeting either, as roaming charges on cell-phone calls are still expensive in Europe and my phone bill is already high. I would have only sent you an SMS to let you know. But you are extremely well-known and will earn millions on your lecture tour wherever you decide to go, whereas I am just a professor-cum-consultant and writer of non-best-selling books.

--Alex, Alex, head high. Lift your spirits. Think positively. You have achieved much.

--I have to take a coach, meaning a bus, to travel to Jarosław, 400 km. southeast of Kraków. The Rzeszów airport has some international flights. So maybe next time I can fly via Berlin to Rzeszów and then still have someone from my friend’s family drive the one hour from Jarosław to Rzeszów to pick me up.

--You could have rented a car, but that would be spending money, which Lutheran Alex does not want to do!

--Well, John, I have to leave you. You can pay for the drinks. I have to walk back to the train station, retrieve my suitcase and find the bus, and I am not even sure if I exchanged enough złotys to pay for the fare. You are Keynesian, so the drinks are on you, if it does not affect your sensitivity.

--No, go ahead. I will be delivering well-paid lectures in Europe this month. Maybe we can meet up again. Alex, I am trying to help you. I will be in Warsaw next week.

--How are you helping me? By getting me to spend more? Of course I have saved a lot. But not enough to buy and maintain a house in northern Europe on my own for the rest of my life if I do not earn a reasonable salary. Or unless I want the house to be puny, in a depressed area and with no objects in it. Which would not only be Lutheran, but surreal. An empty house. Something out of the Cinderella Man scene with the empty apartment post-1929 crash. I will also be spending money on trips to northern Poland, as well as trips to Croatia, Bosnia, Serbia, Kosovo, Macedonia and Montenegro.

--Great, let us plan to meet somewhere in one of these countries. I will be delivering conferences in Eastern Europe during the summer.

I briskly walked back to the train station, found the bus and paid the 42 złoty fare for the four-hour ride to Jarosław. I was exhausted but have trouble sleeping in a sitting position. The bus was full and I could not lie down. So I meditated, reflected on my upcoming challenges, projects and wishes and read The Economist after daybreak at 4 am.

Upon arriving in Jarosław, I walked with the 24 kg suitcase – which I was ready to jettison by now — for about 1.5 km. to Magdalena’s mother’s apartment, very conveniently located 200 yards from her office on

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Poniatowskiego street 45a. I rang the doorbell. She was not expecting me and was coughing profusely. She had a bad cold. I gave Danuta, Magdalena’s mother, the Chanel 5 bottle I had bought at the Barcelona airport.

She gave me some food I did not need but nonetheless ate. Izabela had cooked it for her sick mother. Tomek then took me to Radymno. I had not slept since 2 pm the previous day. Seeing the house in Radymno lifted my spirits. Radymno. Sounds like a village name out of the Dr. Zhivago film based on Boris Pasternak’s novel. The small-village cottage where tired intellectuals like myself find solace and peace in. During the 13 km ride Danuta’s son and I discussed the Asiana Airline crash and he told me about some bike race in the area. He had taken a couple of days off to go hiking in the mountains. Danuta is strict, but does let her son take time off.

I unpacked. I put away all of my stuff, as I always do when I arrive someplace, no matter how tired I may be. I greeted Lech and gave him the T-shirt I had purchased for him. He told me he was starting a new job. He was kind as always. He has the biggest heart of anyone in the family. Kind, compassionate, polite, smart, easygoing….hope nothing screws up our relationship. He also has a lot of patience with his drunk friends.

I slept two hours and walked the 2 km to the Sek lake in Radymno. I swam to the island and had a 20-minute conversation with a 22-year-old unemployed Pole seeking work in the construction sector who did have some kind of degree and whose brother lived in the UK. I swam back to the shore after realizing I was exhausted and dizzy. I simply had not slept enough during the preceding days.

I walked back to the cottage on Avenue 3rd of May, number 95, occasionally using people as GPSs whenever I needed confirmation of my bearings and destination. I am good with locations, but sometimes need confirmation, especially when I am tired. It also enables me to practice my Polish. I am always very courteous and apologize in advance for stopping someone to ask for directions, smile and thank them profusely.

I did some work and had another conversation with Danuta about my joining her company. There was no way I could convince her that my contacts at many chambers of commerce in Europe and around the world, six languages, business experience and hard work would be an asset to her company. I did not know Polish accounting and that is all that mattered. Alex walked into the kitchen, flashed a smile and walked back out. I was happy to see he was still fond of me.

I then spoke to Magdalena for about an hour, got my stuff ready for next day’s jog and started work on the French version of ACIV´s website. ACIV is the Association of Neighbors and Merchants of the Turó Park of Barcelona.

I unfortunately could only get in two hours of sleep before waking and not being able to fall sleep again. So I continued to write and hoped I would eventually exhaust myself as had occurred in Washington, D.C., when I literally fell asleep on the keyboard on many occasions while writing my books Conversations with Marx and Ethical Capitalism: What it can do for you.

I finally managed to fall asleep and get in about three more hours of sleep. I undertook the jog to Jarosław without any water and with Pawel’s girlfriend’s Ipod as a subtitute for my own, which is no longer charging. I had slept about five hours and none the previous night, when I was on the bus. I was afraid I would not have the strength to do the 13 km. Surprisingly, I was able to do 15 km in about one hour and forty-five minutes. I made a wrong turn right on the expressway from Radymno to Jarosław at one point, and also jogged all the way to Danuta Michowski’s office, on Poniatowski street number 65a, which is at least a couple of kilometers more than the 13 from Radymno to Izabela’s apartment. The borrowed Polish Ipod was some help, although it only featured Polish songs, not my usual Western favorites from the 80s and 90s. I arrived at Danuta’s office on Poniatowski Street 65a only to find that she had stayed home because of her cold.

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Izabela and Tomek were thus in charge of the office that day. I was kind, considerate and even submissive. I briefly told Tomek about some of my ideas for services for new members and clients for the company. The new members would have to pay for things like information on how to open a business, how to access financing, how to export to Poland (and neighboring countries), and how to invest in Poland. They would also be able to access macroeconomic data on the Polish economy, useful information on the addresses of Embassies, Consulates, government buildings, procedures for everything from getting the permits to start a business to how to ensure employees. As Tomek is seated in an area of the office where I could not sit next to him and he had to talk to a couple of people that dropped by, I sat next to Izabela and explained to her these and other ideas in order to enable the company to earn more without having to work harder. I offered to work on obtaining this information (which does not require writing in Polish) and inserting it into the company’s website for free, and also brought up ads on the company website as an additional form of revenue. Izabela thought it would mean more work, or that the companies’ clients already knew how to access this information. I emphasized that I was talking about SMEs from other countries that wanted to export to Poland and neighboring countries or invest in Poland. SMEs from other countries are typically wary of foreign ventures because they do not know how to navigate the bureaucracies of countries like Poland, do not have the necessary information, do not know the language, etc…

I was not discovering the wheel. Chambers of Commerce around the world do this, and they charge their clients for information. So the business model already works, and I was adding additional ideas, such as enabling the companies’ clients to post tweets, write blogs sharing information about best practices and other useful information or tips on everything from the best way to obtain financing from the EU to activities for the members’ employees.

Izabela remained skeptical and told me I should discuss the matter with her mother, Danuta. She then decided that a couple of the companies’ young interns should show me around Jarosław. We visited the Orthodox church, the cathedral, a splendid Renaissance building, the Benedictine monastery and its beautiful gardens, a university library, the old town square, several parks and returned to Danuta’s office after a two-hour excursion. I had now really visited all of the historical buildings in Jarosław, a town of 40,000 inhabitants. The walking tour added another 5 km to the 15 I had jogged. I purchased a couple of soft drinks but strangely was able to endure the heat -- 31 degrees -- without needing much to drink. I was pretty proud of myself. I had done twenty kilometers, 15 jogging and 5 walking, spanning 5 hours with only two soft drinks and a bottle of water. Maybe I will become a camel in my next life.

At four PM, Tomek and Agnieszka drove me back home. The office closes at four. They do not take a lunch break. This is the kind of efficient schedule we lack in Spain. They work 8 to 4, and are open to the public 8 to 3.30 pm.

After checking my email and doing some reading, I checked the Spanish news. I was saddened to read that the PP’s former treasurer -- who has been indicted and was now in jail -- was threatening to reveal secrets about the payments that Prime Minister Rajoy and other members of the party -- but not his government -- had allegedly received when the treasurer, Luís Bárcenas, was in charge of the PP’s finances. Unfortunately, Bárcenas had been the PP’s treasurer for many years, and two newspapers (El País and El Mundo) had obtained notebooks detailing alleged secret payments to Rajoy and other high-ranking PP officials that the press and public now referred to as Bárcenas’ papers. The documents appeared to be authentic and the handwriting was that of Bárcenas. Several independent specialists had confirmed this. Rajoy and the PP´s Secretary-General, Maria Dolores de Cospedal, continued to deny any wrongdoing and all of the accusations. A judge has already been investigating the matter for months. Bárcenas had apparently not revealed more damaging information earlier because he had managed to avoid jail pending the trial. But the judge had now mandated jail pending the trial, and thus turned Bárcenas into an irate man willing to tell all.

--Alex, what do you think Rajoy should do? 95

--It is hard to say. Even the Foreign Minister, García Margallo, has admitted that the Bárcenas scandal is damaging Spain’s reputation. Esperanza Aguirre, Rajoy’s long-time nemesis within the PP, has renewed her criticism of Rajoy. The opposition is demanding an official explanation in Parliament or Rajoy’s resignation.

Rajoy is losing some control of the narrative, sadly at a time when the unemployment numbers are diminishing and his reforms are producing results. Unemployment has dropped for four months in a row, and the June numbers were very impressive, with a fall of more than 125,000, the biggest in many years. Rajoy and the PP’s strategy is to avoid the scandal and point to the ongoing judicial investigation, which will supposedly prove that Rajoy is innocent and the illegal financing did not take place. This strategy may be hard to maintain as time goes by, the media pounces on the scandal and the opposition piles on the pressure. Bárcenas’ handwriting appears to be real and it details payments to Rajoy and Javier Arenas (currently a Senator), Francisco Alvarez Cascos and Jaime Mayor Oreja. Arenas and Mayor Oreja are all party heavyweights and former ministers who are not currently in the government but are still in public office. The payments allegedly took place when Rajoy was a minister under Aznar. Such payments, if proven true, would be illegal under Spanish law as Rajoy was a minister in the government and thus not eligible to receive them. The amounts are also significant, especially for a country with 25% unemployment. Unfortunately, the payments are not 3000 euros or a couple of expensive gifts.

I think Rajoy is hoping that he will manage to turn around the economy in a couple of years and that the investigation will drag on for at least that long. The crimes need to be proven, a lengthy process, and the statute of limitations might kick in, in which case Rajoy would not face charges even if the accusation turned out to be true. So he will stay in office.

--But the judicial investigation will distract him, tarnish Spain’s reputation and give the opposition daily ammunition.

--True. But Rajoy was elected in a landslide, his party has an absolute majority in Parliament, nobody in the party wants early elections (the PP’s support has dropped to 25%) and judicial proceedings take a long time. Some are speculating that Bárcenas is blackmailing Rajoy. But even if this is true, the matter is now in the judiciary’s hands. Bárcenas has amassed a considerable fortune. He might be persuaded to take the fall if his jail term is short. But if he feels betrayed by the PP he might reveal more. It is not a pretty situation. Since one high-ranking PP member (Pio García Escudero, who presides the Senate) who allegedly received the illegal payments has admitted the accusation, the whole affair cannot be dismissed as Bárcenas’ revenge for his dismissal as treasurer of the PP when Dolores de Cospedal took over as PP Secretary General.

In my view, it is probably true that the other PP officials who received payments (Arenas, Mayor Oreja) knew about the payments. In Rajoy’s case, I believe and hope that he did not know about the payments. Rajoy is a man of great personal integrity who had never before in a long political career been accused of wrongdoing, accepting bribes or doing anything that broke the law.

I think that the system of payments was set up without Rajoy’s knowledge, that Dolores de Cospedal clumsily reformed it when she took over the leadership of the party, and that she never informed Rajoy because she felt insecure about the work or wanted to give his boss deniability if things went wrong. Rajoy explicitly told Cospedal to clean up the PP’s finances after appointing her Secretary General. She may not have had the courage to tell Rajoy all the details after she accessed all of the information. She probably decided to try to clean up the mess on her own, hoping that Bárcenas would keep quiet. 96

On July 11, 2013, I had planned to rent a car from the AVIS office in Rzeszów. I woke up at 715, after realizing that the Iphone´s alarm had been ringing for several minutes and my mind and body refused to recognize its message, namely that it was time to wake up. The previous week’s physical exercise (33 km. of mostly jogging from Radymno to Jarosław), writing, translating the Turó Park’s website into French, networking and few hours of sleep were taking a toll. Lech and Agnieszka drive to work at 730. I had prepared and planned to take the train to Rzeszów from the Jarosław train station. But the first train left at 6 in the morning and the next one at 1113. So I would look for an electronics shop in Jarosław which would hopefully take care of my several IT issues, namely the fact that the sound card on my laptop had stopped working (making it impossible to make calls on Skype), my Ipod was not charging and my Palm had not been resurrected.

But upon arriving at Danuta’s office, Izabela changed my plan. She insisted that I not rent the car for the weekend, that it was pointless to do so as we would drive somewhere with one of the family’s cars (I had suggested the late Renaissance pearl of Zamosc) and I should wait until Monday to rent the car. I protested that I wanted to have the freedom to drive around on my own and that I like to drive. But she insisted I should accompany her to pick up Victoria from her camp.

As I finished my blog lambasting The Economist for its unabashed anti-euro tone (yet another issue full of anti- euro articles and op-eds), prepared my bag and clothes and searched the Internet for the train directions to Rzeszów.

The next day it was off with Izabela to Bielina na Podkarpacie, the camp where Victoria had been training for two weeks. She had earned a yellow belt. Vikka’s routine had been waking up at 8, six hours of judo and thirty minute jogs for two weeks, quite demanding for an eleven-year old. I assumed that she would not be as energetic as during her visit to Barcelona. She was of course overjoyed to see her mother, to drive back home, and was looking forward to seeing her rabbits and the kittens in Radymno.

After dropping off the Ipod and getting a tip for restoring the sound card on the laptop, it was off to the camp, a one-hour drive north of Jarosław on slow and badly paved roads. Victoria again impressed me by repeating the Spanish phrases I had taught her, and even the Catalan “Jo sóc polonesa” which would break any Catalan nationalist’s heart. ERC had overtaken CiU for the first time ever in the polls. Forty percent of Catalans now favored independence, although a plurality still preferred options that included the status quo, more devolution of powers to Catalonia, a federal Spain or even less autonomy. Rajoy’s absolute majority would ensure his ability to continue to enact the necessary reforms and austerity Spain needed. The PP’s deputies would not revolt as the PP was polling in the low 20s, more than twenty points below their result in November of 2011. Mas was now completely in ERC’s hands and any rapprochement with Rajoy was highly unlikely, even if Rajoy attempted and initiated it. Keynes and I agreed to meet in Rzeszów. I was eager to get his advice on what to do.

--John, should I just leave Radymno and drive off on a solitary trip around Europe? Fly back home?

--Alex, just be normal. Do not push things. You are still too impatient. You have to allow natural processes to run their course.

--Yes, you are right. I do feel much better in Radymno. Magdalena’s family is very kind to me and Magdalena does not want to break up with me. I told her I am not breaking up with her, but that I want her to try to smoke less, be more cheerful, relax, etc. This is for her own good, regardless whether we stay together or not.

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On July 12, Izabela drove her kids to Radymno and I obviously went along as I still had not rented the car and was not about to jog the 13 km. that separate Radymno from Jarosław for the third time in a week. Vikka was excited and played with the kittens. I shot some footage, and insisted – to no avail – that the cats be named. The white kitten was the most daring of the bunch. I wanted to name the three brown ones tiger1, tiger2 and tiger3 until they received more formal and permanent names. They had become quite good at climbing high furniture which was stored in the rooms where they live.

Alex’s persistent stomach ache prompted Izabela to drive back home earlier than she would have. The ensuing night he threw up, and Izabela therefore did not arrive with Danuta in Radymno until eleven as she obviously needed to get some sleep. Izabela took me to the electronics store near her mother’s place. They had repaired the Ipod but at the cost of reprogramming it and thus deleting all of my music. This was a blow. An Ipod with no music is useless, and I would now need to put in additional hours to fill the Ipod with content. Moreover, Tomasz, who is trustworthy as he is good friends with Tomek, told me that none of the USB ports in my computer worked. I was surprised. The pen drive had worked recently. So I did not purchase the new microphone and headphones. If the Toshiba’s USB ports indeed were all malfunctioning, I would need to purchase a new laptop. For the time being, I used Tomek’s spare cable. I also left the Palm in the shop and begged Tomasz to try his hardest to revive it by getting a new battery just long enough to enable me to recover the data from it. Tomasz promised to install the software on a new laptop for free, and Tomek suggested that it would take five or six hours to transfer the files from the Toshiba to the new laptop. So I now had a laptop with a US keyboard, non-working USB ports, a microphone that was barely audible to the person on the other end of the Skype call and a provisional cable.

My IT problems were multiplying. But there was the hope that Tomasz would fix at least some of them (and also synchronize all of my contacts in one device). He certainly did not lack incentives. I was going to purchase a new laptop and pay him to jailbreak my Iphone that Vodafone had locked. Liberating the Iphone would take several days and cost 60 euros. I was determined not to leave Radymno and southeastern Poland until my IT issues had been sorted out. I now had IT hardware spread out between my apartment in Barcelona, the house in Radymno and the electronics store. Supply lines were getting stretched. I had electronics stuff all over the world!

Upon returning to Radymno, Danuta and Izabela prepared lunch. I obviously did not need to eat a big meal and by now had explained at least ten times to everyone in the family that I am a grazer, that I eat smaller portions and have more meals, that this is healthier for me (telling them it is healthier for any adult would have offended them) as my latest blood analysis showed. The problem with trying to help people change their ways is that not everyone accepts a need to change. Proving that I could jog long distances, never get sick, shower with cold water all year long, swim in the sea all year long and other proven methods of staying fit and very healthy is not that hard. They had witnessed my jogs, my ability to endure long days with little or no food and seen pictures of me swimming in the sea. But adults understandably are reluctant to change their ways. It is tantamount to admitting they have been doing things wrong for many years. Gentle and gradual persuasion might do the trick. Showing off -- which I never do -- obviously backfires.

After speaking to Magdalena and getting a commitment from her that she would not move out of the apartment in Barcelona, I ate the meal and cleaned the dishes. I continued to look for activities in the Podkarpacie region for Alex and Victoria. But I was hurt when Izabela told me that she would not let me take her kids -- with Alex’s nanny -- to places near Jarosław which might be fun for them. She was clearly as stubborn as she admitted. She would not let me invite her and her children to a weekend at the Masurian lakes, she would not let me take the kids to nearby places with Alex’s nanny (who clearly seemed responsible) and she was not interested in English lessons for Victoria. Vikka has outstanding grades. She has been the best student in a school for 400 children for years. But she needed reinforcing in terms of spoken English. She was embarrassed to speak to me but I had heard enough to ascertain that her English needed improvement.

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On July 15th in the evening, Keynes and I had arranged to meet in Warsaw. I was pursuing my quest for work in Poland to supplement academia and the edition of the book on renewable energy I had been working hard on since April. I had taken a train at 1109 AM at Jarosław with the initial intent of renting a car in Rzeszów that I would drive to the Masurian lakes region and further north to Lithuania, Latvia and even Sweden. Keynes was delivering a conference in Warsaw on the same day. At about 10 pm we arranged to meet at a restaurant on Aleja Jerozumelska.

--So, Alex, how is your job-hunting in Poland working out?

--Well, I must admit that I am pretty proud of the effort I am putting in but nothing has materialized yet and I am not even close. I have been networking for about a month in Poland. I have spoken to several university professors, the Director of the American Chamber of Commerce in Poland, the Director of the Spanish-Polish chamber and of course lobbied Magdalena’s mother, Danuta, Tomek and Izabela to convince them that I could add a lot of value to their accounting firm.

Danuta and Izabela are very stubborn. It is true that they both have colds. Danuta has missed two days of work and is in her apartment. She has had the flu for over a week. I have praised her to high heaven, given her tremendous credit for launching the company in 2001 and turning it into the most important accounting office in Jarosław. But she is 55. Her sons Tomek and Lech are in their 30s, as is Izabela. Danuta and Izabela consistently reject my ideas and Izabela even told me this morning that she did not want me to look for new clients. I was astounded. I was taking some of Danuta’s business cards and Izabela actually said they did not want or need more clients. I was failing to convince them about expanding the business through my contacts, languages, experience, etc.

--Maybe she was being polite. She knows you have a lot on your plate and did not want you to feel added pressure.

--Maybe. On Sunday I slept over eight hours for the first time in a long time. Izabela arrived in Radymno and woke me, asking why I was sleeping so late. It was Sunday! I was going on four hours of sleep and had jogged more than 30 km. during the week. In addition, I had done a radio interview with Radio Intereconomía, during which I publicized southeast Poland, translated the Turó Park’s association of businesses and neighbors’ website into French, learned many new Polish words, practiced my Polish, swum in the lake in Radymno, and undertaken a five-hour walk in scorching heat in Jarosław. After a quick breakfast, Izabela drove the kids and I to Łańcut. It is about an hour’s drive from Jarosław. It had been raining all weekend and the temperature was abnormally low for July, around ten degrees. The weather had been London-like in almost all of Poland.

Łańcut is a marvelous Baroque castle and palace built in the XVIIth century. It was commissioned by the Lubomirski family. Łańcut itself was founded by Casimir the Great in the XIVth century. We first visited a collection of horse-drawn carriages, and then proceeded to a greenhouse that featured all kinds of plants and flowers. The palace was next. Alex was feeling better. His stomach ache was gone. It was Victoria’s turn to be difficult. She was cold but did not want to put on the sweater I offered. Magdalena later argued that Vikka already was mindful of her looks, and my blue sweater did not match her pink clothes, umbrella and jacket. To be fair, Alex often picks a fight with Victoria. She retaliates and can obviously clobber her smaller brother as she is smarter and a tad stronger. Alex weighs 34kg and Victoria 23kg. Alex has a normal weight and is quite intelligent. But Victoria is in a league of her own when it comes to a high IQ. She still cries when she allows Alex to provoke her and Izabela does not punish Alex.

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We ate a first meal at a restaurant next to the castle. Fortunately, Izabela allowed me to pay the bill. They ate and I drank an orange juice as I was not hungry at all. I paid 30 złotys and Izabela had allowed me to pay five złotys for the parking. That was all of the generosity she would accept from me on that day. Her car had mechanical problems, the battery that heats the water in her apartment was not working well, she was taking time, paying for the gas, driving to Łańcut and would not let me invite them to anything else. I sprinted to the box office and paid 66 złotys for the four of us. Izabela had given me a 50-złoty bill because she did not expect me to be able to pay for the entrance fee for all of us with my credit card. I sprinted back proudly with the tickets and she refused to take the 50 złoty-note despite my repeated pleas. We managed to join a guided tour. As we walked through the different rooms in the palace – the usual array of bedrooms, bathrooms, concert room, studies – decorated with Baroque, Rococo and neo-classical furniture, stuccos and wooden floors, I managed to understand about 70% of the explanation. I even asked the guide some questions that she did not answer to my satisfaction. I had read that Łańcut is one of the finest -- if not the best -- examples of a Baroque palace in Poland.

The present castle was commissioned by Stanisław Lubomirski and built between 1629 and 1642. At the time, Łańcut was a modern, “palazzo in forteza” type of residence, consisting of living quarters with donjons at the corners and surrounded by bastion fortifications. The palace’s architects were Maciej Trapola, Krzysztof Mieroszewski, Tylman von Gameren and Giovanni Battista Falconi.

I wanted to know the features of the Polish version of Baroque that the castle’s impressive website mentioned. The guide answered that the palace also had Rococo and neo-classical elements, which I already knew. The owners of the palace had been the Lubomirski family and later the Potocki family. There were plenty of portraits of the two families’ members in the different rooms that we traversed with slippers in order not to damage the wooden floor. I queried the guide about other noble families’ interest in Łańcut, since it was also a magnificent fortress and I remembered reading that the Habsburgs had played a role in Łańcut’s history. Łańcut used to belong to Galitzia, a region that was part of the Austro-Hungarian Empire from the partition of Poland in the XVIIIth century until 1918. She was also unable to answer this question. They did not allow us to take pictures.

Vikka and Alex behaved well but I was unable to motivate Vikka with questions about the Łańcut visit. We ate at the same restaurant for a second time. Izabela refused to let me pay even though she ordered a soup for me -- zurek -- that I had not wanted. I used my Iphone as a picture gallery to show Vikka and Izabela the pictures from the Caribbean and the Costa Brava that I had taken since December.

Vikka got her first glimpse of the Caribbean from the Iphone and whispered into her mother’s ear that she wanted to go to the Masurian lakes. Izabela had categorically rejected my invitation. She was too proud to enable a win-win situation to develop. These can take place between people who are very intelligent, have a good heart and are flexible. Izabela clearly has a good heart and is quite smart. But flexibility is an alien concept to her. I would only pay the accommodation for them in Gyzicko (a resort in the Masurian district) for two nights. No way. Izabela would only go to Masuria if her mother or other family member paid for the trip. Danuta would probably be too sick. Lech was broke and had started a new job. That left Tomek and Agnieszka. I liked them. But their daughter, Oliwia, aged 9, was a bit distant. She was quite normal, but not a bundle of joy as Alex and Vikka.

During the Łańcut excursion I restrained my natural kindness towards Vikka and Alex, partly because they did not behave well at some points. But also because Izabela had made it clear that she did not want more invitations or gifts from me for her children. After the palace visit, we got a tour of the orangerie – with tropical plants and some small animals – and then raced to a nearby pond.

Alex and Vikka fed the ducks while I took pictures of them and recorded. Watching the children 100

feed the ducks in the pond was one of those fleeting moments of happiness you have to savor. There was nothing to do except enjoy the moment.

Life, liberty and the pursuit of happiness. Pursuit means that it is not a permanent state, a goal that can be achieved easily, but rather an attitude. We strolled through Łańcut’s beautifuch gardens with roses and other flowers, with nothing but green as far as the eye could see. There must have been thirty ducks in that pond, and as I watched the scene unfold, I wished I could have stopped time. A dog nearby tried to get into the pond, and there were also fish. I have improved in terms of enjoying these brief moments of serene tranquility and happiness. But inevitably my mind starts to work on devising a method of making such happiness more permanent. I remembered the last day of Izabela’s visit to Barcelona. Alex was homesick and in a terrible mood. He turned down all of our suggestions – the park in Ganduxer, even hamburgers at a fast- food restaurant.

So we just sat at the Turó Park benches and waited for time to go by so I could drive them to the airport. We had spent four wonderful days in Barcelona. Magdalena and I had taken them to the aquarium, the beach at the Barceloneta, Montjuïc at sunset for a view of Barcelona, the Tibidabo theme park, the labyrinth park, the zoo, Montjuïc castle and the cable-car in Montjuïc. But that Friday morning, as Alex whined about not being home and Vikka looked on in frustration, I wondered whether I would ever be able to make them happy again. The Turó Park scene, with its pitiful pond, contrasted with the majestic pond in Łańcut’s gardens.

Vikka and Alex eventually ran out of food with which to feed the ducks in Łańcut’s gardens. So it was off to the next challenge. They dared me to race them. They had a huge head start and the finish line was undetermined. I did not want to just let them beat me. But I was carrying three umbrella and my shoes hindered my ability to run. Alex and Vikka wanted to visit the greenhouse again. They convinced their mother into buying two small plants. I tried in vain to pay for them.

As we drove back to Jarosław and I memorized my Polish vocabulary, the radio played one of my favorite songs. I also enjoyed the moment. We briefly stopped at Danuta’s apartment. She was still coughing and looked miserable. I showed her the pictures of Łańcut and the kids gave her one of the plants. The other would be added to Vikka’s growing list of flora and fauna in her apartment – the two rabbits, the turtle and the goldfish. I also told Danuta about my trip to Warsaw and my networking efforts to impress upon her that I was working my ass off to find a job in Poland.

Izabela took me to see the cemetery near Radymno. It was another very poignant moment. Vikka and Alex were both in a good mood. But we all turned somber as Izabela showed me her father’s grave. He died at age 39 from a heart attack. Izabela asked about my age, although she perfectly knew that I am in my forties (44 at the time). I don’t know what message she was trying to convey. That I should enjoy life while it lasted? In all likelihood, her comparison was aimed at reinforcing the idea – which in my case was unnecessary – that we are mortal and vulnerable even at a young age.

Magdalena and Izabela’s father had taken terrible care of himself. But 39 was an extremely young age to die. He passed away in 1997. After a brief prayer, Izabela returned to the car and the children showed me the grave of Agnieszka’s son, who passed away after only a few months. I was again amazed at how these two children, traumatized by a divorce and the disappearance of their father only two years earlier, showed such poise and matureness. They remembered that we should pay a visit to the tomb of Agnieszka’s son, and Alex and Vikka told me about the tragedy in a tone of voice that conveyed seriousness and sorrow. As we walked back to the 101

car, I asked Vikka to show me her grandfather’s grave again. I had heard the terrible stories about her physical abuse of Danuta. Yet I still felt that we should briefly stand and honor him.

The somber situation turned into another joyful moment when Alex and Vikka discovered that a small dog was sitting in the driver’s seat in the car parked next to her mother’s Peugeot 206. The children dashed to play with the kittens as soon as we arrived in Radymno. I headed to my room to prepare my things for the upcoming trip, send emails to try to arrange meetings in Warsaw, shower, and shave. I was determined to leave Radymno in an optimistic mood. Yet when Izabela peered into my room to tell me she was heading back home to Jarosław, I could not help feel a tremendous sadness that Alex and Vikka had not remembered to say goodbye. I wondered when I would see them again.

The following morning, I woke at seven after getting 5 hours of sleep. I put on my suit and walked outside. Tomek was riding his bike to work, so Agnieszka did the driving. When I arrived at the office, I continued my networking and checked whether anyone has responded to my requests for interviews. Bielecki’s assistant had, but only to let me know that he was on vacation and would return on the 22nd of July. I replied that I could be in Warsaw on the 22nd and ensuing days. At nine I walked to the electronics store. Tomasz had managed to resurrect the Palm. We discussed which laptop I would purchase. He charged me 50 złotys for repairing my Iphone and resurrecting the Palm. I briskly walked back to the office and called Citibank to check on the latest transactions in my account and ask for the travel agency service to provide information on a hotel in Gyzicko, in the Masurian lake district. I offered Agnieszka to make a reservation for them and she welcomed the idea. I had left almost all of my clothes in a suitcase in Radymno, which I asked Agnieszka to bring along. I was obviously not going to travel 500 km. south just to get my things if they were going to drive to Masuria as well.

Izabela printed some Google maps for my travel and urged me to head for the train station, which is located about 50 meters from Danuta’s office. I took some cards and told Izabela I would try to recruit more companies. She again shot back that the company had enough clients.

As I boarded the modern train, I realized that it was dumb idea to drive all the way to Warsaw. I would exhaust myself. I hence cancelled the reservation with AVIS in Rzeszów and paid an additional 60 złotys to stay on the train until Warsaw. Renting the car was a ridiculous waste of time and money, as the train would arrive in Warsaw at a reasonable time in the evening. I also was exhausted and had no GPS (and rental cars don´t have GPS, unless you are renting an expensive one). I had written down the Google instructions on three sheets of paper but they involved many turns and I would have no-one to help me out. I needed a co-pilot. The train conductor was impressed with my Polish and told me I could wait in my compartment and someone would come by during our stop in Rzeszów to charge me.

I tried to sleep but felt cold. A 20-year-old second-year university student from Warsaw boarded the train in Lublin. We had an interesting conversation that enabled me to practice my Polish. A mother and child also boarded, as well as a woman and her teenage daughter. It was now packed. I told Tomasz, the university student, about my travels in Ukraine and Belarus -- and the infamous story of my isolation for 90 minutes at the Grodno train station in 1994 -- only to ascertain that the woman seated next to me was from Belarus. I struck up a conversation with her, partly in Polish and partly in Russian. She was traveling from Minsk to a town on Poland’s Baltic coast. One of her daughters studies in Poland. She told me it had taken her about four hours to travel from Minsk to the border. She did not seem like someone who would vote for Belarussian president Alexander Lukashenka, the country’s long-time dictator who holds farcical elections from time to time. She seemed pleased to be in Poland and proudly told me about her daughter studying in Poland.

Warsaw’s central station -- as opposed to almost everything else -- had not improved much since my visits in the late nineties. It took me a painstaking 25 minutes to locate the bus I needed to board to reach Gabriela’s 102

house. No-one had any information on the buses. I was following Tomasz’s instructions, as he had checked his smartphone and concluded I should get off at Warsaw’s central station and take two buses. There was no information office or counter for buses (there was one for trains). Several drivers were clueless or rude. I persevered and eventually managed to get one to take me to an employee in charge of an office that dealt with buses. He was extremely rude. I pleaded with him to speak slower. He became agitated and started yelling at me. This was the classic specimen of an embittered post-Communist low-level public employee with hostility towards anything from abroad. He must have been in his forties. I pushed back and told him—in Polish—that I had a right to ask and that I would not tolerate verbal abuse. He finally grudgingly drew a small map.

I boarded bus number 227, and after several km. got off and took 204 to the Bialołeka district, which is located north of Warsaw on the right bank of the Wisła. I was exhausted and disappointed with the experience at the train station, where I had had to ask ten people for directions in order to purchase a ticket and locate the bus stop. I had expected some kind of general information point, not just a counter for information about train schedules. This is the main train station in Warsaw, after all.

The 227 bus crossed the Wisła. As I looked back and enjoyed the panoramic view of the modern skyscrapers, the Dom Kultury Stalin-era skyscraper and the old town’s towers and spires, I could not help thinking that I had left my heart in Jarosław. I did not mind being in Warsaw as a tourist, but was tired of networking. Memories of the times I had been in Warsaw in the past came to mind.

These conflicting thoughts crossed my mind as the bus reached the Bialołeka district. Monika and her husband Jan, a gynecologist, live in a splendid new house about 15km. north of Warsaw. I showered, had dinner and treated them to my repertoire of description of life in Spain, savage criticism of Zapatero, staunch defense of Rajoy and his work (Tusk and Rajoy had met in Warsaw that afternoon in Madrid), transatlantic dream description and other matters. This was a very sophisticated English-speaking highly-successful couple. I could not log on to the Wifi with the password Monika provided. So I took a cab and headed downtown to meet Keynes.

--Well, Alex, sounds like you had a hectic day.

On July 18th, 2013, Keynes and I arranged for a meeting in the Plac Bankowy in downtown Warsaw. I had not been in downtown Warsaw in thirteen years. My last time in Warsaw had been a two-day business trip in 2007. Leaving aside this brief stay, I had not really been to Warsaw in thirteen years. I took bus 204 from Echa Lesne and then switched to the tram at Rembelinska Avenue. Most buses in Warsaw do have air-conditioning, but the driver on this particular one had turned it off. I sweated profusely. Plac Bankowy was teeming with people, Warsovites and foreign tourists alike. I tried to enjoy the view of the City Hall across the square and the skyline with the Lutheran church’s cupola in the foreground and modern skyscrapers in the background despite the noisy protests that were taking place. A grass-roots movement was collecting signatures in a bid to hold a referendum to oust the ruling party’s (Civic Platform) mayor, Hanna Gronkiewicz-Waltz, who has always been close to Bielecki. I walked past the former city hall building, visited the Franciscan church, walked past the Grand Theater- National Opera (initially built in neoclassical style in 1825-33 by the Italian architect Antonio Corazzi) and the statue of composer Stanislaw Moniuszko (the most famous XIXth century Polish composer after Frederic Chopin) and onto Piłsudski square.

Piłsudski square must rank as one of the biggest in Poland and Europe. The general-turned-politician’s statue rises on one side. Józef Piłsudski ran Poland for much of the period between the two World Wars despite the fact that Poland was technically a parliamentary democracy. Nearby, a huge white cross marks the location from which Pope John Paul II addressed hundreds of thousands of Poles on his first visit to his native country in June of 1979, a year after taking over as head of the Catholic Church from John Paul I. 103

Cardinal Wojtyła had been pushing for a commemoration of the 900th anniversary of Saint Stanislaw’s death before becoming pope. After becoming the first Polish pope in history, he received an invitation to visit Mexico, a country with a clear separation of state and church. According to Cardinal Stanisław Dziwisz, the Vatican used the Mexico invitation to negotiate with the Polish authorities, who had not allowed Pope Paul VI to visit Poland. The Polish government rejected a trip in May 1979 for the Saint Stanisław commemoration, so the pilgrimage was planned for June. The Communist rulers accepted Wojtyła’s visit under the condition that he not travel to territory east of the Wisła river or to Silesia. The trip, which lasted nine days, drew massive audiences everywhere and significantly weakened Poland’s Communist leadership. The Communist Party had hoped to prove that it could continue to rule and provide improved standards of living despite the presence of a Polish pope in the Vatican. The Polish Communist leadership dramatically miscalculated in thinking they could compete with Karol Wojtyła. Some analysts feel the Communists were trying to provoke the Pope into appealing for a confrontational approach. Instead, in mass after mass, attended by millions of adoring Poles, Pope John Paul II preached values such as goodness and urged Poles to stand by one another. Millions chanted “we want God” in a country that was officially atheist.

There has been much analysis and many books have been published about the downfall of Communism in Eastern Europe and the former Soviet Union. Some credit John Paul II -- who was coordinating some of his actions with President Ronald Reagan and CIA director William Casey -- with dealing a mortal blow to communism in Poland and Eastern Europe. Others, myself included, acknowledge his leadership and courage in the defeat of Communism but place it in a broader context which includes several additional factors, such as Communism’s utter failure to deliver decent standards of living, Gorbachev’s desperate attempts to reform the Soviet economy through perestroika, Reagan’s staunch opposition to the Evil Empire and Gorbachev’s abandonment of the Brezhnev doctrine.

But no-one can question that Pope John Paul II’s visit to Poland in June of 1979 significantly bolstered the nascent opposition to the Communist Party and emboldened it to launch the Solidarity movement. The Pope’s speeches lifted the mood of millions of Poles. Wojtyła had called the Communist Party’s bluff. This was a situation somewhat akin to Gorbachev’s visit to East Berlin in 1989 to mark the fortieth anniversary of the founding of the German Democratic Republic (GDR). The head of the GDR, Erich Honecker, had hoped to capitalize on Gorbachev’s popularity but instead appeared to millions of his countrymen as the emperor with no clothes when Gorbachev publicly rebuked him for not undertaking reforms. Wojtyła similarly exposed the total moral failure of Communism in staunchly Catholic Poland.

I walked to the middle of Piłsudski square towards the tomb of the unknown soldier. I could not hold back my emotion. Poland has suffered tremendously in its history. As a country located on the northern European plain with no natural defenses (such as mountain ranges), its neighbors have invaded on countless occasions. But now it is a consolidated democracy, the strongest and most vibrant economy in central and Eastern Europe and it guards the EU’s eastern border with Belarus, Ukraine and Russia (Kaliningrad oblast).The monument and tomb feature the usual changing of the guard. The monument’s pillars are the only remains of a Saxon palace that occupied the space until World War II. The pillars list all of the battles in history in which Polish soldiers (Army, Navy, and Air Force) have fought. The monument was erected in 1925 following an initiative led by Polish newspapers and supported by General Wladisław Sikorski. The remains of an unknown fallen Polish soldier who died in the defense of Lwów (the initial battle of the Polish-Ukrainian war of 1918-19) were transported and placed in an urn. In early June, I had visited a cemetery in Lwów that is the resting place for hundreds of Polish soldiers who lost their lives fighting for the Austro-Hungarian Empire in World War I.

Approximately a third of current Polish territory was part of the Austro-Hungarian Empire between 1795 and 1918, and Lwów was the capital of the region of Galitzia. As I took pictures and filmed the stern-looking soldiers

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and the monument, located in the middle of the square next to a fountain and the garden of the former Saxon Palace, I feverishly looked for battles waged in years ending in ‘4’. I was brainstorming for ideas to present to Bielecki on July 23rdat our meeting. One would be to jointly celebrate the 70th anniversary of the Normandy landings (where the Polish Armed Forces in the West fought alongside the Allies), the battle of Arnhem (Operation Market Garden) and other World War II battles in 1944 with the 570th anniversary of the battle of Warna, which unfortunately for my idea witnessed the defeat of the Polish forces under King Wladisław III of Poland at the hands of the Ottoman forces in present-day eastern Bulgaria.

The Polish Armed Forces in the West, which operated under the command of the British, numbered 195,000 by the end of World War II. They made a big contribution to the Allied campaigns, most notably at Montecassino, Normandy and Arnhem. In 2014 there are few veteran survivors of the Polish Armed Forces of the West. By 2024 there will be none. A big commemoration of the Polish Armed Forces of the West’s battles in 1944 (and the Warsaw uprising of the same year) would reinforce the narrative of Poland as a liberal free-market democracy that has overcome its neighbors’ invasions, communism, the Great Recession and has again become a prime ally of western countries and the U.S. This patriotic portrayal of a democratic and liberal Poland might win over some PiS voters and shore up support from wavering Civic Platform voters dismayed by harsh structural reforms and austerity.

I finally reached the Royal Castle and the Sigismund column. I was now beginning to feel the Stendhal syndrome. I had been memorizing Polish words and absorbing all of the historical, cultural and architectural information related to Warsaw’s landmarks for almost three hours. The sight of the Royal Castle soothed my anxiety. The castle, originally built in the XIIIth century, served as the residency of the Polish kings and the administrative offices of the Royal Court from the XVIth century until the partition of Poland. May 3rd will now be forever etched in my memory. Magdalena’s family home in Radymno is located on the May 3rd Avenue, as is one of the main streets near Izabela’s apartment. Bielecki’s birthday is also May 3rd. I walked to Rynek Starego Miasta, Warsaw’s Old Town Market Square.

Stary Rynek dates back to the 13th century, when Warsaw was founded. The representatives of guilds and merchants met in the town hall (built before 1429), and fairs and the occasional execution were held. The houses around it were built in Gothic style until the great fire of 1607, after which they were rebuilt in late-Renaissance style and eventually in late-Baroque style by Tylman Gamerski in 1701. After the Warsaw uprising of 1944 against the Nazis, the Germans destroyed 80% of Warsaw. Old Town Market Square was not spared. It was reconstructed after World War II and is on the UNESCO World Heritage List.

John had reserved a table at the Bellini restaurant, which serves Neopolitan and Tuscan dishes (among others) in red brick vaulted rooms with wood floors and film star photos. After I arrived and greeted John, he fired away with several questions.

--Alex, I have been delivering the conferences in Poland, but I focused on preparing and delivering them. I want you to clear up some things. The Polish government has managed the crisis rather well. But now it needs to focus on promoting growth. The economy has slowed down dramatically, and the euro zone’s woes will bring the Polish economy to a halt if there is no stimulus. Polish exports to the euro zone have dropped and Poles are spending less. What is the unemployment rate? What about the budget deficit? Inflation?

--Look, the unemployment rate stands at 14%, above the EU average. The economy grew about 2% in 2012 and will manage GDP growth between 1 and 2% this year after growth of over 3% in 2010 and 2011. The budget deficit slightly exceeds the 3% of GDP needed to fulfill one of the Maastricht criteria. Inflation hovers around 3%. There is disillusionment over the slow pace of construction of 105

transportation infrastructure, and murky deals involving some government officials. There is a grass- roots campaign to oust Civic Platform’s (PO) Hanna Gronkiewicz-Waltz as Warsaw’s mayor by collecting signatures and holding a referendum. The public does not understood and rejects the government’s tax and pension reforms. The right-wing conservative and populist PiS party has defeated the PO’s candidates in a recent by-election in the Senate and in a recall election for a city’s mayor. PiS has unfortunately surged ahead of the PO in the polls.

On July 26th, 2013, my mother’s eightieth birthday, I began to lose all hope that things would work out. I called Keynes on Skype. He had just delivered a conference in Poznan. I needed to speak to a friend.

--So, Alex, what is up?

--Unfortunately, the past few days have been full of disappointments and sheer bad luck. I decided to take the train back to Radymno after the meeting with Bielecki at the Prime Minister’s Office in Warsaw. Monika drove me to the Gdansk train station, where I proceeded to take a bus to Aleja Ujazdowskie. Purchasing a ticket on a Warsaw bus is not an easy proposition. There are 20-minute tickets, 40-minute tickets, one-day tickets, three-day tickets, one-way tickets, etc. Some cannot be acquired on the bus, however. The automatic ticket dispenser on buses does take credit cards. Every time I board a bus or tram in Warsaw, I must ponder what might happen next or during the rest of the day. I have to choose an option on the menu while hanging on for dear life, as some Warsaw bus drivers slam the brakes instead of slowly stopping. I also have to be mindful of my belongings -- suitcase, bags -- so they will not flip over when the driver takes a racecar-like turn. I was not feeling optimistic in the morning as the bus drove across the Wisła River, past the old town and onto Ujadowskie Avenue. I wondered when and whether I would see Warsaw’s old town again. It brought back so many memories. I tried to erase the bad ones with good ones, a hard task in Warsaw or in other parts of Poland.

Bielecki is a man who is always full of energy. He was an innovator in the 1980s, lost his job because of his activism in Solidarity after Wojciech Jaruzelski26 imposed martial law, but nonetheless remained in Poland and continued to recruit people for Solidarity, distribute pamphlets and monitor police surveillance. He was fired from his job at an economics center. He found a new one as a truck driver for an agricultural cooperative. His bravery in the eighties was remarkable. Hundreds were arrested and some killed under martial law between 1981 and 1989. He persevered, did not give up, did not flee abroad and worked feverishly for the opposition.

Bielecki had returned on the previous day from his vacation. At age 62, and given his usual energy level, I was somewhat saddened that he looked tired. This is a man with many passions who often rides his motorcycle to work instead of taking the limousine he is entitled to.

26 Wojciech Jaruzelski was a Polish military officer. He climbed the ranks of Poland’s Communist Party and became its First Secretary in 1981. He was responsible for the bloody crackdown that sent thousands of Poles abroad, underground or to jail and cost dozens their lives after he imposed martial law in December of 1981. As the Communist leader of Poland, Jaruzelski ordered a crackdown on Solidarity’s democratic challenge to Poland’s Communist dictatorship. Jaruzelski also served as Prime Minister from 1981 until 1985 and president of Poland from 1985 until 1990. After failing to crush Solidarity and revive the economy, Jaruzelski accepted Round Table negotiations with the democratic opposition (basically Solidarity) that resulted in the first democratic elections in Poland since before World War II and the first in any member of the USSR’s block in Europe. After a trouncing victory by Solidarity, Jaruzelski stepped down. An estimated 700,000 Poles fled their country during Jaruzelski’s rule (1981-1989). Some defended some of his decisions, pointing out that his repression prevented a Soviet invasion in 1981. Many attempts were undertaken to put him on trial after 1990. He died in May of 2014. 106

After a few minutes of small talk in Polish, I had to switch to English in order not to commit a faux pas. I gave Bielecki a copy of my book on German unification. Bielecki inquired about my conclusions on the topic of why Gorbachev behaved the way he did, the different countries’ negotiating stances, and other matters relating to the topic. There is an important Polish angle to the subject, namely the negotiation between the unified Germany and Poland leading to the official recognition by the unified Germany of the Oder-Neisse line as the common border. Bielecki conducted many international negotiations on behalf of Poland during his tenure as prime minister, managing to convince several western countries to write off Poland’s Communist-era loans.

I had penned a wonderful dedication of the Ethical Capitalism book, which ran over two pages. It complemented Bielecki on his service to Poland and Europe. Bielecki asked about football but I just replied that I watched the big competitions. Bielecki is an avid fan, who plays with Prime Minister Tusk in his spare time and was rumored to want to head the Polish Soccer Federation after his long stint as president of Bank Pekao.

The conversation proceeded. I had to reach for Bielecki’s glasses so he could read my dedication. He said it was a very kind gesture on my part. I included a sentence at the end of the dedication about wanting to help Poland and even work in Poland. Bielecki prompted me as to why I would like to work in Poland. After mentioning that it is the most successful democracy in Eastern Europe, has avoided a recession since 2008, continues to grow, has a big internal market and other positives I had included in my dedication, I also delivered my take on Fromm, the vision and the hallucination. For the first time in the 15-minute conversation, Bielecki’s eyes lit up. A friend of his had told him exactly the same thing a few days earlier. The chemistry finally flowed. I explained that my dream is to own a very small house, have a family and work hard.

I exited the chancellery after retrieving my heavy suitcase. I was thrilled to have met with Bielecki for the first time since 1998 in London when he was Poland’s representative at the EBRD.

I walked across the street to the Lazienki Park, site of some unhappy memories, and strolled through its gardens with sculptures of Polish writers, musicians (Chopin) and other luminaries. For a few minutes I enjoyed the moment and prayed that I could soon erase those memories with a life with Magdalena in Warsaw.

I needed to catch the 140 pm train from Warsaw’s central station. So it was off to the races in order to fulfil my objectives. The bus ride to the central station, the purchase of a ticket (only 49 złotys, although it involved three different trains) for the Warsaw-Przeworsk trip, acquisition of The Economist and presents for the family. By the time I got to the presents, I had fifteen minutes left before the train departed. I wanted to get something for Alex, Vikka and Danuta. A pet shop allowed me to buy a snack for the kids’ rabbits and a plant for their goldfish bowl. But these were very cheap and simple presents. I raced to a bookstore and, with an employee’s assistance, found the rights books on animals and a children’s novel in English for Vikka. The train was leaving in three minutes and I was 500 yards from the platform. I sprinted like crazy and made the train in the nick of time. The chocolates for Danuta were a bridge too far.

I spent most of the six-hour trip reading The Economist. Upon my arrival in Pzreworsk, I was thrilled to see that Alex and Vikka had come with their mother. They gave me a friendly hug and Vikka pointed to an old but refurbished locomotive standing in front of the station. I showed the kids the pictures from Warsaw, asked Izabela polite questions about the situation and enjoyed the drive to Radymno -- as opposed to a jog with suitcases -- as Radio Zet played another of my favorite songs. But Vikka got off at her grandmother’s place on Poniatowski Street. She was losing interest in me. I could not discern why. Was I no longer the flavor of the month?

The following morning I jogged to Jarosław yet again. I made it to the electronics store, where Tomasz once again showed me he could turn on my Palm. We also discussed the acquisition of a new laptop. I raced to the

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office only to find Danuta and Izabela were not there. I wanted to walk to a couple of language schools. I added another 5 kilometers to my trek but got nowhere as one university’s director of studies was on vacation (though I could send my CV and certificates by email) and the language schools were closed for the holidays. I sprinted back to the office by 4pm in order to hitch a ride home with Tomek and Agnieszka.

I spent most of Thursday working on organizing the trips for August and work-related matters.

--So here we are. Saturday the 27th of July. A rental car with no-one to accompany me anywhere for the weekend.

--Alex, just spend money! Travel! You need to stimulate the economy.

--Yes, you are right. And to make matters worse, Danuta thinks I am tight-fisted because I save on some things despite my generosity with the family.

--You see. You have to act like a Keynesian. Pump some money into the Polish economy. Do you want to save yourself to death? You can be a small stimulus package. Forget this Germanic obsession with austerity.

--Yes, I rented a car and will drive somewhere over the week-end. I am praying for Bielecki to help me get into a university or think-tank in Poland.

On August 28th, 2013, I flew back to Barcelona after my nine-day Balkan marathon. I had driven about 4,000 km in nine days, visited nine countries and crossed ten non-EU borders. I had gathered many interesting thoughts, talked to many interesting people and traveled to three countries I had never been to before—Serbia, the Former Yugoslav Republic of Macedonia and Kosovo.

During the trip, many hopeful signs about reconciliation in these countries had lifted my mood and provided ideas that I think would benefit other countries. Upon my return, I submitted some of my ideas, thoughts, and questions to Senén Florensa, Spain’s former ambassador to Tunisia, Minister of Foreign Relations for the Catalan government and currently head of the Institute of Mediterranean Studies in Barcelona.

I managed to finish editing the chapter on geopolitics for Professor Antonov´s book on alternative energy. I had already edited it once. But Jon asked for some further revisions. I had to align some key ideas listed at the beginning of each subchapter with the accompanying text. This implied deleting, moving or revising the existing text in order to reflect the points in each outline. This is a painstaking task, and it was especially hard on my dizziness as it required constantly switching between pages –the one with the outline at the beginning of each subchapter and the ones in the text. I also had to revise the conclusions. I needed to muster a lot of strength to finish the task. I asked Magdalena if she could help. After sending her the text, she was able to list the key points on her laptop while I searched and replaced them in the body of the subchapter.

I managed to finish the task and send it to Jon Pendleton in time to not have to take my laptop for a three-day trip to Italy with Magdalena. She had admitted that she smoked much less when she was with me and that work stressed her terribly. She had actually told her boss that she would quit after the trip to Italy. I desperately tried to convince her to reconsider and call her boss as soon as possible, as I had done on other occasions over the preceding five months when she had breakdowns. On Saturday, the 21st of September, we took an early-morning flight from El Prat’s new terminal to Milan’s Malpensa airport. It was a smooth flight. A coach bus took us across Milan to its main train station, where I managed to buy a neat remote-controlled toy helicopter for Aldona´s son, Christian. This was added to a bottle of brandy, a box of sweets and another food item. In all, I spent about 108

70 euros on the gifts. We boarded the train to Verona, a two-hour journey during which I read The Economist. I also shared some of my plans, ideas and visions with Magdalena. We were both going on four hours of sleep. The train looked old compared to Spain’s spanking AVE, but it was reasonably cheap. At Verona we took another -- newer -- train to San Bonifacio, 20 km from Verona. Aldona, Magdalena´s high-school friend, lives in San Bonifacio with her Romanian husband and their son Christian. Aldona left Poland after high school and moved to Italy, following in her sister’s footsteps. She met Adrian, and they proceeded to create a company that purchases machines operated in bars that allow children to obtain – or attempt to in some cases – some kind of gift, for example by moving a mechanical arm within a short time period after inserting a coin. They had bought a nice house and drove an Audi. But with the onset of the crisis, business slowed. Aldona had to juggle helping Adrian with the business and taking care of Christian, a cute and adorable child who seemed happy but had trouble falling asleep.

Both Verona and San Bonifacio are located in Italy’s Veneto region. I had already been to Verona once and twice to Venice, located about 60 km. east of San Bonifacio. After deploying the toy helicopter and crashing in on its maiden flight, we ascertained that the street vendor in Milan’s train station had probably sold me used batteries, although I managed to bring down his initial price of 45 to 35 euros. Magdalena ventured that they were probably Chinese.

I was still exhausted but pushed myself to visit Verona with Magdalena. Aldona drove us to the train station, where we unfortunately had to wait for about an hour. When we arrived in Verona, I had to take the lead as we had a map that Aldona had given Magdalena but which was useless in the approaching darkness. I asked some people in the train station about the way to the Corso Porta Nova. We proceeded to the Corso, then visited the Bra square and Verona’s other historical landmarks.

The one-day trip we took two days later was exhausting but very fulfilling. We boarded a train very early in the morning headed west so we could visit the picturesque summer resort of Peschiera di Garda and I could swim in Lago de Garda. We then took another train heading east for the 70 km. trip to Venice. We spent six magnificent hours briskly touring the Serenísima’s dozens of churches, palaces, monasteries on foot via Venice’s streets, squares and labyrinthine alleys. We crossed many bridges over its famous canals, visited the Rialto bridge, and made it to Piazza San Marco in time to visit the square’s giant confines, admire the towering campanile (Barcelona has two in one of its main squares modeled on the Venetian one) visit St. Mark’s Basilica, the Duke’s Palace and take a vaporetto along the Grand Canal back to the central train station in time for us to get back to San Bonifacio at a reasonable time. I thoroughly enjoyed myself, although in my desire to both show as much of Venice to Magdalena as possible and also seek new corners of the Pearl of the Adriatic that I had not seen in my previous visits, I pushed myself very hard. Nonetheless, as Magdalena sat on my lap taking pictures of the palazzos and churches on the banks of the Grand Canal as our vaporetto sailed calmly, I felt we had visited and absorbed as much of Venice as humanly possible in five or six hours.

I will always treasure the memories of the places we visited, the movies we watched, the trips we undertook, the conversations we had, the You Tube videos we shared, our week-ends at the Costa Brava, the wedding in Radymno and so many more that filled my heart with emotion and allowed me to push myself hard in order to carry out the editing work.

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Chapter 10. The U.S. government shutdown of 2013

On Saturday, October 5, 2013, I awoke at ten in the morning. It was a beautiful fall day in the Washington area, although a bit warm for my taste. I was hoping that Eugenia would drop by as she had promised. She had been extremely kind in our initial conversations and had even driven to Dulles Airport to pick me up. I had profusely praised and thanked her. I was very grateful that someone had greeted me upon arrival at Dulles, something that had not happened at any airport in years. The flight from London to Washington had been smooth. We did not have to fasten our seat belts due to turbulence during the entire flight. The first four hours went by reasonably fast. Reading The Economist, eating lunch and about one hour of work on a document for Antonov kept me preoccupied. Yet most airlines still do not have a mechanism to enable you to recharge your laptop’s battery if you fly economy. Virgin Atlantic, which I was flying for the first time in my life, has added many services to its long-haul flights. You can access the Internet and even make phone calls. But neither service is cheap. After my battery’s life was exhausted, I tried to distract myself for the remaining three hours of the flight. After I settled in my living area at Eugenia’s place, I called Keynes and urged him to fly to Washington. I understood that I was asking him to interrupt his international conference tour, but the polarization in the world’s first economy was serious. Keynes is a principled man. He interrupted the tour and flew to Washington. We agreed to meet at the Spanish Jaleo restaurant on 18th Street so I could bring him up to speed on the government shutdown and thus empower him to intervene. I had reserved a table in this wonderful and delicious Spanish restaurant and waited for Keynes. He arrived at 8 pm on the 6th of October. He was obviously tired after the transatlantic flight (he had been delivering conferences in Italy), but was determined to make a difference and ensure that the global economic recovery did not go off the rails.

--Alex, here I am. Flew from Rome to Washington, D.C. What on Earth is happening? The Republicans have shut down the U.S. government and are threatening not to raise the debt ceiling and default on the U.S.’s debt? I thought I had heard of lunatic ideas, this one takes the cake. Tell me more.

-- John, to be fair it is only a part of the Republican Party’s caucus in the House of Representatives. I feel exhausted and disgusted with The Tea Party Republicans. They indeed seem to prefer bringing down the whole U.S. economy than compromising and raising the debt ceiling. The Democrats had maintained spending levels in the proposed budget for fiscal year 2014 they approved in the Senate. The budget actually cut spending because of the so-called sequester, a compromise reached after the last government funding showdown. The deficit has actually been reduced in half since Obama has been in office. The Republican majority in the House rejected the Senate’s draft budget for fiscal 2014, which obviously started on October 1st. Republicans in the House wanted deep cuts in spending and were determined to defund the Affordable Care Act, otherwise known as Obamacare. As no agreement was reached, the government had to shut down non-essential operations on October 1st. -- So, you are telling me that despite the fact that the stimulus helped in 2009, that the Fed has cut rates and implemented quantitative easing and the economy is growing, the Tea Partiers want to cut the national debt and deficit? -- Precisely. They feel that the U.S. government and the Federal Reserve have acted in a way that adds to the U.S.’s debt, which the next generations will be unable to pay back. Unemployment has dipped to 7.3% and the economic recovery is gathering pace. But these individuals with little or no knowledge about international

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economics and finance cannot seem to get over the fact that Obama has been elected twice, that Mitt Romney’s defeat also entailed the electorate’s refusal to repeal and replace Obamacare, and that the legality of the Affordable Care Act had been upheld by the Supreme Court. These people either have minimal knowledge of economics and finance or are on a mission to shut down the government to make life hard for the Obama administration. They used similar tactics since they took control of the House in the 2010 mid- term elections. Obama is right not to budge and enter into negotiations about how to prevent a default in the middle of a shutdown provoked by the Tea Party. The Senate, where Democrats are in the majority, has passed a budget. But the House, where Republicans have a big majority, will not vote on the budget or even a continuing resolution to keep the government operating at current funding levels until a final agreement is reached. There are enough Republican votes in the House to pass a continuing resolution, but Speaker John Boehner, the nominal head of the Republican Party, will not bring it to the floor for a vote. He is a reasonable man but is too afraid of the Tea Party members in his caucus. --Alex, this I madness! And of course Obama cannot give in. It is a matter of principle. The U.S. government, its economy and the global economy should not be held ransom just because a faction of the GOP in the House dislikes the government and Obama. -- Many Republicans wanted to take advantage of the need to pass the 2014 budget and raise the debt ceiling to lambaste the Obama administration over the flawed roll-out of the Affordable Care Act. They were therefore conditioning reopening the government to totally or partly defunding Obamacare. But other, more enlightened Republicans, wanted to use the budget negotiations to address mid-term issues such as entitlement reform or Obama’s reluctance to approve the expansion of the Keystone XL pipeline. Unfortunately for Obama and the Democrats, the breakdown in the budget negotiations between Republicans in the House and Democrats in the Senate coincided with the flawed launching of the Healthcare.gov website, which will enable Americans to shop around for health insurance packages offered by insurers on so-called exchanges and provide subsidies to those unable to afford health insurance at all. -- Alex, if the roll-out of the Healtcare.gov website is such a fiasco, why don’t the Republicans stick to criticizing it and instead shut the government down? --John, the problem is that the flawed roll-out emboldened the most radical Tea Partiers, and there is a freshman Republican Senator from Texas who is setting himself up to run for President and views negotiations and compromise as a political sin. The Tea Party congressmen have allowed the government to shut down because they either want to grandstand for their base or think that it helps them damage Obama’s popularity. Boehner does not want the shutdown, but is again proving that he cannot stand up to the Tea Party. Boehner is the Speaker of the House, the second official in the line of presidential succession after the Vice President. But he does not have the courage to bring the Tea Party into line and bring a clean Continuing Resolution bill to the House floor for a vote that would probably pass and reopen the government. --Alex, what is Boehner’s personality? -- I have never met him. But going by his public appearances, I like Boehner’s personality and admire that he has risen from a humble family to become Speaker of the House. Deep down he is a moderate by today’s standards, and he is almost always kind. Comedians tend to poke fun at him because he has a tendency to cry in public more often than other politicians. He shuns drama and does not pontificate. He might be different in private. I have no clue. So nothing has changed since 2010. The Tea Partiers are still calling the shots in the GOP. Sarah Palin is no longer making headlines. Hence, this new freshman Texas Senator has become the darling of the Tea Party by speaking without interruption for twenty-some hours in the Senate in a childish and futile attempt to draw 111

attention to himself and the supposed need to save America from Obamacare. The moderate GOP leadership had wanted to take on Obama over entitlement reforms, tax reform, deficit-reduction and the Keystone XL pipeline and planned to use the need to have the GOP-controlled House approve a continuing resolution to keep the government open and another to raise the debt ceiling as tools to extract concessions from the White House. Yet this Senator derailed these plans with his antics over Obamacare in the Senate. Other Republicans wanted to use Obamacare against the president as well, but the Tea Party turned it into the only issue. It took more than a week of sniping between Obama and the Democrats on the one hand, and Boehner and the Republicans on the other, to shift the conversation away from defunding Obamacare and back to the bigger issues. Most Americans’ patience was running out by the time some glimmer of hope emerged on October 10th. The President’s approval rating had dropped to 37%. Republicans’ approval ratings had plunged by more than 10 points in a month, those of Democrats 4 points and Congress’s approval rating stood at 5%. Keynes and I arranged to meet at the Filomena Restaurant in Georgetown. Jaleo and Filomena are expensive restaurants, but Keynes appreciated my effort to keep him updated. We met for dinner on October 10th. --So, Alex, is there progress towards passing a continuing resolution and ending the shutdown? --There are plenty of stories in the news about people who are suffering -- families whose deceased veterans’ benefits are not being paid, living handicapped veterans whose benefits are not being paid, sick children whose clinical trials or treatment has been interrupted, people stranded in the Grand Canyon, vendors at national monuments unable to make a living… The negotiations over the government shutdown and the debt ceiling have stalled again. The House Republicans offered a deal whereby the debt ceiling would be raised for a relatively short period of time – six weeks or until January – and did not include reopening the government in their offer. Obama and Senate Majority Leader Harry Reid rejected the offer. House Republicans decided to return to their districts. The Senate approved an increase in the debt ceiling but the Democratic majority could not muster any Republican votes and fell short of the sixty needed to pass. --I cannot believe it. Despite all of the suffering inflicted by the shutdown for ten days, the persons being affected, the Tea Party is not budging? -- Yes, John, we are back to square one. Goldman Sachs warned that U.S. GDP could shrink by 4% in the event of a long shutdown – we are now in day 11 – and/or default, and also estimated the U.S. would lose $75 to 125 billion in financing monthly if the debt ceiling is not raised. The GOP is getting clobbered in the polls, but the Tea Party still seems to be calling the shots. They are not dumb, however. --But how could they not be dumb if Republicans’ poll ratings are plummeting and they insist on families not receiving benefits, veterans not receiving care, patients not undergoing clinical trials, businesses and vendors losing money because the national parks and landmarks are closed? These are everyday people in vulnerable situations, not federal employees being furloughed. --Well, John, you are thinking rationally. I think some Tea Party congressmen come from districts that are very hostile to the federal government and feel their base agrees with them. Their constituents may have never been to Washington, D.C., and cannot appreciate what the federal government does for them because certain TV channels and radio stations brainwash them into thinking that investment (education, transport and energy infrastructure) is wasteful spending and anything the government does is inefficient. Other Tea Party Congressmen may simply not know enough about economics, and some are sitting on the fence to see how things play out in the next days. I know this is very painful, John. You believe in incurring deficits and debt to stimulate demand, stimulus programs, and government assistance for the neediest. The Tea Party is thus the

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antithesis of everything you believe in. Don’t let it get to you. I will introduce you to a good and very smart friend who is a very successful investor and whose company you will enjoy. I picked John up on October 11th and purchased a bottle of Rioja on the way to Don MacShane’s house. I told John some of my favorite George Carlin jokes as I drove on a congested Route 66. The overcast weather cast a pall over the normally picturesque rolling hills on Crest Hill in Fauquier County. The dinner featured Don’s assorted repertoire of jokes, bonhomie, intellectual conversation – on the economy, politics, etc. Chris, Don’s half-nephew, was interning for Senator John McCain and I was eager for him to arrange for me to meet one of my heroes. The dinner was delicious, and John had a good time conversing with Don. I cracked a few self-deprecating jokes, was able to enjoy how John and Don cheerfully debated the merits of free markets, debt, government spending and the shutdown. And we all enjoyed the delicious meal that Pon cooked. On October 13th, Fareed Zakaria had interesting guests on his Sunday-morning show, GPS. They discussed why and how the American political system had become so polarized. Jeffrey Toobin, who had just published a new book, weighed in with insightful analysis as usual. Norm Ornstein, AEI’s token Democratic-leaning analyst, also took part. Jim Rogers, Chairman of Duke Energy, explained that we have the same levels of Co2 emissions as in 1992, with a much larger population. Asked about inequality, Lloyd Blankfein, CEO of Goldman Sachs, pointed out that the flattening of the world has some adverse consequences. He went on to comment that winners take almost all or a lot, and a lot of people and countries cannot keep up with the competition. Most flat- screen televisions are made in Taiwan. Income redistribution is a part of the fix for a part of the problem. You have to make products that world markets want. Dennis O’Brien, Chairman of Digicel, remarked that wages have dropped 20% in Ireland, making Ireland, Portugal and Spain more competitive, and in some regard taking on the quality of an emerging economy. On the same day, October 13th, on NBC’s Meet the Press (my favorite Sunday morning news show), Judy Woodruff, Brian Todd, Harold Ford, Jr. and Kathleen Parker discussed the stalled negotiations over the government shutdown and the raising of the debt ceiling. Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell were negotiating on a bill that would raise the debt ceiling and reopen the government but had not yet struck a deal. There was confidence that a deal could be thrashed out. An NBC poll published on October 12th showed that sixty percent of Americans would vote to replace every member of Congress. Eighty percent of Americans thought the country was headed in the wrong direction. Only during the Great Depression and the Lehman crisis had such a high percentage of the U.S. population been so gloomy. Harold Ford Jr. explained that the U.S. has overtaken Russia in energy production and that the U.S. economy was poised to take off as soon as the impasse in Washington was resolved. According to one expert, the U.S. economy was losing $160 million a day due to the shutdown. Four out of five Nobel laureates employed by the U.S. government were furloughed. Food inspections were not being carried out, despite a salmonella outbreak on the West Coast. And the National Institute of Health had to turn down people who were scheduled to start clinical trials for new treatments. Democrats and mainstream Republicans understood and accepted these facts. But Tea Party Republicans either had no understanding of economics or were ready to inflict substantial and possibly catastrophic damage to the U.S. and global economy in the name of ideological purity and pleasing their government- hating voters. After a breakfast meeting with Joan Rosàs at the Mayflower Hotel on October 14th, I took care of some errands downtown. I then darted to the metro and got off at West Falls Church only to realize there were no buses. Columbus Day meant a free day for all government employees and some private-sector ones as well. Washington was eerily empty. But the sunshine had returned, the temperature was a normal 72 degrees and a 113

compromise over the increase in the debt ceiling and reopening of the government was in sight. Just getting away from the wall-to-wall news coverage on the government shutdown was a relief. As I strolled along K Street to 15th to find a travel agency, I caught a glimpse of the Hilton, where I had managed to give President Obama’s Washington, D.C. campaign head a copy of my book in 2011 at an event which I was able to attend. Keynes and I agreed to meet in a Virginia mall. I was living in Vienna, Virginia, and it also made sense for John to visualize the gigantic malls where some Americans overspend. --Alex, I cannot stand this crazy shutdown any longer. So many people are suffering, and the world economy could plunge into a recession again. --John, it is worse in other countries. The IMF is predicting 25% unemployment for Spain until 201827 and a recovery to pre-crisis GDP per capita by 2021. Six million people in Spain are officially unemployed, out of a total population of 46 million. We have a 59% employment rate (Germany 72%, Netherlands 77%). Seven hundred thousand housing units are still unsold. We have not had a revolution because an entire generation is emigrating, the underground economy allows people to make it to the end of the month and family support tides many people over. It will take six years to clear those 700,000 housing units according to Fitch. And the central government has to face down regional governments’ anger because of budget cuts that hopefully will get us down to a 6.5% deficit by the end of this year. Public debt is almost 90% of GDP, and private and public combined is astronomical. Home prices have dropped 30% and may fall another 20%. Exports have been booming, and investors are returning (financial, in industry, etc.) because of our internal devaluation. But it will be very hard going for several years. On October 15th, 2013, the countdown to the U.S.’s first default since the XVIII century continued. President Obama had creamed the Republicans politically. His poll numbers had diminished, but those of the Republicans had taken a free fall. Obama had stood on principle that no president ever in the future – Democrat or Republican – should allow the U.S. and arguably the world economy to be held hostage and inflict great economic damage over a law that Congress had passed and the Supreme Court had upheld. Since my arrival in Washington on October 3rd, I had had lengthy conversations in fourteen days with, among others: Stephen Eule of the U.S. Chamber of Commerce (the head of its energy unit), Chip Hass of the Alliance for Peacebuilding, Desmond Lachman and Karlyn Bowman at the American Enterprise Institute, Jeremy Shapiro at Brookings, Peter Berkowitz of Stanford/Hoover Institution, and Joan Rosàs of La Caixa, who had been in town for the IMF Annual Meetings. After a very interesting discussion with Desmond Lachman, it was back to watching CNN’s coverage of the government shutdown. Heidi Heitkamp, Democratic freshman Senator from North Dakota, is a real intelligent version of Sarah Palin. She just rolls those ´r´s as people in North Dakota, South Dakota, Minnesota and some other states in the Prairies do. And as Sarah Palin famously does and Tina Fay flawlessly mocked. Tina Fay’s month-long parody of Sarah Palin during the 2008 campaign on Saturday Night Live is one of the most hilarious videos I have watched in the past years. And Tina Fey is a beautiful, funny and great actress in her own right. David Letterman’s interview of Tina Fey is also a must-see. Fay analyzes and mocks with great wit how she prepared for and eventually mastered Palin’s accent. In the most embarrassing passage of Palin’s infamous interview with Katie Couric in the 2008 presidential campaign (Putin rears his head from Russia as foreign-policy experience, could not name any national newspapers, Supreme Court decisions, etc.), Palin

27 This forecast has been proven wrong. Reforms undertaken by the government, sacrifice by Spaniards and a liberalization of the labor market has gradually brought unemployment down to 24% in the second quarter of 2014. There is net job creation in Spain, and investors are convinced the recovery is solid. 114

rambled and Gay did not even have to make up any stuff. She just repeated verbatim what Palin had said on TV! Hence, Heitkamp is the intelligent Sarah Palin. Her interviews on CNN during the last days of the showdown and debt ceiling deadline were an idealist breath of fresh air. She grasps the issues and has a can-do attitude. I just hope it does not get to her head as is the case with new senators. All senators see a potential president when they look in the mirror. Barack Obama made history by becoming the first African-American president. Hillary Clinton could be the first woman elected president of the U.S. in 2016. Cory Booker could someday become the first gay president of the U.S. if he focuses on being a good senator from New Jersey as he promised in his first post-election interview. I had to insert this intellectual humor because we had reached the end of the line. The final countdown. This is it. Down to the wire. We are in the red zone. We are out of time-outs and cannot challenge any calls. These are all National Football League metaphors of what is happening in Washington, D.C. The NFL has been my only source of distraction during the past fourteen days. But I have been doing work during most games and cannot remember the last full game I watched. Possibly the Denver Broncos’ 51-48 defeat of the Dallas Cowboys, which had a sweet ending. America’s team! They are a good team and Tony Romo is one of the all-time great Dallas QBs. Yet I am tired of people who have never been to Texas, let alone Dallas, and passionately support the Cowboys. And now the Redskins will have to change their name! President Obama favors it, Bob Costas (legendary NBC broadcaster is also for it) and the mainstream media has made a legitimate case that Redskin is a slur – as opposed to Chiefs, Indians, Seminoles, etc. They are right. But with the New York Giants at 0-6, that leaves only the Philadelphia Eagles as the team I can support in the NFC East. I like traditions. I have been to Dallas but will never forgive them for crushing my heart when Roger Staubach engineered a 4th quarter 14-point come-from-behind victory to beat the Redskins in the last game of the 1979 regular season and keep them out of the playoffs. I went home that night after watching the game at Roger Solà-Solé’s house and cried. I decided to diversify my emotional sports portfolio and became an Eagles fan. After all, Philadelphia is the city of Brotherly Love and of the Liberty Bell. A city that usually and rightly has an African-American mayor. The biggest city in one of the greatest states, Pennsylvania, which has a little bit of East Coast, Appalachia and Midwest. I always cheer for the underdog when I watch a game. The NFL has parity. I love it. New Orleans lifted the mood of its inhabitants when it won the Super Bowl after Hurricane Katrina. The Packers represent a relatively small city. So does Baltimore. Both the Packers and Baltimore have won Super Bowls. Charlie Dent will vote yes. Despite forty or fifty republicans in the House opposing it, the Senate bill that will FINALLY REOPEN THE GOVERNMENT AND EXTEND THE DEBT CEILING will get enough Republican votes to pass in the House. Just get it done! Congress’ approval rating is at 5%. Seventy-four percent of American are in favor of not re-electing any member of Congress. The Tea Party fanatics should show some intelligence and vote yes. They are in gerrymandered districts. They can persuade their constituents that they could not defund Obamacare but did everything possible to do so, including shutting down the government for sixteen days. If they cannot manage to do so, they are stupid period and deserve to lose their seats. The end of the government shutdown and the raising of the debt ceiling lifted my mood. Victory belongs to those who believe in it the most – and the longest. My victory has been making enough money to buy an apartment or a small townhouse outside of Spain (in a developed country) despite not having a technical university degree and having had to endure mean and extremely demanding bosses. But my failure has been my inability to find a partner that will share my project. If you complain, you will remain. If you praise, you will be raised. I will continue to praise in my writings, knowing that with history the final judge of our deeds, with a good conscience our only sure reward, let us lead

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this land we love, asking for God’s blessing, but knowing that here on Earth, his work must truly be our own28. I will visit Arlington and memorize all of John F. Kennedy’s passages from his 1961 inaugural, knowing that the resting place of the most popular U.S. president in the world lies not far from where mine could end up being. I called Pon on Wednesday, the 23rd of October, to ask how Don was doing. She told me he was still in quite a bit of pain but at least back home after spending two days at the hospital. There has been much bad news around the world in the last few days -- violent storm with deaths in northern Europe, shootings in schools in the U.S., and the row over NSA eavesdropping on the U.S. and some of its closest allies. Alexis de Tocqueville said after one of his famous trips and stays in the US in the XIXth century that Americans have an innate capacity for solidarity. He called it “Habits of the Heart”. U.S. society and Washington, D.C., in particular, is individualistic, dog-eat-dog, and very competitive. Most Americans nonetheless continue to have the sense of solidarity with others that de Tocqueville described. Technically, “Habits of the Heart” is a term de Tocqueville used in “Democracy in America” (which he wrote from 1835 to 1839). He named family life, religious convictions and participation in local politics as helping to form the unique American character. A prime example of such “Habits of the Heart” was Don’s sponsorship of me this year in paying for one month’s rent in Virginia. I really was exhausted after non-stop work for two years. But his offer made me push myself harder. The 50th anniversary of JFK´s assassination was approaching. I had always admired JFK’s courage and idealism. There would be plenty of documentaries, interviews, footage and commentary in the following days and weeks to reflect on the 50th anniversary of Lee Harvey Oswald´s assassination of the most popular U.S. president around the world. JFK had risked his life in the Pacific in World War II, received several medals and ultimately lost his life at a young age because he valiantly led his country into the complicated 1960s. On November 8th, 2013, I arranged for a meeting with Keynes at Panera restaurant in Waldorf, Maryland. Unfortunately, the Philippines had been battered by one of the worst storms in recorded history. A category five typhoon named Haiyan had hit the central and eastern islands of the Philippines. The storm packed sustained winds of over 145 mph with gusts of over 195 mph and generated a wave surge of up to forty to fifty feet in the area of Tacloban City. The eye of the storm had cut a swathe of destruction in the central islands of Cebu and Leyte. All communications with the worst affected areas had been cut and there was no way to ascertain the extent of the damage. Keynes was eager to know what had transpired around the world during his conference tour.

--Alex, I have been busy with my conference tour in the United States. What have I missed in terms of big news?

--John, in terms of developments that affect the world economy and markets, the European Central Bank surprised analysts by cutting its main interest rate yesterday by 250 basis points. This leaves its main refinancing rate at 0.25%. It held the rate it pays on bank deposits at zero and reduced its emergency borrowing rate from to 1%. The ECB Governing Council decided that the low inflation numbers (0.7% in October, far from the ECB’s 2% target) and stalled recovery in the euro zone merited a loosening of monetary policy. The very weak growth numbers coming out of the euro zone’s main economies have convinced the ECB that additional stimulus is necessary. Moreover, it signaled that it was prepared to cut even more if the outlook in the euro zone did not improve.

--I feel vindicated again! And this is the ECB, not the Federal Reserve, which has chosen to boost

28 This is a passage from John F. Kennedy’s inaugural speech, delivered on a cold January day in 1961. 116

demand by cutting rates. Keynesianism is carrying the day with almost all institutions and scholars!

--John, I understand your joy. But you are painting a somewhat exaggerated picture. There are voices within the Federal Reserve’s Federal Open Market Committee that oppose the magnitude of the bond-buying program. About one-quarter of the members in the ECB’s Governing Council, led by Bundesbank President Jens Weidmann, voted against the ECB rate cut. And many scholars are expressing concern that bubbles have been generated in equity and property markets by the ultra-loose monetary and fiscal policy practiced by the U.S., Japan and to a lesser extent Europe.

After the ECB announced its cut, the euro dropped to 1.33. The October jobs report in the U.S. was surprisingly strong, with the creation of 204,000 jobs, a number that also helped to drive the dollar higher. But some of the underlying numbers in the U.S. economy and especially the labor market point to continuing weakness. The employment rate dropped to 62%, which is only three percentage points higher than that of Spain, and contrasts with Germany’s 72% and 77% in the Netherlands. The percentage of underemployed Americans remains high, and the employment rate decrease means more are leaving the labor market. Consumer sentiment in the U.S. as measured by the University of Michigan dropped and inventories are high. Outgoing Federal Reserve Chairman Ben Bernanke and two members of the Fed signaled that the October jobs report was encouraging but in no way enough to warrant a fast reduction in the Fed’s bond-buying program. Experts expect that the Fed will not start scaling back its monthly purchases of $85 billion before March of 2014. --More good news! The Fed will continue to act in a Keynesian way. Maybe they should change the term and call it Keynesian Easing! It has purchased $3 trillion worth of bonds and mortgages since the onset of the crisis.

--I will let you enjoy this nadex of Keynesianism, although you fully know that cutting deficits and debt in Europe and the U.S. is necessary and that we are postponing the day of reckoning in terms of cuts in spending and tax increases. In other matters, Secretary of State John Kerry stunned many by voicing his doubt that Lee Harvey Oswald acted alone and received no inspiration when he assassinated JFK on November 22nd, 1963, in Dallas. Philip Shenon, who had just published a book titled “A Cruel and Shocking Act”, pointed out that Oswald had been dealing with the Soviet and Cuban embassies only seven weeks before he shot Kennedy in Dallas. Oswald had also openly boasted about his intention to assassinate JFK in Mexico City. Douglas Brinkley, a professor of History at Rice University, remarked that President Johnson remained convinced that there had been a Soviet or Cuban connection to his dying day. People have known these facts for decades. Brinkley asserted that seventy to eighty percent of scholars still conclude that Oswald acted alone and there was no conspiracy. Both agreed that the fact that the Warren Commission had failed to properly investigate many leads makes it difficult to reach a definitive conclusion. They suggested that documents in Russian and Belarussian archives could provide new information. President Johnson and the Warren Commission, in the context of the Cold War, had wanted to avoid an inflammatory report that would stoke tensions with the Soviets.

On Tuesday, November 26, 2013, Keynes and I arranged to meet in Baltimore. The city still evoked many fond memories for me. The only baseball game I have ever attended was in the old Orioles ballpark. I had returned to Baltimore many times over the years. The city´s remarkable comeback after decades of post-industrial decline was poignant, especially as it is the biggest city in the state that is closest to my heart – Maryland. The city had once hummed with factories, shipyards and a busy port. But by the late seventies, the smokestack industries had closed and left a sad landscape of run-down shacks, empty buildings and a high crime rate. The city still possessed an array of historic landmarks, and one has remained on my mind all my life. Old Saint

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Paul´s church, where the Desiderata was supposedly located. For years, I -- and many -- had wanted to believe that it was an apocryphal text from the Middle Ages. It seemed too good to be true. A compendium of wisdom whose validity had held up for centuries. In reality, Max Ehrmann wrote the Desiderata in 1923. My mother has a copy framed in her apartment. St. Paul’s church does contain a tablet with the text, even if the church outdates the Desiderata by many centuries. I had tried to visit the church on several occasions. On one occasion, shortly before dusk, a kind employee had advised me to head to safer neighborhoods. In the nineties, Baltimore began a slow but determined comeback. The entire waterfront area was renovated and offered visitors a dizzying choice of malls, restaurants, bars, shops and a first-class aquarium. I had had lunch by myself at a Hard Rock café on the waterfront once. The Washington, D.C., to Baltimore train connection out of Union Station is efficient and allows for transatlantic and U.S. flight combinations. The city that produced Wallys Simpson, who married the only Englishman to renounce a crown, is blossoming. It regained a successful NFL team with the Ravens, who won the Super Bowl in January of 2013. Keynes and I next met at a restaurant near Old Saint Paul’s church. I was close to achieving a small and downsized version of the American dream. Bess, a nice car, and a 3-bedroom apartment. I was eager to tell Keynes about it and emphasize that saving had been a big part of the reason. --I have to continue to save and spend moderately. You have to cherish the American dream. But also respect it.

As we start the year 2014, I should feel grateful and happy that I have achieved a scaled-down version of the American dream. I have a three-bedroom condominium, a 2013 Honda Civic, many gadgets in the condominium and money in the bank. But I thought I had found a partner to share my American dream with. It turns out that Bess did not love me. Today, New Year’s Eve, I managed to repair the shredder, get a haircut, buy soap at Safeway, two lamps at Walmart, obtain a provisional parking permit from the Brookside office and run other errands. I drove to Waldorf to speak to Bert, the boss of the Honda dealership where I bought the Civic. A kind employee fixed the Bluetooth device in the Civic. I am grateful that I have an apartment in Washington (Oxon Hill is technically in Maryland, but very close to Washington, D.C.), that I am healthy and have friends. After I got home this evening, the 31st of December of 2013, I watched Anderson Cooper and Kathy Griffin usher in the New Year as part of CNN’s special coverage from Times Square and other locations around the United States and the world. I was still shocked and depressed to have been abandoned in an almost empty apartment. Kathy Griffin actually handcuffed herself to Anderson Cooper and was hilarious as usual. Anderson Cooper was very gracious in absorbing the verbal blows that Kathy Griffin inflicted on him during three hours. Of course, if I made what Anderson Cooper makes and had 5 million followers on Twitter, I would also gladly accept being ridiculed on national television! At any rate, watching Anderson and Kathy’s performance was the only company I head on New Year’s Eve. This year will mark the 70th anniversary of the Normandy landings, Operation Market Garden, the battle of Arnhem and the Warsaw uprising. Scotland will hold a referendum on independence in September and Catalonia’s government is determined to do the same on the 9th of November. There will be elections for the presidency of Brazil, Colombia, Afghanistan and Indonesia, legislative elections in India, elections to the European Parliament, and the World Cup will be held in Brazil, in addition to the Winter Olympics in Sochi, Russia. John Keynes honored me with a visit to my recently purchased apartment in late January of 2014. He had attended the World Economic Forum in Davos and was in town to advise President Obama’s economic team. I was thrilled to be able to see Keynes, and especially to show him the apartment. It is the culmination of many 118

hard years of work, saving and wise investments. It is a modest condominium, and it is the first property I have ever owned. --So, Alex, what is happening around the world? I was too caught up with meetings and participation in panels at the WEF and could not watch the news?

--Well, lately I had tuned out as well. I have become accustomed to watching the American CNN, which does not carry as much international news, and I have been unable to purchase The Economist for a few weeks.

--The Middle East and North Africa are descending into an Arab Winter. Egypt’s military has overdone their crackdown of the Muslim Brotherhood, imprisoning thousands of its leading members. Jihaddists attack police and military compounds in the Sinai and the Brotherhoods’ supporters continue to mount protests which often end violently. Twenty-nine were killed on the third anniversary of the toppling of Hosni Mubarak. The military government submitted a referendum to the Egyptian people that lays out a roadmap for a return to democratic rule with presidential and parliamentary elections later this year. I was happy to see Morsi’s overthrow, but cannot understand why Abdel Fattah Al-Sisi (who is in charge of the military government) and his fellow officers need to crack down so harshly on all forms of dissent – including on liberals or others who are not part of the Brotherhood. But Egypt is an oasis of calm compared to Iraq, which is fast descending into a level of violence not seen since the US-led surge in 2008 stopped the brewing civil war of 2006-2008. That surge was accompanied by the Sunni awakening that jointly defeated Al-Qaeda, which was massacring Shias and thus stoking and endless cycle of Shia-Sunni reprisals that threatened to plunge the country into all-out civil war. The surge worked, Al- Qaeda was defeated and it seemed that the U.S. and its allies could withdraw from Iraq and leave a reasonably stable young democracy behind. Two major factors have rekindled the violence in Iraq. Firstly, Shia Prime Minister Nuri Al-Maliki has done everything possible to alienate Sunnis. He has expelled them from his cabinet, tried to jail them and allowed Iran to gain increasing influence in Iraq. This has drawn in extremist Sunni groups, some of which are also fighting against Bashar al-Assad’s regime in neighboring Syria. Anbar province and other regions with significant Sunni population are again witnessing almost daily attacks. Sunni extremist groups and ISIS target Shias, in the same way they did in 2006-2008. It did not help matters that the Obama administration caved in and did not maintain a contingent of U.S. forces in Iraq under a so-called Status of Forces Agreement. The U.S. obviously cannot indefinitely keep Sunnis and Shias from slaughtering each other, but a contingent of U.S. forces could have prevented the renewed escalation. Thousands of soldiers from the U.S. and other countries lost their lives, as did hundreds of thousands of Iraqis, in trying to bring about a democratic and stable Iraq. Billions of dollars were spent. I thought and wrote at the time that the U.S. invasion of Iraq in 2003 was a war of choice. I opposed it. But, after so many lives were lost, a hasty withdrawal was a big mistake. The civil war in Syria has claimed more than 130,000 lives. Evidence of war crimes committed by al-Assad´s forces has surfaced. His regime starves and tortures prisoners to death. On the battlefield, the Saudi and Qatari-funded Sunni rebels (unfortunately of the jihadi kind) hold their own against Assad’s forces, but have been unable to wrest control of any sizable chunks of territory from them in some time. The anti-Assad forces are divided and even battle each other. Russia (with military equipment), and Iran and Hezbollah (with foot soldiers) have bolstered Assad’s position. The removal of the chemical weapons does appear to be taking place, but at a very slow pace. The Obama administration continues to hope that the diplomatic track –

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negotiations in Geneva between the regime and the opposition – will yield results. Most observers are skeptical. We are witnessing a regional competition for power in the Middle East. Saudi Arabia, Qatar, Jordan, Egypt and other Sunni countries are extremely worried about Iran’s expanding influence (and its nuclear program, the subject of renewed negotiations) and that of Shias in the shape of the regime in Iraq and Hezbollah in Lebanon. The U.S. and Secretary of State John Kerry, who is doing a great job under the circumstances, wants to bring peace to the region. He finds himself closely aligned to the Sunni powers – who nonetheless were outraged by Obama’s refusal to follow through on his promise to bomb Syrian armed forces after they crossed the red line and employed chemical weapons against the opposition and civilians. The transition in Libya is also messy and continues to feature violence. Tunisia is really the only Arab country whose spring 2011 revolution has produced a sustained peaceful and democratic transition.

--What a mess. I prefer to focus on economics.

--Yes, let me lay out for you in detail the main challenges that countries face moving forward if they want to remain or become economic powerhouses. I call the four challenges the TIDE challenges – Technology, Inequality, Demographics and Energy.

There is no question that the BRICS-as-giants-factories of the world economy model is slowing down and could even morph into something altogether different. India’s growth rate has plummeted in the past years. Its manufacturing sector has grown at a much slower pace. Dysfunctional politics, the difficulty of governance in the world’s biggest democracy, corruption, red tape, lack of competition in many sectors, sectarian divides and insufficient investments in education, health care and infrastructure are some of the main reasons that explain India’s poor performance. All hopes are now pinned on Narendra Modi, the Head of the Bharatiya Janata Party and India’s new prime minister. His party has an absolute majority in Parliament and a mandate to transform and modernize its economy. Modi successfully turned the state of Gujarat into an engine of growth and innovation as its governor. Replicating this feat for all of India will be much more daunting. Japan’s ageing problem is worse than some thought. Japan’s National Institute of Population and Social Security Research projects that between 2000 and 2050, the population will have shrunk by a third, from 127 million to a little under 100 million. By 2050, the number of Japanese over 65 will be approximately 40 million, while those of working age (15-65) will only number about 50 million. Women’s fertility rate stands at 1.41, and only 2% of Japan’s population is of foreign origin. The government of Shinzo Abe recognizes the problem, but may not necessarily adopt measures to reverse the trend. It may spend more on child care and fund programs that encourage women to join the labor market. Yet Japan’s corporate culture still frowns on women working in certain sectors. The government released a report in February 2014 with the recommendation that Japan take in 200,000 new permanent immigrants per year beginning in 2015. Yet an ingrained suspicion of foreign workers and their non-Japanese habits will make it difficult to reach this target. As we head into 2014 and I wish everyone a Happy New Year, whether by email, old mail or just verbally, I must begin to terminate this manuscript. Luckily, the cold temperatures have not been accompanied by the white stuff in Washington, D.C., after New Year’s. I am fine with cold, as long as it is sunny. It was cold but balmy compared to Minnesota when I went to the Pentagon City mall in early January. After exiting the mall and as I pathetically lost my way several times on the Virginia side of the Potomac trying to get to Georgetown, I reflected on how empty the streets were. Pentagon City, Alexandria, Rosslyn, Arlington, Fairfax and other towns in Virginia west of Washington, D.C., rarely ever feature crowds of people – with the possible exception of July 4th. They house many administrative, governmental and business offices 120

and only their downtowns usually have people strolling around. Nonetheless, as I circled trying to cross Key Bridge and access the Washington, D.C., Department of Motor Vehicles in Georgetown, I felt locked in my car. I wanted to enjoy the beautiful sunshine amidst the sprawling memorials and lawns of the Iwo Jima Memorial or Arlington National Cemetery. I do not mind the cold at all. Yet there was hardly anyone walking around because most people are obviously at work. But even those who are not working for any reason (retired, unemployed, in-between jobs, out of the labor market) or are taking their lunch break prefer to be in the glitzy Pentagon City malls than outdoors. I actually prefer outdoors, even on a very cold day. The mall is certainly warmer, and includes an endless array of great stores with every conceivable product. I admit I would like to have many of them. On February 4th, I had lengthy email exchanges with Don MacShane. Don has been a good friend for over 13 years and had recently returned from a long stay in Asia. His wife Pon is from Thailand. They now live in Marshall, Virginia. They are both workaholics, and in the years I have known them they have purchased nice homes (in Warrenton, Virginia and Escazú, Costa Rica), enjoyed them, improved them with the help of architects, and sold them. I admire how hard they both work to keep the house and property in a pristine condition – meaning the gardens look like those of a European palace and the house is so clean, organized and uncluttered. Pon puts in many hours taking care of the gardens, and like Don has a great amount of energy. If Obama could behave more like Bill Clinton and ignore his base and Boehner could ignore the Tea Party, immigration reform, tax reform, public-private partnerships in infrastructure, and a grand bargain on debt and entitlement reform could all be done until he leaves office in January of 2017. If the Republicans take over the Senate in 2014, they are very unlikely to compromise on the major issues – tax reform, immigration reform, investing in infrastructure, entitlement reform – because they will not want to hand Hillary Clinton -- the presumptive Democratic nominee for President in 2016 – any major accomplishment of what they might portray as a third Obama term (a Hillary Clinton presidency). Although Hillary is to the right of Obama and will face opposition in the Democratic primaries only to her left (Bernie Sanders, Elizabeth Warren, Martin O’Malley), Hillary’s views coincide with those of moderate Republicans on foreign policy (more robust) and some value issues (gun control). Although foreign policy will certainly play a role in the 2016 presidential, the U.S. will not be engaged in a major war. It is thus economic issues, and especially the middle class’s difficulties, that will decide the 2016 elections. In any event, the best way to break gridlock is to institute term limits for senators and congressmen. Term limits are necessary for members of Congress. Divided government does not work. I like Obama personally, but he seems to have given up because Republicans are not willing to compromise on any issue and are focused on taking back the Senate in November of 2014. The controversies over Benghazi, the IRS, the failed rollout of Obamacare website, the increasing numbers whose health-insurance providers are dropping them from their plans because of Obamacare’s requirements, the NSA flap, and questionable deals with Syria and Iran have hurt not just his ability to get things done but peoples’ perception of him. The U.S. has such a high corporate tax rate and is one of the few countries where the tax system is not territorial, so multinationals pay taxes overseas. A lower corporate tax rate, eliminating a lot of deductions (interest on mortgages, buying private jets, college for kids, donations) and have two rates for income tax. It is not rocket science! New York is giving new businesses tax-free zones! What about the ones that are already there! The U.S. tax system is becoming feudalized! But moderate Democrats and moderate Republicans are disappearing. People want successful governors or businessmen, not establishment politicians. --Any news regarding banks found guilty of deceiving their customers?

--Yes, John, good news for you on that front. Credit Suisse pleaded guilty to a criminal charge on May 19, 121

2014, for helping Americans dodge taxes. It will pay a fine of $2.5 billion. This is a landmark settlement and admission of guilt by a leading multinational bank that it facilitated tax evasion. The battle against tax evasion and tax havens is far from won. But this is an important victory.

U.S. prosecutors had charged Credit Suisse of deceiving U.S. tax authorities by hiding their customers’ deposits in illegal and undeclared bank accounts during decades. Credit Suisse will pay financial penalties to the U.S. Department of Justice, the Internal Revenue Service, the Federal Reserve and the New York State Department of Financial Services to settle the charges. It had already paid $200 million to the Securities and Exchange Commission. --This is just one Swiss bank being fined.

--John, there is more. In July of 2013, UBS agreed to pay $885 million in a settlement to a U.S. regulator. UBS had been accused of misrepresenting mortgage-backed bonds, which resulted in other banks paying billions for them.

The FBI and the Securities and Exchange Commission are investigating possible insider trading by billionaire investor Carl Icahn, golfer Phil Mickelson and Las Vegas gambler William Walters. Investigators are examining whether Mickelson and Walters may have traded illegally with private information received by Icahn about his investments in public corporations. Federal prosecutors in New York are carrying out the inquiry with the FBI and the SEC. Since August 2009, Manhattan U.S. Attorney Preet Bharara’s office has convicted a record 81 people of insider trading, either at trial or via guilty pleas, with no acquittals. And regulators in your country, John, are also active. Barclays Plc has been fined 26 million pounds ($43.8 million) for failures in internal controls that allowed a trader to manipulate the setting of gold prices, just a day after the bank was fined for rigging Libor interest rates in 2012. --Well, Alex, a few banks may have to pay fines. But these are slaps on the wrist. They will continue to gamble with their depositors’ money and develop sophisticated financial products that allow them to speculate.

--I am not so sure. The Obama administration – specifically the Department of Justice under Attorney General Eric Holder Jr.— has been forceful in investigating and indicting banks and bankers for their practices during the subprime crisis. The credit rating agencies have had to pay fines for not awarding correct ratings to many products. UBS, Credit Suisse, Barclays, and Carl Icahn are just the latest examples of banks or investors that have paid a price for their illegal or shady practices.

--Yes, Alex, but Obama is a Democrat and his administration (especially the Justice Department) has been zealous in cleaning up the financial sector and punishing banks that peddled toxic assets. The next U.S. administration will not be as thorough in ensuring financial institutions are held accountable for their unethical practices.

--We shall see. I think a Democrat – in all likelihood Hillary Clinton – will occupy the White House in 2017. I agree that Obama has been a driving force in making banks pay for their illegal practices, but prosecutors have also played a role. The new Governor of the Bank of England, Mark Carney, has added his voice to the chorus of leading establishment policymakers criticizing growing equality. Christine Lagarde, Managing Director of the IMF, told me she is worried about inequality when I handed her a copy of my book on Ethical Capitalism. She and many politicians and economists attended a conference in London in May of 2013 on 122

inclusive Capitalism.

--Well, Alex, the developments you mention are taking place because growth is sluggish and politicians have to make gestures to placate public opinion given high unemployment, stagnant wages and growing inequality. As soon as growth picks up, it will be back to business as usual. The IMF and the ECB have warned that property bubbles are developing again in several European countries, notably the United Kingdom, Sweden, Norway, Finland, France, and Belgium. Interest rates are at all-time lows and not enough housing units are being built, especially in those countries’ capitals.

--You are absolutely correct, John. But the Great Recession has had a brutal impact. I think people over 30 will not forget in their lifetimes how housing bubbles and financial engineering wiped out part of their savings and destroyed jobs. I do not think these people will repeat the mistake of taking out loans that they cannot possibly repay. Maybe people in their 20s who will not have any recollection of the Great Recession will behave differently. There is evidence to support this thesis. Deleveraging by households in the U.S. has been substantial. Americans traditionally owed more than Europeans. Currently, however, U.S. households’ level of debt as a ratio of after-tax income has diminished to 105%, whereas for euro zone households the ratio has climbed to 110%. Central bankers and governments need to continue to implement measures that curb excessive mortgage lending, but do spur lending to businesses. The key for policymakers is to foster lending that promotes investment, as opposed to speculation. The Netherlands has done so with success.29

You should be very happy about the ECB Governing Council’s decisions, adopted on June 5, 2014, to inject more liquidity into the financial system. The ECB announced it was cutting its benchmark lending rate to banks from 0.25% to 0.1%. Moreover, it will now charge banks an interest rate on funds they park with the ECB, thus providing an incentive for them to lend to businesses and individuals. In addition, the ECB announced that it was ready to inject 400 billion euros over the next four years to banks at a low interest under the condition that they lend it to SMEs. This program is a variation of the LTROs adopted in late 2011 and early 2012. In this case, however, the banks will have to commit to lending, otherwise they will not receive the funding. This is necessary to prevent the banks from borrowing from the ECB and simply investing the funds in higher-yielding assets, which is what they did with the LTRO loans. The conditionality is the key to the success of the new program, called TLTRO. Of the 400 billion euros, 155 billion will be earmarked for banks in the peripheral euro zone countries (Greece, Ireland, Italy, Portugal and Spain). Spanish banks should receive 54 billion euros and Italian ones 75 billion. Analysts were quite positive after the announcement. Even the Anglo-Saxon press greeted the raft of measures and predicted that companies’ financing costs in the peripherals would drop. John, with the ECB’s package of measures, we can assert that everyone in the world except Germany’s leadership and the Bundesbank has adopted Keynesianism. The ECB was one of the few holdouts. Now it has embraced Keynesianism with this range of measures. This year also marks the seventieth anniversary of the Bretton Woods conference, where leading powers negotiated the institutional architecture of the post-World War II era, and specifically the creation of the International Monetary Fund and the World Bank. You were present at Bretton Woods as the United Kingdom’s representative. You passionately advocated that the IMF behave like a bank for the neediest countries, in effect lending to struggling economies in order to increase demand. You wanted the IMF’s resources to be allocated on the basis of need.

29 “Popping property bubbles: Choosing the right pin”. The Economist. August 30, 2014, p. 123

--Exactly. And what happened? The U.S. turned it into an institution it can always control because it holds 17% of the voting power, and major decisions such as accepting a new member, increasing the IMF’s capital or its Articles of Agreement cannot be adopted if the U.S. opposes them. The 17% voting share gives the U.S. a veto right over these decisions. --You are right. But many important decisions are decided by a simple majority and cannot be vetoed by the U.S. Whether to approve funding for a project requires a simple majority, for example. And emerging countries have been given bigger voting power in the past years to reflect their increased role in the international economy. During Bob Zoellick’s tenure as president, a realignment of voting power was carried out. China became the IMF’s second shareholder, leaving Japan in third place. It is true that those countries that have a bigger share of trade have more votes at the IMF, but it is equally true that the U.S. no longer dominates the IMF the way it once did. And at the Inter-American Development Bank, which operates in Latin America and the Caribbean, the countries of operations have more than 50% of the voting power. You should thus feel completely vindicated. Your triumph is complete! --Well, Alex, I appreciate what you are saying, but what guarantee is there that the banks will actually lend the funds provided by the ECB and not simply use them for a carry trade?

--Yes, there is a risk that will happen. The ECB’s funding for lending needs conditionality. The devil will be in the details, as usual. But analysts are optimistic. The U.S., Japan and many other leading economies are growing at a faster rate. Keynesianism has carried the day. And it has worked in getting the world economy out of the Great Recession.

--John, you will be extremely pleased to hear that Mario Dragui, the president of the European Central Bank, has forcefully urged northern European countries to implement expansive fiscal policies. In essence, Dragui is conveying to Germany (and the Bundesbank), the Netherlands, Finland and other austerity hawks that the ECB has done everything within its powers to revive demand.

--He is right. It has lowered interest rates to historic lows, is now charging banks to deposit their funds with the ECB, lent 1 trillion euros to banks through the LTROs in late 2011 and 2012 (which basically used the money to purchase higher-yielding bonds from peripherals) and designed the OMT program in the second half of 2012 to purchase additional bonds from struggling peripherals.

--Right. And do not forget the ECB’s announcement of an additional package of 400 billion euros in lending to banks provided that they using the funding to extend credit to businesses and families.

--So why did Dragui speak out so forcefully at the Jackson Hole meeting of central bankers?

--John, the ECB has been taking a lot of heat and is under constant pressure to do even more. Second-quarter GDP, manufacturing and employment data in most euro zone countries was very weak. Inflation in the euro zone has dropped to 4%, far below the ECB’s target of an inflation rate of “close to but below” 2%. If deflation sets it, governments, businesses and households’ debts will increase in real terms. In stark contrast to the U.S and the United Kingdom, which are growing and creating jobs, the main euro zone economies are stagnant. Output in the euro zone has not recovered to its 2011 level, whereas the U.S., the United Kingdom and even Japan have surpassed them. The Anglo-Saxon press and their policymakers are urging Dragui and the ECB to adopt quantitative easing, as it has worked in the U.S., United Kingdom and to a lesser extent Japan.

--The ECB should therefore insist that it will not raise interest rates in the foreseeable future and purchase 124

massive amounts of government bonds.

--Yes, John, that is what The Economist and others are calling on the ECB to do. But remember that the German Bundesbank is strongly opposed to QE. Even if the Bundesbank were to change its mind, which is very unlikely, there would be challenges before Germany’s Constitutional Court about the legality of the ECB directly purchasing government bonds. According to a strict interpretation of the ECB’s mandate, the ECB cannot directly buy government bonds. So it is ultimately Karlsruhe (the city where Germany’s Constitutional Court is located) that has just as much a say on the ECB’s policies as the Bundesbank, located in Frankfurt.

--So what can Dragui do?

--He can continue to urge European leaders to adopt expansionary fiscal policies. He is correct in pointing out that a three-pronged approach is necessary to revive the stagnant euro zone. Monetary policy is part of the three-legged stool. The ECB has done as much as it can legally do to ease monetary policy.

--That is not correct. It could adopt QE and forget about the Bundesbank’s threats. Inflation in the euro zone came in at 0.3% in the second quarter, the lowest figure since 2009. Give me a Keynesian break!

--Well, Dragui hinted at Jackson Hole that the ECB could adopt QE. At any rate, the second leg of the stool is an expansionary fiscal policy. Germany has a budget surplus and it making noises about funding public-private partnerships to invest in infrastructure. Dragui has called for a sizeable public investment program. Jean- Claude Juncker, the incoming president of the European Commission, has mooted a 300 billion euro public and private investment plan.

--But, Alex, we have been through this since 2008. It sounds like a broken record. I am ready to knock my Keynesian head against the wall. What happened to the European Investment Bank’s project bonds? What about the EU budget’s funds to stimulate demand by funding R&D, training and energy efficiency? And the Growth Pact agreed upon by EU leaders at their summit in June 2012 that would implement precisely such fiscal policies?

--John, you are right. You have to understand that German opposition to QE is fierce. Merkel and Finance Minister Schäuble are not opposed to these investment programs in principle. Yet they are wary about adopting them because they fear France and Italy will renege on their commitments to lower their budget deficits and adopt structural reforms, which are the third leg of the stool. It is true that Spain and Italy to a lesser extent have carried out these painful structural reforms (liberalized their labor markets, cut red tape hobbling businesses, increased competition in the product and services markets, etc.), but France has not. It now finally has a government headed by someone – Manuel Valls – willing and determined to take on vested interests and liberalize its economy. Valls has asserted that France has been living beyond its means for forty years. Merkel, Schäuble and the Bundesbank fear that big investment packages will result in France and Italy backsliding in their commitment to implement such reforms and reduce their budget deficits.

--Alex, I am exasperated. Millions are unemployed across the euro zone and sinking into poverty. To hell with what the Bundesbank thinks! Just adopt QE. If someone challenges it before the German Constitutional Court, and Karlsruhe rules against QE, there will be riots in Europe!

And what about the International Monetary Fund?

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--John, Olivier Blanchard (the IMF’s Chief Economist) and Managing Director Christine Lagarde have embraced Keynesianism. Lagarde often talks about the need to address inequality, has backed stimulus packages and a softening of austerity. When I gave her a copy of my book about Ethical Capitalism at a grocery store in downtown Washington, she expressed interest and added that she would be attending the conference on Inclusive Capitalism in London.

Moreover, the IMF is working on a plan that will make it easier for countries to restructure their debt and avoid default. And in 2010, the Obama administration enacted a sweeping law, known as FATCA, which will deal a severe blow to tax havens and the banks that protect tax cheats. Under FATCA, foreign banks (whether in Switzerland or in the Bahamas) will be forced to either turn over information on what are described as U.S. persons (basically U.S. citizens or residents) or to transfer 30% of the funds they receive from the U.S. back to the Internal Revenue Service. Foreign banks will not be able to get around FATCA (Foreign Account Tax Compliance Act). The proof is that more than 77,000 financial institutions have already signed up to comply with FATCA. And 80 countries have signed agreements with the U.S. allowing their financial institutions to furnish information to the IRS. Approximately 7 million U.S. citizens live outside of the U.S. They will have to fill out additional forms with their banks, but will not pay taxes twice as there are treaties that avoid double taxation. Transparency campaigners regard FATCA as the most comprehensive piece of legislation in the international struggle against tax evasion. The usual suspects are complaining about the high cost of compliance and predicting that many Americans will give up their citizenship or Green Cards (2,999 did so in 2013), but it is all hyperbole. Banks will complain because it forces them to work harder. But we just cannot afford in the post 9- 11 world to have banks laundering or holding funds for terrorists or other criminals. Analysts expect FATCA to rake in $800 a year for the Internal Revenue Service. --The tax evaders will find a way around FATCA.

--That is the reason why the OECD is working on a system whereby countries will automatically exchange financial information annually. Fifty countries have signed up for the scheme, including China, India, Brazil and most European powers. Most big banks also back the OECD plan. It differs from FATCA in that the exchange of information will be based on a person’s residence, not citizenship.

--John, I also want to tell you about the latest examples of financial institutions that the Obama administration has imposed fines on. The list reads like a Who is Who of international finance. In late June of 2014, U.S. authorities announced they had imposed a fine of $9 billion on BNP Paribas for evading U.S. sanctions on doing business with Iran, Sudan and Cuba. The French bank pleaded guilty to conspiracy and falsifying records, and will not be able to clear certain dollar transactions. Between 2002 and 2012, BNP Paribas hid $190 billion in transactions denominated in dollars with Sudan, Iran and Cuba. It eliminated information from documents that would have revealed the nature of the transactions and sent payments through a network of banks to disguise its operations with the aforementioned countries. The International Criminal Court has indicted Sudan’s president for war crimes and genocide in his brutal repression of the population of Darfur. Several Western countries also applied sanctions on Iran to force it to halt its supposed development of nuclear weapons.

--But what gives the U.S. the legal right to prosecute BNP Paribas, a French bank?

--The fact that the transactions were denominated in dollars. They therefore had to pass through New York

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and hence fall under its regulatory authority. Several emails reveal that executives at BNP Paribas knowingly approved and knew that the bank was executing transactions with Arab banks in order to get around the sanctions on Sudan.

The Obama administration and federal and state prosecutors have gone after many big U.S. banks and imposed substantial fines on them for their roles in developing and selling toxic mortgage-backed securities (MBS) and foreclosing properties without due diligence. JP Morgan Chase paid a fine of $13 billion in October of 2013, Bank of America paid a $11.6 billion fine in January of 2013 for its role in mortgage repurchases, another one to the tune of $11.8 billion in February of 2012 for its foreclosure practices and a third one of $9.3 billion in March of 2014 for peddling MBS. That is a combined fine of $32.7 billion!30 Who can claim that the banks have not paid a steep price for their actions related to the subprime bubble! Credit Suisse settled with U.S. authorities and paid $2.6 billion for assisting its clients evade taxes. U.S. regulators will continue to bring charges against financial institutions that violated the law.

Wells Fargo, for its part, paid a $5.3 billion fine for its foreclosure practices, and JP Morgan Chase paid an additional combined $10.4 billion in fines for its foreclosures and mortgage repurchases. The ten biggest settlements of banks with U.S. authorities since 2012 amount to $75.8 billion. The anti-globalization and anti- establishment rabble-rousers cannot claim that governments have allowed banks to get away with their illegal practices, which were a key cause of the crisis.

The Economist, which compiled the aforementioned data on fines and settlements, questions the proportionality of the fines. I wholeheartedly disagree. The design and marketing of toxic assets such as mortgage-backed securities, the abetting of tax evasion, the illegal procedures banks employed to foreclose homes and the violation of sanctions against regimes such as Iran and Sudan are extremely serious offenses. Moreover, the banks that undertook these actions did so in a big way. The magnitude also counts. Making banks pay for their illegal activities is essential if the public is to regain confidence in its politicians and financial system. The Economist also raises the objection that the U.S. government and state prosecutors in New York should not use the international financial system and the dollar’s dominant role to pursue foreign policy. This is in reference to the BNP Paribas case only, as it violated U.S. sanctions. The other banks, most of which are American, violated the law period.

I do not have a magic formula of how people can strike the right work-life balance, save, invest and make their dreams come true. I do have some advice on how to achieve “the American Dream”, that I leave you with in the form of a list of recommendations in the following chapter. They explain how to make the American dream work for you, wherever you may want to pursue it, how to right-size it.

30 At the time of writing, it was reported that Bank of America would pay an additional $17 billion to resolve claims related to the sale of mortgage-backed securities that ultimately defaulted. This fine amounts to 10% of the bank’s market capitalization. These activities were mostly undertaken by Countrywide, a bank that Bank of America purchased in 2008. See “Bank Settlements: Goodbye to all that”. The Economist. August 23rd, 2014, p. 68. 127

Chapter 11. Final Thoughts on how to Right-Size the American Dream

After the discussion with Keynes and before VIPs provide very valuable input and ideas in the last chapters, I leave you with my list of recommendations for right-sizing the American Dream. All those who already have attained it or are not stressed in maintaining it do not need to read the list unless it piques their curiosity. 1. Buy a place to live in that you can afford. Avoid taking out a loan. If necessary, pay off the loan as soon as possible. It is not that complicated. It is not rocket science. Live within your means. Less is more. Keep things simple. Enjoy a smaller home or a condominium. It is less work. It generates fewer problems, bills, repairs, and need to maintain and clean things. If you can afford the house, buy it! However, if you cannot make a substantial down payment on your loan and/or have a secure job to pay off the rest, buy something smaller. Alternatively, rent until you have saved. You will avoid endless mortgage payments and a lot of stress. 2. Do not buy more objects than you need. I follow a simple rule of thumb. If I do not know how to operate and use all of the devices and gadgets I already own, I do not buy new ones. No matter how appealing and useful the new ones might appear on television or in stores. It is a matter of mental discipline. Learn to use what you have before you get more stuff that piles up in your house or condominium, requiring you to acquire a bigger place for your stuff – George Carlin dixit. 3. Do not buy anything you think you need if you cannot afford to pay it entirely and if you still have similar products, devices or gadgets that you have not fully installed or you are not employing to the highest degree of their capacity or memory. 4. Buy products and services that enhance and increase your ability to work, interact, exercise, stay in shape and stay healthy. These products and services are investments. Books, language courses, exercise equipment, computers, tablets, and smartphones are examples of investments. But do not get a new one if you already have one. A new one means more expenses, installing software, compatibility issues, empty boxes, and reading more manuals. Follow the 1-1-1 rule. One laptop. One tablet. One smartphone. Keep it simple. If you want, add a desktop computer. All other products are mere objects, stuff, things, gadgets, gizmos, material possessions (Carlin dixit). They are bound to take up space and gather dust. You wind up having stuff that prevents you from finding the things in your home that you really need, unless you are extremely organized and have a big house. These unnecessary objects are superfluous consumption and clutter your home. If you can afford them without using your credit card and have a big home, buy them. Otherwise consider that you will hardly use them, they require cleaning, dusting, and with the presence of children and pets are bound to be lost or mixed in with other stuff. I have seen homes in my life where in some rooms you had to wade in knee-deep across a sea of objects and could only locate the phone (handset) because it rang. An extreme, but I am not exaggerating. It does happen. Before you are even remotely close to getting to such a helpless situation, follow a simple rule of thumb. If you have lost an important object in the last few days, do not buy anything new until you have tracked down what you misplaced. It will instill discipline in you. I apply to myself. Only food and emergency supplies are allowed as exceptions to this rule. 5. Immediately throw away any credit-card offers, coupons, or similar advertisements that come in the mail every day. You do not need more than one debit and one credit card. Just one of each. Disregard mail promising money back on a purchase, coupons, other offers. Unless it has real cash for you, throw the mail in the trash. If it is not cash, it should go directly in the trash. Look at what happens to the millions of people who have their identities stolen each year. The Target customers. Hours of lost 128

time, and money. Ask stores where you buy products not to bombard you with dozens of emails with their offers. Tell them they are a great store, and that you will go and buy things when you need them. 6. Relish and enjoy the products you already own, even if they are old and ragged. Warren Buffet has been using the same wallet for over 20 years. If it does the job, who cares what other people think about what you wear, how new your wallet looks or how chic your shoes are? That is for millennials and teenagers. Not adults. Many women will understandably object to this latter statement. 7. Make it a point to be thankful that you have a place to live in and a car and the necessary appliances to lead a relatively comfortable life. Most people in the history of humanity have not enjoyed such a high standard of living. We can still maintain it if we work hard, save, invest wisely and avoid the temptation to overconsume, speculate and seek never-ending careers to indulge in big egos. Retiring at 65 or 70 is fine. Note to Europe: 70, not below. 8. I have achieved a scaled-down version of the American dream at age 45 with no debt because I have no children (all those with children obviously are much smarter than me) and have had demanding bosses who disciplined me. I have discipline and stamina. I do not drink, smoke, drink coffee, do not eat much, do not party, do not go out to restaurants anymore unless it is necessary for networking, do not ski, do not buy new clothes and take cold showers. Moreover, I do not need health insurance because my 20-year fitness program of cold showers and jogs has produced two consecutive years (2012 and 2013) of perfect blood tests. I do not buy a new book until I have finished the previous one I purchased. Some people will argue that the American dream – at least in its U.S. version – requires lots of consumption and borrowing. I have a good credit history, but it is sometimes deemed insufficient because I have not taken out very many loans and have paid off the ones I did quickly. If you like stress and have a good salary, borrow. If you run a business and want to expand it, borrow. For all others, racking up big amounts of debt is a bad idea. 9. Keep in mind that about 2 billion people on Earth live on less than $2 a day. Make it a point to try to go a few days without spending more than $2. It is not that hard if you are an adult. If you have a refrigerator full of food, why should you buy more? Whatever happened to finishing the food you have before buying more? Remember the Peace Corps, doggy bags, Kennedy, the 1960s. For younger people, see the opening scenes of Dirty Dancing to understand this last point. I thus save my money for travel, investments and the inevitable taxes and all kinds of fees and charges (with interest for late payment) that governmental institutions collect from us in order to keep our countries going. 10. Use your savings to invest in a service, start a company, write a book, sponsor a child, fund a program or launch some kind of activity that will generate benefits to other human beings (flora and fauna can be included).

Finally: In addition to the aforementioned points, most important of all, whatever your nationality, origin, race, ethnicity, political orientation, age or appearance is, bear in mind the following: the time that we are able to spend on this beautiful planet called Earth, co-existing with 7 billion people in a 24-7 flat world that is constantly on the go and on-line through email, blogs, Twitter, Facebook, Instagram, What’s App, and whatever other social-networking programs you want to cram into your life, is a time that we should be grateful for and strive to spend meaningfully with family, friends and reaching out to other people. Read the Desiderata every week. And The Economist if you want to stay on top of world events.

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When it is our time to go, and long after we have gone, people will not remember us mainly for our wealth, possessions and professional achievements. They should and hopefully will remember us for the difference we made through our actions to improve the lives of others while pursuing our humble dreams. I have failed to achieve my American dream because I have been unable to raise and give a child the love it deserves, thus not accomplishing a central element of the American dream, wherever you may be pursuing it – Silicon Valley, Kuala Lumpur or Rio de Janeiro. Passing on our DNA and wisdom to at least one child (or adopting one) is the one indelible and irreversible mark we can leave on this planet that will endure and make a difference long after everyone has forgotten our material wealth or fame. The great men and women we admire – painters, composers, inventors, musicians, writers, scientists, statesmen – who have and will go down in history are basically remembered for how they improved our world and touched other peoples’ lives, not by their material and financial possessions or even professional achievements. I really have no clue where I will end up living – Washington D.C., the Dominican Republic, Spain, somewhere else. To love and have loved. If you can say you have done that, as Jennifer Anniston pointed out, you have achieved something in life. I forgive all of the few people with fictional names in this book who have used me or hurt me. Forgiving does not mean forgetting. Time heals wounds. I hope that perhaps, while I pursue my scaled-down or right-sized version of the American dream somewhere, I will find the partner to share it with. I also hope that everyone who does not already have such partner finds one.

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Chapter 12. A conversation with Dr. Juan José Daboub about Latin America’s reforms

Dr. Juan José Daboub, whom I befriended when he was Managing Director of the World Bank Group, replied very kindly to my questions about which and how Latin American reformers had been most successful. Daboub served in three different administrations (12 years) in El Salvador without belonging to any political party then or now -- this in itself is remarkable. He spearheaded El Salvador’s reforms as president of the Telephone company (ANTEL), the Electric Distribution Companies, and as Chief of Staff to the President and Finance Minister. He was a key member of the team that opened up the economy to free trade, privatized state owned companies, achieved investment grade rating for El Salvador, dollarized the economy, and rebuilt the country after two earthquakes that destroyed 1/3 of the public infrastructure and left close to 20% of the population without housing. After his four-year tenure as Managing Director (the second-highest position) of the World Bank Group, Dr. Daboub runs some of his family businesses from Washington, D.C., and is busy fostering private-sector led reforms through his consulting work in Latin America and the Caribbean. Below a conversation with him regarding El Salvador’s and Latin America’s successful reforms. --What are the reforms that you implemented while serving in very senior positions in El Salvador (Chief of Staff to the President, Finance Minister) that you feel have best stood the test of time?

Juan José Daboub (JJD): Opening up the telecommunications sector and dollarizing the economy have provided the best and most lasting benefits to the people of El Salvador. El Salvador went from hardship to investment grade thanks to common people who decided to take destiny into their own hands. We stopped blaming others for our problems and put together a team of technocrats, mainly from the private sector and some from academia. Instead of just complaining about the politicians, many of us decided to take matters into our own hands. There were not too many leaders, so we had to lead by example. There were twelve of us (recent U.S. graduates and/or non-politicians) invited to discuss the future of El Salvador at a think-tank named Fusades (Fusades still exists, but has sort of lost its original shine). The then (1989) recently elected president of El Salvador, Alfredo Cristiani, had invited the Chicago Boys from Chile to share their experiences with us.

We learned a lot about the reforms done in Chile and each of the members of the group of twelve “was adopted” by one of the Chicago Boys to learn more details about the reforms. I ended up working with people who carried out the reforms in the telecommunications sector. I was 26 years old when I returned to El Salvador, and 29 when I first joined the government as a board member of the power generation company.

The reforms that I was responsible for implementing and for which I had some direct support from Chileans, who had done them, were: privatization of the telecommunications sector, sound fiscal policies, and dollarization. The telecommunications reform and the dollarization are perhaps the two most relevant reforms and they have stood the test of time because they delivered the results that were promised. The reforms of the telecommunications sector were carried out twenty years ago and the dollarization thirteen years ago. --Which of these reforms were hardest to undertake in terms of having to take on special interests?

JJD: Privatizing the telecommunications monopoly was the most challenging one. There were five unions that strongly opposed the reforms. There were several crony capitalists that had created their own business model

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around the monopoly. There was a Communist Party (today in government, the FMLN) which ideologically opposed any form of privatization. On the other hand, I had five million (out of six million) Salvadorians that did not have phones on my side. We created a grass-roots movement that ended up getting the support from even the Communist Party and the unions! The crony capitalists learned to compete. Before the reform, only 3 out of 100 inhabitants had a telephone, whereas today we have 150 telephones for every 100 persons. Instead of the original $2.5/minute it used to cost to call the U.S. (where 22% of our population lives), today it costs $0.35 cents/minute! These are real results for people. This is what makes reforms permanent.

--How can economic integration in Central America and the Caribbean be fostered in the current political and economic environment? JJD: In addition to historical and cultural ties, what joins Central America is commerce/trade and security issues. Thus, increasing trade and enhancing security need to be further promoted in order to spawn more economic growth and social development. But they need to be led by individual private sector projects that overcome the bureaucratic and corrupt political systems that still exist in many parts of the different Central American governments. These goals can only be pursued through business opportunities that enable both businesses and workers to make a profit in each country. --Should the leading free-market economies in Central America and the Caribbean pursue further trade liberalization through free-trade agreements (FTAs) with countries in other regions or focus on fostering it in the region?

JJD: Absolutely. They need to do both. Globalization is not a choice, but a reality. One can choose to ride in a train’s locomotive or in the last wagon. I always prefer to lead.

--What additional steps and funding should the international community provide to help the vulnerable Central American and Caribbean economies combat drug trafficking and mob groups?

JJD: The weakest link is in the enforcement of laws. Weak police, limited attorney general resources, and of course corruption. The judicial system is also weak. So, institutional capacity-building is crucial, but also resources to have better witness protection programs, investigative tools (labs, technology), specialized judges and plenty of jails. By the same token, it is important to invest in prevention: better lighting in the streets, recreational areas, and organized community groups in the neighborhoods. The focus should be on helping the victim (or their family), rather than the criminal! --Which four or five Latin American politicians of the last 20 years do you think deserve to be regarded as statesmen, meaning they implemented successful reforms which they knowingly accepted would diminish their popularity and even cost them re-election? JJD: On the basis of the reforms they implemented while serving as Presidents and disregarding the political attacks that have unfairly sought to tarnish their reputation, I would suggest Álvaro Uribe of Colombia, Francisco Flores of El Salvador, Armando Calderón Sol of El Salvador, Fernando Cardoso of Brasil, and Ernesto Zedillo of México. --What are the measures and initiatives that you undertook as Managing Director of the World Bank that you are the proudest of? JJD: “Making the elephant slim down”. I wanted to change the World Bank Group from an elephant into a lynx. To make it faster and more focused on real problems. The Bank had become a big NGO working on the

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flavor of the month. There was a lot of resistance, but to an extent, at least during my four years as Managing Director we made some progress. By the same token, restructuring the integrity department, under the guidance of Mr. Paul Volcker, was an important initiative that has stood the test of time and is producing results. Within this initiative, the STAR (Stolen Assets Recovery Initiative), was one of the ones I felt most proud to have been part of. The merit of these initiatives goes to Paul Wolfowitz, president of the World Bank Group, who had the “balls and the brains” to take them on and support them.

The Arab World Initiative (AWI) was crucial given what would unfold a few years later and what is happening today in the Middle East. So, without knowing the future, Robert (Bob) Zoellick, president of the World Bank Group (2007-2012), launched the AWI and I was responsible for its implementation. Bob was very strategic about the need to create different poles of development and his quick response to the financial crisis was extraordinary – I felt proud to be associated with such initiatives.

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Chapter 13: How today’s VIPs would tackle the post-BRICS TIDE challenges

To refresh the reader’s memory after so much data, I summarize the four challenges I have chosen as a benchmark to determine which countries will become or maintain their status as economic powerhouses in the next 20 years. I refer to them as the post-BRICS TIDE challenges. They are Technological competitiveness, Inequality, Demographics (how entitlements can be funded given ageing populations combined with lower employment rates) and Energy Security. If we take the first letter of each challenge, we come up with the TIDE acronym.

1) Technological Competitiveness: Which countries’ companies are (or will) design, invent, patent and successfully sell products and services with a high degree of technological value added – driverless cars, biometric passwords, farms run by robots, vaccines for malaria and Ebola, etc. as opposed to just cars, televisions and smartphones. The former will enable the future hegemons to maintain their economic leadership. The latter will continue to be produced and sold, but their rate of growth will slow as markets become saturated and only countries in sub-Saharan Africa and south Asia have a majority of populations that lack basic vehicles and appliances. What factors will determine whether countries have the ability to produce goods and services with more technology? What should be done (if anything at all) to mitigate understaffing and excessive automation, which are consequences of technological progress and destroy jobs? What is the net effect on job creation/destruction of new technologies, which make some workers redundant but on the other hand create new jobs in order to manufacture, distribute and publicize the products and services that use such technologies?

Let me describe some extraordinary examples of goods and services which employ very advanced technology, but also have unwanted consequences such as elimination of jobs and an adverse impact on the environment.

 Some technologies have yielded impressive results but make people uneasy about their loss of privacy. The Los Angeles Police Department has a system for reading license plates which has contributed to a decrease in crime. But the American Civil Liberties Union is challenging it because of its invasion of privacy. Any person who owns a vehicle in Los Angeles has their vehicle’s license plate included in the database, even if they have never committed any crime. By accessing the database after a burglary or shooting, for example, police researchers can zero in on which areas to search if the suspect tries to flee in a car.

 New York City, whose population is 8.3 million, is working on a system that will be able to count and record the activities of every pedestrian in Manhattan. Americans spend 36 billion hours waiting in line every year. New recognition technology could allow vendors, stores, malls, online retailers and other businesses to meet consumers’ demands in a way that dramatically reduced or eliminated such lines. Sixty percent of residents in New York City travel by foot or public transport. Recording and analyzing their movements, shopping habits, walking routes, etc. could thus help both businesses and consumers.

 Due to the ongoing drought affecting California, San Diego is experimenting with one of the biggest desalinization plants in the world. When it is finished in 2016, it will be the biggest in the Western Hemisphere. It will process 50 million gallons of freshwater a day, cost $1 billion and serve 300,000 additional customers. The plant will turn 2 gallons of seawater into 1 gallon of freshwater using a technology named reverse osmosis. This process traditionally takes up a lot of energy. But the designers of the San Diego plant claim theirs will use 46% less energy than its equivalents. Reverse

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osmosis does generate brine discharge, which according to environmentalists affects marine ecosystems.31

 In addition to revolutionizing manufacturing, industry and services, technology can also transform the agricultural sector. The Hoeve Rosa cow farm in the Netherlands provides an amazing example.32 Its owner, Mr. Fons Kersten, invested 500,000 euros in 2008 in machines and robots that perform most of the functions needed to run the farm: 180 robots actually feed and milk the cows, clean their stables and ensure they are healthy. An application alerts Mr. Kersten in the few cases where his intervention is necessary. This technology has allowed the farm to double the number of cattle and raise the milk yield per cow between 10 and 15%.

The government and the private sector in the Netherlands have teamed up to increase productivity. Since 1960, the milk yield per cow has doubled. Tomato seeds developed by the company Incotec are worth twice their weight in gold. This cooperation between the public and private sectors to boost productivity in agriculture has served The Netherlands very well. The value of Dutch agricultural exports trails only that of the United States, a country with 200 times its population. It should therefore also not come as a surprise that The Netherlands scores relatively high on the World Economic Forum’s Global Competitiveness Index, and that in the composite ranking of TIDE challenges it finishes second, behind the United States (see pages 139-140).

2) Inequality: The IMF, the World Bank Group, many free-market economists, politicians and academics have reached a consensus regarding the need to address growing inequality. They may differ on how to do so, but no serious policymaker disputes that inequality has increased. Inequality between rich and developing countries has narrowed since 1988. But it has risen dramatically within both developing and rich countries. Africa’s Gini coefficient grew by 9% between 1993 and 2008, and China’s skyrocketed by 34% in twenty years33. How can we reduce inequality globally and within countries without excessively taxing the rich and discouraging entrepreneurs?

3) Demography: Europe as a whole and certain countries in particular (Italy, Spain, Russia, Germany) have extremely low fertility rates and an ageing population. Increased life expectancy combined with unrealistic retirement ages, unsustainable pensions, and a drop in the employment rate require short and long-term measures to reverse this trend. Japan’s demographic crisis is even more daunting. China is beginning to feel the demographic consequences of its one-child policy. The United States is in a much better position given that its minorities have higher birth rates. But it nonetheless needs to reform its pension and health-care systems so they will be sustainable in the long term.

Life expectancy has risen by 2.5 years every decade in developed countries since 196434. According to the IMF, for every year life expectancy increases, the world’s pension bill increases by 4%, or $1 trillion. Additional medical advances will likely increase longevity in developed countries in the coming years. Most pension schemes pay retirees a certain amount (based on their salary) regardless how many years they live. Private pension schemes already have $23 trillion in liabilities, which is the money they are obliged to pay to current and future retirees as long as they live. Pension schemes are exploring ways of offloading the risk such liabilities imply. Some are paying big insurance companies a yearly fee in exchange for the insurer committing to fund retirees whose life expectancy exceeds projections35. Others are developing “longevity bonds”. Investors that purchase such bonds are paid a yearly coupon, but lose money if pensioners live beyond a certain age. Additional private innovative

31 The San Diego plant, New York City systems, and Los Angeles license plate reading technology are examples of innovative technology which were described in CNN’s special, The City of Tomorrow, which aired on July 26th, 2014. 32 “Polder and Wiser”. The Economist. August 23rd, 2014, p. 64. 33 “Free Exchange: Revisiting Ricardo”. The Economist. August 23rd, 2014, p. 71. 34 “Longevity Risk: My money or your life”. The Economist. August 23rd, 2014, p.69. 35 “Longevity Risk: My money or your life”. The Economist. August 30th, 2014, p. 60 135

financial instruments that protect pension schemes and ensure pension liabilities are paid need to be developed.

What are the best ways to prevent an ageing population and unsustainable entitlements programs?

4) Energy Security: The need to secure and access sustainable energy is a key dimension of countries´ foreign and security policies. Burning dirty fossil fuels is unacceptable even to the populations of emerging economies. Renewables still need many years of investment and research to be the prime producer of energy. Some developed countries have turned away from nuclear energy. The U.S. and Canada are successfully exploiting their reserves of unconventional fossil fuels -- shale gas, shale oil, tar sands -- but doing so involves hydraulic fracturing and other land and resource-intensive technologies opposed by environmentalists. The U.S. is on the road to energy independence, having become the world’s top producer of natural gas and matched Saudi Arabia in oil production in 2014. The European Union relies on foreign suppliers for more than 50% of its energy – a share that will rise to 70% by 2030 on current trends. China, India and Japan all face challenges in securing affordable and sustainable technologies.

They key technology that has enabled the United States to become the world’s top producer of natural gas by tapping shale gas reserves is hydraulic fracturing, commonly referred to as “fracking”. Fracking frees gas from shale rock formations by injecting millions of gallons of water, sand and chemicals at high pressure into horizontal wells. Environmentalists and groups opposed to fracking point to the enormous water resources employed and to the increased occurrence of tremors or earthquakes in the areas that are drilled.

Many other countries (Canada, China, Argentina, Australia, Mexico, Poland) seek to replicate the U.S.’s success. Canada is the only one that is managing to do so. The other countries have abundant shale gas reserves, but the combination of hostility from public opinion or inability to exploit the reserves without foreign know-how hampers their efforts.

China desperately needs to move away from dirty coal-fired plants, which generate 70% of energy consumption36. China’s leadership knows that the current pollution levels are unsustainable, both in environmental and social terms. China’s estimated recoverable shale gas reserves are 70% greater than those of the U.S. But China’s efforts to tap these reserves are failing.

In the U.S., shale gas formations tend to be in places that are relatively easy to access, at shallow depths, and in shale rock that is not difficult to fracture. China’s reserves, on the other hand, are mostly in inhospitable areas, deep underground, and embedded in rock formations that resist fracking. To make matters worse, some of China’s shale gas reserves are in regions with water shortages or with proven deadly seismic activity (Sichuan province).

With current technology, China’s ambition to become a leading shale-gas producer is going nowhere. This explains the historic $400 billion agreement China signed with Russia’s Gazprom to obtain 38 billion cubic meters of natural gas every year during the next three decades. Russia does have huge natural gas reserves, but the pipeline network needed to deliver it to China is not yet in place.

How can leading economies best secure a sustainable, secure and affordable energy supply and mix? What alliances between producers and consumers are likely to be formed?

36 “Natural Gas in China: Shale Game”. The Economist. August 30th, 2014, p. 60 136

Projecting how countries will address these challenges in the next twenty years is a difficult task. There are geopolitical variables and uncertainties which must be taken into account. Will Russia become increasingly isolated from the West or will President Putin realize that it is not even in his own interest to continue to foster strife in Ukraine and his “near abroad”? What unfound reserves of conventional or unconventional fossil fuels (conventional or shale oil, conventional or shale gas, tar sands) lie below the seabed or underground, and who will be the first to tap them? Will center-right, right-wing, center-left or left-wing politicians lead the world’s major economies in the next years?

It is possible to make educated guesses to these questions, but impossible to feel confident about the outcome. I am hence extremely grateful to the very distinguished professionals from several countries who have spent time pondering this issue and whose opinions appear after the ranking, beginning on page 140.

I have therefore compiled a ranking of the world’s biggest nineteen economies (in terms of nominal GDP) and examined how they currently score on each of the four challenges. For technological competitiveness I have employed the World Economic Forum’s 2014 Global Competitiveness Index. For Inequality, I have drawn on the OECD’s latest measurements of the Gini coefficient. For demographics, I have used a country’s total fertility rate. And for energy security, I have employed the World Energy Council’s 2013 energy security scoreboard as well as a broader ranking that combines energy security, equity (access for all) and environmental sustainability.

After obtaining the respective figure for each of the nineteen economies, I have awarded them points. On technology, I have given the country with the highest GCI score 25 points, the one with the second-highest score 24, and so on. The countries with the best Gini coefficients (lower) have been awarded points using the same system, with the one having the lowest Gini coefficient receiving 25 points, etc.

Awarding points based on the total fertility rate is a bit trickier. The standard ideal total fertility rate which enables a country’s population to be replaced is 2.1. The developed countries coming closest to 2.1 (all score below) obtained more points. For the emerging countries I have used 2.3. This may be considered arbitrary. All of the emerging economies in the ranking have attained middle-income status. Their families hence do not need to have fertility rates above 3 to compensate for the loss of children to disease, malnutrition and inability to access basic health services. Awarding points on energy security and the combined energy index is quite straightforward. I finally tallied each country’s points in the four categories and ranked them. You will find this data on pages 138-139. The final rank and total points for each country are located in the left-hand side. I hope you are curious as to how countries performed. The challenge now is to project these rankings into the future.

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Technology Inequality 0=perfect equality

1=perfect inequality

(Gini coefficient, OECD) Rank Total Points Volume of GDP WEF Global Competitiveness Index best 25 nominal, IMF, 2013 2014 GCI rank and score Ranking in top 19 Points* Score Rank Points 1 84 United States 5 (5.48) 2 24 0.380 13 15

10 58 China 29 (4.84) 11 15 0 41 15 13

9 60 Japan 9 (5.40) 4 22 0.34 10 18

5 74 Germany 4 (5.51) 1 25 0.285 2 24

6 72 France 23 (5.05) 9 17 0.303 3 23

3 79 United Kingdom 10 (5.37) 5 21 0.341 11 17

13 52 Brazil 56 (4.33) 17 9 0.55 18 10

9 60 Russia 64 (4.25) 19 7 0.395 14 14

14 48 Italy 49 (4.41) 15 11 0.321 7 19

15 45 India 60 (4.28) 18 8 0.38 13 15

3 79 Canada 14 (5.20) 6 20 0.319 5 21

4 78 Australia 21 (5.09) 8 18 0.333 8 20

8 63 Spain 35 (4.57) 12 14 0.334 9 19

9 60 Mexico 55 (4.34) 16 10 0.446 17 11

12 53 South Korea 25 (5.01) 10 16 0.310 4 22

7 71 Indonesia 38 (4.53) 13 13 0.37 12 16

11 54 Turkey 44 (4.45) 14 12 0.417 16 12

2 80 Netherlands 8 (5.42) 3 23 0.283 1 25

6 72 Saudi Arabia 20 (5.10) 7 19 0.32 6 20

Demographics Energy Security

Total fertility rate Points World Energy Council, 2013

(CIA, 2014)

Optimum 2.1 Energy security rank Rank Points United 2.01 24 12 5 21 States

China 1.55 11 18 7 19 Japan 1.42 9 48 15 11 Germany 1.43 10 31 11 15 France 2.08 25 44 13 13 United 1.90 19 11 4 22 Kingdom

Brazil 1.69 16 27 9 17 Russia 1.61 15 2 2 24 Italy 1.42 9 69 17 9 India 2.51 14 76 18 8 Canada 1.59 13 1 1 25 Australia 1.77 17 10 3 23 Spain 1.48 12 22 8 18 Mexico 2.29 23 29 10 16 South Korea 1.25 8 103 19 7 Indonesia 2.18 22 17 6 20 Turkey 2.08 20 64 16 10 Netherlands 1.78 18 42 12 14 Saudi Arabia 2.17 21 45 14 12

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Howard Bloom

Bloom’s area of expertise is mass behavior, from the mass behavior of quarks to the mass behavior of human beings. He has lectured at Yale, Stanford, and Columbia University. He has published on theoretical physics, cosmology, neurobiology, and evolutionary biology. Bloom is the author of several books: The Lucifer Principle: A Scientific Expedition Into the Forces of History, Global Brain: The Evolution of Mass Mind from the Big Bang to the 21st Century, The Genius of the Beast: A Radical Re-Vision of Capitalism, The God Problem: How A Godless Cosmos Creates. Bloom is the founder and head of the Space Development Steering Committee, a group that includes astronauts Buzz Aldrin, Edgar Mitchell (the sixth man on the moon) and members of NASA. Bloom is also the founder or founding board member of the International Paleopsychology Project, The Darwin Project, and Epic of Evolution Society. He is a member of the Board of Governors of the National Space Society and a member of The New York Academy of Sciences, the American Association for the Advancement of Science, and the American Psychological Society. He is currently working with Caltech’s Keck Institute for Space Studies on two projects: the first parallel-processing planetary mission (a mission to Venus) and an energy infrastructure for the solar system.

On Technological Competitiveness:

To make the technologies and software of the future, a culture has to prize the ability to dream. And it has to value the extreme persistence and practicality it takes to turn fantasy into reality. To us Westerners, who prize creativity, the ability to dream seems an automatic. But it is not. There is a competing culture out there, one with an astonishing record of success -- jihadist Islam. Islam once took over a territory eleven times the size of the conquests of Alexander the Great, five times the size of the Roman Empire, and seven times the size of the United States. It accomplished this in a mere hundred years. And all of that territory is still faithful, loyal, and true to Islam. The jihadists believe they can recreate that success and go beyond it, taking not just Asia, Europe, and Africa, but the Americas. Jihadism loathes the ability to dream. It squelches the capacity to fantasize impossible futures. Instead, it is premised on being faithful to the past. It values most the capacity to recreate the seventh century, to go back to the days of Mohammed and his companions. Deviating from that pattern of perfection, that pattern of God’s own dictates, is, to the jihadist, sinful. So do not take the Western emphasis on fantasy and its conversion to reality for granted. It is under attack. And it is under attack by a civilization that could outdo us in the key capacity that turns fantasies into realities: persistence.

On Inequality:

Part of the answer is to tax second-generation wealth, inherited wealth. Utilize apprenticeship to offer practical training and a start-up to the ladder of success. And make university education free. Free university education sounds very expensive, almost impossibly expensive. But in the XIX century, free grammar school and high school education seemed impossibly expensive, too. We have to be meritocratic and reward those who work hard and achieve. But must also open avenues for the peculiar, the outriders and outsiders. Keep in mind what the 20th century’s ultimate outsiders did for Western Civilization from the 1970s to the 2010s. They reinvented our world. They gave us word processors, personal computers, laptops, and cellphones as well as big data and apps. They were called “nerds”.

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On an Ageing Population:

We must reinvent retirement. Reconceive it as a time for the next profession, namely the profession of your dreams. Support those over 65 with pensions, but open avenues for their next level of education. We should also open avenues for volunteer work. The elderly need to be needed. If they work in schools or hospitals, they will be needed vitally. They can also return to work as psychotherapists, caregivers, and guides. Let them shoot for relevance and productivity. We should take advantage of something the elderly can offer that we do not count in economic terms: the ability to love and the ability to care. Love is far higher on the demand scale than we realize. You and I need someone who cares more than we are willing to admit.

On Energy Security:

First, we should exploit fracking and new oil discovery techniques while assessing their negatives and mitigating or eliminating them. But natural gas and new oil discoveries are transitional. We should harvest solar energy in space and transmit it to Earth using the same sort of signals received by your cell phone. SpaceX’s reusable rockets are about to lower the cost of space access by a factor of ten, and a host of experts in the space community are space solar power advocates with practical plans. Among them are 25-year NASA veteran John Mankins in the U.S. and Dr. A.P.J. Kalam, the eleventh president of India and the rocket scientist who helped develop India’s space program. We then need to recognize a basic of biology. Evolution operates by turning poisons into power sources. Greenhouse gasses are a potential energy bonanza. They are a fuel-in-waiting. Trees have used the key greenhouse gas, carbon dioxide, as food and fuel for four hundred million years. If trees are so smart, why are we so dumb?

Aaron Brickman

Deputy Executive Director, Select USA U.S. Department of Commerce

Mr. Brickman earned a Master’s degree in International Relations from the University of Chicago and a Bachelor’s degree from American University. He also studied economic growth at Harvard University and e-commerce at the Wharton School of Business. Aaron Brickman is the founding Deputy Executive Director of Select USA within the U.S. Department of Commerce. Established in 2011 by an Executive Order from the President, Select USA is a government-wide program that fosters foreign direct investment (FDI) and re-shoring into the United States. Mr. Brickman manages the promotion of the United States as the world’s premier investment destination and coordinates across the federal government to tackle policy and regulatory barriers to investment liaising with state and local economic development organizations (EDOs). Mr. Brickman designed, established, and now helps lead Select USA – responsible for staff, budget, communications, policy development and outreach. He also created and led its predecessor program, Invest in America. He has accumulated nearly 20 years of experience creating and implementing trade and investment promotion programs and strategies, and is one of the most experienced federal officials in the subject of investment attraction. He has advised hundreds of U.S. EDOs on creating and implementing best-practice international economic development strategies and thousands of global companies on U.S. market entry. Previously at Commerce, Mr. Brickman focused on analysis of worldwide and U.S. market developments in renewable energy and oil and gas industry market opportunities in Africa and Asia. During 2005- 2007, he played a key role in developing Commerce’s contribution to Presidential initiatives on clean energy and climate change as the Department’s principal analyst for clean energy-related trade policy matters.

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On Technological Competitiveness:

The U.S. ranks very high on competitiveness. There are, however, some things we can do to increase our competitiveness. Our transportation infrastructure needs more investment. Public-private partnerships have worked in some states (Indiana-Illinois, Texas, Dulles Toll Road in Virginia), whereby foreign companies (from Australia, Spain and other countries) upgrade existing roads and highways and are allowed to charge a toll. Americans understandably are wary about long leases that, in their view, are tantamount to a foreign company “owning” a U.S. road, highway or other infrastructure. The public- private partnerships therefore need to be negotiated in a way that takes account of such logical sensitivities (for example, shorter leases). Public-private partnerships might work better in situations where an infrastructure has to be built from scratch. I feel confident that public-private partnerships -- with the necessary adjustments -- will be able to leverage the expertise of foreign companies to improve U.S. infrastructure in the years ahead.

On an Ageing Population:

The U.S. is in a better position than most Western countries when it comes to its demographics. The U.S. total fertility rate is 2.0, much higher than those of all western European countries (except France), Canada and Australia. We can attribute this higher fertility rate in the U.S. to the fact that many of its minorities (Hispanic, African-American) have more children than the replacement rate (2.1). But let us also recognize that the number of people who legally emigrate to the U.S. every year is significant. We need, however, a comprehensive reform of our immigration system. Such a reform will make it much easier for foreign engineers, scientists and IT experts who graduate from leading U.S. universities to be hired by U.S. companies, as opposed to taking their skills to other countries (the H1-B quota that allows U.S. companies to employ these highly-skilled foreigners is quickly exhausted every year). Under a comprehensive immigration reform package, the U.S. might also lower the threshold it currently requires for foreign investors to obtain a visa (a foreign investor currently needs to invest a minimum of $500,000 to obtain an investor visa).

Americans by and large welcome immigrants. But they are obviously worried about a porous border with Mexico through which foreign terrorists could enter U.S. soil. And they also do not want people in huge numbers who have broken the law and not followed the rules to benefit from an “amnesty”. These issues are hard to resolve. But I am confident that some progress will be made in the next years.

To ensure that entitlements are not compromised by an ageing population, the U.S. might have to also increase its retirement age. There are many people who retire whose experience and skills can be of great benefit to our economy. Currently, someone retiring from the public sector can go on to work for the private sector and eventually draw both the public-sector and private-sector pension in full. But additional incentives may be needed. In some professions (for example, teaching), people can remain active beyond 75 years of age.

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On Energy Security:

The United States has obviously made enormous progress in the past years towards energy independence by exploiting its shale gas reserves with new technologies such as hydraulic fracturing and tapping new oil reserves in states like North Dakota. In 2014, the U.S. produced as much oil as Saudi Arabia, and it has become the world’s top producer of natural gas.

We are therefore in a very good position. In order to further our geostrategic aims, the U.S. might consider exporting part of its natural gas to Europe. This would reduce Europe’s dependence on Russian natural gas. But achieving this goal requires the European countries building more regasification plants. On the U.S. side, the opposition of industrial consumers of natural gas will have to be overcome. They oppose U.S. exports of natural gas because it will drive up the price they have to pay. The U.S. could also export some of its oil to Europe.

Daniel Griswold

Daniel Griswold is President of the National Association of Foreign-Trade Zones (NAFTZ), representing its members in Washington before Congress and regulatory agencies. From 1997 to 2012, Griswold was a nationally known expert on U.S. trade policy at the respected Cato Institute in Washington, D.C. The author of the 2009 Cato book, "Mad about Trade: Why Main Street America Should Embrace Globalization," Griswold has testified before congressional committees, commented for TV and radio, authored numerous studies and articles, and addressed business and trade groups across the country and around the world. He holds a bachelor’s degree in journalism from the University of Wisconsin at Madison, and a Masters in the Politics of the World Economy from the London School of Economics.

On Technological Competitiveness:

Depending on their level of development, countries can grow by serving either end of the technological spectrum. They can produce the original technology, the patents and the engineering and fill that niche. They can also grow by employing the technology and turning it into usable products, therefore converting the technology into production on a large scale. It really depends on where countries are in their stage of development.

The iPhone is a good example. Although it is technically assembled in China, the U.S. retains most of the value of an iPhone because we are providing the engineering, the marketing and the retail. If you let markets work, countries will find their niche in the global value chain.

Technology is an overwhelming positive. Excessive automation is almost a contradiction in terms -- an oxymoron -- in the sense that more and more automation goes hand in hand with development. Government distortions, such as restrictions on labor, can lead to more automation than you would normally have, but overall automation is a good thing. We would not be rich and developed in the West if it were not for automation. And understaffing is in the eye of the beholder. Freeing up labor for other uses is also part of economic development.

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On Inequality:

I disagree that there is a general consensus about inequality increasing. If you did a Gini coefficient of the global population, all 7 billion of us, the Gini coefficient has been going down because you have hundreds of millions of people, mostly in China, but also in Vietnam, in India, in Latin America and elsewhere who have been rising out of grinding poverty to something like a middle class existence. That is a very good development that we cannot ignore. Has the Gini coefficient risen in particular countries? Yes. Sometimes that is a good thing, and sometimes that is a bad thing. If the standard of living broadly is rising throughout society, the fact that it happens to be rising more rapidly for people at the top is a preferable situation to a general stagnation.

I therefore challenge the basic premise that rising inequality is by definition a bad thing. It depends. What is the general standard of living in society? Is it rising? Is there a hope for people up and down the income spectrum that life can get better materially, as well as regarding individual liberties and good governance? The inequality picture is more complicated and nuanced than the general discussion would lead you to believe. If you are focused exclusively on reducing inequality, you open up the door to some policies that leave society worse off by increasing taxation and discouraging entrepreneurs. It is a complicated subject that people have written best-selling books on recently37. My modest contribution on the topic is that it is a more nuanced picture globally and within countries.

On an Ageing Population:

Demography is a real challenge in the countries outlined (Japan, Russia, some in Western Europe). Having a shrinking working-age population is new territory for many countries. It poses a range of challenges for pensions and entitlement programs. The challenge can be surmounted by not artificially discouraging people from having children. Immigration is another policy response to this challenge. Increased immigration is a win-win. Societies that welcome immigrants win, the immigrants themselves win, and in many ways the sending countries gain as well. There are studies that back this up. The single best thing that rich countries can do for global welfare is liberalize their immigration policies.

It is odd that we view ageing as something negative, when it is positive that people are living longer. A thousand years ago life expectancy was 25 years, and now we are living to 85. On the whole this is obviously a good thing. But it does have challenging repercussions. The best policy responses are to encourage people to keep working through higher retirement ages and policies that allow societies to take advantage of the experience and the productivity of older workers. And we need to design entitlement programs that are more self-financed. Defined contribution programs are part of the answer.

On Energy Security:

We would have a more secure energy future if markets were allowed to work and allocate resources by price, supply and demand. We are running into problems because governments are thwarting the ability

37 Mr. Griswold is referring to Thomas Picketty’s Capital in the Twenty-First Century. 144

of markets to provide energy. Yes, governments need to control energy-related pollution in the public interest. But governments can also go too far in subsidizing alternative energy. Germany is waking up to the fact that its big push for alternative energy is having a huge downside of making its industry less competitive.

In the U.S., because we have more clearly defined property rights and more pro-technology regulation, we are able to develop and take advantage of hydraulic fracturing technology to liberate more energy resources. That is a policy lesson for other countries.

I question the premise that burning dirty fossil fuels is unacceptable even to the population of emerging economies. In a country in a stage of development such as China, its population is more tolerant of those kinds of fossil fuels. They are starting to reach that point in the environmental Kuznets curve where they are demanding more controls on fossil fuel pollution, but I would not say that any pollution from fossil fuels is unacceptable to them. They have a different trade-off than residents of Western Europe or the United States.

The common thread that applies to all of these challenges is that we must consider what stage of development a country is at. That will determine to a great degree what its relation is with technology, demographics, immigration and pollution abatement. A lot of the policy goes wrong at the multilateral level because Western countries are trying to impose developed-country standards on developing countries that likely want to have a different set of standards.

Orhan Güvenen

Orhan Güvenen holds a Bachelor of Sciences degree in Econometrics from the University of Istanbul, a Master in Sciences degree in Econometrics from the University of Paris I, and a PhD in Econometrics and International Economy from the University of Paris (Sorbonne). Güvenen specializes in Strategic Decision Systems, Information Systems, Econometrics, and the International Economy. Since 1988, Orhan Güvenen is Professor of Strategic Decision Systems and Econometrics at Bilkent University. He is also the Founder and Director of the Institute of World Systems, Economies and Strategic Research (DSEE), and Chairman of the Accounting Information Systems Department at Bilkent University. Moreover, he serves as Chairman and member of the Executive Committee of the Advisory Board on Strategy, Economy and Industry of the National Nanotechnology Research Center (UNAM). Prof. Güvenen is President of the Applied Econometrics Association. He is a visiting professor of the University of Paris- Pantheon-Sorbonne and a Fellow of the World Academy of Art and Science.

On Technological Competitiveness:

History shows that until now two big technological advancements created big jumps in socio-economic structures of societies all over the world. The first advancement was the usage of steam power and the latest is information and communication technologies (ICT). These two technologic advancements have had dramatic effects on the way people live and interact with each other. The Figure 1 shows the effects of technological advancements on socio-economic structures in a visual way.

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Figure 1: The Effects of Technological Advancements on Socio-economic Structures38.

The graph below shows another technological advancement that has a dramatic effect on socio- economic structures, and which can be summarized under the category of nanotechnologies. This category includes nanotechnologies, nanobiotechnology, genom projects, and many more disciplines connected with nanotechnologies. Nanotechnology creates new ways we interact with materials, observe world and universe, and it also redefines the way we live. Nanotechnology has strong connections with many different disciplines like the medical sciences, information technologies, engineering, material science, biology, communication, and chemistry. In fact, in terms of science methodology it is a transdisciplinary science. As a natural result of this, nanotechnology will have more dramatic and important impacts on socio-economic structures than the two previous technological advancements.

38 Güvenen, O., (2003), Paper presented to the “Bilkent University Computer Science Association”, Bilkent University, “Institute of World Systems, Economies and Strategic Research”, (DSEE), Ankara

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Figure 2: The Growth of Nanotechnology39

Figure 2 shows the development and growth of nanotechnology through the years. It is possible to see that nanotechnology started as a basic research in 1970s and, after the early 2000s, nanotechnology went into a rapid growth phase. According to the figure, we are going to see the products of nanotechnology in mass markets by 2020. This shows us that the economic importance of nanotechnology will increase dramatically by then.

In light of this information, it is possible to say that the countries that invest more in nanotechnology research and development are the ones which will have a stronger impact in the future of world dynamics.

On Inequality:

All scientific and statistical data shows that the world economy is growing, but the welfare is not shared equally among people. Recent research shows that in OECD countries, the average income of the richest ten percent of the population is almost nine times that of the poorest ten percent of the population. This means the OECD average has the ratio of 9 to 1. The ratio varies from one country to another.

By the mid-1980s, the Gini coefficient average of OECD countries was 0.29. This ratio has increased to 0.316 by the end of 2000s. An increase in the Gini coefficient represents an increase in the inequality of income distribution. Recent research shows the rise of inequality in developed countries like the United States, United Kingdom, Japan, Italy, and others. This shows that developed countries also suffer from the effects of inequality along with the developing countries. In the last three decades, globalization has brought a substantial increase in total world GDP. But there is an inverse correlation with world income distribution, which has worsened during the same period.

Rising inequality causes serious socio-economic problems and affects economies by decreasing the populations’ support of an open market economy. Human society and market structures need a “regulatory framework” which endogenize ethics, legal, economic frameworks, rights, and minimize risks in decision systems which can converge to peace, environmental, nature and human sustainability.40

Taking such precautions will be a useful step towards solving the problem of inequality.

39 Nanotechnology. (2012, January 1). Retrieved October 9, 2014, from http://www.futuretimeline.net/subject/nanotechnology.htm 40 Guvenen, O. (2014). World Dynamics, Global Wealth and Income Distribution. In Eurasian Silk Road Universities Consortium, "Investigating The Social, Global & Cultural Issues Along The Silk Road" LAP Lambert Academic Publishing. ISBN-13: 978-3659244001

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On an Ageing Population:

Figure 3. World Population Change 2010 – 205041

Figure 3 demonstrates the change in world population between 2010 and 2050. The graphic shows that another 2 billion people will be added to the world population, making the world’s total population reach 9 billion by 2050. Better living conditions and improved health system increased the life expectancy of people throughout most of the world, and especially in developed countries. As a natural result of this, the percentage of ageing population is considerably higher in the developed countries compared to overall population. An ageing population causes some constraints in economic and health systems such as increasing health care expenditures and diminishing active population ratio.

41 Buiter, W., & Rahbari, E. (n.d.). Global growth generators. (2011). Moving beyond Emerging Markets and BRIC, p. 12, Retrieved from www.investphilippines.info/arangkada/wp-content/uploads/2011/07/Citi-Global-Growth- Generators.pdf

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Figure 4 - Percentage Composition of World GDP 1950 –205042

Figure 4 shows the percentage composition of world GDP from the 1950s to 2050s. This figure is very illustrative of the shift in the distribution of world GDP. It is possible to say that the countries with ageing populations will have a smaller share in world GDP in the future. In contrast, it is expected that countries with young and dynamic populations will gain a bigger share of world GDP.

On Energy Security:

Socio-economic structures require energy and for this reason specifically developed countries spend most the world’s energy today. The world needs to change its energy strategy and move at a maximum level to renewable energies in time dynamics.

The key for sustainable development is to use renewable energy sources like solar energy, wind power, and hydropower. Developed countries are aware of this and have promoted renewable energy sources in a bid to gradually over time replace fossil energy sources. This strategy must be broadened and is a necessary condition for all countries in the context of coming decades.

42 This figure is based on the data by Citi Private Bank. The wealth report 2012. (2012). A Global Perspective on Prime Property and Wealth, Retrieved http://www.thewealthreport.net/The-Wealth-Report-2012.pdf

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Gary Litman

Vice President for International Strategic Initiatives, U.S. Chamber of Commerce. He leads the Chamber’s work with international financial institutions, including the G20, the International Monetary Fund and the World Bank Group. For over ten years, Mr. Litman was Vice President for Europe & Eurasia at the United States Chamber of Commerce, the world’s biggest business association, which represents more than 3 million companies of all sizes, sectors and regions. Mr. Litman was responsible for developing and implementing the U.S. Chamber of Commerce’s regional trade policy, managing its offices in Europe, assisting member companies in trade and investment in Europe, and providing member companies with business advocacy services. Mr. Litman has played a key role in advocating a transatlantic common market, an initiative which the U.S. and the EU are currently pursuing with their negotiations on the Transatlantic Trade and Investment Pact. He has testified before Congress on numerous occasions regarding transatlantic trade and investments matters. Prior to joining the U.S. Chamber of Commerce, Mr. Litman was an associate at the Law Offices of Stewart and Stewart in Washington, D.C., where he was in charge of the firm’s international business and investment division. He has authored several legal publications on international business, including U.S. export controls, privatization in Central Europe, oil and gas sector investment and intellectual property legislation. Mr. Litman earned a J.D. from George Washington University in Washington, D.C.

On Technological Competitiveness:

The United States will continue to be able to design, invent and patent high-tech products. We have the incredible momentum of the last thirty years of education and flexible financing of innovation that have created both a supply of talent and incentives for trying new things. However, the consumer seems to be less inclined to try new and complex things. There is a growing gap between what our technological elite can conceive and what the average consumer is willing to try. Companies are aware of these issues and will introduce new products and services in countries where there are more early adopters, lower barriers to entry, and reduced liability risks.

The notion of economic leadership as a whole is questionable since multinational companies are constantly shifting their allegiances between countries. If leadership is defined in terms of being able to impose a particular new standard, the European Union will likely remain in a good position to do so.

The U.S. will also have to confront a mild version of the Dutch disease as a result of the frenetic investment in fracking, which is creating a bubble mentality and concentrations of labor in ‘boom towns’ that may or may not be sustainable. However, our major challenge is that we rely on importing the products of foreign public education systems in the most technologically advanced fields, while our own education becomes less and less affordable domestically. If this were any other product, there would have been countervailing duties. It is not a sustainable system. We have to simultaneously reform our education and immigration systems. This poses a major political challenge since the former is a state issue and the latter is a federal one.

The notion of excessive automation is not yet present in the public debate since the mainstream opinion is that we have a geographical and sectorial mismatch between skills and demand.

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On Inequality:

The issue of growing inequality is indeed an important political challenge. The response in the U.S. has been slow and indirect. We are still in denial about the fact that inequality is an economic rather than a purely social problem. The organic response in the U.S. seems to be a broader inclusion of the lower income groups into small-time entrepreneurial activities, distributed manufacturing, all sorts of digital services, and shared economy patterns. These approaches help achieve a better distribution of income. However, the geographical income gaps entail huge economic disparities between different regions of the United States and thus pose a more immediate political challenge.

On an Ageing Population:

The best way to address the problems created by an ageing population is to reassess longevity risks. The key is to shift from policies aimed exclusively at supporting older people to ones that spur them to be active participants in the economy. Longer years of relatively healthy, educated and connected populations are just as much an asset to society as lots of young people. The question is not postponing retirement from the 9-to-5 job one has held for many years but creating opportunities for older citizens to contribute to society in other ways, and to compensate them for it. There is also a need to revisit the education system. Given how much more we know about the human psyche and the productivity tools we have, does it really take 12 years to bring kids up to some productive activities? There is ample room to revisit the way new people enter the tax-paying age as well as exit it. The key is to look at peoples’ entire life span rather than analyzing the issue and implementing policies that confront the young versus the old.

On Energy Security:

The U.S. has made great progress and could achieve energy independence in the years ahead. Exploiting oil reserves in new locations (South Dakota) and employing hydraulic fracturing (fracking) to extract shale gas have been a game-changer. The U.S. is now the world’s top producer of natural gas and in 2014 matched Saudi Arabia as the biggest producer of oil. It also has extensive and untapped shale oil reserves. The U.S. could drill and extract more conventional and unconventional (shale) oil and gas on federal lands or offshore, but the issue is controversial. Recent U.S. energy efficiency gains are also a source of great optimism in the American economy. Environmental groups and their supporters in Congress argue that fracking is an aggressive technology that takes a heavy toll on the environment, that requires more intensive use of land (more wells have to be drilled compared to traditional extraction), and may cause tremors. States will continue to pursue extraction of oil and shale gas while projects on federal land or waters will be subject to the political parties’ relative power at the federal and state level.

One-hundred commercial reactors (65 pressurized water reactors and 35 boiling water reactors) are licensed to operate at 65 nuclear power plants across the U.S. In 2011, they produced 790 Tw of electricity, amounting to 19.2% of the nation's total electric energy generation. After the accident at Three Mile Island in Pennsylvania in 1979, more than one-hundred orders for new nuclear power reactors were cancelled. There has been no ground-breaking on new nuclear plants in the United States

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since 1974. In 2012, the Nuclear Regulatory Commission approved construction of four new reactors at existing nuclear plants: Stations 2 and 3 at the Virgil C. Summer Nuclear Generating power plant and Units 3 and 4 at the Vote Electric Generating Plant.

A flurry of interest in the construction of new reactors and plants -- with potential government loan guarantees – seemed to herald a "nuclear renaissance". The U.S. has some of the biggest reserves of uranium in the world. But the Fukushima disaster of 2011 and difficulties in financing the construction of new reactors and plants led to the abandonment of most projects in the U.S. Only five new reactors are expected to enter service at existing plants by 2020 – Sothern’s two Vote reactors, two at Summer in South Carolina and one at Watts Bar in Tennessee, and some face delays. At the same time, researchers continue to get venture capital funding for developing fusion technologies. Privately funded innovation has a good chance of up-ending expectations in power generation, while public funding is focused on improving security and resiliency of the grid.

Combining an environmentally-friendly extraction of fossil fuels (conventional and shale), new nuclear reactors and plants whose safety has been appropriately addressed, coal-fired power plants that employ clean technologies and renewables is the sensible and logical policy the U.S. should pursue. Renewables will continue to increase their share of total generation, but they still require subsidies and surmounting obstacles such as storage. The U.S. should therefore pursue an all-of-the-above energy policy. Moreover, by coordinating its energy policy with Canada and Europe, U.S. geostrategic objectives can be attained. There are, however, many vested interests in maintaining the status quo or unreasonable opposition to some forms of energy.

Michael Maibach

Maibach was the first American elected under 21 years of age, specifically to the Dekalb County Board in his native Illinois at age 20. After completing a B.S. and a Master of Arts in Political Science at Northern Illinois University, he joined the Caterpillar Tractor Co., first as a machine shop foreman, then as a Government Affairs Manager. He opened CAT’s California Government Affairs Office. During this period, he earned a B.S. in American and Latin American History at California State University. In 1983, Maibach moved to the Intel Corporation to establish their Government Affairs Department and serve as assistant to Intel’s co-founder, Dr. Robert Noyce. He was named an Intel Vice President in 1996. He was a lead industry advocate for the Semiconductor Chip Protection Act, the US- Japan Semiconductor Agreement, SEMATECH funding, the GATT Uruguay Round, the 21st Century Patent Reform Act, and China’s WTO membership. Maibach opened Intel Government Affairs Offices in Washington, Brussels and Beijing. He was involved in President Reagan’s Commission on Industrial Competitiveness, as well as President George H.W. Bush’s National Advisory Committee on Semiconductor. While at Intel, Maibach earned a B.A. in International Business at American University and a Master of Arts in Political Philosophy at Georgetown University. He served as the President & CEO of the European-American Business Council. Maibach serves on the Board of the World Affairs Councils of America, the Witherspoon Institute, and is a member of the US State Department Advisory Council on International Economics. He is currently a Senior Fellow at the Aspen Institute.

On Competitiveness:

There are four strategic vectors that determine U.S. competitiveness: Talent, Tax, Technology and Trade.

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TALENT. It is enveloped by culture. Open, healthy cultures engender creativity – but also, free association. All wealth is created by a few individuals who freely associate to serve others. Noyce, Moore, Grove, Vadez and Rock invented Intel. Today Intel employs 100,000 people who make 80% of the brains of the Information Age.

Freedom to think and to associate are thus two pillars of a "creativity culture". These freedoms have flourished in the U.S. historically, allowing us to prosper. The current drift towards sharp cultural divides over certain moral issues threatens our open culture in nuanced but real ways. Refusing to allow certain speakers to appear on campuses, government requests for the sermons of ministers, tracking of everyone's cell phone calls -- these are the talisman of a closing culture. We need to tilt back to tolerance.

The third pillar of a healthy culture is strong, intact families. When the Moynihan Report was issued in 1965, 5% of America's children were born out of wedlock. Today that number is 40%. This decline in intact families is a major cultural as well as economic threat. Strong families teach discipline, self- governance, service to others... and cooperation for good. Strong families build strong nations.

While strong cultures are societal creations, government has a leading role in the formal education of talented workers. America's K-12 schools are failing, and have been for several decades. Our children score among the lowest in worldwide math and science tests, for example. There are many reasons for this. The number one action state and local governments can take to dramatically improve U.S. STEM and other educational results is to move from government schools to public education. Parents care about their children more than anyone else. Let's empower them to choose their children's schools. This will engender creativity in our schools, bring higher pay for talented teachers, and free parents to become more involved in the education of their children.

TAX: The U.S. has the highest corporate tax rate in the world – 35%. We are the only OECD nation that has not lowered its corporate tax rate in the past 15 years. We are also the only major trading nation using worldwide rather than territorial corporate taxation. These two factors – high rates and worldwide taxation – are major U.S. competitiveness roadblocks. U.S. firms operating globally are keeping over $1 trillion abroad, rather than reinvesting it in the United States due to the taxation of profits brought home. No other nation has this kind of anti-investment policy. We need to move to a 25% flat rate on territorial profits only.

TECHNOLOGY: Three actions by the U.S. government could enhance America's Technology Policy today. First, double basic research funding of non-health related R&D, such as physics and engineering. This goes for national labs, the NSF, as well as grants to major research universities. Second, staple a Green Card to every Masters and PhD STEM diploma earned by a foreign citizen at a U.S. university. Third, enhance the climate for U.S. manufacturing investments. This begins with tax reforms noted above, and includes expensing of capital goods. Manufacturing involves daily, iterative 'R&D'. When making a product, one constantly changes tools, processes, materials and designs to improve it. This is a vital form of "technological innovation" we call manufacturing. Finally, most firms locate R&D labs near

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manufacturing sites to enhance cross-pollination. Manufacturing and R&D policies must be holistic to enhance them both.

TRADE: Adam Smith taught us that wealth creation comes from specialization. A corollary to this rule is that the broader the market, the deeper the specialization can become. A ring of concentric circles of specialization expands with expanding markets. Opening markets drives exponential wealth creation. The U.S. should complete the Trans-Pacific Partnership Agreement and the Transatlantic Trade and Investment Partnership agreements by 2016. This can happen if the new Congress in January grants the President Trade Promotion Authority (TPA).

On Inequality:

Much has been written about the growth of inequality in the United States. Studies show that, indeed, the rich are getting richer and the poor are stagnating. This must change. Causes include:

 Family Quality. All statistics show that being raised by married, loving, positive and spiritual parents are major factors that determine of success in adult life – success in most every aspect of life.

 K-12 Education. I live in Alexandria, Virginia. Sixty percent of our children attend private schools. These parents pay for the public schools, and pay again for private schools. The poor are left with less robust schools, and the cycle of inequalities is thus magnified.

 Global Markets. Sports figures and company CEOs today make much more than their predecessors did 50 years ago. Why? Global trade, TV and the Internet have expanded markets exponentially. Those involved in global and digital markets usually make more than those who operate locally.

 Information Age Skills. In the Agricultural and Machine Ages, men were created roughly equal physically. They all had two arms and two legs, etc. Brawn, not brains, was often the strategic advantage. In the Information Age, mental and emotional IQs are king. Come from a strong family, graduate from great schools – you will do much better than those who come from a broken family and a failing school.

 Illegal Immigrants. It is estimated that we have 11 million illegal immigrants in the United States and growing. A significant amount of our neighbors are not learning English, not learning American history and not becoming part of our culture, communities, and institutions. Major reforms are needed.

 An Inequality Action Agenda: Support strong families, move from government schools to public education vouchers for all children. Also, help our children engage effectively with the worlds around them. Everyone must speak and write English well, and students should be encouraged

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to study abroad for a semester of college. I studied in England and Mexico while in college. It provided dramatic insights!

On an Ageing Population:

"Demographics is destiny". No European country has a replacement birthrate today. The 2.1 U.S. birthrate is barely at replacement level. A child born today in America will live 100 years on average, twice the life expectancy of those born when Teddy Roosevelt was President. We must fashion XXIst century policies and practices to deal with new realities. Such an agenda should include:

 Life-Long Employment: People used to work for one company for most of their adult lives. The norm now will be eight or more jobs in a lifetime.  Life-long Education: The days of graduating from college and never going back to school are gone. Life-long education is vital as people make career changes and as technologies advance rapidly.  Life-long Contributing: Binary retirement mind-sets should disappear. We work like crazy until age 62, then golf for 25 years. This can no longer be the case. Going forward, people will want to, and in many case will have to continue to contribute, some with part-time jobs, some as volunteers and mentors. The state cannot support us for three decades of retirement.  Digital Exports: With millions (baby-boomers) now retiring, the Internet is presenting new ways to "export expertise" from your home office. Teach English to Chinese, read X-rays for an Indonesian hospital, tutor new realtors, or advise a start-up company in Ethiopia – all of these tasks can be performed before lunch.  Social Welfare Reforms: The biggest, hardest, most critical change needed today is a re-set of our Bismarckian social welfare model. Social Security, Medicare, Medicaid, Food Stamps, and (soon) ObamaCare – all are going bankrupt. It is decision time if we are to avoid major institutional collapses. We should means test Social Security on a sliding scale, and raise the full- benefit retirement age. On healthcare, government should help with catastrophic health insurance, but leave all non-catastrophic health costs to each patient. We need to create "markets in medicine" to let patients know what treatments cost. No one knows what anything costs in medicine today. This leads to dysfunction, debt, and denial of service.

On Energy Security:

The American economy has been given an immensely important gift, thanks to advanced energy extraction technology. Soon we will lead the world in both oil and natural gas production – a stunning change from the days of gas lines and OPEC boycotts in the 1970s. Combine this with a 25% territorial tax system and we can usher in an American Manufacturing Renaissance. Energy policy should favor "all of the above". Moves from coal to natural gas in the U.S. have been caused by market forces and a cut in half of the carbon footprint has been achieved without carbon taxes or draconian regulations. Let's favor "investment and innovation over taxation and regulation".

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Mark Amadeus Notturno

Mark Notturno earned his Ph.D. in Philosophy from Columbia University in 1982. He was a friend and associate of Sir Karl Popper, and has lectured on Popper’s philosophy in twenty countries in Europe, Asia, and America. He is the author of “On Popper, Science and the Open Society”,“Objectivity, Rationality and the Third Realm” and the editor of “Perspectives on Psychologism”. He is also the editor of Popper’s “The Myth of the Framework and Knowledge and the Body-Mind Problem”. Notturno held teaching and research positions at several universities and foundations before joining the Interactivity Foundation. Between 1994 and 1999, he served as director of the Soros and Ianus Foundations’ ‘Popper Project’. Based in Budapest and Vienna, he organized and directed over forty international workshops and seminars for philosophers and scientists in the republics of the former Soviet Union and former Communist countries in Eastern Europe. These programs focused on problems pertaining to the philosophy of science and the transition to open society and were attended by more than one thousand faculty and researchers from these countries’ universities and research institutes.

On Technological Competitiveness:

It is impossible to know what the next valuable technological innovation will be, where it will come from, or who will create it. This is part of what makes an innovation an innovation. If we had the ability to predict innovations, then we would probably be able to make them ourselves. So it is difficult to predict which economies will design, invent, patent, and successfully sell products and services with a high degree of technological value added. But if we ask which kinds of economies will be most likely to do these things, then it stands to reason that they will be the kinds of economies that encourage and reward critical thinking, creativity, and individual initiative instead of trying to stifle or, worse still, punish them. They will be economies with governments that do the same. They will be economies that encourage people to think freely and to act on their thoughts, that encourage technological development and economic growth, and that allow innovators and entrepreneurs to profit from them. And they will be economies that already enjoy a fairly high degree of technological development. This is because it is all about building a better mousetrap. Inventing products and services that add a high degree of technological value requires innovators to recognize flaws in the products and services that already exist and find ways to improve them. So one relevant factor would probably be the existing state of technology within an economy: whether and to what extent it has access to technology, and what kinds of technologies it has access to.

The question ‘What factors will determine whether countries have the ability to produce goods and services with more technology?’ is somewhat different. For once a successful technology has been invented and is in place, it may not require all that much knowledge -- let alone freedom, critical thinking, creativity, or individual initiative -- for people to produce goods and services with it. One need know only how to use it, and not how or why it works, or how to improve it. Indeed, trying to think critically and creatively about how to improve a good or service or the technology that enables us to produce them -- and taking the initiative to try to do so -- may only be a distraction. But if we ask this question, then two factors that would probably be relevant are: a) whether or not we can train the people in a country to use a technology, and b) whether or not they want to be employed in producing goods and services with it. If the answer to these questions is ‘Yes’, then it stands to reason that most countries will be able to produce goods and services with more technology.

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Finally, the question ‘What should be done (if anything at all) to mitigate understaffing and excessive automation, which are consequences of technological progress?’ seems to raise entirely different issues. I am not sure what counts or should count as ‘excessive’ automation. But it seems clear that the public and private entities that resort to understaffing and automation do so because it enables them to cut their costs and save money. They simply would not resort to them, or continue to use them, if they did not. We could, of course, try to mitigate understaffing and excessive automation by passing laws that forbid public entities from using them and boycotting private entities that do. But most people would probably not be willing to go down that path, since they are also concerned with cutting their costs and saving money, and it would only result in their paying more for the goods and services they want and need. Indeed, I think that few people would regard understaffing and automation as problematic were it not for the fact that some people will lose their jobs as a result of it and have difficulty finding new jobs that will pay them as much as they once earned from them. This, no doubt, is a problem for those who do their jobs. And we should find ways to help them while they are searching for new jobs that do not crush their incentive to work. But while the loss of jobs may be one of the more conspicuous consequences of technological progress, there are other consequences as well. Technological progress is progress primarily because it enables us to produce more goods and services than we previously did. It increases the value of our dollar when it does by enabling us to buy more goods and services with fewer dollars. And, perhaps most importantly, it enables us to expand our horizon of employment opportunities by developing new goods and services that we could not pursue in the past because it was not economical to do so. I personally think that trying to mitigate understaffing and excessive automation would be a fool’s errand. They will inevitably work if they are profitable, and they will fall of their own weight if they are not. Better to focus our attention upon the new opportunities they may afford us and to find ways to take advantage of them.

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On Inequality:

Plato told us that the philosopher-king of the republic would have to tell a noble lie -- that we are unequal by nature: men of gold, silver, and bronze -- in order to ensure peace in the republic. Today some people would tell us a new noble lie, namely, that we are or ought to be equal -- though it is not at all clear that this lie is intended to keep peace in the republic, or that it would actually succeed in doing so.

It may be true that no serious policymaker disputes that inequality has increased in recent years. But it is an entirely different question whether growing inequality poses a problem, let alone a serious problem that should be addressed by serious policymakers -- unless, of course, we regard a policymaker’s belief about whether or not inequality poses a serious problem as a criterion for determining whether or not he or she is serious. I presume, of course, that we are here talking about growing economic inequality, or inequality of incomes, and not, say, about growing physical inequality, or educational inequality, or inequality on the tennis courts, or before the law. But I am not at all clear that the IMF, free-market economists, politicians, and academics have actually reached a consensus that growing economic inequality is actually a problem -- or if only the serious ones have reached that consensus. In any event, is the outstanding progress that we have made in reducing poverty, or at least the debilitating effects of poverty, over the past fifty years a large part of the reason why we are talking more about inequality these days?

Poverty was clearly a problem. People starved as a result of it. They froze in the winter because of it. They went without medical care due to it. They were homeless and lived on the streets because of it. It led some people to commit crimes. And many people actually died from it. But it is not so clear that people suffer and die from income inequality per se, or that they suffer in the same way, or why we should regard it as a problem. Some people, of course, may regard economic inequality as part and parcel of poverty, since those who have less than others will always be impoverished in relation to them -- even if they do not suffer or go hungry or freeze or die from it. But if people do not suffer or go hungry or freeze or die from their relative poverty, then it is not clear whether and why we should regard relative poverty as problematic either. Some people, of course, regard inequality as problematic because they think it is unfair. Others regard it as problematic because they think it will corrupt our political system. And still others regard it as problematic for our democracy, since it means that some people will inevitably have a greater voice in making societal decisions than others. But I think that the arguments that inequality is unfair cut both ways and that their persuasiveness depends very largely upon a person’s individual situation. And I think that it is difficult to see how an increase in economic inequality will corrupt our political system any more than it already is, or give some people a greater voice in it than they already have.

But one thing that does seem clear is that wealth entails inequality, and great wealth great inequality -- the greater the wealth, the greater the inequality -- so that it may be difficult, if not impossible, to actually reduce inequality without simultaneously reducing wealth. So the real the issue, from my perspective, is not so much inequality as whether or not we want to live in a wealthy society, even if some individuals have much greater wealth than others. And here, we may have to come to grips with the very real possibility -- if not, indeed, the reality -- that societies that produce great wealth will be able to combat poverty and its debilitating effects better than societies that do not, even if they simultaneously produce great inequality. So the best thing we can do, from my perspective, is to focus

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upon the gains we have made in combatting poverty, on promoting equal opportunity and the equality of civil rights, and refrain from fomenting envy and other emotions that might lead to violence in the streets and bloodshed by talking about inequality in the distribution of wealth.

On an Ageing Population:

Germany was the first nation to introduce an old-age social security insurance plan. Emperor William I put forth the plan, which was designed by his Chancellor, Otto von Bismarck, in 1881, saying ‘those who are disabled from work by age and invalidity have a well-grounded claim to care from the state’. The plan was adopted by Germany’s Parliament eight years later, in 1889. And while it may be an apocryphal tale, it is said that William was initially cool to the idea, which set the age for retirement benefits at 65, until Bismarck pointed out that German workers at the time had a life expectancy of 62. I point this out partly because the German plan was never intended to support large numbers of people who are disabled from work by age or invalidity for long periods of time, and partly because our contemporary welfare entitlement programs have nonetheless increased the benefits they offer and the number of people they offer them to over the years. Thus said, the best way to prevent an aging population is obviously to prevent the population from aging, and the best way to prevent unsustainable entitlements programs is not to create them in the first place. I imagine that there are several ways to prevent an aging population — including, but not limited to, waging wars, which would probably also not be an economically sustainable policy. We could, for example, outlaw abortion and all other forms of birth control. We could encourage free sex and offer subsidies and other incentives to encourage pregnancy and childbirth. We could also encourage voluntary euthanasia, or mandate involuntary euthanasia, for those who are sixty- five or younger. But none of these seem to be particularly palatable policies -- let alone policies that are consistent with our liberal and humanitarian principles -- and all of them are likely, if not certain, to have unintended consequences that might undermine the goals of preventing an aging population and unsustainable entitlement programs. Some of them, indeed, may be responsible for where we are today. If money is no longer real, then we can always print more paper to cover the escalating costs of our welfare systems. But if it still is, then it would seem as if we will need to do something to trim the unrealistic expectations that our citizens have become accustomed to, while simultaneously stimulating greater employment. This will clearly be a daunting task. And it will no doubt experience pushback from a variety of special interests. But my own sense is that the best that we will probably be able to do is to adopt policies that encourage greater economic growth along with retirement ages and welfare programs that are more realistic given our current circumstances. Retirement ages and welfare programs may, of course, be readjusted if and when economic circumstances improve. We should, however, always be very clear that they are neither written in stone nor entitlements of citizenship, but privileges that wealthy nations may be able to afford their citizens during the good times.

On Energy Security:

This question assumes that burning dirty fossil fuels is unacceptable even to the populations of emerging economies. I’m not sure whether ‘unacceptable’ is meant in a literal sense -- partly because what is and is not acceptable is typically contingent upon available alternatives and their relative costs; and partly because the populations of emerging economies do in fact burn dirty fossil fuels, and thus obviously find it ‘acceptable’ in some sense of the term. But this question also assumes that renewable sources of energy -- such as solar, wind, geothermal, etc. -- still need many years of investment and research before they

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can become our primary sources of energy. So to say that burning dirty fossil fuels is unacceptable to the populations of emerging economies seems aspirational at best. And here the aspirations are clearly on the table. Environmentalists have raised the world’s consciousness in recent years about the need to protect the environment, and the role that using renewables and forgoing fossil fuels might play in it. We are told that there is a clear consensus within the scientific community that burning fossil fuels contributes to global warming and that we must do something about it -- even if the predictions about the dire consequences of global warming do not keep step with that consensus. There can, in any event, be little doubt that some people and even some countries may be wealthy enough to afford to use only clean and sustainable energy sources, and that they may forgo the use of fossil fuels and choose to rely only upon renewables, more or less, right now if they really want to do so. But such sources of energy are still a boutique luxury that most people even in wealthy countries cannot afford. For them, it is what they would aspire to do, if they could only do it, and if it were only cost effective. And it is entirely possible that renewable energy sources will never be developed well enough to make them acceptable to the cash conscious -- let alone to the populations of emerging economies -- and to those who need to rely upon energy sources that are reliable. The upshot is that most people who need to heat their homes, cook their food, and transport their bodies through space and time are likely to use whatever energy sources are available and affordable to them for such purposes, and to do so regardless of the dire effects environmentalists say they will have upon the planet. So how can leading economies best secure a sustainable, secure and affordable energy supply and mix? Keep thinking about and experimenting with alternative energy sources, but use whatever energy sources you have available while you are doing it. Sven Oehme

Mr. Oehme is the President and CEO of the European-American Business Organization, Inc. He is a recognized expert in European-American affairs. Until 1998, Mr. Oehme served as Managing Director of the European- American Chamber of Commerce, Inc. (EACC), with special responsibilities for the chamber's legal department. Before joining the EACC in 1991, Mr. Oehme held numerous executive positions for subsidiaries of Gruner+Jahr, the magazine and newspaper publishing division of the German media company Bertelsmann.

Mr. Oehme’s expertise includes European Economic and Monetary Union, the Euro, and international trade. Mr. Oehme is a member of the Executive Board of the Trans-Atlantic Business Dialogue (TABD), which is the official channel between American and European business leaders and U.S. Cabinet Secretaries and EU Commissioners. He is the Senior Advisor for the Northeast Region of the United States for the American Chamber of Commerce in Germany. He is also a director of the American Foreign Law Association, a member of the Advisory Committee of the European Union Studies Center of the Graduate School and University Center of the City University of New York, and a member of the Board of Advisors of the Weissmann Center for International Business at Baruch College. Mr. Oehme studied law and economics at the University of Hamburg, Germany, and is admitted to the bar in Hamburg. He also earned a Master of Laws degree in International Business and Trade Law with a focus on European law from Fordham University’s Graduate School of Law.

Alexandre Muns’ book is hands-on with experiences one can easily relate to. We obviously all would like to know where we are going to be tomorrow; what the future of the world will bring; and what environment we will find ourselves in. The issues singled out to by Alexandre Muns give us an opportunity to analyze future trends. Technology, inequality, demography and energy are the four corners of the playing field. Currently we are in a situation where the two largest economies are the U.S. and the European Union. We will see whether the negotiations for a Transatlantic Trade and Investment

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Partnership (TTIP) that began in 2012 will come to fruition. A successful conclusion of the TTIP negotiations would be a very positive development for both Europe and the U.S. The other big economy in the world based on manufacturing many of the products we use is China.

On Technological Competitiveness:

It is very interesting to note that the United States is the leading country when it comes to developing new technologies. Looking at the people who are behind these developments, it becomes clear very quickly that many of them were not born in the United States. There are several causes why these foreigners come to the U.S. and try their luck here. In the U.S., there continues to be a favorable environment to start up bold enterprises. First, there have been so many examples of successful start- ups that nobody needs convincing that it can happen. Second, there is still the notion that anybody can start a company from their parents’ garage or their dorm room. Third, it is relatively easy to find start-up capital and a continuing flow of investment. Many rich people in the U.S. fund such projects and new ideas. In my consulting practice, I ascertain that more and more young entrepreneurs from Europe and elsewhere come to the U.S. to look for venture capital. It is safe to predict that the United States will be the technology and innovation hub of the future. The key for the U.S. to retain this leading position and for other countries to catch up is education. It is crucial to improve the education of future generations, but not just at the top at the college and university level, but also at the very beginning when children start school.

Europe has always envied the success of the American innovation economy. The European Commission has set up numerous programs to encourage Europeans to become innovators and has repeatedly established goals as markers for success. However, the European Commission’s ambitious results have not been achieved. From my consulting business, I know that there are European companies that seem to be in a position to be innovators, but are considering whether they should relocate to the U.S. because the bureaucratic hurdles in Europe are higher. Red tape does not play as prominent a deterrent role in the U.S. as it does in Europe. This is a big gap between the two economies. The European environment is not one that encourages young entrepreneurs and innovators to take risks. A recent survey of German law students showed that many of them prefer a career in the civil service that pays a good salary, with six weeks of vacation time, health insurance and a 40-hour workweek and a decent pension than to work for a law firm or company where the hours are longer, and both the demands on and the rewards for the employee are higher.

On Inequality:

It is striking to notice that this topic is widely discussed in Europe, but not in the United States. In a recent survey conducted by the German IW Institute, researchers concluded, on the one hand, that most Europeans perceive that their societies are far less equal than they really are. According to the survey, Americans, on the other hand, believe their country is more equal than economic data shows. Is this proof of American optimism versus European pessimism? Frank Sinatra’s “New York, New York” song comes to mind, specifically the line ‘If I can make it there, I’ll make it anywhere’. Driving around the U.S., one sees poor neighborhoods --especially in rural areas -- but it is also the country of ‘super-rich’ people. In New York, the rundown areas of Harlem and the South Bronx have mostly disappeared. What 161

is frequently overlooked by people who complain about inequality is the fact that richer people engage in philanthropy and finance entrepreneurs, the arts, universities, and colleges. Let’s stay in New York. Who pays for the Metropolitan Museum of Art, the Museum of Modern Art, the Guggenheim, the Whitney Museum, the Neue Galerie, the Metropolitan Opera, Carnegie Hall, the New York Philharmonic Orchestra, and many other institutions? Not the government. A look at the list of donors in New York, but also all over the U.S., shows the funding is provided by rich people who give small and big amounts to these institutions. In addition, rich people in the U.S. are involved in funding other philanthropic charities, such as helping the homeless. Philanthropy is not practiced in Europe as it is in the United States, and therefore is not part of the discussion in Europe on inequality.

On an Ageing Population:

People, rich or poor, live longer. Life expectancy is increasing in poorer countries as well as developed ones. Advanced economies are registering declining fertility rates. The workforce will thus shrink and the remaining workers will face the burden of financing a growing pool of senior citizens. Last year 80,000 vocational training positions could not be filled in Germany. This happened at a time when the youth unemployment rate in southern Europe is at astronomical levels. There is a lack of labor mobility in Europe compared to the U.S. The U.S. also benefits from a higher fertility rate among the Latino community. Legal immigration also plays a major role in maintaining a younger population. Statistics show that the U.S. population and its workforce will keep growing. However, the growing number of seniors in a country with the highest health care costs puts a special burden on everybody. The double- digit increase in health insurance since the introduction of the Affordable Care Act (Obamacare) makes this very clear.

On Energy Security:

In the energy area we find huge differences between the U.S. and most other countries in the world. Shale gas has brought a sea-change. The U.S. is on its way to energy independence. Most shale gas reserves are located in areas that are hardly populated, which limits environmental concerns. Shale gas brings wealth to parts of the country that were poor and did not have much economic activity. That is now changing. The price of electricity in the U.S., especially for commercial consumption, has come down dramatically and companies from high-price energy cost countries are relocating manufacturing to the U.S. This is a major challenge for European countries which is not receiving enough attention. Oil and gas in the U.S. continue to be important pillars for mobility, electricity and the chemicals industry. Most people do not know that, after China, the U.S. is the second largest producer of wind energy, far ahead of any European country. Many of the U.S.’s fifty states offer tax incentives for the installation of solar panels on factory roofs, office buildings and individual homes. These incentives are being used and it is easy to spot buildings with such sun panels on the roof. A good example of a successful U.S. innovator is the electric car manufacturer Tesla. It is the largest producer of electric cars in the U.S. and is also expanding dramatically overseas. Tesla is an example of the American innovation hub economy at its best.

Europe will not become energy independent. But fears over a cut-off of Russian oil and gas exports to Europe are exaggerated. These deliveries started more than forty years ago during the Cold War and 162

continued without interruption as long as both sides fulfilled their contractual obligations. For Russia, exporting oil and gas to Europe is a major source of income.

Alfred Pastor

Alfred Pastor holds a PhD in Economics from the Massachusetts Institute of Technology. He is a professor in the Department of Economics and the holder of IESE Business School’s Bunco Sabadell Chair of Emerging Markets. Pastor has served as Spain's Secretary of State for Economics (1993-1995), Director of Planning and Chairman of the National Institute of Industry (INI, 1983-1985), President of ENHER (1985-1990), a board member of the Bank of Spain (1990-1993), and a Country Economist at the World Bank (1980-1981). He has been a professor of Economic Theory since 1976.

Alexandre Muns has written on a timely subject: what will be the consequences for the rest of the economic world of the recent slowdown in the largest emerging market economies, the so-called BRICS countries.

Although BRICS is -- and probably will never be -- a political entity, but just an acronym to designate five disparate countries, the five have some common characteristics: they are large, with moderate-to-low income per capita levels. Three of them, Russia, Brazil and South Africa, are resource-rich, and two are not (China and India). China and to a lesser extent India are large platforms for the outsourcing and offshoring of advanced economies as well as buyers of advanced economies’ high-tech goods and services.

The slowdown of the BRICS will hurt some advanced economies’ current accounts: Germany, the UK and the U.S. in particular. At the same time, rapidly rising labour costs in China will lead to a relocation of manufacturing, especially light manufacturing, to other emerging economies, and may partially reverse the trend, leading to a repatriation of manufacturing capacity, especially to the U.S. Taking climate change issues seriously may further depress China’s competitive advantage in manufacturing. This issue affects both advanced and emerging economies: thus, although China is the largest producer of CO2 emissions, the U.S. comes second.

On Technological Competitiveness:

Of the four issues, technology may be the most uncertain and potentially the most disruptive inside the group of advanced economies: jobless recoveries, polarization and the spread of outsourcing may result in a backlash against free trade and protectionist measures.

On Energy Security:

Energy concerns are common to all economies, but in different degrees. Shale oil and gas will dramatically alter the pattern of production and trade, and the U.S. may undercut Europe in energy- intensive industrial production, while the European dependence on Russian gas will probably not decrease.

On an Ageing Population:

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Demography, on the other hand, does not seem to portend changes in the relationship between the advanced economies and the BRICS, since both groups have a relatively weak demography, and it is Africa that is supposed to generate the largest increase in world population in the next four decades.

On Inequality:

Inequality, suddenly in fashion, is in fact a complex issue, and it varies enormously between advanced and emerging economies. European countries are relatively homogeneous when looked at from a world perspective; inequality issues may cause problems in China, whose income distribution has become much more unequal since 1978, and especially in Brazil, one of the world’s most unequal countries. Prof. Muns has chosen four essential issues; none of them pose a problem, in the literal sense of the word, but rather are part of long and complex processes which will shape our world in the medium term. What makes his work especially relevant is the fact that these processes are taken together, because it is obvious that they affect each other: thus, energy policy will influence growth, and conversely; inequality may create social unrest and hamper growth efforts; technology will influence growth and income distribution and thus impinge on inequality. The attempt to bring these issues together is a real challenge, and Mr. Muns is to be commended for undertaking it.

Victor Pou

Víctor Pou earned a B.A. in Economics and a PhD in Law from the University of Barcelona. He also holds an MBA from IESE Business School and a post-graduate diploma in European Integration from the University of Amsterdam. He is a professor in the Department of Economics and founder of the IESE International Faculty Development Program. Prof. Pou was the first director of economic planning, the first director of adaptation to the European Communities, and the first director of the Catalan Trust for Europe of the Autonomous Government of Catalonia (1980-1987). Between 1987 and 2005, Prof. Pou served in several positions at the European Commission, including as head of the Enterprise and Industry Unit and Counselor for External Relations. Prof. Pou has published extensively on European integration and international relations. He has also published books on the agreements between Andorra and the EU (2006), the Andorran economy (2006) and the effects of EU enlargement for the Catalan economy (2005).

On Inequality:

According to Andrés Ortega Klein, a member of the European Council on Foreign Relations, “the last three decades have witnessed a great historical convergence between most of the advanced economies and the emerging and developing ones, thus beginning a reversal of the divergence ushered in by the Industrial Revolution. This convergence is probably the most substantial change the world has underwent in the past years. The crisis that struck advanced countries beginning in 2007-2008 accelerated this convergence, as emerging countries continued to grow and thus cut their gap with developed ones.43

43 Sahagún, Felipe (Editor). Strategic Panorama 2014. Madrid, Spanish Institute of Strategic Studies, 2014. 164

According to Zanny Minton Beddoes44 “the world is heading towards a great equalization in income. In 2050, the gap between rich and poor will be much smaller, and will depend a lot more on one’s educational level and less on where one lives. This will occur because emerging economies will grow at faster rates than developed ones, in stark contrast to what has happened in the last two hundred years, when the richer countries in Europe and North America usually outgrew poorer countries. The decrease in the wealth differential between countries will be greater than that within countries. Inequality at a global level – the difference in income between the population, regardless of country of residence – will diminish, most likely acutely”. Beddoes concludes that “in the next decades there will be a great levelling, and will show that the great winners of globalization will be the emerging middle classes”.45

A chorus of critical voices against globalization has emerged in the past years precisely because of the increase in inequality. In 2014, French economist Thomas Piketty’s book Capital in the Twenty-First Century46 is having a great impact. In it, he profoundly analyzes wealth inequality caused by globalization. Piketty’s analysis leads him to a pessimistic prediction about capitalism’s future. On the other hand, the data employed by the World Bank reveal that both the absolute number of poor people as well as the inequality between rich and poor have decreased since 1970.

But the Organization for Economic Cooperation and Development (OECD) -- often described as the rich countries’ think-tank -- criticizes the excessive concentration of wealth. Its economists point out that the richest 1% of the population in developed countries “captures“ a “disproportionate share of total pre- tax income, 20% in the United States in 2012, more than double the share in 1980”. According to the OECD’s report47, published in June 2014, Spain is one of the countries where inequality of income grew at a higher rate between 2007 and 2011. Specifically, inequality of income, discounting social benefits, has risen in Spain by 1.5 points and 3 points in Greece since 2010. The share of the population which earns less than half of the average net income skyrocketed by 15 percentage points in Greece and 8 points in Spain and Ireland. The report highlights that this is a general trend. In 2011, the richest 10% of the population in the OECD member countries obtained 9.6 times more income than the poorest 10%, up from 9.3 times in 2007. The growth in poverty since 2007 “has wiped out most of the improvements in the standard of living attained by lower-income households in the previous twenty years”.

The OECD’s report also reveals that Chile, alongside Mexico, Turkey and the United States, are the OECD members that display the greatest inequality of income between the rich and poor. The difference in income between rich and poor, as measured by the Gini coefficient, came in at 0.503 in Chile in 2011, slightly lower than the 0.51 recorded in 2010 and the 0.511 of 2007. The OECD measured Mexico’s Gini coefficient at 0.482 in 2011, Turkey’s at 0.412 and that of the United States at 0.389. The average Gini coefficient of OECD members was 0.315 in 2011.

44 Franklin, Daniel (Editor), Andrews, John (Director). London, Megachange: The World in 2050, The Economist, 2012. 45 Ibidem. 46 Piketty, Thomas. Capital in the Twenty-First Century. Harvard University Press, 2014. 47 Income Inequality and Poverty. Organization for Economic Cooperation and Development. Paris, June 2014. 165

According to Elhanan Helpman, professor of Economics at Harvard University and a leading researcher on the effect of globalization on inequality, there is no doubt that globalization has been a resounding success. The income of hundreds of millions of people has increased, especially in China and India, narrowing the gap with the population of other countries. What is currently on the rise is inequality within countries, especially in developed ones. Technological change has increased the demand for highly-skilled workers, thus contributing to the rise in inequality to a much larger degree than globalization. Helpman recently stated: “It is true that inequality is growing in advanced countries, but on the other hand the difference in income between the population of advanced countries and that of emerging countries is diminishing. Hence, the former prosperous middle class is now struggling in the West, but new middle classes are being created in formerly poor countries”. Helpman concludes that if governments do not seriously address growing inequality within developed countries, we will likely experience strong social protests and political pressure to implement substantial changes.

On Energy Security:

It is very important to point out that the world currently is undergoing an energy revolution due to the extraordinary development of fracking – hydraulic technology employed to extract unconventional shale gas – in the United States. This game-changing development has decisively altered the world’s competitive playing field. Families and companies have seen their energy bills drop by as much as two- thirds, thereby enabling the former to increase their purchasing power and the latter to improve their competitiveness. In the meantime, the European Union is taking a cautious and slow approach with regards to fracking.

In all likelihood, 2008 will be remembered as the year of Lehman Brothers’ bankruptcy and of the beginning of a deep financial and economic global crisis that we describe as the Great Recession, and from which we have not entirely emerged. In energy and geopolitical terms, however, 2008 will go down in history as the year that marked the revival of oil and gas production in the United States with the extraction of unconventional fossil fuels from shale rock formations employing hydraulic fracturing (fracking).

This energy bonanza is part of a scientific and technological revolution that drives economic growth in the United States by reducing gas and electricity prices and thereby improving industrial companies’ competitiveness. But this revolution is also transforming the U.S.’s role in the world energy trade.

The growth in production of light shale oil has turned the United States into the top global producer, surpassing Saudi Arabia. Forecasts predict that the U.S. will be able to top the production ranking until the middle of the next decade as long as the price of a barrel of oil does not drop below 80 dollars.

The U.S. is also the world’s leading producer of shale gas, which accounts for 40% of all gas extracted in the country. Experts project shale gas production in the U.S. to steadily increase beyond 2040. According to professor Joseph S. Nye, shale gas provides the U.S. with a “trump card in the geopolitcal world table”48. The technological revolution which has enabled this energy transformation ocurred in the

48 Nye, Joseph. “Shale Gas Is America's Geopolitical Trump Card”. Wall Street Journal. June 18, 2014. 166

preceding decade as pioneering extraction techniques were applied. “Ten years ago the U.S. was perceived as a power with an increasing dependence on imported energy, whereas currently it is building export terminals for liquefied natural gas to be shipped at a low cost. The U.S. is seeking to become energy independent by 2020. The U.S.’s Department of Energy estimates that the country holds around 482 trillion cubic feet of recoverable natural gas from shale basins, which combined with other gas resources and oil guarantee a substantial production capability for more than two hundred years. The shale gas revolution will bring about external geopolitical consequences – decreasing dependence on imported energy resources – as well as deal a blow to the myth of U.S. decline”.

Joseph S. Nye estimates that the shale gas revolution in the U.S. will impact both its foreign and its domestic policy. The decrease in exports will improve its balance of payments and the lower energy costs will improve industrial competitiveness. Countries like Russia and Venezuela will have a diminished ability to influence events and the U.S. may redefine its ties with oil and gas producing countries in the Middle East.

From an energy standpoint, the European Union finds itself in a worrying situation. The average cost of European energy is too high. The price of gas in the EU almost trebles that of the U.S., and European industry must also cope with high electricity prices that partly stem from policies designed to foster renewable and low carbon energy sources. The resulting burden on Europe’s economy and its competitiveness is high. Labor costs in the European Union are more than double those in Asia, while energy costs are 60% higher than those of the United States.

The time has come for the European Union to seriously consider the adoption of a new common energy policy, especially in light of the geopolitical challenges posed by Putin’s Russia, which are based on its substantial gas and oil exporting capacity, which turn it into an “energy caliphate”.

George Ward

George Ward received a Bachelor’s Degree in History from the University of Rochester and a Masters in Public Administration from Harvard University. After serving as an officer in the Marine Corps and being deployed in Vietnam, he joined the diplomatic corps. He was Deputy Chief of Mission in Germany (1989-1992) during the process of German unification in 1989-90. As principal deputy assistant secretary of state for international organization affairs in 1992-96, Ward helped develop United States policy on multilateral peacekeeping and managed the policy process on United Nations political questions. He served as Ambassador to Namibia (1996- 1999), where he managed a successful de-mining program and launched a campaign against gender violence. After retiring from the foreign service after a thirty year career, he was appointed vice president at the U.S. Institute of Peace, where he directed -- among other tasks -- the Professional Training Program. He later served as senior vice president of World Vision.

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On Technological competitiveness:

Innovation will continue to be concentrated in countries that offer a combination of excellent science and technology education, low barriers to establishing new businesses, and reasonably free societies that are conducive to creativity, commerce, and innovation.

Governments should not attempt to pick winners and losers in any field, least of all in high-technology industries. The poor track record of the U.S. government in fostering so-called clean energy is emblematic of the likely failure of such policies.

There are two – among many – big questions for the future that affect technological competitiveness:

Will America continue to attract tech-savvy immigrants to make up for the deficiencies in STEM education in the U.S.?

Will China liberalize its economy and society to a degree sufficient to become host to the blossoming of creativity, thereby transitioning from producer of goods to innovator?

“Understaffing” and “excessive automation” are inappropriate terms for discussion of the future of work because they are value judgments. The fact is that, all over the world, more and more goods and services are going to be produced with less and less human labor per unit produced. More and more processes, including many that currently require significant intellectual input, are going to be automated. This will probably happen more quickly than we imagine.

These inevitabilities do not condemn the world to high unemployment and poverty. We can avoid those outcomes by improving education at all levels, but most especially in vocationally focused curricula that will promote labor mobility and adaptability. At least in the U.S., significant improvement in the education system will require a willingness to make fundamental changes in systems, educational power structures, and institutions.

Moreover, we need to allow the free market to guide the movement of labor from high-unemployment areas to regions in which there is a shortage of labor because of economic growth based on new energy resources and growth friendly policies.

We also need to train workers for service in industries in which the pace of automation and adoption of artificial intelligence will be slower, such as the health and medical field.

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In many areas of the world (e.g., Europe, China) the workforce will be growing slowly or even declining in size over the next several decades. To some extent, this trend will cushion the impact of automation and application of artificial intelligence.

On Inequality:

I disagree with the premise. There is not a consensus that inequality is the problem, even if inequality has increased. If the bottom 75 percent were getting richer, would it matter that the top 1 percent might be getting richer faster? Probably not. The problem is that the wealth of the bottom 75 percent has been increasing very slowly, if at all. This situation needs to be addressed, taking fully into account the impact of existing government transfer programs and tax advantages in all income brackets.

It is mathematically impossible to substantially relieve inequality – even if that were accepted as a goal – simply by increasing taxation of the rich. Every attempt to do that has failed. The rich will find means to protect their income and capital.

The objective should be to create wealth at all levels. In practical terms, that means helping workers acquire the skills needed for positions with a higher degree of intellectual content.

On an Ageing Population:

People are going to need to work longer and stay healthier. That is a tall order, but achievable. Maintaining the retirement age at 65 is unrealistic given the gains in human longevity that have been achieved. In the future, most people are going to need to work until age 70. That is probably a good thing overall.

Immigration to countries with labor deficits will need to be encouraged. Bright and motivated knowledge workers will continue to leave countries that restrict innovation and impede the flow of ideas to free societies.

On Energy Security:

Every form of energy, conventional and renewable, is currently heavily subsidized in one way or another in most advanced economies. If these subsidies were reduced, we would come closer to a sustainable mix of conventional and renewable energy resources.

The most significant development in the energy field during the past decade has been the application of technologies for hydraulic fracturing. No government foresaw the impact that these technologies would have, and no government participated in their development and implementation. Even leading experts in the energy field were busy touting the concept of “peak oil” when the new technologies were pushing that concept into the distant future. We should learn from recent history and allow entrepreneurial energy and the free market to address our energy concerns.

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Xu Xiaonian

Xu Xiaonian (Chinese: 许小年) was born in 1953. He is a Professor of Economics and Finance at China Europe International Business School (CEIBS). Businessweek ranked him as one of China's Most Powerful People in 2009. From 1981 to 1985, he worked as a Research Fellow at the State Council’s Center of Development and Research. Dr. Xiaonian graduated from Xi’an Jiaotong Univesity and Remnin University of China before earning his PhD in Economics in 1991 at the University of California, Davis. From 1991 to 1995, he worked as an assistant professor at Amherst College.

On Technological Competitiveness:

Why are the United States and Israel the most innovative economies in the world? Institutions and culture, and not government policies, are the key to their success. A free market for ideas, as Ronald Coase put it, is necessary for the creation of new technologies and their applications. The market includes a pricing mechanism for new ideas and inventions, various channels for financing them such as venture capital and private equity funds, and exits for investment. Entrepreneurs, the most important player in the market, do not need a national strategy and plan to develop cutting-edge technologies. Contrary to the conventional wisdom, government intervention only diverts resources and dampens entrepreneurial spirit, as can be seen clearly in China. What the government should do is to provide a regulatory environment friendly to innovation and effective protection of intellectual property rights. Douglas North argued convincingly that the reason England became the first industrialized economy is because it established property rights, and not because of its possession of advanced technologies.

Culture is the soil and climate that fosters technological innovations. Silicon Valley has a unique culture of innovation, that dares to challenge existing authorities, promotes risk taking, a culture of admitting failures, and a culture of dreaming to change the world. All these features make it difficult – and probably impossible -- to duplicate Silicon Valley.

For the aforementioned reasons, the BRICS will continue to be followers as opposed to leaders in the field of technology.

Inequality:

The central issue of economics is not income distribution, but wealth creation. Mr. Thomas Piketty is wrong. What is there to distribute if no wealth is created in the first place? Secondly, the role of financial capital in wealth creation has quickly diminished due to its abundance, whereas human capital, particularly entrepreneurship, and social capital have become scarce relative to financial capital. Taxes on financial capital would not be able to solve Piketty’s problem. If we want to tax human and social capital, tax rates must be negative for the benefit of society. Thirdly, social mobility is far more important than income distribution to advance justice and social stability.

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