Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 30 March 2015

Greece and other benefit scroungers

Whenever I write a post critical of German views on Eurozone policy, I get comments which can be paraphrased in the following way. Greece (and maybe other Eurozone countries) are incapable of governing themselves properly, and when they get into difficulties Germany has to bail them out, so it is only reasonable that as a price for this Germany should insist on imposing changes to the way these countries do things.

To say such an attitude is inherently wrong (wrong in any possible circumstances) seems to be too strong. The IMF, after all, has played a very similar role many times. Many may criticise the kinds of reforms that the IMF has demanded as part of its conditionality, but to suggest that conditions are never made as part of such a loan package seems unrealistic.

But while conditionality of any kind cannot be ruled out, it can also go far too far. It should never become imperialism, and the choices of a sovereign people should be respected and accommodated, not ignored.

It is clear that the Greek government ran up unsustainable debts, and tried to hide these. As a result, it was bound to default on those debts. As doing so would exclude it from the markets for a time, it was also reasonable to lend (not give) Greece money to enable it to gradually rather than immediately achieve primary balance. Some conditionality to correct any underlying weaknesses in the openness and accountability of the budgetary process would seem reasonable in such circumstances.

Contrast that with what actually happened. First the Eurozone resisted default, and then it was only partial, which meant providing far larger official loans than were needed. The beneficiaries of this were mainly the financial institutions (e.g. Eurozone banks) who would have otherwise lost money. Second, ridiculously severe austerity was imposed, which crashed the economy and made it much more difficult for Greece to adjust. Third, conditionality far in excess of what was required is being imposed.

I have argued before, based on very rough and ready calculations that the fall in Greek GDP since 2010 could be entirely accounted for by fiscal austerity. This conclusion has now been backed up by rather more rigorous analysis in a new paper by Sebastian Gechert and Ansgar Rannenberg. As we both acknowledge, some GDP loss was inevitable because the deficit had to be reduced (and Greece does not have an independent monetary policy which could offset the impact of deficit reduction). However, as always, timing is everything. The paper argues that “most of the costs of fiscal consolidation could have been avoided by postponing and gradually implementing it after the recovery of the Greek economy, due to the lower expenditure multipliers during normal times.”

The delay in default, its partial nature and a degree of austerity that Gechert and Rannenberg describe as ‘biblical’ and which did such damage are all acutely embarrassing for the Troika. But instead of criticism being directed at these governments, we see a narrative that tries to blame what happened from 2010 onwards on Greece itself, and the Greek people in particular. The economy has crashed because the Greek people do not work hard, austerity has not worked because it has not really happened, and there have not been enough reforms. None of this is true, but the narrative seems largely impervious to facts. (On reforms, for example, see here.)

All this reminds me strongly of how certain attitudes to beneficiaries of the welfare state have been encouraged by the UK coalition government. Rather than admit that unemployment benefits had risen because of the recession and the absence of a recovery (itself a result of austerity), the focus became on the personal failings of the unemployed themselves. The media (TV as well as the tabloids) are still full of examples of supposed ‘welfare cheats’, but they rarely put such examples into context: how tax evasion is a bigger problem that benefit fraud, for example.

People do hate the idea of ‘their taxes’ allowing ‘other people’ to get ‘something for nothing’. In contrast tax evasion does not sound too different from tax avoidance, which many people do as much of as they can. Condemning one and ignoring the other may be human nature. What is clearly wrong is politicians playing on these feelings to misdirect anger away from their own mistakes, or undertaking unnecessary or even harmful policies to play to the gallery. A clear case of the latter is the recent increase in benefit sanctions, which are being applied in an excessive and unfair way, greatly increasing the use of foodbanks as a result. That a committee of MPs where the government is in a majority have expressed grave concerns about the policy just before an election gives an indication of the scale of the injustice that has been taking place.

When politicians do this, it is a sign of chronic political weakness: a desperate attempt to cover up past mistakes. There is a strong danger that the same dynamic may occur in the continuing standoff between Greece and the Eurozone. Having encouraged a rhetoric where a virtuous Eurozone has shown nothing but generosity to a feckless Greece, politicians feel compelled to live up to that false narrative by acting tough in negotiations, which does no one any good to put it mildly. When Putin behaves recklessly to boost his popularity and succeeds, we can blame the lack of press freedom. When political leaders in the UK or Germany play the same trick, do we blame the media for playing along or the people for falling for it?

35 comments:

  1. Another spot on post...but talking about cover-ups by the present government, did you catch this from last week, where even the former Tory minister Lord Boswell "comes close to saying that ministers tried to cover up the findings, which do not support David Cameron’s claims that the EU is “becoming a state” and has already accrued excessive powers"?
    http://www.theguardian.com/world/2015/mar/28/lords-accuse-tories-burying-eu-powers-review
    Isn't it important for the electorate to have as much information from all viewpoints as possible when it comes to deciding on who will govern them for the next 5 years? Unfortunately it seems the direct opposite is the case; whether it be on the origins/causes of the last recession, the impact of austerity, the reasons for our current economic situation, immigration, welfare and now the EU. Perhaps the Prime Minister and Chancellor are big fans of Doris Lessing, who once said that “There is no doubt fiction makes a better job of the truth.”?

    ReplyDelete
    Replies
    1. Hello Everyone I am Daniel Steve from Texas, USA. I will like to share the goodness of God in my life after so many months of trying to get a loan on the internet and was been scammed so i became restless and desperate in getting a loan from a legit lender online. But as God would have it, i saw a comment from a friend called William Ken and he talked about this legit loan company where he got his loan fast and easy without any stress so he introduced me to a man called Mr Mason Diego who controls a firm called Diego Loan Company, So i applied for a loan sum of ($170,000.00USD) with low interest rate of 2%, so the loan was approved and deposited into my bank account in less than 48hrs, that was how i was able to get back on my feet to keep my broken business running and also to pay off my bills so i am advising everyone of you who is interested in getting a loan without collateral, no credit check, no co signer with just 2% interest rate and better repayment plans/ schedule, to please contact Mr Mason Diego. You can contact him through his email: diegoloancompany@yahoo.com

      Delete
  2. Great points in this post.
    Blaming individual Greeks is a part of neoliberal coin of Wealthy are meritocraticly rewarded for succes. Teil of that coin is Unemployed are guilty for their failure.
    Mentality of Reagan and Thacher are still prevalent in MSM and in public which wealthy trough politicians easily convert for their own benefit.

    But i have a beef with one sentence: "It is clear that the Greek government ran up unsustainable debts"
    but then later on points to real culprit: "Greece does not have an independent monetary policy which could offset the impact of deficit reduction"

    Every country has ran up unsustainable debts, there is no country in the world that can pay off its debts and not have the same consequence as Greece. AND every country services its debts with new debts.
    What makes it unsustainable is the monetary policy, not the level of debt. Countries with dependent Central banks (those using foreign money or fixed FX) can not lower interest rate when economy tumbles. They have to rise rates in order to atract more foreign money, this kills their already falling economy.

    Central Banks determine interest rates on debts of their own country. Is CB independent of fixed FX and having sovereign currency (not independent of politicians as false economist claim) determines sustainability of public debts.

    Again; Central Banks determine interest rates for their own's country debt. Why they do it opposite then needed is when they are dependent on foreign money.

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    Replies
    1. What debts? As Martin Wolf recently pointed out, there is no effective difference between national so called "debt" and money (at low rates of interest);

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    2. Sanjay
      That is way further down the argument, let's cross this hurdle first: Why debt becomes unsustainable? Thanks

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  3. I guess the creditor governments have strange incentives now. You can't even say that they are rationally and selfishly focused on making as much profit (minimizing the losses) on their loans to Greece. More precisely, they don't want to realize any losses while they themselves are in office. Merkel would love Greece to default on its debts -- but only a few years after she leaves office as this would allow her to avoid blame.

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  4. 'A virtuous Eurozone has shown nothing but generosity to a feckless Greece.' A false narrative indeed. The Dutch Centre for Research on Multinational Corporations found that Greece has missed out on at least €1.7 million in tax revenues, because the company, Eldorado Gold, profited from the Dutch tax rules. Please note the Netherlands is the homecountry of Dijsselbloem. The link: http://www.somo.nl/publications-en/Publication_4177?set_language=en

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    Replies
    1. 1.7 millon euro! With a capital M. By gosh, in 600 years that makes a Billion.

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    2. Greece certainly has a problem with tax evasion.
      Having the "Double Dutch Sandwich" available for the tax cheats does not make things better.

      There is plenty of blame to go around, IMHO.

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  5. Isn't it time this blog had a good look at the differences inherent in 'rational' economics compared to 'irrational' conservatism an an ideology?

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    Replies
    1. That would require admitting that the economy, and economic behavior, are embedded in such things as "culture," "class,"and the like. And then the foundations of economic theory (theories) would implode.

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    2. Or alternatively you could enrol on a basic introductory class.

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    3. Or you could read beyond the usual lit for that basic introductory (to what?) class. Ironically (or not), that's been one running issue: economists need to get out of their intellectual and empirical comfort zones.

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  6. "The beneficiaries of this were mainly the financial institutions (e.g. Eurozone banks)..."

    E.g. UK banks. This kind of lacuna I'm afraid is what is so comical about SWL's posts about Greece.

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    Replies
    1. Can you explain what point you're actually trying to make here and give a little more justification.

      Delete
    2. Hello Everyone I am Daniel Steve from Texas, USA. I will like to share the goodness of God in my life after so many months of trying to get a loan on the internet and was been scammed so i became restless and desperate in getting a loan from a legit lender online. But as God would have it, i saw a comment from a friend called William Ken and he talked about this legit loan company where he got his loan fast and easy without any stress so he introduced me to a man called Mr Mason Diego who controls a firm called Diego Loan Company, So i applied for a loan sum of ($170,000.00USD) with low interest rate of 2%, so the loan was approved and deposited into my bank account in less than 48hrs, that was how i was able to get back on my feet to keep my broken business running and also to pay off my bills so i am advising everyone of you who is interested in getting a loan without collateral, no credit check, no co signer with just 2% interest rate and better repayment plans/ schedule, to please contact Mr Mason Diego. You can contact him through his email: diegoloancompany@yahoo.com

      Delete
  7. A little food for thought: Margaret Somers and Fred Block, "From Poverty to Perversity: Ideas, Markets, and Institutions over 200 Years of Welfare Debate."

    http://asr.sagepub.com/content/70/2/260.abstract

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  8. " But while conditionality of any kind cannot be ruled out, it can also go far too far. It should never become imperialism, and the choices of a sovereign people should be respected and accommodated, not ignored."

    This is an awesome point. But, how many noticed what it acctually means? It means that democracy is in the way of bondholders. When bondholders ask for odius debt repayment democracy should not exist. It is destruction of democracy which what Yanis keeps talking about.

    Reagan and Thatcher brought times when bondholders are paid off first and then pension has to strugle with funding for social insurance coverage. Examples of New York in 80's, Detroit, Cleveland, Camden today. All destroyed cities but bondholders had to be made whole first and social needs last. Is there a wonder why there is resurgence of fascist and socialist parties that offer alternatives to this idiocy?

    Greece also had to pay off debt swaps that Goldman Sachs used to hide Greece debts but which later became very expensive. In the begining, the swap was cheap, but it became usurious and unsustainable, but it had to be covered when bailout was forced upon Greece.

    The same happend with Montgomery county in Alabama (Atlanta) when Bank of America's dealer was sentenced for forcing such usurious swap onto the County's funds but County still had to pay up while going bankrupt and defaulting on pensioners.

    This shifting of funds from pensioners to banks by usurious and quantum algoritmic swaps and investment is prevalent in the West. It is not only Greece that is suffering from it. It is the most visible place.

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    Replies
    1. That's why Greece needs to exit the Eurozone and be sovereign its own currency. Not need to look after 'bond vigilantes.'

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  9. "It should never become imperialism"

    To reuse this quote. It was the imperialism from the start that drove to this point. Imperialism did not just rear it's head, it was there from the begining when euro was formed, when imperialism logic forced fixing colonist currency to empire's currency. This made Central Banks dependent on foreign funds, forcing rates up when the rate needs to go down in recession.
    This makes any debt unsustainable.

    It is structural deficiency, nothing of individual guilt.

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  10. Prof. Wren-Lewis,

    You accept that loans can be made subject to conditions to be met by the borrower.

    You say that Germany set conditions that went too far.

    That means that we are discussing questions of degree.

    But you do not say one word about which conditions would have been acceptable and where Germany went too far. Was it unreasonable to ask for decent tax collecting service? Or a functioning land register to protect property rights? Were six years not enough for that??

    The devil is in the details, and you would be much more convincing if you gave some.

    As for respecting and accommodating the choices of a sovereign people, remember that it was democratically elected governments of that sovereign people who drew their country into unsustainable debt and who signed the Euro treaty under which no partner is required to bail out another. That means that a country can only avoid austerity if it has the money to do so. Greece didn't - not even in the case of default (which Schäuble is said to have favoured). You yourself admit that Greece would then have had no access to capital markets for a time. For whom would it have been reasonable to lend it money during that time?

    Greece did receive help from the Eurozone countries, Germany among them. The consequences of default would have been much worse - or how do you think Greece would have survived the first years?

    I am willing to be convinced if you can supply the details.

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    1. Default would have been better than the last 6 years. (See Argentina's default) Greece has suffered a humanitarian crisis with many more years of high unemployment ahead of it. The wonder is that it took this long to elect a Syriza.

      "The paper argues that “most of the costs of fiscal consolidation could have been avoided by postponing and gradually implementing it after the recovery of the Greek economy, due to the lower expenditure multipliers during normal times.”

      I'll pass the mic to Mark Weisbrot:

      "It could hardly be more obvious that this is not about money or fiscal sustainability, but about politics. This is a government that European authorities didn’t want, and they wish to show who is boss. And they really don’t want this government to succeed, which would encourage Spanish voters to opt for a democratic alternative — Podemos — later this year.

      The IMF projected the economy to grow by 2.9 percent this year, and until the last month or so, there was good reason to believe that — as in 2014, after years of gross overestimates — its forecast would be on target. This growth would likely have kept Syriza’s approval ratings high, together with its measures to provide food and electricity to needy households and other progressive changes. The ECB’s actions, by destabilizing the economy and discouraging investment and consumption, will almost certainly slow Greece’s recovery and could be expected to undermine the government’s support.

      If carried too far, European officials’ actions could inadvertently force Greece out of the euro — a dangerous strategy for all concerned. They should stop undermining the economic recovery that Greece will need if it is to achieve fiscal sustainability."

      http://america.aljazeera.com/opinions/2015/3/destroying-the-greek-economy-in-order-to-save-it.html

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    2. You are right it is a matter of degree, and really it is best to talk about the conditions that are contentious. I'm not sure the current government would have any problem with getting a good tax system or a functioning land register - indeed the current government may be better at achieving that than those in the past. The more contentious conditions involve privatisations and labour law reform, and here is where flexibility on the part of the Troika is required.

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    3. Prof. Wren-Lewis,

      What are the contentious conditions of labour law reform? Those are the interesting details.

      As for tax collecting, it seems plausibleat first sight that a leftist, i.e. anti-capitalist government might be more effective - if its practice were not different: The Greek parliament has just passed an act offering a rebate of 50 % on unpaid taxes. The original draft made an exception for taxes due over 1 million €. The government dropped that clause so a tax-evading millionaire can save half his taxes. That also includes a football club owned by a Russian oligarch. That sounds more like a Greek version of America's Republicans.

      So please give details, esp. on labour law.

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    4. The imk paper starts from the flawed assumption that underutilization of the Greek economy is the problem and a fiscal expansion could solve the problem. But this is not the case.
      Greece ran fiscal deficits of 5 - 15% for decades allowing it to pump up gdp per capita together with EU transfers to unsustainable levels without building an underlying supportive economic base. The GDP rise was a debt fuelled consumption spree that only worked as long as lenders were willing to finance it.
      This is not about Austerity. This is also not about the Euro. This is about ending a business model with the European Union that is not sustainable anymore. There are much poorer members in the Eurozone that are nevertheless more competitive and less corrupt than Greece that are unwilling to finance Greeces escapades.

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    5. The problem is that this argument cannot possibly account for the current level of GDP - do you think an economy can run at 25% above capacity for years? The OECD think the current account gap is 10-15%, which is less than the 25% fall in GDP, but not zero either.

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    6. Prof. Wren-Lewis,
      thank you for your response.

      Is there a theoretical limit for running above capacity? Consumption can go up unlimited as long as someone is ready to finance it. Austerity might look 'biblical' - esp. compared to 2007 spending levels - but so were Greek debt and spending excesses from 2002 to 2007 even before the crisis.

      The runup in gdp from 2002 to 2008 is unbelievable and looks stellar. So the fallback since the crisis is not so dramatic given the excess performance before.
      Take 2002 as a basis and Portugal and Greece look comparable.

      Delete
  11. I am always carerul when reading someone who expresses views I am more than willing to accept. However, it is not hard to figure out the problem in the claims put forth by whatever it is that happens to disagree with your points here.

    I can understand that people get inflammed and passionate when it comes to public policy. Not only does it involve ethical dilemmas, but it also crucially concerns the fruits of their labor. On the other hand, gut feelings is the last thing you want here: it is to play the games of politicians and policy advocates or lobbies to do so. One of my professor works in health care economics -- imagine how friendly doctors, administrators and public orficials get when he starts telling them their solutions are inefficient, costly and needs to be revisited... It gets ugly.

    Here is no different: those pesky economists tell people what they should consoder when making decisions -- it's annoying for many people, inconvenient and embarrassing for politicians. Still, your tips are worthwhile and not hard to grasp. Essentially, cuts aren't always as costly in terms of production and, if you need or want to do them, be smart enough to do it when it's cheap. Right wing policy tips has lately been the équivalent of telling a friend he should buy AAA beef filets when they're at full price for his bbq, when in fact it would be much more sensible to wait a week or two and take it when it's on sale. Or like telling someone they should take a day off when the boss offers one and a half the ordinary hourly rate -- it's dumb.

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  12. I didn't see any mention of the Lagarde list.

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  13. Good post!
    Complementary to the recent blogposts on www.thebrokeronline.eu on the issue. See http://www.thebrokeronline.eu/Blogs/Another-perspective/Clash-with-Syriza-what-does-reform-really-mean-Part-2
    It may need adding the need for reforms only on the part of the creditors.
    Yes, the Greek government (and Goldman Sachs helping them) is to blame and has to bleed to some extent and to reform itself in a moderate pace.
    So does the financial sector of North-Western Europe which has profited from Greek bonds on usurious conditions (compared to those on which they and their governments can borrow) and from being able to shift the risk of overcrediting to others.
    Not only should Greece create a trade balance surplus to be able to gradually repay its debts, but those countries with trade balance surpluses and large reserves should also go into trade balance deficits to enable Greece to do so.

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  14. It's remarkable how free we all are with advice to lenders. I wonder what would be the interest rate demanded for a loan from the writer, and commentators, to Greece? Surely we should not conclude that my magnanimous feelings should dictate the future of your pension--or should it?

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  15. In my view, the Eurozone has to have a national fiscal authority, to become like the US, or break up.

    ReplyDelete
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    ReplyDelete
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