Greece's Underlying Policy Problem.

[T'Girl]

Basically this, is Greece's current financial problems a result of it's monetary policy, or it's fiscal policy?

I feel that the underlying problem, the original source of the problem, is the Greek government's long term unwillingness to enact a reasonable fiscal policy. Especially since it joined the eurozone.

If it had had a realistic fiscal policy over it's recent history, it wouldn't be having problems today selling bond/securities.

Or is the true core of the problem Greece's fiscal policy?

What say you?

 

[royalfan5]

I think the biggest mistake of Greek Policy was leaving the shelter of the Ottoman Empire.

 

[horatio83]

I don't feel about these matters, I think.

You are right that Greece is basically bankrupt because it did not manage its public finances well. The right thing to do would have been to accept this bankruptcy and partially default on the debt like Iceland has done. Instead the European taxpayer basically bailed out the bondholders and the main institutional bondholders are of course banks
The main structural problem of Greece which has not been addressed at all by the Troika is the badly functioning tax system. Everybody is focused on expenditures.

It is pretty obvious that Greece has to reduce its expenditures and increase its revenues. But you do not that that immediately, in a recession cutting public expenditures reduces aggregate demand and the recessions is intensified, hence unemployment rates over 20% in Greece. The right way to do it is to commit to a long-run reduction of public debt.

It is no coincidence that economists like Krugman or Koo who did research on Japan analyze the contemporary crisis so well. Japan faced a similar problem as the whole world does nowadays in the nineties. A balance sheet recessions with interest rates being stuck at zero which implies that monetary policy has become ineffective. They did the right thing, compensate the reduction of private spending via an increase of public spending. And as I already explained to you, they have no problems with maintaining a debt over GDP ratio of 200% because their central bank can prevent speculative attacks via committing to buy treasury bonds.

This is via a country like Spain where a debt/GDP was around 30% before the crisis cannot finance itself nowadays. No independent monetary policy, no central bank which was willing before the end of last year to play the role of lender of last resort. This is not a new notion, Walter Bagehot already advocated this in 1873.

So yeah, although conservative politicians in the US uses Greece as bogeyman to warn about rising public debt (Once again, long-run public debt is a problem. Gee, I even think that governments should emit no debt but strive to finance themselves via taxes plus holding assets and living of their returns. But you gotta separate this long-run issue from the short-run necessity of counter-cyclical public spending. As Keynes said "the boom, not the slump is the time for austerity".) it cannot happen as the US can print its own money.


Another problem of not having your own currency is that you can devaluate it (via printing more if it) during a recession to increase export demand.
Countries have to "internally devaluate", let wages and prices drop which leads to massive unemployment.
Furthermore the Euro created massive European trade imbalances. Germany constantly had positive net exports vs. negative net export in the South which implies a flow of capital from the north to the south ... and nowadays the north basically whines that their investments weren't totally sound. Two sides are to blame here, not just the debtor but also the creditor. At least if you dislike socialism for the banks and are rather a fan of free markets, taking responsibility for your actions and so on.

 

[publiusr]

Let's not forget Iceland, whose economy was wrecked by deregulation
http://en.wikipedia.org/wiki/2008%E2%80%932009_Icelandic_financial_crisis

 

[stj]

The point about Spain's problems, which are so similar to Greece's, yet obviously have nothing to do with the ratio of public debt to GNP, is well taken. And the situtation is pretty much the same with Italy. For that matter I think the Iceland problem had nothing to do with public debt but the insane overextension of its previously rather small banking system. On the face of it, the problem is a systemic failing of the entire capitalist system. The burden of proof is on those who want to blame the victims.

Of the domestic factors that made Greece weaker than other national economies, the worst should have been obvious. The infamous junta of the Seventies savaged the Greek polity with a savagely regressive revenue system. The notorious tax evasion began with the colonels letting the upper classes cheat. If anyone is to be blamed, it is them. But obviously the people who want the Greek population to suffer are brothers and sisters in spirit to the torutrers.

The Keynesian prescription for cutting government spending in normal times rather assumes that crises are inexplicable deviations, rather than the normal workings of capitalism. It even assumes there are no tendencies towards increasing magnitude of crises. It also tends to assume that "normal" capitalism will achieve maximum levels of growth (however you choose to measure that,) with no possibility of lagging development. It even assumes that normal capitalism will automatically develop nations! No Keynesians really make an effort to justify these propositions.

 

[horatio83]

It depends. Hicksian Keynesiansism, after WWII mostly popularized by Samuelson's famous textbook and nowadays via Krugman's blog, does indeed treat recessions as deviations.
Post Keynesians like Minsky or Paul Davidson do on the other hand focus on disequilibrium tendencies, i.e. a financial crisis like the current one is not an anomaly but a regularity (and historically this is of course right).
As Keynesianism is about economics it doesn't assume the development of nations. No idea where you got that form.
Of course you are totally right that no Keynesian is anti-capitalist. Keynes wanted to fix the problems of capitalism, not throw it overboard. And given that demand management worked so well after WWII I fail to see why we should throw it overboard.

But let's also focus on commonalities between radical lefties and social democrats. If you want to read something from a guy who also thought about the business cycle at the same time as Keynes and came up with similar ideas yet unlike Keynes has a socialist and not a liberal political background I suggest this brilliant article by Kalecki. He predicted in the fourties that the political power of capital will undo any attempts to create full employment via demand management and his prediction turned out to be right.

 

[stj]

I seem to remember an article by Kalecki about the political trade cycle (the very title?) and his little book Theory of Economic Dynamics. Although Kalecki did indeed predict political machinations, so far as I know that actual business cycles that have occurred have not transpired in any way that could be explained by Kalecki's putative causation. I think that in the end, Kalecki also agreed that capitalism only needed a correct economic policy, even if he was shrewder about the politics.

As to Keynesianism on economic development, I am pretty sure that it assumes that the normal operations of capitalism will develop all economies, presuming that comparative advantage is pursued. I think economic history refutes this. (And the absence of an analysis of imperialism in Keynesianism, which after all originated when the maps officially still read British Empire and French Empire should be quite an embarrassment.)

The world economy is not an exogenous factor. I don't think any Keynesian has even seriously thought about the long-term meaning of demand management in that context. And frankly, what monetary and fiscal tools could possibly mean in a world that doesn't really have a common currency?

Again, there is no reason that I know of to pretend to analyze the Greek situation apart from a general crisis in the world capitalist system. That's just foolishness. I don't think it's unique to political conservatives. That is obviously (I hope) why I didn't vote the poll.

 

[horatio83]

My problem with the "symptoms of capitalism" stuff is that it is too simple. It's like when conservatives said "socialism failed just because".
No, you gotta be specific analyze what works and what doesn't. Socialism failed because companies couldn't go bankrupt and in capitalism we also just witness problems on the capital markets.

So instead of leading big ideological debates we should rather think about how we can create a well-functioning capital market. And just to be clear, although I am liberal and a social democrat this doesn't imply that I have problems with radical suggestions like bank socialization. I care about whether stuff works, not whether it is done publicly or privately.

 

[Oerdin]

Basically this, is Greece's current financial problems a result of it's monetary policy, or it's fiscal policy?

I feel that the underlying problem, the original source of the problem, is the Greek government's long term unwillingness to enact a reasonable fiscal policy. Especially since it joined the eurozone.

If it had had a realistic fiscal policy over it's recent history, it wouldn't be having problems today selling bond/securities.

Or is the true core of the problem Greece's fiscal policy?

What say you?

A bit of both. Yes, the Greeks found that when they entered the Euro they could borrow at dramatically lower rates and they went over board but they also entered the Euro Zone on to high an exchange between the Drakma and the Euro. This meant Greek products just became too expensive especially since Greek productivity is so much lower than in Northern Europe so this effectively priced most Greek goods off the market.

The other problem is corruption, over regulation, and cheating on taxes is as natural as breathing to Greeks. EVERYONE cheats on their taxesl when an election is coming up the first thing the government does is stop collecting taxes because they might lose votes if they actually made people pay taxes. Lastly, the entire Greek economy is massively over regulated, this is a long lasting effect of the country being a military dictatorship for so long, but even getting a phone line connected to your house requires getting permits from at least three government offices and it can take years to get permission to open a store or to build a development. They need to slash the bureaucracy, eliminate the minimum wage so that it becomes cost effective to hire Greek labor, and lastly they should consider exiting the Euro if wages don't come down to a level where it is cost effective to hire people.

 

[stj]

Unless I'm completely confused (which is possible, given the flurry of dubious ideas,) the decline of tourism revenues in Greece cannot be attributed to low Greek productivity. That single factor must be attributed to an international downturn in economic activity. And yes, so far as I know, it is a major one for the Greek economy.

Capital markets are working quite well for those who possess capital. They are not functioning so well for the mass of humanity, but then, in a capitalist system, people are merely a factor of production. They only exist to service the economy, the economy does not exist to service them. Insisting on a capital market in the end means insisting on this state of affairs.

Another dubious idea is the notion that the Greek economy is over-regulated. If the Greek government (and the people who supposedly create it) cannot collect taxes or force its personnel to carry out its policies uniformly without indulging in personal benefit, in what sense is it even honest to claim the Greek economy is over-regulated?

Needing three government agencies' approval to connect a phone suggests that the government bureaucracy needs to be simplified, of course. But historically bureaucracies acquire a seeming independence from the directing higher elements of goverment, the official leading part that is supposed to determine general policy, by acquiring a reciprocal relationship with a special interest. This is particularly true in bourgeois democratic governments, where the owners are particularly anxious that elections do not actually change anything.

Lastly, of course, the notion that lowering the minimum wage will cure a depression is folly motivated by hatred of workers, whether personally felt or imbibed with ideology. Firing most of the civil service of course is pretty much the same. This last incidentally gives the lie to the sincerity of the belief that "over-regulation" is a genuine problem. If you really believed that, you don't need to fire any government workers, thereby aggravating a depression by lowering consumer demand. You need only direct your workers to sit at home, collecting their paychecks.

Everyone of course knows that this would be insane, because they know that over-regulation is really the problem they claim. Therefore bureucrats sitting at home maintaing consume demand would not benefit the economy to any significant degree. The whole idea is just another fraud. It's just a disguised way of lowering wages.

 

[horatio83]

Insisting on a capital market in the end means insisting on this state of affairs.

Let's get concrete. How do you want capital to be allocated?
You said that you don't want it to be done via markets. As I already pointed out, socialism failed because companies could not go bankrupt and because people with a good idea couldn't set up their own company in the first place, i.e. there was no space for innovation.
So what's your idea, repeating the mistakes from really-existing socialism, cooperatives or what? What kind of non-market allocation mechanism for capital do you have in mind?

 

[stj]

Yes, I've read Acemoglu and Robinson's Why Nations Fail. The notion that capitalism has solved the problem of technological innovation requires two assumptions. First, that the human costs are irrelevant. Second, that ecological costs past and future are counterfactuals, hence also irrelevant. Those two gentlemen also refuse in all those wasted pages to even attempt to describe, much less define, extraction economies. Their fury at the Argentine devaluation fairly leaps from the page, on grounds which for me also calls into question the basic humanity of their views.

I'm not sure how you could possibly think you could require me, personally, to solve the problem of technological innovation in a world where humanity is stressing the entire biosphere. These problems are far beyond one person.

Your implicit assumption that capalism, with the suitable policy, however can says to me that you're the one who should be spelling out policies in rather more detail. This is especially true given the huge importance of the government in so-called capitalist innovation. We are discussing this on the internet after all. Suppose that global climate change does proceed to the point where massive geoengineering projects to repair the damage are needed. Who would have the incentive to do this in a capitalist system? No one.

In fact, in a capitalist system, which is predicated upon a world of nations, or, possibly, empires, such geoengineering projects must necessarily lead to a divergence of interests. There would be inevitable conflict between those nations and empires that would benefit from these projects, while others would suffer. This scenario is not particularly extreme, though who knows if it will come to pass?

(See Levitan for discussion of these possibilities. Incidentally, the way that Levitan clearly states that academic economics is all about incentives, then conveniently never troubles to ask about incentives in his apologetics for ecosystem destroying technological development! Such unconscionable fraud is routine for conventional economists.)

That said, yes, the reluctance of a socialist system to end employment does by capitalist standards mean inefficiency. I believe that simply paying full unemployment to the workers while physically liquidating the assets will make it clear when liquidation of old technology is truly desirable in an economy aimed at fulfilling human needs.

There are multiple reforms that could be made to even the old-style planning system the USSR used. A social form of bankruptcy could be developed. The design bureau approach could be further developed. Given a sufficient level of productive development, experimental forms of development, even to the point of randomly supporting would-be innovators, could be tried.

But frankly, one of the greatest problems was isolation, requiring a single government to attempt to do everything, while under constant threat. No socialist economy has ever been allowed to demonstrate the inevitable failure of socialism. The capitalists have always spent massive amounts of money and spilled massive amounts of blood to make sure that there would never be an opportunity.

The capitalists may know something about their system you dont'?

 

[horatio83]

I wasn't talking about technological change but about capital allocation as you said that capital markets are bad. Technology and capital aren't the same thing. Capital is the computer you are currently sitting at, the house you are living in and so on. Technology is the "recipe" which describes how you can produce this stuff.
About your concrete suggestions, really-existing socialism failed and not because of wicked Western forces sabotaging it. Deal with it.
"Random support" means you throw dice. This is far inferior to a bank which monitors creditors. If I wanna finance a house and another dude wants to finance a house as well yet he doesn't have one penny and I have a steady income stream throwing a die and perhaps giving him a loan for a house is utter lunacy.

You want me to spell out things in detail? In short, back to the sixties. You could call it social democracy or moderated capitalism.
What does this mean CONCRETELY: Separate normal and investment banking, increase bank's equity requirements to perhaps 10-12%, crush shadow banking, crush rating agencies or socialize and regulate them. Make banking once again a business which doesn't pay more than being an engineer or doctor. Crush tax havens, significantly increase the taxes on the rich, conduct serious demand management, create democracy in the workplace, work on corporate governance problems such that shareholders gain more power over management.
About climate change, crush the political power of the energy industry, try to solve the worldwide cooperation problem (it is basically a prisoner's dilemma) and then create a worldwide CO2 tax system while reducing taxes on capital and labour at the same time.

Given that capitalist and socialist countries wrecked havoc on the climate I am not inclined to be a fan of either capitalism or socialism. I prefer empirics over ideology, I am a fan of things that work and 20th century history has shown that a mixed social democracy economy works best. Despite the slow unraveling of social democratic over there like in the rest of the world, Scandinavian countries are still among the best places to live.


See, I am totally with you when it comes to crushing reactionary forces, undoing the rise of income and wealth inequality worldwide and so on. But I totally cannot understand the radical left's ramblings about the evils of capitalism and free markets while failing to provide anything but a very vaguely sketched alternative.

 

[stj]

In the end, most of your ideas about economics are Rogoff and Reinhart writ large. Namely, dubious assumptions motivated by an agenda are supported by supposed facts whose math doesn't bear close examination. The Sixties were a time of war, assassination, Cold War, inflation, gold drains.

The Sixties also led inexorably into the Seventies, whose infamous stagflation refuted Keynesianism. The attempted revival is a fad inspired by desperation. Are there counterfactual arguments that a combination of misfortunes, crimes and errors prevented a better outcome for Keynesian policies? To be sure, just as there are stronger counterfactual arguments about the possible outcomes for socialist economies.

I have a much more interesting post about Greece to reconstruct, but real life has slowed it. This is to keep the thread alive til I can rewrite it.

 

[horatio83]

With Rogoff and Reinhart you probably refer to their bad paper on debt. I have no idea how you can imagine that my previous post is in any way influenced by them, high levels of public debt are rarely a problem if you have your own currency. I know that apart from their recent missteps they are fine economists but I never read anything by them.

Stagflation did not refute Keynesianism. That's Thatcherite bullshit and I am surprised that you have bought it. What happened in the seventies is that we became aware of the problem of inflation expectations and future monetary policy took this into account.
Keynes' General Theory wasn't about managing an ordinary recessions via decreasing the interest rate, it was about the dire need for fiscal policy in liquidity trap (i.e. when interest rates are close to zero and conventional monetary policy becomes ineffective). And as we are right now in a liquidity trap fiscal policy is what the doctor orders.

If you can come up with something better I am all ears. But so far your description of your preferred alternative, a socialist economy, is extremely vague.