What Greece needs

Yes, Greece should never have joined the euro.  But what about today?  What is their best option?  A letter written by 13 distinguished (Greek?) economists (including one Nobel Prize winner) is highly critical of the Syriza approach, and instead calls for neoliberal policy reforms.  Here’s an excerpt:

A Grexit and move to a new drachma would be a complete disaster for Greece. The banks would collapse as depositors would withdraw their euros not knowing whether they would be able to withdraw them later and at what exchange rate.

.  .  .

What would be crucial elements of a good agreement? Besides the fiscal issues of balancing the budget and making pensions proportional to contributions, a good agreement should emphasize microeconomic reforms. It should greatly simplify the procedures for running a business in Greece and reduce business taxes, in order to attract investment and create a productive, export-oriented sector, new jobs, and debt-repayment potential. It should reduce the huge and inefficient state sector that weighs down on the private sector and the taxpayers. The procurement mechanisms of the state should become competitive. Greece should proceed with privatization of trains, airports, ports, and the energy sector. The “closed sectors” of the economy (such as pharmacies and transportation) should be opened to competition. The labor market should be liberalized and the state should crack down on the underground economy that pays no taxes and no pension contributions.

Finally, an agreement must restructure the Greek sovereign debt to European countries and the European Stability Mechanism. Keeping the nominal value constant, the best way to restructure the debt is to elongate its maturities. If maturities are moved to 75 years and the presently variable interest rates are converted to fixed ones and slightly reduced, the net present value of the debt will be reduced by 50 percent. A 10-year grace period (during which interest is not paid but recapitalized) with the money saved invested would promote growth.

Growth is, in fact, the only guarantee that Greece will pay its debts.

Written by:
Marios Angeletos, MIT
George Constantinides, University of Chicago
Haris Dellas, Universitat Bern
Nicholas Economides, New York University
Michael Haliassos, Goethe University Frankfurt
Yannis Ioannides, Tufts University
Costas Meghir, Yale University
Stylianos Perrakis, Concordia University
Manolis Petrakis, University of Crete
Chris Pissarides, Nobel Laureate, London School of Economics and University of Cyprus
Thanasis Stengos, University of Guelph
Dimitris Vayanos, London School of Economics
Nikos Vettas, Foundation for Economic and Industrial Research; Athens University for Economics and Business

My own view is that Greeks should vote yes on Sunday to get rid of Syriza.  The new government should implement aggressive neoliberal reforms.  If that’s not possible, then perhaps they should leave the euro.  But only after attempting a supply-side solution first.

The American/European divide on Greece

Is it just my imagination, or is there considerably more support for Greece in the US than in Europe?  As far as I can tell there is almost universal outrage in Europe over the recent actions of the Syriza government, except perhaps on the extreme left.  In contrast, I see significant support for Greece among US pundits.  Why? (Keep in mind that in most respects, opinion in Europe is well to the left of mainstream opinion in the US.)  Here are some possibilities:

1.  Framing effects.  In this recent article, Anne Roiphe indicated that at an emotional level she found herself sympathizing with the escaped convicts in New York, even though the logical side of her mind knew they were not deserving of sympathy.

Don’t say it. I know that is a daydream without a shred of reality. This is not the way a grown up woman should think. And yet this Jewish woman, if honest, admits that the hunted and the chased evoke her worry, and the power of the state is not always benign, and that the day I loose my faint wish that these convicts or the next ones escape captivity is the day I loose my Jewish memory. So then I have to tolerate both the twinge of fear I feel for the escapees and the hatred I have for them as killers and thugs.

Perhaps something like that is going on here.  Over at Econlog I have a post on the mezzogiorno, a failed region of 20 million people in southern Italy.  I’d guess that in Europe there’s not a lot of sympathy for this region, perhaps because outsiders feel that Sicilians and Neapolitans have only themselves to blame.  In America, progressives employ a sort of “victims and villains” framing, where poor minorities are seen as being poor precisely because they are oppressed by the dominant class.  Americans may see the Greeks as a “victimized” group, whereas the Europeans may see them simply as a country governed by irresponsible white males.

2.  Perhaps the difference is explained by the fact that it’s their money, not ours, which would be used to bailout Greece. (After all, there’s nothing stopping the US government from bailing out Greece.)  We have everything to gain from European stability, and avoiding another Lehman moment, and nothing to lose from a deal. We just want the two sides to agree on something.

3.  Maybe it’s because Americans have a better understanding of macro, and thus a better understanding of the fact that the Greek depression is partly caused by low AD, not just irresponsible Greek policies.  This is the point where my views are closest to Syriza.

4.  Perhaps Americans are less aware of just how extreme the Syriza party really is. There aren’t many Maoists in the governing coalition, but it’s kind of shocking that there are any.  In most European countries, extremists are not allowed into the ruling coalition, even if this exclusion results in a minority government, or another election.  The fact that they are sympathetic to Putin is also not widely understood here.  Europeans expect a certain degree of “seriousness” in their governments (recall they pressured the Berlusconi government to give up power), and Syriza just doesn’t have it.  We are a long way away, and maybe the fact that Syriza is a government more fitting for Argentina than a EU member is less worrisome to us.

5.  We’ve always had a sort of “debtors mentality” in America.  We have relatively lenient bankruptcy laws, compared to Europe. In America, people like Trump go bankrupt and just start over, as if nothing happened.  You can even run for president.  In many parts of Europe, a person’s responsibility to pay their debts is taken much more seriously.

6.  The Europeans (who often vacation in Greece) might think the Greeks are exaggerating the amount austerity, noting that Greeks are still about as rich as they were in 2000, while Italians are actually poorer.  In saying this, I don’t doubt that many individual Greeks are suffering, but is that because the Greek government has not spread the pain evenly? Even today, Greek pensions are far higher than pensions in Eastern Europe, and Greece is asking Eastern European taxpayers to subsidize them with debt relief.  That doesn’t go over well.  In contrast, all that Americans know is what we see on news reports showing individual Greeks who have been hurt badly by the austerity.

7.  Are there sentimental feelings in the US because western civilization began in Greece?  Would we be equally sympathetic to equal suffering in nearby Moldova?  I doubt it.  (A Greek depression would be like paradise for Moldovans, the world’s unhappiest people.)

What else?

Showing your displeasure

Here’s the NYT in 1938, reacting to accusations that big business was deliberately causing a depression to show its opposition to FDR’s policies:

To some minds it has suggested that the idea of severe reaction, deliberately caused by finance and industry as a lesson to the New Dealers, still has possession of some minds at the capital. This somewhat crude conception may have been based on the legendary Hindoos who committed suicide on the doorstep of a disliked individual, in order to show what they thought of him. But it hardly belongs to sober American thinking. (3/7/38, p. 25.)

I have no idea what the Greek government is up to, but I strongly believe that Greek citizens are “sober” enough to not want to commit economic suicide. Eventually they’ll be able to find a government that knows what it’s doing. Hopefully within a few weeks:

“If a ‘yes’, who are we trusting, who are we working with to then implement that programme?” asked Mr Dijsselbloem.

This weekend, for the first time, Mr Varoufakis hinted his government was prepared to reshuffle cabinet posts or even coalition members if that was required to win back trust.

“If the people give us a clear instruction to sign up on the institutions’ proposals, we shall do whatever it takes to do so — even if it means a reconfigured government,” he told the eurogroup on Saturday.

Some within Mr Tsipras’ Syriza party have even suggested the government would resign if it lost Sunday’s vote. That could clear the way for a technocratic government akin to the one that last governed amid Greece’s debt crisis in 2011.

As usual, don’t believe the headlines.  There are no “deadlines” in Europe.

 

Off topic

Occasionally I get bored with economics, and would rather talk about something else.  (In any case, there’s not much to say until they do the last minute Greek deal, or not.)  Here are some interesting links that I ran across:

1.  From an article on the poet Charles Simic:

His opposition to any utopian project, including nationalism, which would place a collective interest above the safety of the individual, is unremitting. As Slobodan Milošević was taking power in Serbia, Simic warned early on that he was “bad news,” and for his pains was denounced by Serbian nationalists as a traitor. His answer: “The lyric poet is almost by definition a traitor to his own people.” As he saw it, “sooner or later our tribe always comes to ask us to agree to murder,” which is one good reason he has resisted tribal identification with a passion: “I have more in common with some Patagonian or Chinese lover of Ellington or Emily Dickinson than I have with many of my own people.” Leery of all generalizations, he insists again and again that “only the individual is real.” As the civil war heated up, he found that his appeals to forgiveness and reasonableness were met with total incomprehension and finally hatred.

2.  This quote from Schopenauer reminds me of the internet:

Bad books are an intellectual poison that destroys the spirit. And since most people, instead of reading the best to have come out different periods, limit themselves to reading the latest novelties, writers limit themselves to the current narrow circle of ideas, and the public sink ever deeper into their own mire.

It’s from a delightful book by Enrique Vila-Matas, entitled Bartleby & Co., consisting of nothing but footnotes to a book that was never written. Highly recommended for fans of Borges, Calvino, Walser, Musil and Pessoa.

3.  In the same spirit, Morgan Warstler sent me this quote from Mark Twain:

“Travel is fatal to prejudice, bigotry, and narrow-mindedness, and many of our people need it sorely on these accounts. Broad, wholesome, charitable views of men and things cannot be acquired by vegetating in one little corner of the earth all one’s lifetime.”

And even more so for (imaginative) travel to the past and future.  When I read internet discussions about what “we all should think” about social practice X, I sometimes have the feeling that the writers couldn’t care less about what the public view was 200 years ago, or will be 200 years in the future.  All that matters is the eternal here and now.  The most notable exception is Scott Alexander.  I’d always known that there were math geniuses, physics geniuses, composer geniuses, etc.  But not social science geniuses.  Sure there have been brilliant economists like Irving Fisher, Milton Friedman and J. M. Keynes, or even some of the top bloggers.  But none of them make you say “wow, how did he do that?” Until Mr. Alexander, who seems to have arrived from another planet to enlighten us childlike earthlings.  If he ever forms a new “ism”, you can sign me up.  This recent post is far from his best, but he somehow emerges without a spec of dirt clinging to him, whereas I’d end up covered in “mire.”

4.  Peter Hessler wrote three wonderful books about China.  Here’s an article discussing his amazing popularity in China:

I asked why they read him. After all, they must know China better than a Missourian.

“He shows us a familiar country, but one we never saw before,” said one young man, a twenty-five-year-old engineer named Brian Cheung. “He cares about the lives of ordinary people.”

A tall young man of twenty-nine stood in the background. When the crowd thinned out, he stepped forward and identified himself as an English teacher at a local university.

“I’d like to hear more from him about politics. I feel we need to know more about Liu Xiaobo and Charter 08,” he said of the imprisoned dissident and his manifesto for political change.

“But if his books were about that he wouldn’t be here promoting his books,” I said. “Those kinds of books can’t be published here.”

“I know, I know.” The young man said. “But I still want to know about that too.”

“And yet you’re here.”

“He notices things about China that make us think. He sees a slogan on the wall and describes it, just like that. No commentary. Just the slogan, and when it’s told like that, it seems absurd, laughable, like Kundera’s The Joke. And we think: What are those slogans doing there? They are absurd. And then you start to think: Why?”

When I read The Joke I thought to myself, “what would it be like to live in a society where one’s life could be ruined by a single joke.”  I don’t have to wonder any longer.

5.  And speaking of China, I found this to be an intriguing observation:

But why do I feel that China—and Sinologists—would be better off to relax about the idea that “we have great novels, too”? I feel this because I think that setting up literary civilizations as rivals (although I can understand the insecurities that led Liang Qichao and others to do it) only gets in the way of readers enjoying imaginative works. What does it matter if the author of Chin P’ing Mei might be less than Flaubert? Why should anyone have to feel defensive?

Let me put it the other way around. Novels were not the primary language art in imperial China. Measured by volume, xi, translatable as “drama” or “opera,” would be in first place, and measured by beauty, calligraphy or poetry would be. Should we compare poetry across civilizations? If we do, classical Chinese poetry wins easily. The contest is almost unfair, because, as my students of Chinese language eventually come to see, the fundaments of language are different.

Indo-European languages, with their requirements that tense, number, gender, and part of speech be specified, and with the mandatory word inflections that the specifications entail, and with the extra syllables that the inflections add, just can’t achieve the same purity—a sense of terseness and expanse at the same time—that tenseless, numberless, voiceless, uninflected, and uninflectible Chinese characters can achieve. In a contest, one person has a butterfly net and the other a window screen. Emily Dickinson might have come to be known as the greatest poet in world history if she had written in classical Chinese. Should Westerners feel defensive that this was not the case? Far better just to inherit what we all have done, and leave it there.

Federal revenue in 2013

Jason Smith has a post that points to a very interesting fact about 2013—federal revenue from asset sales soared, primarily due to dividend payments by Fannie Mae and Freddie Mac.  By my calculations the revenue from asset sales increased by about $111 billion, from $53.6 billion in 2012 to $164.7 billion in 2013.  This is certainly a non-trivial portion of the $500 billion in deficit reduction that occurred during 2013, and in my view offers a far better argument than pointing to things like state and local government (which is just as endogenous to the Federal government as private investment.)

I don’t claim to understand the Keynesian model, so I won’t even pretend to comment on the importance of these payments.  Until recently I thought Keynesians viewed deficit reduction done via reduced transfers and higher taxes as being “contractionary.”  You know, the sort of austerity that you see in Greece.  Now I’m not so sure what they think. FWIW, at the time Matt Yglesias thought these GSE dividends were a contractionary “disaster.”

The only problem is that this gusher of federal revenue is actually an economic disaster.

In normal times, government coffers filled with dividends would be good because they could be put to some use. The government could spend that money on building Hyperloops or repairing schools or vaccinating children. Alternatively, the government could do the exact same things it was doing before, but reduce taxes and put more money in working peoples’ hands. But that would require a functioning political system. Today’s gridlocked Congress isn’t doing anything with the money.

Still, under ordinary circumstances the reduced government borrowing that results from a dividend windfall could be useful. A smaller deficit often allows the Federal Reserve to run lower interest rates without sparking inflation. That makes it easier for people to buy houses or for firms to invest in new production. Today, though, the Fed’s preferred measure of inflation is running at its second-lowest level on record, even though short-term interest rates have been at zero for years now.

So the Treasury is earning tons of Fannie/Freddie money. But the profits aren’t letting us spend more, they aren’t letting us tax less, and they aren’t freeing up private investment capital either. They’re doing nothing. It’s as if the money were sitting around as cash in a storage locker somewhere.

PS.  There are all sorts of “Ricardian equivalence” arguments as to why Matt might be wrong—that those payments to the Federal government don’t matter.  But do Keynesians believe in Ricardian equivalence?

PPS.  Yglesias also has an excellent new post on the Chinese stock market:

On the other hand, I should say that when I went to China in 2008 I heard from a lot of smart foreign observers that the country was in the midst of an unsustainable stimulus-driven boom that would surely crash someday soon. Now it’s seven years later, and all the smart foreign observers say China is in the midst of an unsustainable stimulus-driven boom that’s in the midst of collapsing. And since no country goes forever without an economic contraction, surely China really will see its long boom come to an end and the economy fall into recession one of these days. Maybe even tomorrow!

But it’s dangerous to be too confident you know what’s going on. Nobody really predicted the boom that’s unfolded over the past six months, so nobody really knows what the future holds.