#DEBTOCRACY: MUCH BETTER THAN A REVIEW

Δείτε επίσης και την ελληνική μετάφραση αυτού του άρθρου εδώ.

Like most of Greece’s online population, I spent some time the other night watching Debtocracy, a crowdfunded indoctrimentary which outlines to the incessant whining of stringed instruments (the world’s smallest, one is tempted to add) the causes of Greece’s indebtedness as understood by a pontificating third-rate Politics major. As with any such offering in Greece, it is steeped in sarcasm, which is its sole redeeming feature. I’m hugely into sarcasm from way back in my debating days; not just because it’s funny but also because it raises the stakes tremendously when one’s argument isn’t quite as good as one thought.

And the Debtocracy argument isn’t. It is telling that already people are falling back on the defence that it’s a ‘first attempt at raising the issues’, or an alternative view that the conventional media won’t broadcast.’ No doubt they were expecting a slightly better reception but sadly one of the fortunate byproducts of the Greek fiscal crisis is the fact that some people have taken the time to learn some Economics 101.

The minds behind Debtocracy start from the stated premise that our debt is essentially due to the enrichment of a handful of businesspeople and politicians and thus does not need to be paid back. ‘It is immoral to repay an immoral debt’ as per the most quotable line in the documentary. They then go on to goal-seek a solution to our woes that they have already decided must be the one practiced by Ecuador in 2008, namely denouncing our foreign debt as ‘odious’ or ‘immoral’ and defaulting. They conveniently gloss over the fact that Ecuador at the time had way more in cash reserves than the debt they defaulted on and that it is an oil producing country and a member of OPEC which must have given it some leeway following a long commodity boom.  I.e. Ecuador could default because, however momentarily, it was a surplus country. The strong oil rally in 2010 has kept their finances sustainable since.

But of course the Greek Left don’t like economics half as much as politics so the real boner-inducing factor for them is the fact that Ecuador is sticking it to The Man – the US of A. Already people are starting to post things like the quote below on Twitter, which simply gives me the creeps. Aaaah, for a strong Latino leader to carry us away in his muscular, sun-bronzed arms... That’s 1981 all over again, and Christ-single-handedly-rowing-a-trireme don’t we know where that got us.

Anyway, Debtocracy proposes that we hold a Public Debt Audit to declare our debt odious and then default, which, while admittedly inevitable, is neither an original idea nor ‘covered up by the conventional media’ as they claim. Default is only the most commonly cited solution to our debt problem in the entire financial world. Foreigners have been talking about it since Dubai went bust, and some of the same people who toast Debtocracy’s health today used to accuse them of being New World Order vultures for it. Moreover the audit has been advocated for some time, most notably through this initiative and of course by myself here.

In short, as per the strangely pornographic old Greek schoolyard taunt, ‘αυτά μας τα ‘παν κι άλλοι, που την είχαν πιο μεγάλη.’ We’ve heard that one before, and the other guys had bigger cocks than you.

Except the Debtocracy ‘solution’ is not about using the Audit intelligently as a bargaining chip with our creditors or as a tool for democratic accountability as I suggested here; the journos have already decided that the debt is odious and would rather use the Audit as a kangaroo court that MUST find it to be such: a sovereign get-out-of-jail card. In fact, they show very few signs of understanding that even if some of our debt is indeed ‘odious’ it’s unlikely that all of it is, as between half and two thirds of all government spending during the last fifteen years has gone directly to the Greek people via social welfare and public sector wages, as per the graph below (blue line is the pay of civil servants, red is social welfare spending and green is their sum, all expressed as a share of Greek public expenditures. Source).

That the makers of Debtocracy and their slavering viewership can actually seem to take pride in having taken apart a car in order to invent the wheel makes me want to drop-kick a tiny kitten right into space. Still, given my own views on the matter you may ask whether this ‘my-call-for-a-default-is-better-than-yours’ stance is in any way constructive, and indeed whether I’m not just throwing a patrician tantrum because people I judge to be inferior are getting more airtime than me. Surely, calling for a default with a reference to intertemporal balance sheets and budget items is no better than just calling for a default?

Sure it is. Defaultniks and Debtocratistas see the default as the end of our struggles: we the Sainted People did not do anything to incur this debt (which we did) and therefore left to our own devices, with a proper populist popular government (and without the odious debt to pay back) we will be debt-free post-default. Except we won’t. We’re expecting the 2010 deficit to still clock in at above 10% of GDP. Even with a 100% default (which will not happen) we will still need to find 3.2% of GDP in credit from somebody in order to service our primary deficit. Perhaps Ecuador would lend us? Why not get on the phone now? Otherwise, we’ll have to get the deficit down to zero in almost zero time, when getting it down to zero in three years is so hard even trying it is killing our economy.

Debtocracy is in dire need of a sequel: #surplusocracy. Or something. The idea is that default is all very well if you can survive without borrowing, but not a good idea if you cannot, as the natural consequence of taking a dump on your own government paper tends to be that no one wants to buy it anymore. I’m a little perplexed as to why genuinely intelligent people don’t care to answer this question. I assure you it matters. If you think taking salary cuts to the public sector was bad, just wait till all those pensioners that half the country is living off suddenly find that their cheque is ‘in the post’ – indefinitely. Or wait until the police discover they would rather take a bribe today than rely only on their salary which may or may not come tomorrow. Or even better: wait until the Government starts printing some kind of funny money that isn’t worth the linen it’s made of and you have to time your weekly purchases carefully so that your money doesn’t lose too much of its value in the meantime.

So how should we do it?

As I said, however, I do believe in the Debt Audit and the default. Because of the risks I explained above, they must be done very carefully and with as much respect for the rule of law and due process as we can have while defaulting on an obligation written into law (i.e. our Budgets).

If this is to be avoided, the question at the heart of the Debt Audit must be made explicit. My view is that it should be simply this: how much of the Greek public debt can be attributed, directly, or indirectly to the will of the Greek people, and must therefore be repaid?  Clearly, when a politician takes a backhander in order to award a defense contact to a foreign bidder at inflated prices, the extra spending involved isn’t carried out by the will of the Greek people. It is hard to defend causing anyone else any hardship in order to repay the resulting extra debt. If only all of our deficits were incurred in this way (which some parts of Debtocracy erroneously imply was the case).

I believe we need a few rules for this exercise. Some conditions under which the debt is valid and the Greek people are responsible for it. I would suggest the following:

First and foremost: examining everything on a payments basis. There is no point engaging in a theoretical exercise about who caused our debt unless we can point to specific funds and their recipients. This helps put things in context. If Greece misprocured some wonky subs from the Germans that’s probably wrong but it means very little if this payment amounts to only about 0.1% of our public debt. This principle has one very important implication. This principle implies that the Greek people have no responsibility for debt on a conceptual basis but for individual transactions of the Greek state.

Second, constitutional legitimacy. Sure, no government has ever been democratically elected with a 100% majority. Greece also doesn’t employ proportional representation so our majorities are even smaller. But this is just the rules of our system. No one has demonstrated in favour of PR in years, so presumably this was not a priority for our people, i.e. they were happy enough for the show to go on. At any rate, ours is not, by the standards of developed or developing countries, a flagrantly undemocratic system. My argument from the above basically boils down to this:  budgets passed into law by the Greek parliament and by due process must be taken to reflect the allocation of funds demanded by the Greek people.

Third, an intelligent people. By this I don’t mean that the Greeks are universally very bright but that they can construct naïve estimates of how the Budget is likely to go wrong. Budgets have, of course, been implemented with varying degrees of success, so it’s important to bear in mind that the deficit voted for each year need not be the deficit achieved. In fact it hasn’t at any point in the last decade. The additional borrowing involved has the potential to build odious debt, but not necessarily. A naïve estimate in this case would be to assume that a given year’s Budget will be violated to the same extent as last year’s; the latter violation must be estimated based on the latest information made public by the Greek government prior to the new Budget. For the 2008-9 period this will be in the form of EDP notifications to Eurostat, whereas for the other years we’ll probably have to rely on the actual Budget reports. Any spending above this is a violation of the people’s mandate and the part of it that is financed by debt creates potentially odious  debt. See below for a quick application of this with real figures:

Note to my fellow cynics: I realise most Greeks never read the Budget or cared what was in it. But the Budget is a law of the land and ignorance of the law is no excuse in a court of law.

I realise the above principle is the most controversial of all and it makes a huge difference to the amount of ‘odious’ debt incurred. I think it is important to hold on to it for two reasons. First, because it is the Greek people’s job to hold their Governments to account. We’re the ones who are supposed to care whether someone is robbing our children and grandchildren and if we don’t, no one will or should. Second, if our default is to work we must avoid at all costs giving potential creditors the impression that Greeks have abdicated this responsibility.

Still, it’s probably wise to prepare one estimate that assumes an intelligent citizenry and one that does not; in a way the difference between the two indicates the burden of active citizenship.

Fourth, sovereignty. The Greek people can only be responsible for budget over-runs as long as they have power over the state. Post 2009 it’s hard to determine the effect of the will of the people on the execution of the Greek budget because Greece has not been sovereign throughout all of 2010, or ever since. Also, there’s no point going back any further than 1975 because Greece was, not too briefly, a dictatorship. So our timeline for this adjustment exercise is 1975 to 2009. Any borrowing above the budgeted amounts during the Memorandum period is odious debt.

In addition to the four principles above, we need a fifth principle for allocating the potentially odious deficit (and thus the potential odious debt) to its sources. The deficit is not a transaction or even the sum of many transactions. It’s the difference between revenues and expenditures, a net figure. Thus it’s not entirely clear where it comes from (just as it’s unclear which country a trade surplus or deficit comes from, as explained in the comments here). Still we must choose a method.

The simplest one is to assume that the potentially odious deficit is allocated just like overall government spending: this implies that potentially odious over-spending is just like any other spending – the Government has simply over-reached and given itself a little bit more headroom, but would have been proportionately as corrupt, wasteful and servile to special interests even if it had had to stick to a lower budget allocation. Under this fairly unrealistic assumption, between 50% and 65% of our potentially odious debt can’t be truly odious because the Greek people have received this money in direct transfers from government, via wages or welfare.

Of course this is not a very good solution because presumably truly odious debt comes from a forced reprioritisation of spending that violates the people’s desires.  So perhaps a better idea would be to examine how gov’t spending on wages and social welfare or the income of the median Greek household correlates with the part of the deficit that is potentially odious and derive a rule of thumb. The R² value of the regression would be the % of the potentially odious deficit each year that is not odious. This is more fair but very difficult to sell to anyone.

Finally, we could audit transactions one by one, starting with the 20% largest ones, and establish a) their status vis-à-vis the Budget presented to Parliament and b) their legal validity. Assuming a Pareto Law, these should account for 80% of our spending. For the other 20% of small transactions which are likeliest to involve individual citizens, we could audit a sample for each year – but even with a very very small sample, like 1,000, this would take many many years. We’d still have to be very careful – overpaying a supplier does not necessarily mean some kind of graft is involved. Hospital suppliers, for instance, knew that our payment terms were 5 years from delivery (!) so of course they would overcharge. We still took those terms and that was that.  Once again, any obligation the Greek state took on without coercion and in accordance with the Budget is legitimate. It’s payable.

More on this very soon.