I CAN HAZ MIDDLE AGE? (NO)

The last two rounds of elections in Greece were, more than anything else, about one of my favourate subjects: age and the battle of generations. 

Older voters, with their pensions to protect, came out in force for the former major parties, fearing that more radical choices would put our bailout at risk; younger voters, many of them unemployed and with little to look forward to anyway, came out in force for the (occasionally radical) left and some even for the far right. 

The cut-off point used by most media outlets to illustrate this was the age of 50 or 55. That, to me, is a happy coincidence.

You see, in January 2012, the Eurobarometer wonks published a survey of European attitudes towards ageing, which asked people, among other things, at what age they thought a person ceases to be ‘young’ and at what age they thought a person begins to be ‘old’.  

Greece was, as it often is, an extreme case: on average, Greeks considered people to be ‘young’ up to the age of 50.5. We were beaten only by Cyprus on this account.

While youth seems eternal in Greece, old age is not particularly long. The threshold for ‘old’ age was 65.7, which is quite typical within Europe – and it suggests an expected 14.4 years between the threshold of ‘old age’ and the average Greek’s life expectancy - also close to the average. 

Between these periods of ‘youth’ and ‘old age’ is an implied 'middle age' – and due to our long period of ‘youth’ in Greece it lasts for just 15.4 years. Only the Hungarians, who count people as old from the age of 58 onwards, had a shorter middle age.

I tried to calculate one last crucial interval: the average duration of retirement in middle age. This measures the amount of time that people can expect to spend in retirement while still not being considered old. I suspect this is an implied target in industrial relations – in a perfect world, one would retire still young enough to not be held back by ill health or a weakened body.

Germany is unique in this regard in that the Germans are the only Europeans to work into what they perceive as old age - about two and a half years of old age. Only the Turks and Hungarians come close, but both nations tend to retire before reaching their subjective 'old age' threshold. The Netherlands, France and Belgium are at the other extreme, with new pensioners looking forward to at least 11 years of ‘middle age’ left. Greece is more in line with accession countries in the Baltics in this regard, with workers looking forward to only about 4 years of middle age after retirement.

I need to explain at this point that this is not a core versus periphery narrative. The longest implied middle age in Europe occurs in fellow PIIG Portugal, and at 31.1 years it lasts twice as long as Greece’s. Sweden follows with 29.7, while the typical German has about 22 years’ worth of middle age to look forward to – not far from the European average. Even middle age in retirement, which sounds like a political choice, is not a clear cut core/periphery issue.

I do, however, think that culture matters, so I ran a quick test using Hofstede's cultural dimensions and any other data I could get my hands on. The Eurobarometer study hinted that a country's median age might matter when defining the thresholds of middle and old age: growing old makes people more lenient when it comes to defining youth and old age. 

My tests revealed this to be true with regards to the old age threshold but not the middle-age one. Still, every year added to a country's median age pushes the threshold of old age further out by just over 10 months. On the other hand, it is the expected  duration of a working life that makes the difference to the middle-age threshold - short expected working lives prolong perceived youth by delaying emancipation, and this time there are no diminishing returns. In fact, every year of lost working life delays the onset of subjective middle age by a year and half. 

Just as interestingly, more 'macho' or masculine cultures tended to be associated with shorter periods of youth and an earlier onset of subjective old age. To avoid confusion, Hofstede defines 'masculinity' as

a preference in society for achievement, heroism, assertiveness and material reward for success. Society at large is more competitive. Its opposite, femininity, stands for a preference for cooperation, modesty, caring for the weak and quality of life. Society at large is more consensus-oriented.

By celebrating 'heroic' and assertive attitudes, as well as the ability to provide for one's family, masculine cultures tend to shove people into middle age and old age quicker.

In the case of Greece, a combination of very delayed emancipation and a persistent masculine culture leads to a shrinking middle age - which would be just a curiosity among many except for what I think is a significant cultural and psychological effect. Middle age is the time when one has no excuses and expects no one to clean up after them. For countries, a shrinking middle age may be a shrinking field of accountability.

Worse, I think the pressure one is subjected to when forced to cope with delayed emancipation and macho expectations at once is a breeding ground for monsters. The link between cultural masculinity and violence is echoed in studies of family killers and 'honour' killings. It could even explain why Greece's increase in suicide ideation has been mostly among men, especially married ones.  But I hope to return to this point at a later date. 

Notes on the data

The Eurostat study does not provide life expectancy or working life expectancy estimates, or indeed cultural attitude estimates. I have I used median age and life expectancy data from the UN, here, extrapolating the figure for 2012 from the estimates for 2010 and 2015. I’ve also got average retirement ages from here and Hofstede culture dimensions data from here.

As for average working lives, I’m using expected working life durations at 15 and there are two sets of recent estimates to choose from. (Economix 2009) was commissioned by the EC and can be seen here. Hytti & Valaste (2009) can be seen here. I’ve gone for Hytti & Valaste but Economix is about two years more up to date. Either way, differences between the two are small.

PUBLIC BROADCASTERS VERSUS STATE TELEVISION - HERE'S A REAL DILEMMA FOR A CHANGE

Having spent much of the last couple of days hearing that state television is what separates us from the animals, I thought I'd expand on the topic a little further than I did in my original post on the ERT reboot . Sadly people busy licking the boot of the Big State (while deploring the non-socialist foot currently in it) have no time to dig up evidence. Although I am often told by such folk that one needs professional journalists in order to discuss any news in depth, I thought I'd risk voiding the manufacturer's guarantee on my brain and do it myself.

As chance would have it, a massive international team of researchers published last year a study of the effect of public broadcasters on the public's knowledge of hard and soft facts. No, it doesn't cover Greece, unfortunately. It's based on a large survey of people's knowledge of current affairs in six countries (with fully comparable data for five by the looks of it). You can check out a study on audience perceptions based on the same data here. Spoiler: old people like public broadcasters the most.

Overall, the researchers found that the general trend is for audiences with exposure to public broadcasters to be more knowledgeable of 'hard' facts (politics, economics, international affairs, etc) and no less knowledgeable of 'soft' facts (gossip, celebrities, etc). You can see their comparisons on the right. This was not always the case of course - in Italy, for example, the only Southern European country surveyed, the opposite was true - exposure to public broadcasting meant people were less knowledgeable - and this in a country where people who trust television are reliably more likely to trust Silvio Berlusconi. A similar effect was found in (South) Korea, where exposure to public television did not make people less knowledgeable but did contribute less to their knowledge than exposure to private television. How come?

Well, the researchers found that it was the de jure independence of public broadcasters that explained most of their ability to educate the public. This correlation was so much stronger than the correlation between public funding (i.e isolation from the corrosive powers of competition, neoliberalism and all the other supposed evils of the world) and educational value that independence wins hands down. Compare for yourselves below:

So this leads us, ultimately, to what we all seem to agree on: if you must have a public broadcaster (and I don't believe we must), then it needs independence in order to work. What is this de jure independence mentioned in the graphs, I hear you say? Well it's a measure of the level of legal protection for public broadcasters choosing to broadcast things their Governments don't like. A proxy, after all, for de facto independence. For a fuller discussion, see here.

In fact, given insufficient independence for the public broadcaster, insufficient quality among the private broadcasters, and endless interference and cross-subsidy by rent-seeking business interests, perhaps Greece needs to borrow an African perspective on this debate after all. Or maybe we should revisit why private television (which nobody proposes to ban - yet) is more successful in educating the public in Japan than elsewhere, despite producing those dreadful cringy or semi-pornographic game shows you hear about from time to time.

UPDATE: I'm going to try to get hold of and analyse the data for the latest Eurobarometer report on the use of media in the EU. While this doesn't examine the issue of public broadcasters in detail, I hope it can be used to demonstrate the extent to which broadcasters in general are being sidestepped by young people.

In the meantime, please consider the following typology of possible types of broadcaster (sourced from here), and try to consider where our new ERT should be, in your view. It's more than most people will ever do.

A VERY DIFFERENT VIEW OF THE FAILED GREEK STATE

I love Google Scholar.

Like all things hyperlinked, Google Scholar's number one unintended attribute is that it makes serendipity not just possible, but inevitable. You look for X, you find Y along the way.

Tonight I found myself looking, for the umpteenth time, for and at papers explaining Greece's record of Total Factor Productivity Growth after the 50s, as part of my efforts to expand this article. If you'd like to follow that thread, the best I found for you tonight was this paper on the incomplete convergence of Total Factor Productivity between Greece and other European countries.

Anyway, as I was leaping, monkey-like, from citation to citation with about 30 tabs open, I stumbled onto this paper, a review of about 60 years of productivity growth in Europe. In itself, it seemed to me like  the EU-KLEMS stuff I've read so much of, only a little out-of-date. I know I'm doing some solid researchers a great disservice in saying this but hey, it's my evening, I demand something slightly more interesting.

Then suddenly I stumbled on this phrase, which sounded eerily familiar:

"Harrison (2002) considers a game between the Dictator (D) and the Producer (P) to investigate when it will pay both parties to maintain a high coercion, high effort with monitoring equilibrium."

I love that phrase: 'high coercion, high effort with monitoring equilibrium' - it implies there's an opposite equilibrium involving low coercion (well, by the standards of an abstract Dictator), low effort and monitoring. And that, my friends, sounds a little like Greece.

You see, Greece is a paradox of both over- and under-regulation, where an overbearing, omnipresent state coexists with a truckload of employer misconduct, poverty, rent-seeking, anticompetitive practices and cronyism. You can't call it socialism because profits (often in fact rents) are widely tolerated and the state's safety net was full of holes in the best of times. You can't call it capitalism, because price signals are either supressed or hopelessly distorted by state intervention. So here's my hunch: the low-coercion, low effort and monitoring equilibrium that Harrison blames for the collapse of the Soviet Union is in fact also responsible for the failure of the Greek State, which, despite undisputedly democratic elections, remained unreconstructedly authoritarian in its function except where it was forced by outside stakeholders (usually the EU) and the threat of a popular backlash to act otherwise.

Harrison (2002) is in fact this paper and I urge you to read it. Some of it is game theory; most is in fact economic history illustrated by facts, figures and equations. Harrison, as we've seen, set up a game with two agents: the producer and the dictator.

"The dictator maximises a payoff made up by the value of rents less his costs and losses, while producers maximise their income received in wages and bonuses and appropriated through theft, less the costs of effort and punishments."  

In the Greek case, for 'producers' read 'businesses and the self-employed' - the mix of 'wages' and 'bonuses' would be different to what Harrison expected under this reading but I doubt this changes much. For 'Dictator' read, of course, the State, but in a broader sense, reflecting the particular social classes and interests that hold the State captive for a particular period of time. Output theft relates to entrepreneurs' failure to render the tax and social contributions and regulatory compliance expected by the State, whether through avoidance (legal) or evasion (illegal). Of course calling these things 'output theft' is not the libertarian view of tax, but it definitely fits the authoritarian view quite well. For a quick analysis of how regulation is a tax, I would refer you to pg 14 here. You might argue that Harrison doesn't have regulation in mind when speaking of Dictator's rents, but actually he does - just check out page 21 here.

"The dictator sets coercion high or low by deciding whether or not to monitor. Without monitoring the dictator cannot stop producers stealing output. The dictator raises coercion by monitoring output, which efficiently eliminates stealing, but monitoring is costly and is a deduction from their rents. When output is monitored, high output can be rewarded and low output punished."

"Output depends on both effort and the scale of punishments. Producers decide whether effort is to be high or low. When effort is low, the value of output is positive and the producer cost of effort is zero. When effort is high and has a positive cost, the value of output is raised by the value of effort. Output depends also on the scale of punishments, because firing and forced labour reallocate workers towards employments of lower intrinsic productivity. Output is high when effort is high, low when effort is low and low output is unpunished, and lower still when low output is punished. (Because planners know who is being punished, the dictator can discriminate between the output loss arising from low effort and that arising as an indirect cost of the punishments he has imposed, so he does not try to punish the latter twice." 

In the long run the scope for high coercion depends positively on the dictator’s return from high effort, the cost to the dictator of not monitoring, and maximum feasible or credible punishments, and negatively on the costs of effort and monitoring. It also depends positively on the excess of the dictator’s discount factor over that of producers. The more the dictator is orientated towards the long run, the more he will pay to sustain coercion in the present; the more producers are orientated towards the short run, the less they will sacrifice to persuade the dictator to abandon coercion. 

So how does the system collapse? For Harrison the two key variables are the cost of monitoring the economy and the Dictator's reputation. He argues that post-industrial economies are much harder to monitor than agrarian or industrial ones, making it unsustainable for the command economy to maintain a high-monitoring equilibrium. Some reforms can, of course put things back on track rather than undermine the Dictator - but in Greece's case the reforms would have had to increase tax administrative capacity - which never worked. In fact, even to this date the reaction to every effort at increasing the State's capacity to monitor is staggering, as the IMF's most recent review of the Greek bailout reveals:

To cut a long story short, here is a summary of Harrison's findings:

• The system remains stable right up to the point of collapse.
• Command economies can secure stable high output through artificial incentives, under given historical circumstances.
• Coercion can be legitimate socially but not legally. Authority that rests on coercion cannot make binding commitments. Rather, the credibility of commitments rests on the Dictator’s reputation, which is fragile and may be lost if coercion is relaxed once. The absence of binding commitments results in a time-consistency problem for central planners.
• In exercising coercion the dictator is rationally secretive. Both the dictator and producers may exploit information asymmetries to shift payoffs in their favour. Specifically, the dictator will conceal monitoring and punishment costs, and producers will exploit the difficulty of observing effort to overstate its subjective costs and secure improved rewards.
• Command economies may be undermined by adverse trends in monitoring costs. Changes in the means and complexity of production can raise the costs of monitoring producers. When monitoring becomes unprofitable, the dictator will abandon high coercion.
• Command economies may also be undermined by bad policy. Too much and too little coercion are both destructive. Too much means overreliance on penalties. Too little means tolerating rent–seeking and erosion of the dictator’s reputation. Both can undermine the profitability of monitoring.
• Command economies can be undermined by economic reforms. Moreover, the cycle of reforms and counterreforms can harm the dictator’s reputation.
• The dictator’s surrender, not workers’ resistance, triggers the system’s collapse.

  

THIS! IS! NOT! ARGENTINA! (UPDATE)

The other day, I got an email from Dan Beeton, the International Comms Co-ordinator at the CEPR. As veteran readers will recall, Dan and I have occasionally worked together on debunking the Weisbrot hoax. Dan is a colleague of Mark Weisbrot, so he has an interest in this.

Dan shared with me the latest CEPR paper which draws some compelling comparisons between Greece and Argentina and uses these to make the case against further austerity and in favour of Greece defaulting and leaving the Euro. I’ve promised to help disseminate this paper both on Twitter and on this blog. Not because I agree with it, but because I believe that since a Greek default is desired by a great deal of the population and ultimately inevitable, it is important for its advocates of default to become more rigorous in their argument.  

For the record, as you will know, I’m all for defaulting once we’re running a primary surplus, though I would caution that this will not in itself make Greece’s finances sustainable.

That said, as much as I respect Weisbrot and his colleagues at the CEPR, I’m sick to the back teeth of comparisons between Greece and Argentina. They are just too simple. Argentina was on a foreign currency peg; Greece is in a monetary union, which is like a foreign currency peg. Argentina had an IMF intervention, Greece had an IMF intervention. Argentina defaulted; Greece is expected to default. Hey presto, Greece is Argentina. What worked for one, must surely work for the other. It’s so easy to predict the future when you already know what you want it to look like. So I thought I’d talk you through some of the main ways in which Argentina in 2002 was not like Greece in 2011. I know it won’t convince the defaultniks but at least I’ll get this stuff off my chest. 

First, it’s important to appreciate how big the Argentine budget deficit was when that country defaulted. As I’ve said on this blog ad nauseam, a country with a primary surplus can default anytime – it can still pay its way regardless of what creditors do. A country with a primary deficit has a problem. Argentina’s budget deficit in 2001 was a paltry 3%. At the time, Argentina was paying 3.58% of GDP in interest (same source), so in fact they were running a primary surplus of 0.8%, courtesy of the IMF’s bitter medicine, compared to our projected 2011 primary deficit of 2.3%, which may yet turn out to be much higher, but is only at this non-eye-watering level courtesy of the IMF too. Search the latest CEPR paper for references to Argentina’s primary surplus. Not one. Yeah, I thought so. Even rigorous-minded Keynesians don’t believe deficits matter. You know why? Because cool guys don’t look at explosions.

Similarly, the CEPR paper makes the point that Greece’s exports are much higher as a share of GDP than Argentina’s back when it defaulted, and therefore better placed to drive growth. First, I would point out that Greek exports have grown, by nearly 10% in 2011. Second I need to explain that the share of exports on GDP is not the only thing that determines the sustainability of falling off a currency peg.

In early 2002, Argentina’s current account was nearly balanced, with a deficit of 1.4% of GDP in January. Nearly all gains in competitiveness went into growth. Greece is a different story: we’ve got a current account deficit of over 10% of GDP. Hence, while Argentina was able to grow at the very substantial rate it did using a devaluation of about 65% between 2001 and 2005, it would take a much greater devaluation to replicate this effect in Greece. Remember, even with massive inflation, you can’t devalue by more than 100%, although Keynesians will no doubt find a way (perhaps a tax on holding the national currency?). But even with their ‘modest adjustment’, the Argentines paid dearly for this strategy. You can check here what happened to inflation in the aftermath. It topped 25% in the first year, and was almost 15% the year after that, and has since never recovered to pre-default levels. In fact, Argentina is still blatantly manipulating inflation figures to keep up appearances – so much so that they have to threaten and fine anyone who dares publish more accurate figures (unless they are a union, and then only if they keep their estimates of real inflation for the negotiating table only).

If you are advocating foreign-currency default but don’t know why inflation is bad for a country, I’m tempted to suggest that you deserve to have its massive double-digit slapped across your face. But let me explain nonetheless: inflation means your money is worth less in relative terms and is harder to store, i.e. convert into wealth such as savings or a house. Inflation is a tax on everyone who earns a wage or benefits but has little negotiating power with the government, as well as everyone who saves money in a bank or owns a cash-poor business. It is, on the other hand, a subsidy to anyone whose income comes from investment, anyone who owns gold, anyone who owes money in the national currency, anyone who has the political connections to negotiate higher salaries, and any business able to borrow cheaply.

Think really hard of which of the two sides you’re on and you’ll know whether it’s good for you. Rich people and banks are typically winners from massive inflation. The working poor are typically losers. That’s partly the reason why, despite Argentina’s success in battling income inequality, wealth inequality (as measured by the wealth Gini coefficient) has not only failed to come down, but actually increased since the default, from 74% in 2000 to about 75% in 2010, and is in fact way higher than Greece’s.

That’s one point. On to the second. Whatever the fiscal and current account deficit figures, we need to get one thing clear: the Greek state is much, much bigger than Argentina’s was when it defaulted. More than double in size in fact. Even without paying any interest, the Greek state would still be leeching much more money out of its economy than Argentina’s ever did, either pre- or post- default. Hence the potential for growth post-default would be much smaller without, you guessed it, more austerity! Don’t forget, unlike government investment, government consumption does slow down growth.

I can sense your disbelief at this point. The assumption among most commentators is that anyone who flicks the finger at the IMF must be a socialist who believes in an all-encompassing state. But in fact, by 2001, the last full year before it defaulted, Argentina was spending just 18% of GDP in primary government expenditures. Contrast this to Greece’s projected primary spending of 42.7% of GDP in 2011 (which, again, could turn out to be higher). Remember, I’m using the primary spending figure because clearly in a default(nik) scenario we wouldn’t be paying interest at all.

This comparison, incidentally, tells you a little bit about why Argentina grew so fast post-default.

If Greece were to default and revert to spending, minus interest, what Argentina did as a share of GDP in 2001, just before it defaulted, we’d save 24.7% of GDP and, in my preferred scenario, return it to the taxpayer through tax cuts. And according to the IMF’s calculations, a tax cut of that monumental size would boost the Greek economy’s output by 1.3x24.7%=31.1% within 2 years (or anyway that’s how much an equivalent increase in taxes would shave off our output). Libertarians would of course love this, and provided we could find that extra 2.3% of GDP through some other revenue (such as privatisations) it would actually be possible, but defaultniks would typically hate both small states and privatisations, so I don’t expect them to come out in support of us becoming like Argentina in this regard.

Not that we could do that, either. Too much of our primary spending is locked in. The second major difference, you see, between Greece and Argentina is demographics. Greece has for many years been a much older society than Argentina. In 2002, Argentina’s old-age dependency ratio was a mere 16%, while Greece’s ratio for 2011 is just over 28%. You can check this for yourselves here (select ‘detailed indicators’ on the right).

Now by looking at the correlation of health, survivor, sickness and disability spending with old age spending, it is possible to approximate the total impact of ageing: it adds up to about 17% of GDP per annum (if you don’t like my estimate, try your own using the COFOG government spending data provided by Eurostat). Remember I’m only adding to age-related spending the additional spending on other things attributable to ageing.

Now, if our old-age dependency ratio were the same today as Argentina’s back in 2000, it’s only a matter of simple math (and an assumption of linearity which I admit may be wrong) to deduce that we would be spending 7.1% of GDP less on our aged and see a primary spending figure of 38.1%. Still more than twice what Argentina was spending when it defaulted.  Although that would, in theory, put paid to Greece’s primary deficit, cutting that much off pension and health spending would have disastrous effects on Greek society.  In fact, let’s go balls-deep in the defaultnik scenario and assume that Greece cut all of its toxic public procurement budget as well – no new roads, no new arms spending, no nothing – that would save us 13% of GDP at most. We’d still only get down to 25% of GDP, which is still way higher than what Argentina used to spend when it defaulted.  

Note by the way that Argentina didn’t have to worry about destroying its pension system when it defaulted, because by the time it defaulted it had privatised its pensions system, courtesy of the same hideous reforms that defaultniks hate so much. In an earlier paper, the CEPR credits this with losing Argentina about 1% of GDP in government income annually (presumably, of course that was meant to be the people’s money, not the Government’s, but hey let’s humour them), but they forget to mention that it is precisely this that made it possible for Argentina to default without destroying or confiscating the pensions income of its own citizens.

But in any case, this little exercise suggests that, even if our population was currently as young as Argentina’s when it defaulted, we’d still be in a far worse position to default than they were. But at least we would be able to default.

Remember, ageing is not reversible. Pre-austerity, it used to add a significant 0.46% of GDP to our primary spending per year. At this rate, if we were to balance the 2011 books in one fell swoop, by 2020 we would be running a 4.6% primary deficit once again. Unless we cut pensions and benefits savagely, of course. Which we have, to the towering rage of defaultniks everywhere.

Why is pensions income so important? Well because they are a huge part of the Greek household income. Now there’s no actual calculation available of this, so I’ve had to come up with my own. I can only offer a mix of 2011 and 2010 figures, but that’s a start. Greece’s pensions funds paid out EUR25.6bn on pensions in 2011 (pg. 95 here), against total household consumption of EUR165.8bn in 2010. Household consumption has probably fallen since, so that resulting ratio of 15.4% is definitely an underestimate. So basically, destroying pension funds via default would eat into private consumption in a massive way (it already has). Another big handbrake on growth, I think.


Defaultniks often point out how investment would supposedly soar in a country freed from the burden of debt. but age once again reaches for the handbrake. Without the ability to tap global capital markets, only domestic savings will be left to finance investment and that will not be nearly enough in countries like Greece (discussion here). Savings rates don't typically go up as a country ages; past a certain point they go down: people reach their maximum savings rate at a certain age and then start eating into their savings to pay for the kids' school fees, for healthcare, for whatever have you. Pensioners are, in fact, de facto negative savers. Have a look at the graph below if you don't believe me (source):

If you're feeling really gloomy right now, you've got my gist. The last decade was actually Greece's golden age of age-related saving propensity, if there is such a term. It was the time in our near history when we were most disposed towards saving, and our governments made sure we didn't. Game over.

The difference in household savings rates between 2011 Greece and 2002 Argentina implied by the above graph is about 8% of GDP. That's 8% of GDP less that we Greeks will be able to put into investment, post-default, than Argentina was able to. That's twice our 2010 gross national savings, bottled up for the foreseeable future by the irresistible force of human destiny. It's also more, by the way, than what we're currently paying in interest.

Here’s one final comparator that people often forget, and it’s related to all of the above. 2002 Argentina was way more entrepreneurial than 2010 Greece:  the average Argentine adult is almost three times as likely as the average Greek to be in the process of starting a business as the average Greek adult, even though entrepreneurial activity fell by half post-default: as growth returned, the appetite for enterprise fell quickly. Entrepreneurs are important to growth because they help convert all of that free post-default cash into sustainable wealth. One reason why we’ve got so many fewer of them is, once again, age: it’s easier to take a huge gamble with bankruptcy when you’re 28 (the median age in 2002 Argentina) than when you’re 41 going on 42 (the median age in 2011 Greece), and who would blame you?

The result is that even if Greece could somehow pump all of that money we spend on interest into the economy, it’s doubtful whether it would ever turn into growth of the sort the CEPR and our local defaultniks are hoping for without an exogenous boost to entrepreneurship. Don’t be quick to blame the Euro; Argentina had a currency peg too pre-2002, remember? That’s the whole point. In fact, I think the difference here is largely down to demographics and the size of the state, but it’s harder to prove this, so let’s park it for now.

This is not the end of the long list of differences between 2002 Argentina and 2011 Greece. It’s just all the stuff I could come up with at relatively short notice. But I hope it helps clarify how tenuous and wishful the Greece-Argentina analogies are.


UPDATE: 


Demetri Kofinas, aka @CoveringDelta, has paid me a tremendous compliment by inserting a reference to this analysis on the very successful show he produces on Russia Today - check it out here. Thank you Demetri!

TROIKAS ALL ROUND!

Readers not living under a rock in the past few days will have noticed that financial contagion has spread to Italy's banks, putting strain on the sovereign itself. You can follow the snafu as it unfolds here.

My Greek readers need not worry that this is somehow our fault too - apparently it is the Spaniards' fault - no, really.

I will add more to this story later today but for now I must share with you the following paper, which just landed in my inbox. The timing is perfect.

You see, the IMF have by now realised that one by one all of the PIIGS will fall, that the EU as a whole is insolvent and that the battle lines will be drawn around the UK and France. So instead of obsessing about the next bailout, a clever IMF wonk, one D. Kanda, has tried to estimate what the optimal fiscal adjustment programmes might look like for six European countries -France, Germany, the Netherlands, Italy, Ireland and the UK- given the preferences of policymakers and existing commitments. The results can be seen here, or in the tables below for short:

Coming soon to a negotiating table near you.

KILL THE CONSTITUTION

Whatever happens to Greece in the coming years, you can bet your bottom dollar one thing will not survive as we currently know it: the Greek Constitution. It's a cracking read; I thoroughly recommend it. Sadly, the political elite never had much respect for it and the Sainted People are already of a mind to wipe their collective ass with it; especially the bits about private property.

Amazingly, there is something very ordinary about the life of the Greek Consitution: it is conforming almost exactly to the historical patterns of constitutional survival.

How do I know? I know due to the amazing work of Tom Ginsburg of the University of Chicago. He's engaged in a massive project trying to figure out why some constitutions live longer than others. You can check out a draft of his report on this project here. The basic facts are these: the average constitution lives for about 17 years, but there are two particular rough patches: the 10-year and the 35-year itch. The 10-year threshold was crossed back in '85, and sure enough in '86 the Constitution was first amended to completely remove the last of the remaining powers of the President of the Republic. Well, guys, the Constitution turned 35 last year: the single most dangerous year in a Constitution's life. Since then, we haven't been sovereign and there's been a lot of legal stuff to get through so hey. One more year.

Now you might argue that this statporn is a little too slavish. There is no such thing as determinism and magic numbers in politics. I agree. But it is also true that Constitutions can outlive the conditions that first gave birth to them. Maybe the trends in constitutional survival are simply an indication of how quickly the political reality comes out of sync with institutions that once served it reasonably well. Stick with me on this one if you still disagree cause it gets interesting.

Turns out that, according to Ginsburg, there are factors that you can watch to see whether I'm on the right track. Turn to page 59 for a list of precipitating factors (literally, factors likely to tip you over the edge).

• Losing a war (which some people think we have in a way, as we have lost sovereignty) 
• Widespread constitutional change globally 
• Lack of constitutional change in neighbouring countries
• Transition to a more authoritarian government
• Coups
• Lack of change of the effective executive (in our case, few or no consecutive changes of Prime Minister) 
• Conflict (this is a general term including incidents such as anti-government strikes on the lower end of the scale and guerilla warfare somewhere on the higher end). 

So if you're a constitutional lawyer and you wake up one day to find that Yorgo is still clinging on despite open rebellion from his own party and the Socialists seem unlikely to be overthrown, if you find that people around the world but *not* our immediate neighbours are overthrowing their governments or forcing them to change the constitution (chances are you have), if you find that the army has taken over, or some leftist nutcase who sets the police or some rabid People's Militia after everyone he/she doesn't like, or if you find that the Government has started to really crack down on civil liberties, well, get your best MontBlanc out.

Once you've got these factors stacked up against the hapless Constitution, there are a few characteristics of the Constitution itself that can help tip it over that much faster. It's important to take note of these as our new constitution will have to steer clear of them too:

• If it was ratified by a public or constitutional convention, but under the auspices of an undemocratic regime (nope)
• If it was not ratified by a public or constitutional convention at all (nope) 
• If the country is acknowledged as being ethnically heterogenous (getting there)
• If the country is poor or underdeveloped (nope)
• If the constitution was not meant to make the system more democratic (nope)
• If the constitution is, by design, hard to review or amend (check). This is a very strong effect
• If the constitution is a short text that does not make allowance for different political scenaria or occurences (sort of; it is long, don't know about complexity; but this is one more reason to be suspicious of the half-baked indignado bullshit hatched over at Syntagma)

This is a tricky one because it suggests that structurally the Greek constitution is probably not built to last. The precipitating factors are mostly and so are many of the structural factors, but not all of them. This means, to my mind, that it will be tricky amending the constitution, and even then only specific things will be changed; we won't get a wholesale review.


Now there are many reasons why Constitutions shouldn't live forever, and they are reviewed quite thoroughly by Ginsburg. But there is one overriding imperative from where I sit which advocates in favour of a long-lived new Constitution: Foreign Direct Investment doesn't really take off until a Constitution has passed its 35-year test, perhaps not coincidentally.

A constitutional.dividend 35 years from now may not sound like much but it just might be factored in by bond markets; some in Greece are secretly hoping to borrow bilaterally from China for a few years as well, and the central planners in Beijing will sure appreciate some staying power in our institutions if they're going to take a punt.

Good luck guys!

OH MY GOD THEY DIDN'T KILL KENNY!

One of the key assumptions in the dominant narrative of the Greek crisis is that poverty has exploded to unprecedented levels.Frankly I never expected groundbreaking new levels of poverty because our social welfare system is one of the most inefficient (in terms of poverty alleviated per Euro spent) in the developed world and thus much of the money lost is money that would have been diverted to better-off recipients in the form of either welfare payments of wages. More on this here. But there can't not have been a substantial rise in poverty, and any rise is bad news.

As it happens, a new study is out that models the effects of policy changes on personal incomes from 2009 to 2010. Now if this was a country with a proper policy industry, this study would be cited left, right and centre, and its findings would be spun by all sides in whichever way. But there is no such thing in Greece, so I guess I have to spin by myself.

First things first:

The most common definition of relative poverty (also known as the standard poverty rate) is the % of persons earning less than 60% of the median (not average) income. This is relative in the sense that the poverty line is higher in more affluent societies. For a discussion of absolute poverty in Greece, you may want to take a look here.

By that measure, the study says, 20.1% of Greeks were living under the poverty line in 2009 and 20.9% were doing so in 2010. That’s a very small rise in poverty, in the order of 4%. However, this is not the end of the story. The authors suggest (and I think they are right in doing so) that a better measure of the change in poverty rates would be to benchmark against the 2009 median income, adjusted for inflation. This conveys much better the subjective experience of sliding into poverty – essentially we’re crudely counting the net number of people who have woken up to find themselves unable to afford some pretty basic things that they could afford a year ago. 

Benchmarked against this figure, those that are ‘poor by 2009 standards’ made up 25.2% of the population, which means a 25% rise in relative poverty. That’s pretty substantial.  The difference in the rate at which poverty levels rose under the two specifications comes from the fact that ALL of Greece saw its income fall in absolute terms in 2010.

So far, so predictable, although it’s important not to trivialise the issue of a 25% rise in poverty. I know some people have made it sound like this figure would be 2000000000%, but the real figure is still horrible news. But there are some findings that really are shocking.

Shocker no 1: Inequality actually fell in 2010, although this was largely because the upper middle class lost ground to the lower middle class (such as it is).

Yup. Although depending on what measure of inequality one chooses, the results can vary a lot. The top quintile of earners (i.e. those earning more than 80% of the population does; though check below for a hint at how well of they are) put even more distance between themselves and the bottom quintile (those earning more than 20% of the population does). But the overall Gini coefficient, the most commonly used measure of income inequality, actually fell. Can the same country become both more and less equal? Of course it can.  See how in the graph below:

Shocker no. 2: Public sector cuts reduced inequality

Yup. Why is this? Because 74% of public sector employees belong to the 30% highest-income Greeks. This means the civil service has almost the same share of marginally comfortable staff (realistically this is people earning a net EUR1,200 - 1,300 per month, see below) as the banking sector, the poster-boys of excessive compensation. See below:

Changes to personal income taxation also reduced inequality somewhat, while VAT was hugely regressive and cuts to pensions mildly so.

Now I know there's a grimoire of methodological caveats attached to all of these figures but to me they suggest one thing. It is easy to simplify the facts of the crisis to fit ideological frameworks; only if we dare to look the data in the eye, however, can we evaluate policy. I would add to this the suggestion that raising taxes is very bad for equality, on top of being very bad for growth. The best way, surely, to keep poverty at manageable levels ahead of the inevitable default, is to shift more of the emphasis of our adjustment programme away from tax and onto cutting spending. 

TECHNICAL UPDATE:

I know I said there's 'a grimoire of methodological caveats' to the above figures, but following a well-placed question from @side_shore I think I should point out the most important one.

Basically it concerns the accuracy of income reporting. The incomes used in estimating the above figures are of course themselves estimates. There is no database of Greek incomes after all. Basically, the authors have used EUROMOD to extract incomes as stated to the tax authorities. Assuming massive amounts of tax evasion and avoidance, they have adjusted these figures. The assumption is that incomes are under-reported by 1% for salaried employees, 0% for public sector pensioners, 55% for farmers and 25% for the self-employed (see pg. 7 here). These figures are not arbitrary but rather they are taken from this study.

The problem is that, as I mentioned, there is no such thing as a database of personal incomes, nor could there ever be. So what the authors of this last study did was compare incomes reported to the pan-European EU-SILC study with real tax returns in Greece and arrived at the above figures for under-reporting of incomes. The problem, however, is that while people are more honest when responding to survey questions than they are when filing tax returns, that's a far cry from being totally honest. If you make a buzzilion per year, you don't really want to tell somebody over the phone. In fact, if you earn that much you're unlikely to stick around to take the survey. Similarly, if you're very poor you may not want to discuss this over the phone, or you may omit benefits you are receiving from the state either because you don't consider them to be actual income or because you don't know what the particular benefit is called.

The authors of the first study I mentioned do recognise these limitations but argue that the incomes recorded by EU-SILC have been shown to match up to national aggregates. For a full discussion of the extent and sources of under-reporting, see this paper. It tests the data in places like Hungary and Italy, where people can be as crafty as the Greeks sometimes.

Finally, there's a big problem with the tax evasion and avoidance statistics because they reflect 2004 incomes. In 2004, the tax avoidance and evasion landscape didn't look anything like it did in 2010. The authors of the study I discuss here claim that avoidance got worse between 2004-9 and fell in 2010 under pressure from tighter inspection, but there's actually no way of knowing. In fact, it makes sense that the opposite happened as in 2010 incomes got tighter and tax morale (the crucial feeling that one is not an idiot for paying their fair share of tax, a crucial determinant of tax avoidance/evasion) must have fallen as the government's legitimacy fell rapidly. For more on the determinants of tax morale, see my past post here.

What effect these shortcomings would have on the validity of the findings (not the data, mind you) depends on the extent to which people in the top 10% and 30% of earners under-reported their income to EU-SILC. Despite being a European survey, EU-SILC is administered by ELSTAT and, upon being recruited to respond to it, one is informed that refusing to take the survey is punishable by law, much like dodging a Census. Despite assurances that all answers are confidential, this will have put some people's backs up. You can see the precise questionnaire for all past versions of EU-SILC here.


Bear in mind: the top 10% of Greeks are not a very exclusive club. To join them in 2006, you had to have a net income of about EUR36,000 per year (source). Let's call it 40k net in 2010 money. That's a good salary by Greek standards but it's hardly...

To join the top 30%, you needed a net income of about half that, EUR18,000. That's not a princely salary, and in fact I'm not surprised most civil servants get paid more than this; it's just not that much money. This of course also means that most people in the top 10% and 30% brackets are salaried persons who can't really hide their income from the taxman and wouldn't bother to hide from EU-SILC. That said, most of the income of this 10% is concentrated in a few households so if they are massive tax evaders or avoiders then the data is problematic. I don't know how bad the problem is but do look at the validation study I link to above; it should give you a hint.

So, yeah, lots of caveats.

ZENTREPRENEURSHIP, TENDERPRENEURSHIP, NEPOTREPRENEURSHIP

A couple of days ago, a research paper landed in my inbox, authored by small business research celeb Roy Thurik and Phillip Koelinger of Erasmus Univ. in Rotterdam. It's due to appear at the Review of Economics and Statistics sometime next year. Although they are kind enough to acknowledge me as a reviewer my only contribution to this paper was to point out this other fascinating paper to them, which in the end they didn't have much use for : )

What the Thurik and Koellinger paper does is explore the relationship between a) entrepreneurship (measured in multiple ways, including business ownership but also self-reported entrepreneurial activity) and b) the business cycle and provide some explanations for the way in which they are correlated. Data refer to 22 OECD countries from 1972 to 2007. It's a very complex chicken-and-egg story but they find that entrepreneurship is a strong leading indicator of the business cycle at the global level, and a weaker on at the national level. The authors believe this is because at the global level the political cycle gets smoothed out, but that's another day's lecture.

For now I think it's important to point out one country in which the relationship between GDP growth and enterprise is nearly statistically zero. Can you guess which one it is?

You guessed right. The numbers here denote statistical significance, they are almost like the probability (ranging from 0 to 1) that the two variables are unrelated. Thus Greece's 0.99 score means the two variables are almost certainly uncorrelated. I.e. a rise in business ownership in Greece appears to be neither the cause nor the effect of cyclical GDP growth.

Now I must confess that this is the result of only one test, which looks at the relationship between enterprise and real GDP from year to year. Other tests that look at longer-term cycles also returned insignificant relationships for Greece. A test that controls for all but the strongest annual shocks to GDP finds the following:

Any ideas on why enterprise in Greece (and many other OECD countries) doesn't seem to respond to the business cycle, let alone lead it?  Probably because a lot of it is not actually enterprise. Not in the sense of taking on uninsurable risks and turning a profit. Remember, enterprise is not a Good Thing in Greece as it is nearly everywhere else in the world (see here and here).

What we have plenty of is Tenderpreneurs - people who will set up 'businesses' for the express purpose of winning government tenders; Zentrepreneurs - people who have no product as such or who have set up 'businesses' when in fact they are empoyees; and Nepotrepreneurs, people who are slowly burning their family's money while pretending to run a business.

More thoughts on this to follow. Possibly soon, possibly not.

IF I WAZ A SAFE BET... PART TWO

I think the IMF is trying to give Ireland a hint. Or perhaps Greece. Or maybe their staff have too much time on their hands.

Remember about a month ago when I wrote about the effects of the 'investment-grade' premium on our spreads? The idea back then was that regaining the investment-grade glamour would push our spreads back down to barely-viable levels, although of course this was never going to happen.

More dedicated readers might also remember this analysis which I did a propos the Stiglitz "Leave Britney Greece alone!" article in the Guardian. (Readers less up to date with the cultural reference will probably have to read this).

As these readers will recall, I believe that the Stiglitz intervention marked the end of our sovereign period by rallying Greek pundits around the idea of a 'mild adjustment' and thus convincing the rest of the world that we were never going to get serious about the debt situation. Thanks MUPPET. I'll send you the bill in spilt guts.

Well this argument has now been made far more formally by the IMF's researchers, in a recently published analysis of what is called 'debt dilution'. Debt dilution basically works like this: if Greece owes say 100% of GDP and is running a huge deficit, a new creditor knows that the chances of being paid, let alone being paid out first, are diluted by the fact that there's going to be a long, growing queue of people waiting to be paid too, some of them our own citizens, and some nominally senior creditors like the IMF and the EU.

The authors simulate what would happen if we were to throw in a guarantee to compensate bondholders for any losses they suffer as a result of our bonds losing value due to dilution. This will of course never happen but it helps isolate the effects of dilution.

It turns out that, for the average sovereign, dilution accounts for 36% of the amount of nominal debt issued (because undilutable debt would be issued at better prices/lower yields) and an amazing 92% of the average spread. Let me put this another way. This would mean that Greece would pay an amazing 4.21% on its debt based on these spread figures. Btw the implied 74bp spread is not entirely fictitious; it is actually more than what we used to pay between 2002 and 2007 (although note these are spreads v. bunds, not T-bills as in the calculation above).

This should really serve to remind people of how stupid investors were back in those days. But it should also explain just why the balance in favour of default can tip so quickly. In our present state, where investors know not only that their chances of getting paid decrease with each penny we borrow but also that we would be genuinely better off defaulting, is it any surprise that the only people buying Greek debt are the ones who have no choice?

IF WE WAZ A SAFE BET, YA HA DEEDLE DEEDLE, BUBBA BUBBA DEEDLE DEEDLE DUM

Our Leader Yorgo often says, in his more closely scripted statements, that Greece's biggest problem is its credibility deficit, not its Government deficit. This line goes down very well with world leaders because it seems to them to signal that we want to become a respectable country.

Now there's at least some evidence to help us measure how true the statement is. Although the source of this is a paper by IMF staff (which is admittedly suspect these days), it's a paper that sets out to discuss a very different issue, with regards to very different countries. Hence, I'm inclined to believe that there is no foul play involved.

The academic minds over at the IMF set out to discover whether being able to issue investment grade (i.e. not junk) bonds makes any difference for debtor countries. Investment-grade is a largely arbitrary distinction, but it generally means that, in a credit rating agency's opinion, you have a less than 10% chance of defaulting within 5 years. But investment grade issuers are also, in investors' minds, tantamount to the club of 'decent' debtor countries - the ones that frankly just don't default. It's not a conviction that's based on facts, but it is one that is hard to shake; Greece's ratings for instance held out long after investors had given up hope.

This illusion of 'decency' is in principle what Greece wants to regain. If, the reasoning goes, we could just get back into the cosy club of good debtors it would make a difference even if our fundamentals hadn't really improved. Credit ratings will of course lag this transition (indeed they lag everything), but the idea is that once we've got our 'credibility' back we'll go back to investment grade in no time. This begs the question: how big is the effect of investment-grade status? Apparently it reduces spreads (against US treasuries) by 36%.

Note that this is above and beyond what can be justified by fundamentals. It comes from investors' unwillingness to believe that such a country could ever default; however, even with this, the yield of ten-year bonds for a country with Greece's fundamentals would come in at 8.9% (calculations based on this). While this would still make Greek spreads higher than those of Portugal, it is just under my viability benchmark of 9.25% (which was, however, calculated before a further upward revision of our debt figures). This means that, if Greece could once again bask in the glow of investor confidence for a moment, as well as carry out all possible reforms successfully within three years, the suspension-of-disbelief effect would bring us back onto a viable trajectory.

This is essentially a vindication of the Vayanos et al case for avoiding a Greek default and I hope it comes to pass. The problem, however, is that the suspension of disbelief effect was a collective delusion of investors which has been shattered by the sovereign debt crisis. To paraphrase an old saying, even if Greece manages to get to the spring (of hopium, or cool-aid or whatever), will there be anything there left to drink?

So to conclude, fixing the 'credibility deficit' would, ceteris paribus, indeed put Greece on a potentially sustainable path as per Yorgo's observations. The problem is that the cetera are not paria and the investor-grade bonus probably just doesn't exist anymore, except perhaps (almost certainly) for triple-A rated sovereigns. Until of course, they too come into question.

I CAN HAZ IPHONE4? ASK LOLGREEK'S KIDS

Avid readers may remember the story of the iPhone 4 rollout in Greece, and how our supposedly impoverished population lapped up the latest gadget, which at the time cost the equivalent of a month’s minimum wage. Now, anecdotes are useful for illustration purposes but hard evidence is always best.

To the BatCave then.

Partly out of loyalty and partly because I get their newsletter, I read a lot of LSE publications and am particularly keen on EU-wide mega-surveys feeding central planner porn to EU officials with names straight out of Star Trek.

I was particularly keen to read this latest offering – a survey of children's experiences of the internet around Europe (full report). As expected, this spreads the evidence quite thinly over the Eurocrats’ pre-drafted policy toast: the internet is full of disturbing stuff for children (who, when quoted, seem to be talking mainly about spam, ads and malware – the report plays very well on the double meaning of the word ‘disturbing’).

It also finds that parents need help controlling what kids see and are grateful when nice social workers give them a ‘toolkit’ for doing this. War is peace. Freedom is slavery. Ignorance is strength.

Amidst all of this muppetry, I found a massive gem. Feast your eyes, friends, on the chart below, taken straight from the report. Apparently two thirds of Greek kids access the internet on their phones. That’s twice as many as in the UK and over 1.5 times the percentage of the second-ranked country. Another 12% uses other handheld devices which I suppose range from Blackberries to PDAs, iPads and the like.

 Wow. This, by the way, is not a sampling error of some sort. The Greek sample is 1,000 strong, and the Greek internet-accessing sample is 87% of that. It is also not a matter of timing as the Greek fieldwork was carred out between 10 May and 2 July 2010. So overall, 68% of Greek kids browsed, post-IMF, on a mobile device and the error attached to this estimate is tiny. Not too shabby!

Next up, EU poll shows an alarming number of Greek pets have gold-plated teeth.

I DAREZ PAUL MUPPET KRUGMAN TO DEBATE TEH AUSTRIAN THEORY

This post is copied from Jeff Harding's post on The Daily Capitalist. I have matched Jeff's pledge and would urge you to do the same. At best, my guy loses and we help feed some hungry people over in NY. At worst, Paul MUPPET Krugman gets his ass handed to him in a symbolic defeat of Keynesian MUPPET running dogs the world over AND we help feed some hungry people over in NY. I'm happy either way.

========================================

I Dare Paul Krugman To Debate Austrian Theory

By Jeff Harding, on October 23rd, 2010

UPDATED

How much would it be worth to you to see arch-Keynesian Paul Krugman debate a top-notch Austrian theory economist on business cycle theory?

Krugman has prattled for years about Austrian theory being a flawed dead-end of economics. My guess he has never read anything by Mises, Hayek, or Rothbard, the greatest scholars of the Austrian School. He doesn’t understand it in any way; I have read his critiques and they are uninformed.

Robert Murphy, one of the bright young lights of Austrian theory economics, has challenged Krugman to a debate. Now let me say others have tried to draw Krugman out, but he won’t do it. Murphy, who got his Ph.D at NYU, has made an offer of debate that Krugman will be hard pressed to refuse. Here’s the challenge:

When Krugman agrees to debate Murphy at the Mises Institute, $100,000 will be donated to the Fresh Food Program of FoodBankNYC.org, a non-profit dedicated to feeding the hungry of NYC .

Murphy is soliciting donations for the debate through The Point, a web site that hosts campaigns. Launched only 4 days ago, they already have raised $22,000 $28,000 $32,000 57,165. I just pledged $100. If Krugman doesn’t accept the challenge, I will not be charged. If he does, I get a charitable donation deduction to the Food Bank of NYC.

Click the banner below to donate. Please join me. This will be money very well spent.

UPDATE: Murphy has put up this video of himself prepping for the Krugman debate:



Can you imagine a Keynesian High Priest taking himself this seriously?