Thursday, 26 August 2010


More news my friends: it's not just over-hyped tosspots like Stiglitz that misguidedly stick up for Greece.

A letter has arrived at the FT, signed by four London and Athens - based academics, which claims that the case for expecting a Greek default is seriously overstated. This actually came to my attention through one of the many Troktiko clones that have started since the assassination of S. Giolias, one admirably true to its predecessor's ideals of giving a voice to the semi-literate.

This letter is signed among others by one of my best ever professors, Dimitri Vayanos of LSE. This man is a real hero and a real gem, which is why despite his own best efforts he is still not teaching in Greece. He is such a fantastic lecturer he managed to make the Greek/Cypriot contingent of my course sit through a pretty robust  lecture on options after this night.

Vayanos et al do not make a Keynesian defence - if anything theirs is a libertarian one. Their argument (developed in detail here) is that Greece is so far damaged by over-regulation and statism that any material departure from this tradition will yield enormous returns if we can just muster the courage to drive reform. I know this argument very well because that was my own argument too, right up to April 2010.

The evidence is in plentiful supply, but I recommend the following:

  • The OECD indicators of product market regulation (source)
  • The World Bank's Doing Business indicators (source)
  • The World Economic Forums' World Competitiveness Report (source

Unfortunately, that window of opportunity is now closed, as I argue here. And even this good man is wrong. Sorry Prof!

The gist of my response to Vayanos et al. would be that as formidable as the gains from de-regulation would be, they are simply not large or quick enought to buy back the country's independence. For a taste, consider this paper, which demonstrates that even if one of the 25% most regulated countries in the world were to become one of the 25% least regulated countries in the world, it would on average only gain 2.3 percentage points of annual growth. Given a bit of time, of course, this is an amazing thing and I do wish we could achieve this. If we could do this within 3 years the benefits would vindicate Vayanos et al.

But of course, we cannot. The benefits of regulatory reform are, like most supply-side things, not quite as strong during depressions. And besides, we burn people alive for lesser reasons, remember?

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