Tag: Greece

Ignorance of Economics Is No Excuse

The new Spanish leftist party Podemos takes great inspiration from the victory of Syriza in Greece. As NPR reports:

Much of Europe is watching Greece closely after an anti-austerity party won elections there last weekend. And Spaniards are paying particular attention because Greece may be influential. A similar new political party–left-wing, anti-establishment–has formed in Spain over the past year. And polls show that it could win power in elections this fall.

If Podemos is elected, Spaniards may be disappointed in the results. Consider the cognitive dissonance here:

Many Spaniards are … frustrated that while the economy here is growing, unemployment still tops 23 percent and double that for youth. Polls show voters are switching to Podemos. It promises to raise the minimum wage, hike taxes on the rich and re-evaluate whether Spain should pay its debts.

Making it more expensive to hire workers and reducing the return on investment don’t seem like policies designed to deal with Spain’s appalling unemployment problem. Europe has had higher unemployment than the United States for most of the past two decades. In 2004, economist William B. Conerly suggested some reasons for that: longer and more generous unemployment benefits, reducing the incentive to find a job; inflexible wages; and job protections that make businesses reluctant to hire workers whom they won’t be able to let go. The economist Mark Perry reports that the unemployment rate in European countries with a minimum wage is twice as high as in countries with no minimum wage. And minimum wage laws certainly seem to reduce youth employment.

Greeks Vote Against Euro and For Democracy

Greece’s parliamentary elections could reshape Europe. In voting for the radical left the Greek people have reinvigorated home rule and democracy across the continent.

Greece has been in economic crisis seemingly for eternity. Even in the Euro the system could not generate the growth necessary to repay the debt:  the economy was hamstrung by enervating work rules, corrupting political influences, profiteering economic cartels, and debilitating cultural norms.

The inevitable crisis hit in 2009. Athens couldn’t make debt payments or borrow at affordable rates. Nor could Greece devalue its currency to make its products more competitive. The European “Troika” (European Central Bank, European Commission, and International Monetary Fund) developed a painful rescue plan.

Syriza, meaning Coalition of the Radical Left, arose to challenge the two establishment parties. Headed by Alexis Tsipras, Syriza won 36.2 percent and 149 seats, two short of a majority, on Sunday.

Syriza offered dreamy unreality:  free health care and electricity along with food subsidies, pension increases, salary hikes, and more public sector jobs. Billions in new revenue is to magically appear.

E.U. Austerity, You Must Be Kidding

The leading political lights in Europe – Messrs. Hollande, Valls and Macron in France and Mr. Renzi in Italy – are raising a big stink about fiscal austerity. They don’t like it. And now Greece has jumped on the anti-austerity bandwagon. The pols have plenty of company, too. Yes, they can trot out a host of economists – from Nobelist Krugman on down – to carry their water.

But, with Greece’s public expenditures at 58.5% of GDP, and Italy’s and France’s at 50.6% and 57.1% of GDP, respectively – one can only wonder where all the austerity is (see the accompanying table). Government expenditures cut to the bone? You must be kidding. Even in the Unites States, where most agree that there is plenty of government largess, the government (federal, plus state and local) only accounts for a whopping 38.1% of GDP.

As Europe sinks under the weight of the State, it’s austerity, not anti-austerity, that should be on the menu.

Bulgaria Wins Balkan Prize

Every country aims to lower inflation, unemployment, and lending rates, while increasing gross domestic product (GDP) per capita. Through a simple sum of the former three rates, minus year-on-year per capita GDP growth, I constructed a misery index that comprehensively ranks 89 countries based on misery. The table below is a sub-ranking of all Balkan states presented in the full index.

 

All of the Balkan states in my index suffer from high unemployment and relatively high levels of misery.

That said, the least miserable Balkan country is Bulgaria. For all of its problems, including a recent bank run, the country’s currency board system - which I, as President Stoyanov’s adviser, helped design and install in 1997 - provides monetary and fiscal discipline, and produces positive results in a region plagued with problems. 

Can We Have An Evidence-Based Debate about the Future of the IMF?

On Saturday, March 30, the New York Times ran a curious editorial about the International Monetary Fund (IMF). The piece makes the case for a quick ratification of IMF’s quota reform by the United States, which it pictures as being in America’s interest. Unfortunately, the article is somewhat casual when it comes to the evidence it presents in support of its argument.

Firstly, the authors claim that the IMF

“has helped stabilize the global economy, most recently by providing loans to troubled European countries like Greece and Ireland.”

It is far from obvious that the repeated bailouts to Greece, in which the IMF has participated, have done much to calm the financial markets or to help the country’s economy. Recall that Greece is still going through a recession deeper than the Great Depression, with youth unemployment at around 60 percent, and no signs of recovery.

Secondly, there is the following assertion:

“[T]he fund’s capital […] has fallen sharply as a percentage of the global economy in the last decade.”

That is misleading as it does not take into consideration the increased use of the ‘new arrangements to borrow,’ (NAB) through which the Fund’s lending capacity was tripled in 2009, from $250 billion to $750 billion. That represented a historically unprecedented hike in the amount of resources available to any international organization.

Thirdly, the statement that the increase in quotas will happen “without increasing America’s financial commitment to the organization” is disingenuous. While the increase in quotas is to be accompanied by a reduction in the use of NAB’s – making it appear fiscally neutral on surface – the deployment of the NAB’s is accompanied by a stringent approval procedure, whereas the quotas can be deployed towards various lending purposes at the Fund’s discretion. Greater reliance on quota funding would thus enable the Fund to make bigger claims on the public purse, with less accountability.

A debate about the future of the IMF is long overdue in this country. But it should be a debate based on a careful examination of the Fund’s track record in mitigating financial crises around the world. To flatly assert, like the editorial does, that “[i]ncreasing the fund’s resources will ensure that it can respond quickly to another wave of turmoil in Europe or elsewhere” does not do the job. If anything, that claim - like much of the editorial - only strains credulity.

Liability Is ‘Wrong’ Solution for Rating Agencies

Last week, while America was occupied with elections, an Australian court found Standard & Poor’s liable for “misleading” local council governments by awarding AAA rating to derivatives that later lost value (more detail on the case here). Not surprisingly, after the financial crisis, dozens of suits were filed in the United States, Europe, and elsewhere claiming investors were “misled” by the rating agencies. Most of these suits were quickly dismissed or withdrawn. The Australian case is one of the few to find liability.

First, as I documented in a recent Cato Policy Analysis, the regulatory structure for the rating agency is fatally flawed and was without a doubt a contributor to the financial crisis. That said, subjecting rating agencies to legal liability would make the situation worse, not better. From that analysis:

[A] risk from subjecting rating agencies to liability for either their statements or processes is that, in order to protect themselves, the agencies would adopt a “reasonable man” approach. For instance, if the agencies used government forecasts of house prices in their mortgage default models, then it is likely that any court would deem such assumptions “reasonable”; after all, these are the assumptions that regulators rely upon. If such assumptions are, however, grossly in error, as were the housing price forecasts used by various federal agencies, then the value of information created by the rating agencies would also be reduced, if not compromised. A reasonable-man approach would also encourage rating agencies to utilize “consensus forecasts” of key economic variables. Yet the consensus could be dangerously off. The economic forecasting profession does not exactly have a great record at predicting turning points, and it also missed the decline in house prices. A system of liability would likely destroy whatever additional information the rating agencies bring to the market, as the agencies would face tremendous pressure to simply mimic widely held beliefs, which themselves would already be priced into the market.

Another problem would be that rating agencies would most likely face litigation risk from those being downgraded, especially by governments. Witness the abuse Standard & Poor’s received from the SEC right after it downgraded the U.S. federal government. Do we truly believe that we would have more accurate ratings if a Greek court were able to decide if a downgrade of Greek government debt was accurate? I would also go as far to argue that ratings of sovereign debt should be considered politically protected speech (but then I’m also for protecting most, if not all, speech).

Study from German Economists Shows that Tax Competition and Fiscal Decentralization Limit Income Redistribution

If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the United States and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the United States, but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.

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