Economist 5/12/16

  1. Puerto Rico’s troubles have their origin in an era of corporate tax incentives in the 1970s that exempted firms from paying federal taxes on profits earned in Puerto Rico. This was done to prevent tax-allergic American companies from setting up shop outside the country. In 1996, the American government, under the Clinton administration, started weaning Puerto Rico off these tax breaks to offset some of the country’s federal deficit. The largesse disappeared entirely in 2006 and its economy has suffered since. The Puerto Rico government continued to borrow recklessly to balance its budget by issuing bonds that are exempt from state, local and federal taxes in America. Investors lapped them up. The bubble burst in February 2014 when three leading credit-rating agencies downgraded the island’s debt to junk. This kicked in “acceleration clauses”; debt that would otherwise have been due in years became payable within days.
  2. Puerto Rico’s awkward position as an “unincorporated territory” and not a “state” means that it cannot abrogate its central government debt without getting sued in federal court. Neither does it qualify for Chapter 9 bankruptcy protection. Since it is not a sovereign country, it cannot seek help from the International Monetary Fund. As it does not control its money supply, it cannot print money to finance its budget shortfall. Puerto Rico’s creditors include hardy hedge funds that own around a third of the island’s securities.Its Government Development Bank has been operating on emergency footing since April 9th. Its biggest retirement programme has just about enough funds to cover 0.7% of future obligations. Last year the cash-strapped government responded by raising the sales tax from 7% to 11.5%, the highest in America. Puerto Ricans pay three times as much for water and electricity as those on the mainland. This week Congress will debate a bill that proposes to set up a federal control board to restructure the island’s debts.
  3. Under Abdel-Fattah al-Sisi, Egypt is even more wretched than under the ousted dictator, Hosni Mubarak. The state has broken down in Iraq, Syria, Libya and Yemen. Civil wars rage and sectarianism is rampant, fed by the contest between Iran and Saudi Arabia.Arab states are suffering a crisis of legitimacy. In a way, they have never got over the fall of the Ottoman empire. The prominent ideologies—Arabism, Islamism and now jihadism—have all sought some greater statehood beyond the frontiers left by the colonisers. Now that states are collapsing, Arabs are reverting to ethnic and religious identities.First, many blame the mayhem on Western powers—from Sykes-Picot to the creation of Israel, the Franco-British takeover of the Suez Canal in 1956 and repeated American interventions.A second wrong-headed notion is that redrawing the borders of Arab countries will create more stable states that match the ethnic and religious contours of the population.A third ill-advised idea is that Arab autocracy is the way to hold back extremism and chaos. In Egypt Mr Sisi’s rule is proving as oppressive as it is arbitrary and economically incompetent.The fourth bad argument is that the disarray is the fault of Islam. Naming the problem as Islam, as Donald Trump and some American conservatives seek to do, is akin to naming Christianity as the cause of Europe’s wars.
  4. All this means that resolving the crisis of the Arab world will be slow and hard. Efforts to contain and bring wars to an end are important. This will require the defeat of IS, a political settlement to enfranchise Sunnis in Iraq and Syria, and an accommodation between Iran and Saudi Arabia. It is just as vital to promote reform in countries that have survived the uprisings.Kings and presidents thus have to regain the trust of their people. They will need “input” legitimacy: giving space to critics, whether liberals or Islamists, and ultimately establishing democracy. America and Europe cannot impose such a transformation. But the West has influence. It can cajole and encourage Arab rulers to enact reforms.
  5. Air rage” stems from a variety of sources, including poor service, discomfort and flight delays.But one of the most common sources of air rage has nothing to do with negative experiences on board a plane. Quite the opposite. According to a new study, passengers are far more prone to misbehaviour if they see that other passengers are having a better experience. Published in the Proceedings of the National Academy of Sciences the study finds that passengers in economy class are 3.8 times more likely to become unruly if the plane also contains a first-class section. If those passengers have to walk through first class to get to their seats, their odds of experiencing air rage double again.A study from 2010 found that rising economic well-being doesn’t make the broader population any happier. Instead, an increase in wealth brings happiness only if others aren’t experiencing the same boon. People are more content if their incomes rise relative to their neighbors or colleagues or university classmates. They don’t compare ourselves to our needs; they compare ourselves to the people around them.

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