Chaos Theory: If a National Security Advisor flapped its tiny wings at the equator, could it trigger a storm that would break up the European Union?

Over the weekend, there was an article in the FT with the headline: “Renzi vents anger as migrant summit ends with modest accord.” The EU is being flooded with illegal immigrants, the great bulk coming through Libya to Italy, which got 170,000 last year. (50,000 in Sicily so far this year.) In addition, there are over 600,000 EU asylum applications annually. The problem is that while the EU will provide Italy with financial support, no other EU country wants to accept these people physically. Renzi said at last week’s migration summit, “If this is Europe, you can keep it.” The president of Lithuania told Renzi that that the immigrants are “your problem.”

It’s not only illegal immigration into the EU that is controversial but also migration among European states. The UK wants to negotiate its treaty relationships so that it can reduce or deny benefits to citizens of other EU countries. Both parties in the Danish election are saying they will re-establish border checks with Germany if elected. (Border checks were gradually abolished by the Schengen Agreement in 1985, which now includes 26 countries, including non-EU members Iceland, Norway and Switzerland.)

The problem arises from the fact that individual countries are responsible for policing their borders while the EU generally is theoretically responsible for welcoming the newcomers and supporting them financially. This is an example of a failure to apply the Public Interest Theory in economics. (As an example, Roger Coase asked, “Who should pay for the lighthouse?” Why devote a lot of resources to policing the borders if a failure to do so is not your problem?)

Here is where the butterfly effect comes in: The immediate crisis was triggered by the overthrow of Gaddafi in Libya as almost all the illegal migrants pass through the territory formerly known as Libya. (Now it has at least two governments and many other groups that don’t recognize either of them.) It costs migrants $200-$1,000 to get to Libya from West Africa or Somalia and another $200-$1,000 to get on a boat in Libya, according to the Economist. The boats issue distress calls once they clear the Libyan coast and migrants are either put on rubber rafts or left on board while the crews abandon ship. Then the Italians come and rescue them. There is a 5% chance of drowning, which are odds I would readily accept were I in the same situation.

The Libyan problem, in turn, arose from the elimination of Gaddafi. So why did we take out Gaddafi? The French and British wanted to do so for some reason, but they needed US support. The State Department was opposed and Obama was reluctant, but the big push came from Samantha Power at the National Security Council. Power was not an expert on Libya and probably didn’t know that the Benghazi freedom fighters represented a small religious faction and that the rest of Libyans would not support them. (This is not to detract, however, from her acknowledged expertise on LBGT rights and women’s issues, and she’s probably learned a lot about foreign policy now that she is ambassador to the UN.) We got the Russians and Chinese to acquiesce in a no-fly policy at the UN, but when it became clear that Gaddafi would be able to suppress the rebellion easily without air support, we bombed Libya back into the Stone Age, thus creating the present situation.

Another unforeseen consequence of the Libyan mistake is that Russia and China feel they were snookered in the UN and this has increased their reluctance to support us in Iran, Syria, and elsewhere.

Of course, knowing that a butterfly might cause a hurricane does not tell us whether it will or not. I guess the only lesson we can draw is that we should be very humble about our ability to predict the consequences of our and other’s actions.

But this is all past wind under the butterfly’s wings. Migration issues, including internal migration, are dividing the EU. Isn’t this a much bigger threat than Greece?

Are the Greeks the best decision-makers in Europe?

The FT recently reported that Greece’s suicide rate jumped 35% between 2010 and 2012, mostly due to older men and women. Unemployment is 26%, the highest in Europe. (Under 25 it is 40%.) 100,000 young people have gone abroad, which a lot in a country of 11 million with only 1 million between ages 15 and 25. Deaths exceed births by a wide margin. (11 deaths for every 8.8 births)

Clearly, the Greeks are not as happy and optimistic as they might be. But are they realistic?

When I work out at the gym, I like to listen to philosophy podcasts in order to get a good rhythm going. I download them from iTunes. (It’s interesting that philosophy podcasts seem to reflect national traits: Philosophy Bites out of the UK is eclectic while The History of Philosophy Without any Gaps out of Munich, now running at over 200 lectures, is massive and systematic. On the other hand, The Philosopher’s Zone from Australia is fun-filled and whimsical. (A recent Aussie episode dealt with the moral issues raised by Buffy the Vampire Slayer and the problem of evil. The philosophy department at Marquette University in Chicago apparently publishes a journal on the philosophical issues in the “Buffiverse.”)

Recently at the gym I was listening to Philosophy Bites and a philosophy prof at the University of Birmingham named Lisa Bortolotti (educated at Alma Mater Studiorum (Bologna), Kings College London, Oxford, Nat. Univ. of Australia), whose field is rationality.

She said that the untrained individual is bad at making rational judgments.

She cited the famous “Linda Problem” of Tversky and Kahneman:

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Which is more probable?

1. Linda is a bank teller.

2. Linda is a bank teller and is active in the feminist movement.

The great majority of people chose the second item as the more probable, while it is the first that is correct. (The probability of two things occurring in conjunction is always less than that of one of them occurring alone.) (How did you do? Everyone I have asked got it wrong.)

She also made the following interesting points:

1. Decisions are generally worse when we are told in advance that we will have to explain our reasons.

2. We assign higher probability to desired outcomes than is warranted by the facts.

3. The higher our self-esteem, the worse our forecasting ability.

4. Pessimists, especially those with low self-esteem bordering on clinical depression, make the best assessments of future probabilities.

Points 3 and 4 are important. One may conclude that the Greeks are being more realistic than other Eurozone members in their negotiations, which the Greeks believe to be futile.

More importantly, should we only listen to Greek forecasters?

Greece and the Art of the Deal

Last week the FT reported, under the headline “Resentment and a collapse of trust make last-ditch deal more difficult” (6/20, p.2), that one night, when the Brussels bureaucrats were burning the midnight oil waiting for the Greeks to fill out their very sketchy last-ditch proposal, the Hellenes were spotted strolling around the Sablon restaurant district recreating themselves. A couple of days ago, FT writer James Mackintosh added the following: “Another day, another missed deadline. Greece has finally jotted down a few rough notes, so eurozone leaders offered their least-favorite pupil yet another homework extension, hoping it will be turned into a deal this week.”

The Greek crisis provides superior entertainment in that it is both interesting and unimportant. It is clear, however, that the present Greek government is committed neither emotionally nor philosophically to a solution that is compatible with the Germanic requirements of a single currency.

I wonder what sort of solution we would want if we were Greek?

Greece: As John McEnroe used to say, “You cannot be serious.”

Last Friday I was in the Berkshire Hills in western Massachusetts helping one of my daughters and her husband build a yurt in which they intend to spend the summer, so I didn’t get around to reading the Friday FT until yesterday. On page 2 there was an article describing the differences between Greece and the creditors in five areas: 1. Primary Surplus, 2. Value Added Tax, 3. Pensions, 4. Labor Markets, 5. Privatizations.

It looks like Greece and the creditors differ mainly on VAT and Pensions, and on pensions they are heading in the same direction but Greece wants to go slow. On VAT, the creditors want two rates: 11% for essentials and 23% for everything else. This is pretty much the situation that already exists, but the Greek government wants a third, lower rate for very essential items: Medicines, books, magazines, newspapers and theater tickets would be taxed at only 6.5%. (Certain Greek islands would be exempt altogether.) Despite my deep respect for the classical Greek theater (think of Sophocles, Euripides, Aristophanes!), this special treatment, which would include showings of Frozen and the Die Hard series, struck me as odd.

The fundamental problem in Greece is that its official tax rates are punitive so everyone evades them. 26% for corporation doesn’t sound bad, but it’s universal like the US, and social security is 42% (26% for employers and 16% for employees, plus the 23% VAT on purchases.)

Maybe the Greeks would prefer a purely socialist system? I say stop bullying them and let them go.

Climate Change: Best Review's "Catastrophe Losses 2014"

The June issue of Best's Review has a folded, glossy insert suitable for framing (by actuaries, I suppose) named "Catastrophe Losses 2014, which present graphically the magnitude and costs of global catastrophes, both man-made and natural, since 1970. It consists of five panels and a map.

I have attached one of the panels whichs puts in perspective the unusual attention accorded to extreme weather these days. Best's shows that global catasrophe losses were well below average in 2014, which belie the impression I had developed before looking at the data.

The epigrammatic words of Sgt. Joe Friday come to mind: "Just the facts, ma'am."

This is not necessarily a good thing for property and casualty insurers however, as future losses could well return to normal and be greater than the level upon which they now base their rates.

It was also interesting that the data shows that 50% of global catastrophe losses of $34.7bn for insurance companies were in North American, with only 20% in Asia, where conditions tend to be more catastrophic. In this respect, we are still the clear leader.

Reinvigorated spirits in the Mysterious East?

Two bits of information caught my eye today: 1. House prices and sales are rising again in China. (slightly: +0.05% m/m, but no longer negative) 2. Capital spending in Japan rose 7.3% in Q1 (vs. 0.1% est.)

This adds to good reports from Europe in recent weeks. Could it be that, finally, prices and economies are re-accelerating?

FT this morning: "Weak rouble and sanctions breath life into Russian industry"

Well, it looks like we've taught them a lesson they won't soon forget with the sanctions.

The Russian economy contracted 1.9% in Q1, which is less than expected and Renaissance Capital has improved its outlook for 2015 from -4.3% to -3.5%. This less-than-dire result comes from the increased domestic manufacturing and food production. The FT says,"some parts of Russia's food sector are booming" following food import bans against EU producers. Georges Barbey, Laxness head in Russian, said,"I see a renaissance of Russian industry, a renaissance we've been waiting for for a long time."

Chinese, Turkish and South Korean manufacturers are being pushed out of the market.

We, and the oil price decline, gave the lemons and they are making lemonade.