Pavlov`s Dog and the Euro

The Malta Independent on Sunday

Pavlov’s discovery of classical conditioning remains one of the most important in psychology’s history. In addition to forming the basis of what would become behavioural psychology, the conditioning process remains important today for numerous applications, including behavioural modification and mental health treatment.

In his digestive research, Pavlov and his assistants would introduce dogs to a variety of edible and non-edible items and measure the saliva production that the items produced. Salivation, he noted, is a reflexive process. It occurs automatically in response to a specific stimulus and is not under conscious control. However, Pavlov noted that dogs would often begin salivating in the absence of food and smell. Pavlov set out to provoke a conditioned response to a previously neutral stimulus. A particular acoustic was chosen to be the neutral stimulus. The dogs would first be exposed to the chosen sound and then the food was immediately presented.

After several conditioning trials, Pavlov noted that the dogs began to salivate after hearing the acoustic stimulus. A previously neutral stimulus changed to a conditioned stimulus that then provoked a conditioned response (salivation).

The financial markets behaved like Pavlov’s dogs last Monday, the first time they opened for business after, on the previous Friday evening, rating agency Standard and Poor’s (S&P) took the unprecedented step of downgrading the sovereign credit status of the United States from AAA to AA+.

Credit Rating of AA+ is still a very strong accreditation, but it is not AAA. It was previously unthinkable that the USA, the most advanced economy in the world and in control of the world’s reserve currency which investors were willing to lend back to the US Treasury for 30 years at less than four per cent, could somehow be deprived of its AAA status. The thinking was that if the USA is not AAA than no one else is.

The unthinkable however had gradually been becoming less and less unthinkable as the US Congress danced close to the edge of the precipice before finding a last minute dirty compromise to raise the US debt legal ceiling. S&P explained that while the USA could still be considered AAA regarding its ability to repay its debts, the shameful and laborious way the debt ceiling was raised created nascent doubts about America’s willingness to pay its debt, especially if the extreme Tea Party right wing branch of the Republicans were to increase its hostage bond on the US legislative process.

On Monday morning, the markets across the world argued that if the US had been downgraded nothing else remained unthinkable, not the breakdown of the euro, not the bankruptcy of other strategically important financial institutions, not even a double dip recession or outright depression, especially as governments had run out of resources to continue supporting the recovery through additional fiscal stimuli. As a result, investors suddenly and without further analysis went into risk aversion mode and sold off shares and bonds to park money into cash, gold and US Treasuries. Yes, like Pavlov’s dogs, investors had been trained to park their funds into US Treasuries whenever anything happened that triggered risk aversion. It was however comical that the downgrade of US credit that triggered the risk aversion forced investors to rush like headless chickens into the same US Treasuries that had just been downgraded.

This could be tragically serious beyond its comical surface. The message that nothing remains unthinkable is forcing financial capital markets into a sudden and spurious meltdown in values. This adversely affects consumers’ confidence, economic tempo, and investment plans. Suddenly, a slow but fragile economic recovery turns into a self-fulfilling recession turning the spurious into real loss of value. In this context, the euro debt problems shift from serious to life threatening. Solution to the euro debt problems largely depends on recovery of economic growth so the austerity measures can be alleviated by some hope of sustainability and return to normalcy. In the context of a double dip recession, the austerity burden becomes unbearable.

It is clear that while the US credit downgrade on 5 August triggered the current turmoil, the ultimate source is also shared by the inability of EU political leaders to get ahead of the market curve and take the hard political decisions needed to force the market to look at the EU as a whole unit rather than judge it by its weakest links.

Some weeks ago I was in favour of our contributing, as a still solid link in the EU chain, our fair share for the Greek bailout. Given developments since, I am changing my opinion. Unless EU leaders get themselves ahead of the markets, piecemeal bailouts will ultimately mean there will be more members in the rescue ward than rescuer members. Contagion will make sure that is a given.

Contagion can only be stemmed by a ‘shock and awe’ solution. This comes in two versions. Either a massive increase in the size of the rescue fund with contributions from sources outside the EU including China, USA and oil exporters; or a major political change in the EU set up permitting the issue of EU-wide Eurobonds on the credit status of the whole euro area rather than on the credit status of the individual components. Such a decision will obviously be the precursor of an eventual economic union, including a fiscal union that will be only one step short of a full political union.

In the absence of either of these measures, the euro system is doomed and will blow out probably sooner rather than later. So, without one of these two measures, I feel entitled to reverse my opinion and counsel against further contributions to bailout without one of these two measures being included in the package alongside the austerity for members seeking rescue.

Big changes in the EU only happen at five minutes to midnight when a strong crisis would be knocking at the door. Unfortunately, that’s the way the EU works. But we cannot continue behaving like Pavlov’s dog in the face of serial demands for bailouts.

Belgian Roulette

The Malta Independent on Sunday



“In Russian roulette there is one bullet in the cylinder. In Belgian roulette the whole cylinder is loaded with bullets.”

Playing Belgian roulette is not a game of chance. It is a disastrous certainty to a tragic end. One consequently marvels why the political leaders on both sides of the Atlantic seem hell bent on playing Belgian roulette with the destiny of their citizens – indeed with the global economy.

Last week, with the Euro system being held together by a thread amid a crisis of confidence about the ability of European leaders to come together and find a political solution to the fiscal and debt problems of periphery countries, the Euro leaders delivered a lot of verbal reassurances, many belated measures that gave tangible help to the problem countries but fell short on one absolutely necessary measure: a measure without which the markets will continue to doubt the EU’s resolve and will come back from time to time to test whether the European leaders really mean what they say.

Small wonder that the euphoria was short lived and that, in the space of a week, the markets are already demanding higher rates for funding Italy’s sovereign debt – proof that that the contagion will not stop with the periphery countries but, if left unchecked, will engulf core countries such as Spain and Italy. When (not if) this happens, the amount of funding that will be required to calm down the markets will be much greater than the amount that was needed last week to resolve the crisis once and for all.

The market was expecting a ‘shock and awe’ increase in the funding of the EFSF, the emergency fund for Euro countries under stress, to add credibility not only about the willingness but especially on the capacity to deliver the support as and when needed. Instead, no increase in the size of the EFSF was announced, in spite of agreement on additional applications that it can employ to resolve the crisis. While the new applications per se sent a strong signal about the willingness to deliver a political solution to the crisis, the failure to increase the size of the EFSF increased doubt about the ability to do so. Soon, very soon, under severe stress, EFSF funding will have to be increased to shock and awe dimensions, possibly with contributions from the US, China and other oil-exporting surplus countries.

If EU leaders are suffering from sclerosis that is forcing the EU to chase rather than lead the markets, on the US side a dirty and destructive political game is being played, in which compromise has given way to hate.

The Republican Party, in control of the US House of Representatives, is demanding impossible conditions to approve an increase in the debt limit without which the US government will run out of money next week and will have to default on its obligations to pay social security, pensions, interest and capital repayments of maturing debt.

Normally this is a simple non-contentious legislative measure. The debt limit was raised 18 times under President Reagan and seven times under the last President Bush. President Obama has already raised it three times, but this was when the Congress was controlled by the Democrats. This is the first time that the debt limit has to be increased since Republicans regained charge of the House following the elections last November.

The conditions the Republicans are making to raise the debt ceiling are silly, undemocratic and economic nonsense. They expect the President to commit himself to balance the budget without any rise in taxes so that the whole burden for the fiscal adjustment would fall on spending cuts, which would hurt mostly the poor and the lower classes. They seem to think that their mandate to control a majority in the House is superior to the mandate of the President who was elected for four years up to January 2013. If these mandates clash, the parties normally compromise and President Obama has indeed tried to compromise by offering a balanced solution involving both spending cuts and revenue raising through higher taxation on the extremely rich and removal of tax breaks for sectors that should be able to afford to do without such tax incentives, especially the oil companies.

The Republicans, who are at the mercy of the extreme right Tea Party wing, are insisting on their way or the highway. Incredibly, the US economic powerhouse, that can comfortably raise 30-year money at 4 per cent on world markets, is heading towards a default that would hurt one and all.

What is surprising is how feebly President Obama is defending himself from the accusations that he is a tax-and-spend President. On taking office in January 2009 he inherited an economy under severe stress, with financial markets falling precipitously, unemployment increasing by some 700,000 per month, the financial sector tethering on the edge of bankruptcy and consumers shocked by the prospect of a 1930s-type recession.

In such extreme circumstances, only strong fiscal deficit can save the economy from the spectre of a depression. Was Obama expected to let the economy inherited from Bush sink` With a balanced budget approach to such circumstances, we can just as well revert to the gold standard. Where was the Tea Party when President Bush, during his eight-year term, was converting a strong surplus left by President Clinton in 2000 into a horrendous deficit through financing two wars and awarding tax breaks to the rich in a clear unsustainable mixture of guns and butter` Logic says it has to be guns or butter, never both. And what dogma is this that tax increases would destroy economic growth` The US had much higher taxes than now under President Clinton, when economic growth and financial markets performance were at stellar levels.

The US must accept that their tax system is unsustainable. While direct taxes are at the higher end compared to other developed countries, indirect taxes are pitifully low. They buy petrol at $3 per gallon whereas we buy it at triple that. Their sales tax, at five per cent, is a quarter to a third of what we pay in Europe. The US needs to revolutionise its tax system to reduce taxes on earnings (real earnings, not unearned income) and increase taxes on consumption. In so doing they will reduce their dependence on imported oil, give a boost to green technology, regain manoeuvrability in dealing with mighty oil exporters and adjust the strong macro-economic imbalances presently plaguing it.

No serious US President can commit himself to legally enforced balanced budgets and a policy of no increases in taxes. The President must commit himself to promoting economic growth, to generating employment and to rendering America more economically competitive on the international markets.

This cannot be done if the Republicans continue to play Belgium Roulette on the brink of Capitol Hill in what is clearly a political hate game that cannot accept a coloured President winning another term in the White House. Shame on them!

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If you believe that the police investigations on Cyrus Engerer and his family have nothing to do with his decision to cross over from PN to Labour, well, you probably believe in the tooth fairy. How convenient to have police action to undermine his credibility now that he belongs to the other side!

* * *

Arriva were not up to it upon launch. I said as much in my last contribution two weeks ago. In all fairness, I must state that in the two weeks since then I have seen a major improvement in their operations. Clearly, they have thrown a more appropriate dose of resources to get their service moving. To those amongst us who are well served by the redesigned routes we can almost say thank God for Arriva. Obviously those areas that have been badly affected by the new routes still consider the new service as retrograde. But Arriva’s disclosure that route changes are being accelerated and will be rolled out in phases over the next three months will hopefully mean that soon they too can sing praises to Arriva!

Failed Project Management

The Malta Independent on Sunday



Arriva is a textbook case of failed project management. It has failed not only in the essential of delivering on takeover a seamless and improved public transport service, it has also failed in the project build-up by raising our expectations, and failed again in the post-launch disaster by incompetent crisis management.

How this could happen to an international organisation who is supposedly experienced in running similar services in various countries is beyond comprehension. The only conclusion I can come to is that the project management team were completely office-bound and took no time to understand the realities on the ground that make the local transport service different from that in other countries due to cultural and geographical differences.

It is worthy to have polite and uniformed bus drivers and it is attractive to have brand new air-conditioned buses. But these are on the fringes of the service, they are the icing on the cake. Without the cake, the icing serves no purpose, and in public transport the cake is the ability to go from point A to point B, departing and arriving at the advertised times with waiting times kept to a minimum and with some protection from the sun or rain.

Arriva has delivered the icing but has miserably failed to deliver the cake. In these two weeks I have tried several times sending my children to St Julian’s and back by channelling them to take the No. 202 bus which goes directly from Rabat to St Julian’s and vice-versa. Each time I receive a distress call from them saying they have been waiting at the bus stop in the full heat of the sun for an hour and there is no sign of the No. 202 bus and, inevitably, I have to resort to private transport. To rub salt in the wound, I see the No. 202 bus going round at times when it is not needed, so the service must be operating but very irregularly.

Meanwhile, I keep receiving glossy brochures from Arriva explaining the routes and exhorting me to use them and to check the time schedules with their website. Now I do understand that projects like this never start without some hiccups. But the Arriva launch is not suffering from minor hiccups, it is suffering from dysfunction.   Whoever was responsible for project implementation must bear the responsibility and learn a thing or two about how to implement such projects.

Firstly, they have to learn that good advertising kills a bad product faster than bad advertising. Glossy brochures, TV spots and attractive billboards promising a completely new and pleasant experience as soon as 3 July arrives raised expectations to possibly unrealistic levels, which were cruelly deflated by the real events on the launch and the first two weeks of the service.

Great expectations were further inflated by the way Arriva reacted to the Bisazza Street saga, where they protested more than mildly that they had planned their service in the most minute detail and such late route changes as caused by the administrative decision to close Bisazza Street to all transport, including the public service, would cause disruptions to the programmed time schedules. We were impressed that Arriva had carried out such detailed planning that it would not be able to cope with a five-minute detour.

Oh how many five minutes we had to endure whether Arriva is on or off! Project management is also deficient in the way a big bang launch was chosen rather than a soft roll out. I have nothing against big bang project implementation but only where the launch has been thoroughly choreographed and tested in serious simulation models. Unless such simulation models had been performed and perfected in the process leading to the big bang, a gradual roll-out approach would have been less disruptive and would have left many important people with less egg on their red faces. But most disappointingly is the way the crisis is being handled. Apologies were offered and accepted. The Maltese are nice people and can understand that things can go wrong and that the service needs time to click into efficient mode. We are prepared to wait and be patient as long as we know that the people concerned are working on it with all their resources to get things right the second or third time around. But we demand to be informed, and it is in Arriva’s own interest to keep us informed. Service notices like this are simply not enough: 12 July 2011 – Service update: 9am

“Arriva Malta is again pleased to report that the majority of bus services are operating this morning in line with planned schedules. We are aware that some delays started to creep into services yesterday as the day went on and we will be closely monitoring performance throughout today in order to counter these and maintain service reliability.”

The least I would expect is a daily report on the efficiency of each route for the previous day. The efficiency should be given in a percentage coefficient showing how many of the advertised services were actually provided and the average delay experienced on each route. This information is crucial to build up confidence in consumers who have a choice as to when it will be safe to start using a reliable public transport service.

On the other hand, if some routes are still suffering low quality service it will help Arriva if consumers avoid those routes until they are in a position to offer a service on those routes of at least the minimum standard level of service expected. Arriva may have a great reserve of experience in operating public transport services in big cities, but it seems that the changeover of a national public transport service where there is no other reasonable public transport alternative is a new experience for them too.

They should use the experience of their Maltese co-owners, who have a long record of successful big project implementation in the local context, most notable amongst which is the conversion of the old Malta Hilton into the glittering Portomaso project in time, on budget and delivering well beyond anyone’s expectations: a project that remains unmatched in beauty and quality even a decade after its launch.

We should reflect on the Arriva experience and make sure we avoid similar mistakes both in delivering the restructuring at Air Malta as much as in our macroeconomic management. In both cases I fear we are making promises and raising people’s expectations on projects that are undeliverable, even with all the good faith in the world.

Air Malta today is different from the old Air Malta that operated a near monopoly over air traffic to and from Malta. Under monopoly condition governments can manage (sic!) commercial operations such as Air Malta but in a competitive environment, I doubt whether government has the power to stay on course for the full painful process of restructuring, and even if once successfully restructured, whether Air Malta under public sector ownership can sustain itself in the long term in competition with lean private sector operators.

Whether we like it or not, we must reflect whether Air Malta, in a full competitive environment, can have the economies of scale to compete successfully and, even if it can, whether public sector management can really extract its full potential under the new economic conditions.

On the macroeconomic level, we continue to promise a universally free public health service which, without limitless resources, can only function under severe rationing conditions. Only this week I, who have paid my taxes and social security contributions for over 42 years, had to resort to the private health sector for a minor day intervention to which I was entitled in the public sector at no cost, had I the will or the inclination to wait my turn.

So what in theory is free universal entitlement is in reality nothing of the sort and we had better start calling a spade a spade. People like me are paying twice for their health service – once through general taxation and again by being obliged by rationing conditions to use and pay for private services.