Saturday, July 23, 2011

Thoughts on Greece, and us

A large part of what holds Greece back, and us as well, is fairly described as rent-seeking--manipulation of public power for private profit, one way or another. In Greece, as in the Latin America of my childhood, it's much more likely to take the form of simple corruption: imagine (as I was told in Greece last week) an underpaid government official who approves environmental permits, and who provides faster service for those who provide extra money. And then he slows down the uncompensated permits sharply, to encourage the trade. It's not that he is lazy or works few hours, it's not even that there are too many such officials -- all that is often said but seems to be wrong. It's simply that his work product tends to detract from actual GDP, even as it's added at "cost" to official GDP. If he weren't doing that, Greece would be richer.

Other kinds of rent-seekers include those who profit from government-imposed monopolies, like the Athens taxi-drivers now striking, unpredictably blocking port and airport. Rent-seeking is a pretty broad category in my mind. I suppose that all countries end up with issues of regulatory capture and indeed of crony capitalism; government makes rules, and these rules will tend to promote the interests of those who have something to offer to the rule-makers, or some credible threat they can make. That interest-promotion is "rent," paid to the people who've managed to make some government power into their own property, legally or not.

I spent last week on Spetses, with various extended-family events relating to my granddaughter's baptism. It's interesting and educational to listen to Greeks and Greek-Americans talking about their fiscal crisis; I'd hoped to get some time specifically listening to Yannis Ioannides and Anna Hardman, and did, but not enough for real understanding. Yannis' basic Greece-is-not-bankrupt statement surprised me considerably (see Ioannides Says Greece Not Bankrupt, Must Change Economy: Video - Bloomberg). He thinks Greece really can pay its debts -- and he thought that even before the ’Restricted Default’ deal of this week, so I presume he thinks his case has been strengthened. He's an advocate for the austerity measures, which I suppose makes him one of the Serious People of whom Paul Krugman said this week in 1937! 1937! 1937! - that

OK, so we’re going to demand harsh austerity in the debt-crisis countries; and meanwhile, we’re also going to have austerity in the non-debt-crisis countries. Plus, the ECB is raising rates. So demand will be depressed in both crisis and non-crisis economies; this will lead to a vigorous recovery through … what? The Serious People are determined to destroy all the advanced economies in the name of prudence.
I'm mostly on Krugman's side there; we're combining monetary policy from the ECB which may be reasonable for Germany but not for Greece, along with drastic contractions of an uncomfortably the-beatings-will-continue-until-morale-improves flavor. Or so it seems to me. But Yannis isn't supporting austerity to reassure bond markets as Krugman says; Yannis thinks that the "austerity" (including the deregulation of taxi medallions being protested) is part of breaking or at least limiting the rent-seeking system. Well, I'm not sure he or Anna ever said "rent-seeking" but that's my understanding of what they did say, and when I look for related material online I find things like BusinessInsider's querying a member of the `professional "elite" class' of Greece, who said
We want the Greek economy reformed. An end to the of unimaginable waste of taxpayers money,...cronyism and corruption. A much smaller and reformed public sector... A pursuit and prosecution of presently wide spread tax evasion practices. The above would immediately provide us with a considerable primary surplus, enabling us to keep repaying our debt, an obligation we wish to honour. ... Unfortunately it appears that the average Greek, does not view things the same way.
That certainly sounds like the viewpoint of the Greeks with whom I spoke. And how big is the corruption problem? Well, Transparency International said
The Greeks paid an average of €1,355 ($1,830) in bribes [in 2009] for public services such as speeding up the issue of driver's licenses and construction permits, getting admitted to public hospitals or manipulating tax returns, ... Bribes paid for private sector services such as lawyers, doctors or banks were even higher...
So really, Yannis and those he supports (to the extent that I understand what's going on here) are not so much engaged in economics as in political action aimed at restructuring Greek culture. Otherwise, the bailouts fail. In The Painful Arithmetic of Greek Debt Default | e21 - Economic Policies for the 21st Century I see
How does corruption limit the capacity for tax and spending reform? Tax avoidance, which relies on bribery to avoid prosecution, is a national pastime in Greece – the envelope used in the bribe even has its own name, the “fakelaki,” confirming the age-old adage that the Greeks “have a word for it.” Bribery is so rampant in Greece that real estate developers’ method of obtaining cheap land is to burn down public land, squat on the burned parcels, and pay off public officials to permit this. Greece’s forest fires, particularly in the Peloponnese in 2007, have been a source of public outrage for years, and yet the developers continue to squat on the land with impunity. Is a society that permits that sort of lawlessness capable of tax reform?
Maybe. Maybe not. I respect Yannis, but if the average Greek doesn't believe in it to begin with, I don't see a happy ending to this story.

Corruption is by no means the only problem, and an end to rent-seeking would not necessarily make Greece fit comfortably into the Eurozone. Clearly, little Greece will never be the target of the ECB's monetary policy. Krugman, in Anatomy of a Euromess, said that

Spain’s troubles are not, despite what you may have read, the result of fiscal irresponsibility. Instead, they reflect “asymmetric shocks” within the eurozone, which were always known to be a problem, but have turned out to be an even worse problem than the euroskeptics feared.
David Beckworth took Krugman's analysis and extended it in "Optimal Currency Area" terms within Eurozone Periphery and the Euro, saying
If a region’s economy is not in sync with the currency union’s business cycle and the above listed shock absorbers ("flexible wages and prices, factor mobility, fiscal transfers, and diversified economies") are absent then it does not makes sense for a country to be a part of the currency union. Instead, the country should keep its own currency which itself will act as a shock absorber.
It's no great surprise to see that in his graphs, Greece ends up as the most ill-placed. But I believe that part of the "austerity" program is intended to increase the flexibility of the job market (by pruning job protection programs, as has been tried before) and maybe, if the austerity programs are accepted, maybe things will work out. For a while. Public Pensions and Labor Force Participation: The Case of Greece
The pension system of Greece is a representative case of the “Mediterranean welfare state”, which is characterized by extensive segmentation, very high payroll tax rates, and yet inadequate pension benefits. In order to explain this paradox we construct an economic–demographic model. We show that in the period 1980–2000, the segmentation of the system and the very low labor force participation rates of the Greek economy have resulted in very high payroll tax rates in relation to the current level of benefits. On top of these problems, the expected adverse demographic developments in the period 2005–2050 will render the pension system completely unsustainable.

Still, the near-term need is to cut the rent-seeking (including corruption) and collect the taxes and shrink the regulatory/welfare state. Maybe. And can it be done? Well, my own approach in Greece, even more than in the US would be:

automate, eliminate, simplify, outsource.
Almost all of a government's functionality should be virtual... Well, maybe I will make a separate post about that, sometime.

Meanwhile, a little more time has been bought. The Economist remarks that

the biggest risk to the euro zone is that its leaders will begin thinking that they've solved the problem. As growth figures worsen in coming months, markets will once again become antsy. Euro-zone officials had better be preparing for a way to convince them anew that they want this thing to work.

And I go back to the pattern I established last winter, of exercise and education

This morning I spent 45 minutes trying to pound a few modern Greek words and phrases into an aging memory; until a month ago, this would have required a major effort of willpower, but lately I've been doing it every day with no problem...
As I commented to my son's mother-in-law, see-gah-see-gah mah-THAY-no, which I think means "little by little I'm learning;" since her response was "bravo, Tom, ah-krih-VOS!" (precisely), maybe it does. And maybe I will eventually learn some economics too. Or then again, maybe not.

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