Strange bedfellows in an endgame only Europe could dream up

We American are simpletons; completely unable to comprehend the dizzying series of twists and turns in this Greek drama. The latest twist is Germany treating Greece like a naughty child, suggesting that maybe they need a 5-year “timeout” from the euro.  And so we arrive at a German/Krugman alliance trying to get Greece out of the euro.  Germany to punish Greece and restore order to the euro, while Paul Krugman sees it as a way of avoiding punishing Greece, of sparking an Argentine-style recovery.

On the other side is the Sumner/Syriza alliance, taking the high road.  Agreeing with the Financial Times that:

Tsipras has capitulated. His antagonists must show magnanimity

Syriza sees Grexit as an economic disaster for Greece and a political disaster for Syriza.  I actually think Syriza would do worse politically if they stayed in the euro.  Even Greece might to worse (it’s unclear, and depends on what else they do). Instead I fear that a Greece pushed out of the euro by Germany would nudge Greece in a radical leftward direction.  A letter writer to the FT reminded readers of the dark side of the “Argentine miracle”:

“One can learn a lot about photography by studying excellent pictures and looking at bad ones. We can emulate the good and try not to duplicate the bad. Argentinian politicians raided bank accounts and absorbed pension plans in the collapse. People who saved for retirement were taken advantage of by populist politicians. Keep that in mind when your country goes down.”

And I also worry that the markets are clearly signaling that Grexit would be a deflationary shock to the other PIIGS, and indeed to the entire global economy. (Yes a modest one, but still unwelcome.)  But I am a bit conflicted, as also I see the euro itself as a huge mistake, a sort of doomsday machine.

And so we await the dramatic climax that I am certain will occur today, because the Europeans told me so.  Oh wait, I forget that we Americans are gullible simpletons like the cartoon character Charlie Brown.  Darn, fooled again.

PS.  Lars Christensen has a really nice post on how the entire euro project exemplifies Hayek’s Fatal Conceit.


New York’s shamefully regressive property taxes

Work is finishing up on the tallest residential building in the Western hemisphere, 432 Park Ave. The penthouse apartments will go for around $100 million each. Here’s how the building compares to the total property values in some well-known American cities:

Screen Shot 2015-07-08 at 3.36.59 PM

That’s a pretty valuable piece of property.

As you know, I’ve often advocated a policy that progressive economists used to love, replacing income taxes with progressive consumption taxes.  In some cases it is hard to actually enact progressive consumption taxes (although not as hard as many assume). But in other cases it’s fairly easy.  I’ve often been dismayed to find out that progressive politicians like Ted Kennedy opposed luxury taxes on yachts, expensive cars, and fancy jets.

Real estate is one of the easiest forms of consumption to hit with a progressive tax. We already have property taxes, and we already estimate the value of properties. Just do it!

Unfortunately, liberal cities like New York do exactly the opposite, taxing the most expensive properties at far lower rates than average properties.  Those penthouse units may end being appraised at closer to $6 million, barely 6% of the actual market value:

Because of an odd idiosyncrasy in the New York City property tax system, the “market values” that the City assigns to real estate are not market values at all. For condos and coops, these values are generated by an antiquated pricing model, which underestimates true property values by as much as 95%.

An extreme example is this $100m penthouse, the most expensive sale ever in NYC. Despite having been purchased just six months ago, its official “market value” is reported as only $6m.

Here’s the ratio of appraised value to actual value by borough:

Screen Shot 2015-07-08 at 3.45.42 PMNotice that wealthy Manhattan is especially under-taxed.  And we see the same thing if we look at the ratio by price range:

Screen Shot 2015-07-08 at 3.47.13 PMI would find it much easier to accept the current progressive obsession over inequality if I saw more interest in progressive consumption taxes.  The rich can do one of three things with their money; invest it, donate it to charity, or consume it. If you aren’t taxing luxury consumption, you aren’t taxing the rich.  A billionaire trust fund baby, non-smoker, non-lottery player, can put all their wealth into muni’s and live in a $100 million penthouse paying an absurdly low tax rate. Meanwhile a working class guy in Queens who plays the lottery and smokes and has an average house gets hammered by NYC taxes. That’s not fair!  (And let’s not even talk about carbon footprints.)

PS.  432 Park is one of the few modern tall buildings with pleasant architecture. The interiors are very minimalistic, if that’s your thing. Pencil thin and about 100 floors tall, with six perfectly square windows on each side, all the way up.  Lots of white marble:

Screen Shot 2015-07-08 at 3.56.40 PMI don’t generally envy the rich, as I have little interest in their lifestyle. But even I have a tinge of envy when I think about how happy I’d be if I owned that bathroom. All that white makes me want to put on the Beatles White album (You say you want a revolution . . . )

And I’m in the top (global) 1%!   :)

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Don’t care for that chandelier.  Hopefully the tasteful monochrome interior will never be messed up with colorful children’s toys.

The Producers

(This post is pure speculation, but let’s have some fun with it anyway.)

During the campaign for the recent Greek referendum, something inexplicable happened. The Greek leader Tsipras suddenly offered a compromise proposal that he said was very close to the proposal of the creditors.  Tsipras was campaigning for a no vote, but this move seemed to support the yes position.  Very odd.  His supporters were very upset. In email correspondence with Tyler Cowen, I mentioned my confusion.  He suggested that there might be nested games being played, perhaps Tsipras secretly prefers a yes vote.  Then on Tuesday Ambrose Evans-Pritchard reported this bombshell:

Like a tragedy from Euripides, the long struggle between Greece and Europe’s creditor powers is reaching a cataclysmic end that nobody planned, nobody seems able to escape, and that threatens to shatter the greater European order in the process.

Greek premier Alexis Tsipras never expected to win Sunday’s referendum on EMU bail-out terms, let alone to preside over a blazing national revolt against foreign control.

He called the snap vote with the expectation – and intention – of losing it. The plan was to put up a good fight, accept honourable defeat, and hand over the keys of the Maximos Mansion, leaving it to others to implement the June 25 “ultimatum” and suffer the opprobrium.

This ultimatum came as a shock to the Greek cabinet. They thought they were on the cusp of a deal, bad though it was. Mr Tsipras had already made the decision to acquiesce to austerity demands, recognizing that Syriza had failed to bring about a debtors’ cartel of southern EMU states and had seriously misjudged the mood across the eurozone.

Instead they were confronted with a text from the creditors that upped the ante, demanding a rise in VAT on tourist hotels from 7pc (de facto) to 23pc at a single stroke.

Creditors insisted on further pension cuts of 1pc of GDP by next year and a phase out of welfare assistance (EKAS) for poorer pensioners, even though pensions have already been cut by 44pc.

They insisted on fiscal tightening equal to 2pc of GDP in an economy reeling from six years of depression and devastating hysteresis. They offered no debt relief. The Europeans intervened behind the scenes to suppress a report by the International Monetary Fund validating Greece’s claim that its debt is “unsustainable”. The IMF concluded that the country not only needs a 30pc haircut to restore viability, but also €52bn of fresh money to claw its way out of crisis. . . .

Syriza has been in utter disarray for 36 hours. On Tuesday, the Greek side turned up for a make-or-break summit in Brussels with no plans at all, even though Germany and its allies warned them at the outset that this is their last chance to avert ejection.

The new finance minister, Euclid Tsakalotos, vaguely offered to come up with something by Wednesday, almost certainly a rejigged version of plans that the creditors have already rejected.

That was a very pessimistic article, but I saw a possible upside—both sides actually might want a deal.  On Wednesday I linked to the article and commented:

If so, is a deal still possible?

Then commenter Mike Sax pointed out that Varoufakis once linked to an article by Evans-Pritchard, praising it lavishly.  Interestingly, the new Evans-Pritchard piece reflects some of the views held by Varoufakis.  Could he be a source?

And then global stock markets started rallying.  Today the BBC has this report, entitled “Athens Capitulates to Creditors”:

Not for the first time over the five years of Greece’s euro crisis – or the eurozone’s Greece crisis – I am confused.

My confusion stems from the proposals for tax, benefit and economic reform submitted by the Greek government to secure, at the very last minute of the last hour, a deal from their creditors to avoid tumbling out of the euro.

Having obtained a copy of this paper, headed“Greece: Prior Actions – Policy Commitments and Actions to be taken in consultation with the EC/ECB/IMF staff”, it feels very familiar.

That familiarity stems from its great similarity to the bailout proposals put to Greece by the creditors – the eurozone governments, the European Central Bank and the IMF – last month.

Pretty much everything wanted by the creditors is there – with the odd tweak or softening, but nothing which looks as though it ought to be noxious to them.

So there is a pledge for budget surpluses rising in steps to 3.5% of GDP or national income by 2018; VAT would be raised to three rates of 23% (the standard rate), 13% (for food, energy, hotels and water) and 6% (for medicine and books) – increases that would raise revenue equivalent to 1% of GDP; and Athens is eating the dust of comprehensive reforms of pensions to make them more affordable; and so on.

So here’s why I am a bit baffled.

Only a few days ago the Greek prime minister Alexis Tsipras won an overwhelming mandate from the Greek people, in a referendum, to reject more-or-less these bailout terms.

And today, on the back of that popular vote, he is signing up to the supposedly hated bailout.

This is big politics that would make Lewis Carroll proud.

Or Mel Brooks.  It would be like selling the same play 10 times over to 10 investors. The play would have to be so bad that it would definitely fail, and then you pocket all their money.  But what if it succeeded?

It’s too soon to say any of this is true.  But each hour that goes by I am more and more convinced that this prediction will somehow turn out accurate:

Does it sound like Syriza was telling the truth?  Will the Greeks now negotiate a better deal?  Or did they not even bother presenting an offer because they knew the game is over and Grexit is approaching?  I’m not sure, but within a week we’ll probably know the truth.  My hunch is that a month from now this won’t be viewed as a “victory for democracy.”

Not my view that Grexit was likely, but rather the prediction that in the end this won’t be seen as a victory for democracy. Some very subtle games are being played here on both sides.  To think that voters could suddenly be thrust in the middle of these complex games, with no understanding of what’s really going on, and less than the legally required two weeks to analyze the situation, and make a helpful contribution to the negotiations, seems increasingly utopian.  I love referenda, but this isn’t how it’s supposed to be done.

Again, this entire post is speculation; I have no information beyond the opinions linked to above.

PS.  If a deal is reached it will be very good news for the global economy–there was danger of a deflationary shock.  But it won’t be good news for Greece, indeed in some ways the worst of all possible worlds.  The socialists will still be in power, reluctant to do neoliberal reforms, and there’s no silver lining of a boost to NGDP coming from devaluation.  Overall I’m happy if there’s a deal because I care most about global welfare—but with a tinge of sympathy for the Greeks.

The Chinese stock market crash

I’ve been asked to discuss something that I don’t know much about, the Chinese stock market.  So here goes:

1.  Stock crashes are often predictions of bad times ahead.  Sometimes they are correct (the US in 1929, 2008) and sometimes they are incorrect (1987).  We know from 1987 that stock crashes don’t actually cause economic problems. Roosters don’t cause dawn.  Chinese stocks are still much higher than a year ago, and the Chinese people won’t decide to stop working just because stocks crash.  Indeed they may work even harder.

2.  It’s possible that the Chinese crash is not a prediction of economic distress, but rather just a sort of mass panic.  But the Australian dollar has been falling in sympathy with Chinese equities, which means that in this case it’s not just panic; it’s actual worry about a slowing economy.  (Unless Australian mass hysteria is correlated with Chinese mass hysteria, which I doubt.)

3.  Tyler Cowen often (wisely) points out that lots of things that superficially look stupid actually have good reasons if you look deeper.  Here he speculates as to why the Chinese government might have wanted to prevent a stock market crash.

4.  However even if Tyler is right, in this case the Chinese government probably is being stupid.  The techniques they are using (such as banning the sale of many types of stock) will actually create more panic, and will lead to more sales from that part of the investment community that is still free to sell.  Just as European governments that make it hard to fire workers end up causing higher unemployment, as people are afraid to hire them.

5.  There’s a lesson here for “bubbles.”  Even if you disagree with my view that bubbles are not a useful concept, there is very little evidence that governments can do anything about them.  The Chinese government tried to stop the bubble on the upside, and then more recently tried to stop the price collapse. It tried hard.  It failed miserably.  China will learn from this lesson.

6.  One reason why bubbles are not a useful concept is that it’s hard to tell what the right price should be in any “fundamental” sense.  Some people thought 1987 was a bubble.  After the huge price collapse of late 1987 they said, “I told you so.”  At that point there seemed to be a consensus among experts that prices had gone way too high, and that a correction was inevitable.  In fact, we now know that prices at the peak of the 1987 “bubble” (Dow 2700) were quite reasonable.  (The Dow was 1700 after the crash.)  If you bought at the peak and held stocks for 10 years, or 20 years, or 28 years (up to today) you did fine.  So the experts were wrong.  Thus even after an apparent bubble collapses, it’s really hard to know which price was right, the peak level or the later trough.  In 20 years we’ll have a better idea whether the Shanghai market should now be at 5000 or 3500 3400 (down 100 since I started typing).  Right now no one has a clue, just as no one in 1987 had any idea that the Dow would be at 17,000 today.

7.  I’d rather the Chinese government stay out of the stock market, but this intervention is of trivial importance compared to the bigger changes occurring in China.  I wouldn’t want the US government to spend a trillion dollars on Vanguard index funds, but if they did so it wouldn’t cause much of a problem.  The tiny Norwegian government has almost a trillion dollars in stocks, and it doesn’t seem to have hurt Norway.  There’s a lot of ruin in a nation as big as China, and China should be far more worried that the PBoC will fail to keep NGDP growing at 5% or more, and/or that Premier Li stops the economic reform process that’s been underway for 35 years, than about whether the Chinese government purchases some stocks.

8.  When I first visited China in 1994 almost no one had cars or owned stocks.  I was fascinated by the country, by the urgent moral issue of raising hundreds of millions of people out of abject poverty and misery.  Quite frankly, I find the modern problems of pollution, traffic congestion and stock market crashes to be rather boring.  Even today poverty is a much more urgent problem for China, but overall the situation is dramatically improved.

PS.  Fascinating story from Ambrose Evans-Pritchardmaybe even true.  If so, is a deal still possible?  (This link is better.)

On welcoming hatred

Greek finance minister Varoufakis got a lot of attention a few months back with this tweet:

FDR, 1936: “They are unanimous in their hate for me; and I welcome their hatred.” A quotation close to my heart (& reality) these days

There are indeed a number of striking similarities between FDR and Syriza.  The one I’ve been thinking about most recently occurred in June 1933. FDR’s representatives had been in Europe trying to negotiate a restoration of fixed exchange rates at the World Monetary Conference.  They were getting close to agreement when FDR issued a shocking statement favoring flexible rates that undercut his representatives and blew apart the conference.  Sound familiar?  FDR took pleasure in outraging the VSPs of his day.  Yes, in temperament Varoufakis is something like FDR.

I’m a big fan of FDR’s policy of devaluation, so why am I not a big fan of Varoufakis?  My critics think it’s all mood affiliation.  Maybe so, but recall that I am also a market monetarist.  And the “market” part refers to the fact that I believe markets provide the best indicator of the likely effect of policy shocks.

In 1933 the Wall Street elite were horrified by FDR’s replacing the gold dollar with a “rubber” dollar, having a flexible value.  And yet US stock prices soared on each and every outrageous statement by FDR, such as when he torpedoed the WMC in late June.  The Greek stock market was closed during the recent vote (and remains closed) but both Greek and European stocks responded negatively to information suggesting that Syriza was unwilling to deal during the month of June, and then rose on hopes for an agreement.  Those contrasting market reactions are probably telling us that there are small but important differences between the US in 1933 and Greece today.

To end on a fair and balanced note:

1.  The market would probably also welcome more European flexibility in striking a deal.

2.  The fact that FDR was right when all the VSPs thought he was wrong should make us cautious about judging the Greek situation.  It’s certainly possible that Varoufakis is right and I am wrong.

PS.  Between mid-April  and mid-July 1933, US stocks were even rising sharply in gold terms, despite rapid depreciation of the US dollar against gold.