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Every time I bring this up I get down-voted, but I cannot resist. No one argues that the Greek economy was in good shape. It clearly had severe problems with c

by lyudmil 15y ago

Every time I bring this up I get down-voted, but I cannot resist. No one argues that the Greek economy was in good shape. It clearly had severe problems with corruption and inefficiencies, which were brutally exposed when the global financial crisis hit. Everyone suffered, but because of the problems in the fundamentals of the economy, Greece suffered disproportionately more. However, the European Central Bank lent the "bailout" money demanding cuts to public spending that, in the current economic situation, would have very likely worsened the Greek economic situation. Greeks realized this and protested, but were (understandably) dismissed as spoiled brats, demanding an unsustainable, comfortable lifestyle. Now that the likely, predictable outcome is looking even more likely (namely, default), journalists are still omitting that crucial part of the analysis. Many economists warned that in a crisis of demand, which is what we're experiencing now, cutting government spending is a bad idea. In a situation of such great uncertainty in the market, the government is the only source of demand big enough to make a dent. It must, of course, borrow the money and therefore increase its deficit by doing so, but that's a worthwhile thing to do when the alternative is default. After the economy has stabilized, the deficit problem can be overcome by growth. Moreover, even if deficit reduction is your priority, if the economy is shrinking you're always going to be fighting a losing battle no matter how many spending cuts you make. To summarize my point, the Greek economic turmoils are less of a cautionary tale of the perils of uncontrolled spending (although they clearly are also that), and more an illustration of the negative effect the austerity measures recommended by the ECB are having on the economies they are imposed on. It should give leading European nations pause when considering what to do with the rest of the troubled economies in the eurozone.

yaakov34 15y ago
I think the element you are missing is that the Greek government spending is very inefficient; they're not investing in some kind of economy-growing infrastructure revolution, they're spending money on totally unreasonable union contracts and extraordinarily early retirement for large classes of pensioners. The cuts they agreed to are something like 78 billion euros over more than 10 years, which is quite moderate, for all the screaming. The European central banks are lending money to Greece well below market rates, and they're quite within their rights to demand a reasonable budget which might actually result in this money being repaid. If Greece wants to increase government spending on infrastructure and investments, they can do that after getting their budget in order and convincing their own population to part with some money for the sake of these programs. P.S. I don't think downvoting/upvoting should be a poll on whether someone agrees with a message; it's a decision of interesting/unhelpful.
- lyudmil 15y ago
  I think I openly admitted that the way the Greek government was spending money was terrible. Yes, I agree with you. The Greek economy was a joke and it definitely needs to change, but let's talk about the situation as of the initial collapse. The fact was (and remains now) that they need(ed) money just to keep afloat. The CEB could have put any provision it wanted on the money lent. They chose to force the Greeks to cut spending. My argument, informed by what I've read on the topic, would be that it would have been better for them to force the Greeks to spend the money as a stimulus, making the sort of investments that you talk about. Instead, the CEB likely worsened an already pretty dire situation. I think you'll agree that the interesting part of this argument isn't Greece at all, but the case study Greece is becoming. It's clear more austerity measures are coming in more European countries and the US. I think it's a bad idea and I'm curious to find out what this community thinks.
  - yaakov34 15y ago
    Suppose you have a friend who screws up and gets fired from menial jobs, spends his money on booze and gambling, and ends up in heavy debt. Now you want to help him out, so you can do one of two things: 1. I'll lend you the money if you get a steady minimum wage job and cut off the spending. 2. Look, I believe in you. I'll lend you a whole bunch of money so that you can go to college, retrain, get a much better job, and then repay me with plenty left over for yourself. Now I understand that (2.) sounds much better than (1.), but it's just not realistic. He will waste the money again, because he knows he didn't earn it. You have to be tough and force him to get his house in order. Then he can save and borrow to retrain. If Greece is spending its own money on infrastructure and investments, there is at least a chance it will be spent well. If it's spending other people's money - no chance at all. EDIT: I didn't mean this to sound like I am calling Greeks in general wastrels and boozers. It's more about how other people's money tends to get spent. See the message below.
    - waterlesscloud 15y ago
      What if you've been lending the money to him that he's spent on booze and gambling? And what if you're very well paid to make good decisions about lending money? Shouldn't you then be forced to take a very serious, if not complete, loss on the money you lent to him? It's your own fault you lent it to a wastrel. Why should you be bailed out, exactly?
jackowayed 15y ago
> In a situation of such great uncertainty in the market, the government is the only source of demand big enough to make a dent. It must, of course, borrow the money and therefore increase its deficit by doing so, but that's a worthwhile thing to do when the alternative is default. So I don't totally understand what you're saying, but I think it's that they need to borrow a bunch more money, spend it to grow their economy, and then pay off their debt once their economy is doing better. The problem with that is that their finances are already terrible and no one really believes that they can pay back their debt. They're already paying very high rates on their new debt. If they tried to borrow even more, those rates would have to go even higher. So somehow they'll have to borrow enough that they can spend a lot to grow their economy and pay all the debt that's coming due, and then quickly recoup all the money they invested in their economy as even more debt comes due. So I guess you're arguing that the ECB should give them the cheap loans without them trying to balance their budget in the short term, and trusting that in the long term their economy will grow and they'll pay it back. The ECB doesn't seem to think that would be effective, and a lot of countries are not too happy about the bailouts even with austerity provisions.
- lyudmil 15y ago
  You're right about what I'm arguing and you're right in your analysis. I think the political situation is very unfortunate and that the large European economies which effectively control the ECB are screwing up. Partly I think the problem is that the media analysis has ignored the possibility the austerity measures could be the cause the complications. The facts of this article at least seem to lend credence to the "stimulus hypothesis" and to take credibility away from austerity. It is the media's job to point that out in order to inform public opinion so that the political problems you mentioned are overcome.
ignifero 15y ago
The current crisis was not a problem caused by the global economic downturn, in fact the drops in tourism were no more than 10% and shipping, well, eventhough it was hit during the recession, but shipping accounts for only 4.5% of our GDP. It had little to do with the global economic crisis because a) greek banks were not exposed to failed institutions and b) greece does not export much anyway. The problem with the economy of Greece is that it is not diversified, it was heavily de-industrialized in the 90s, with rampant corruption, protectionism and an third-world-level tax collection policies. The governments are mainly at fault for these excesses. As things proved out to be, the growth rates of the 00s (the largest in EU) were fake, based on lending that was not reported (and, guess what, nobody has yet gone to jail for that). The current crisis emerged because they were no longer able to hide the fact that the country is insolvent. At the current point, I think it's too late to save the Greek economy anyway. The best options we have are either a) the EU guarantees a large part of our debt (like 50% or so, via something like eurobonds that basically amounts to a bailout) or b) we default and leave the eurozone to rebuild the economy from the start.
- lyudmil 15y ago
  It's silly to say it had little to do with the global economic crisis. Economic production following the initial global downturn went down 8% [1], construction 73% [2], and retail 9% [3]. What's interesting to me is why you think what you think about the Greek economy or the reasons for its collapse? (A sincere question) References (PDF, sorry): [1] http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A0503/PressReleases/A0503_DKT21_DT_MM_03_2011_01_P_EN.pdf http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A050... [2] http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A1302/PressReleases/A1302_SOP03_DT_MM_01_2011_01_P_EN.pdf http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A130... [3] http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A0508/PressReleases/A0508_DKT39_DT_MM_02_2011_01_F_EN.pdf http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A050...
  - ignifero 15y ago
    The data you point to are for 2010, when greece entered the EU/IMF mechanism and govt spending stopped. This does not have to do with the global economic recession that started in 2008. I am Greek, and know that Greek banks were very little exposed to the international toxic assets. None of them collapsed, in fact they chose not to take govt-offered support money they were offered (28 bil. euro or so) in 2008. There are structural problems here, and although measures are being taken to rationalize the market, it's gonna take years to see the results.
yummyfajitas 15y ago
Is the situation dramatically different in the EU than in the US? Here in the US, we are not suffering from a crisis of demand at all. We are suffering from structural unemployment - demand and production have both recovered, but people remain unemployed. http://news.ycombinator.com/item?id=2240468 http://news.ycombinator.com/item?id=2240468 I'd be very curious to see data indicating that the EU is in a different situation.
- lyudmil 15y ago
  Your thesis is surprising, so I'll have to look more into your data. For now I will say that (1) because of the tight correlation between employment and demand, you'd need a very solid argument that demand has recovered but employment hasn't and why and (2) the data you have in your comment doesn't show that conclusively. The only measure of demand you site is Manufacturer's New Orders, which does show an increase. However, most of it is due to airplanes, which are volatile by nature (and is partly fueled by public defense spending). Also, the best predictor of future growth in that category (Core capital goods), while growing, isn't back to 2007 levels yet. [1] I think it's too early to say demand is back, and it's lack also explains unemployment well. [1] http://www.economicpopulist.org/content/durable-goods-new-orders-19-advance-report-may-2011 http://www.economicpopulist.org/content/durable-goods-new-or...
  - yummyfajitas 15y ago
    ...because of the tight correlation between employment and demand... This "tight correlation" is a conclusion of Keynesian economics, and is strongly dependent on an assumed correlation between production and employment. The logic goes: production and employment are highly correlated (i.e., you can't increase production much without increasing employment). Weak AD reduces production, therefore stimulating AD can increase production and employment. As my data shows, the correlation between production and employment is quite weak, and we can therefore not use employment as a proxy for demand.
    - nl 15y ago
      I don't think what you are saying is the full story - demand hasn't recovered completely. For example, I believe real estate demand is very low (and real estate sales has major flow on effects)[1]. However, I do think there is a significant structural change that reflects a little of what you are saying. There is an interesting question on Quora somewhat related: http://www.quora.com/Why-does-the-US-economy-take-increasingly-longer-time-to-recover-from-recessions http://www.quora.com/Why-does-the-US-economy-take-increasing... and my answer http://www.quora.com/Why-does-the-US-economy-take-increasingly-longer-time-to-recover-from-recessions/answer/Nick-Lothian http://www.quora.com/Why-does-the-US-economy-take-increasing... [1] This is from 2010, but I can't find anything more recent: http://www.guardian.co.uk/business/2010/aug/24/us-home-sales-slump http://www.guardian.co.uk/business/2010/aug/24/us-home-sales...
wisty 15y ago
There's an Australian economist called "Steve Keen", who uses mathematics (stuff like dynamic PDEs, not the crap econometricians use) to model this kind of stuff. I think he tends to agree with Keynes, in broad terms - austerity measures are a crock, because they come at a time when the government would otherwise be the only bastion of stability. But we didn't think about this when we subjected African (and other third world) economies to the IMF's demands. What is needed is long-term measures. Gradually raising the pension age, gradually cutting pensions, freezing spending, and so on. Also, government reform (i.e. better transparency, whistle-blower protection, ombudsmen and auditors) is needed, not just "cutting costs".
- yummyfajitas 15y ago
  Long term measures are impossible in government. You cannot bind the actions of future legislators. Legislators will agree to austerity measures which harm the constituents of future legislators, and then future legislators will undo it. The only reliable way of binding the actions of future legislators is to create a politically powerful class of dependents (e.g. old people, government unions) who will fight to protect their cash cow. Unfortunately, that's what got Greece into this mess to begin with.
- Evgeny 15y ago
  There's an Australian economist called "Steve Keen", who uses mathematics (stuff like dynamic PDEs, not the crap econometricians use) to model this kind of stuff. It is probably worth noting that he's been predicting the Australian Property Bubble to pop any time for quite a while. He already had to walk to Mt. Kosciuszko (highest mountain in Australia, like 2000m or so) because he had lost a bet on a housing prices to another economist, but all his predictions still point out that house price bubble pops any day (I'm subscribed to his blog and I admire the way he uses mathematics btw).
Tomek_ 15y ago
Have you read the article you comment on? There's a paragraph or two about that there.
raganwald 15y ago
Every time I bring this up I get down-voted, but... Every time someone begins a comment or blog post with text that says absolutely nothing about what they are trying to say, they weaken their point. If you cannot resist including meta-commentary, I suggest putting it after your rhetoric, like this: p.s. I apologize for meta-commentary, obviously this has nothing to do with the Greek Economy.
- lyudmil 15y ago
  Agreed. If I had taken time to edit my comment I would've probably taken it out.
Symmetry 15y ago
But how was the government to avoid cutting spending? Even if we include the recent austerity measures and ignore the interest payments on the debt Greece is still spending more money than its taking in. Greece can't keep borrowing money from the market if the market doesn't think Greece'll be able to pay its loans back. Greece can't just borrow money from Germany with no string attached because German voters want Greek austerity. Greece cant' default without more austerity to bring its expenses under its income, like Argentina successfully did. And it can't just inflate away its debt because its part of the Euro. Austerity does really suck in bad economic times and its probably worse than inflation, but Greece doesn't have any other options.

by lyudmil 15y ago

yaakov34 15y ago

I think the element you are missing is that the Greek government spending is very inefficient; they're not investing in some kind of economy-growing infrastructure revolution, they're spending money on totally unreasonable union contracts and extraordinarily early retirement for large classes of pensioners. The cuts they agreed to are something like 78 billion euros over more than 10 years, which is quite moderate, for all the screaming. The European central banks are lending money to Greece well below market rates, and they're quite within their rights to demand a reasonable budget which might actually result in this money being repaid. If Greece wants to increase government spending on infrastructure and investments, they can do that after getting their budget in order and convincing their own population to part with some money for the sake of these programs. P.S. I don't think downvoting/upvoting should be a poll on whether someone agrees with a message; it's a decision of interesting/unhelpful.

lyudmil 15y ago
I think I openly admitted that the way the Greek government was spending money was terrible. Yes, I agree with you. The Greek economy was a joke and it definitely needs to change, but let's talk about the situation as of the initial collapse. The fact was (and remains now) that they need(ed) money just to keep afloat. The CEB could have put any provision it wanted on the money lent. They chose to force the Greeks to cut spending. My argument, informed by what I've read on the topic, would be that it would have been better for them to force the Greeks to spend the money as a stimulus, making the sort of investments that you talk about. Instead, the CEB likely worsened an already pretty dire situation. I think you'll agree that the interesting part of this argument isn't Greece at all, but the case study Greece is becoming. It's clear more austerity measures are coming in more European countries and the US. I think it's a bad idea and I'm curious to find out what this community thinks.
- yaakov34 15y ago
  Suppose you have a friend who screws up and gets fired from menial jobs, spends his money on booze and gambling, and ends up in heavy debt. Now you want to help him out, so you can do one of two things: 1. I'll lend you the money if you get a steady minimum wage job and cut off the spending. 2. Look, I believe in you. I'll lend you a whole bunch of money so that you can go to college, retrain, get a much better job, and then repay me with plenty left over for yourself. Now I understand that (2.) sounds much better than (1.), but it's just not realistic. He will waste the money again, because he knows he didn't earn it. You have to be tough and force him to get his house in order. Then he can save and borrow to retrain. If Greece is spending its own money on infrastructure and investments, there is at least a chance it will be spent well. If it's spending other people's money - no chance at all. EDIT: I didn't mean this to sound like I am calling Greeks in general wastrels and boozers. It's more about how other people's money tends to get spent. See the message below.
  - waterlesscloud 15y ago
    What if you've been lending the money to him that he's spent on booze and gambling? And what if you're very well paid to make good decisions about lending money? Shouldn't you then be forced to take a very serious, if not complete, loss on the money you lent to him? It's your own fault you lent it to a wastrel. Why should you be bailed out, exactly?

jackowayed 15y ago

> In a situation of such great uncertainty in the market, the government is the only source of demand big enough to make a dent. It must, of course, borrow the money and therefore increase its deficit by doing so, but that's a worthwhile thing to do when the alternative is default. So I don't totally understand what you're saying, but I think it's that they need to borrow a bunch more money, spend it to grow their economy, and then pay off their debt once their economy is doing better. The problem with that is that their finances are already terrible and no one really believes that they can pay back their debt. They're already paying very high rates on their new debt. If they tried to borrow even more, those rates would have to go even higher. So somehow they'll have to borrow enough that they can spend a lot to grow their economy and pay all the debt that's coming due, and then quickly recoup all the money they invested in their economy as even more debt comes due. So I guess you're arguing that the ECB should give them the cheap loans without them trying to balance their budget in the short term, and trusting that in the long term their economy will grow and they'll pay it back. The ECB doesn't seem to think that would be effective, and a lot of countries are not too happy about the bailouts even with austerity provisions.

lyudmil 15y ago
You're right about what I'm arguing and you're right in your analysis. I think the political situation is very unfortunate and that the large European economies which effectively control the ECB are screwing up. Partly I think the problem is that the media analysis has ignored the possibility the austerity measures could be the cause the complications. The facts of this article at least seem to lend credence to the "stimulus hypothesis" and to take credibility away from austerity. It is the media's job to point that out in order to inform public opinion so that the political problems you mentioned are overcome.

ignifero 15y ago

The current crisis was not a problem caused by the global economic downturn, in fact the drops in tourism were no more than 10% and shipping, well, eventhough it was hit during the recession, but shipping accounts for only 4.5% of our GDP. It had little to do with the global economic crisis because a) greek banks were not exposed to failed institutions and b) greece does not export much anyway. The problem with the economy of Greece is that it is not diversified, it was heavily de-industrialized in the 90s, with rampant corruption, protectionism and an third-world-level tax collection policies. The governments are mainly at fault for these excesses. As things proved out to be, the growth rates of the 00s (the largest in EU) were fake, based on lending that was not reported (and, guess what, nobody has yet gone to jail for that). The current crisis emerged because they were no longer able to hide the fact that the country is insolvent. At the current point, I think it's too late to save the Greek economy anyway. The best options we have are either a) the EU guarantees a large part of our debt (like 50% or so, via something like eurobonds that basically amounts to a bailout) or b) we default and leave the eurozone to rebuild the economy from the start.

lyudmil 15y ago
It's silly to say it had little to do with the global economic crisis. Economic production following the initial global downturn went down 8% [1], construction 73% [2], and retail 9% [3]. What's interesting to me is why you think what you think about the Greek economy or the reasons for its collapse? (A sincere question) References (PDF, sorry): [1] http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A0503/PressReleases/A0503_DKT21_DT_MM_03_2011_01_P_EN.pdf http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A050... [2] http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A1302/PressReleases/A1302_SOP03_DT_MM_01_2011_01_P_EN.pdf http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A130... [3] http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A0508/PressReleases/A0508_DKT39_DT_MM_02_2011_01_F_EN.pdf http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A050...
- ignifero 15y ago
  The data you point to are for 2010, when greece entered the EU/IMF mechanism and govt spending stopped. This does not have to do with the global economic recession that started in 2008. I am Greek, and know that Greek banks were very little exposed to the international toxic assets. None of them collapsed, in fact they chose not to take govt-offered support money they were offered (28 bil. euro or so) in 2008. There are structural problems here, and although measures are being taken to rationalize the market, it's gonna take years to see the results.

yummyfajitas 15y ago

Is the situation dramatically different in the EU than in the US? Here in the US, we are not suffering from a crisis of demand at all. We are suffering from structural unemployment - demand and production have both recovered, but people remain unemployed. http://news.ycombinator.com/item?id=2240468 http://news.ycombinator.com/item?id=2240468 I'd be very curious to see data indicating that the EU is in a different situation.

lyudmil 15y ago
Your thesis is surprising, so I'll have to look more into your data. For now I will say that (1) because of the tight correlation between employment and demand, you'd need a very solid argument that demand has recovered but employment hasn't and why and (2) the data you have in your comment doesn't show that conclusively. The only measure of demand you site is Manufacturer's New Orders, which does show an increase. However, most of it is due to airplanes, which are volatile by nature (and is partly fueled by public defense spending). Also, the best predictor of future growth in that category (Core capital goods), while growing, isn't back to 2007 levels yet. [1] I think it's too early to say demand is back, and it's lack also explains unemployment well. [1] http://www.economicpopulist.org/content/durable-goods-new-orders-19-advance-report-may-2011 http://www.economicpopulist.org/content/durable-goods-new-or...
- yummyfajitas 15y ago
  ...because of the tight correlation between employment and demand... This "tight correlation" is a conclusion of Keynesian economics, and is strongly dependent on an assumed correlation between production and employment. The logic goes: production and employment are highly correlated (i.e., you can't increase production much without increasing employment). Weak AD reduces production, therefore stimulating AD can increase production and employment. As my data shows, the correlation between production and employment is quite weak, and we can therefore not use employment as a proxy for demand.
  - nl 15y ago
    I don't think what you are saying is the full story - demand hasn't recovered completely. For example, I believe real estate demand is very low (and real estate sales has major flow on effects)[1]. However, I do think there is a significant structural change that reflects a little of what you are saying. There is an interesting question on Quora somewhat related: http://www.quora.com/Why-does-the-US-economy-take-increasingly-longer-time-to-recover-from-recessions http://www.quora.com/Why-does-the-US-economy-take-increasing... and my answer http://www.quora.com/Why-does-the-US-economy-take-increasingly-longer-time-to-recover-from-recessions/answer/Nick-Lothian http://www.quora.com/Why-does-the-US-economy-take-increasing... [1] This is from 2010, but I can't find anything more recent: http://www.guardian.co.uk/business/2010/aug/24/us-home-sales-slump http://www.guardian.co.uk/business/2010/aug/24/us-home-sales...

wisty 15y ago

There's an Australian economist called "Steve Keen", who uses mathematics (stuff like dynamic PDEs, not the crap econometricians use) to model this kind of stuff. I think he tends to agree with Keynes, in broad terms - austerity measures are a crock, because they come at a time when the government would otherwise be the only bastion of stability. But we didn't think about this when we subjected African (and other third world) economies to the IMF's demands. What is needed is long-term measures. Gradually raising the pension age, gradually cutting pensions, freezing spending, and so on. Also, government reform (i.e. better transparency, whistle-blower protection, ombudsmen and auditors) is needed, not just "cutting costs".

yummyfajitas 15y ago
Long term measures are impossible in government. You cannot bind the actions of future legislators. Legislators will agree to austerity measures which harm the constituents of future legislators, and then future legislators will undo it. The only reliable way of binding the actions of future legislators is to create a politically powerful class of dependents (e.g. old people, government unions) who will fight to protect their cash cow. Unfortunately, that's what got Greece into this mess to begin with.
Evgeny 15y ago
There's an Australian economist called "Steve Keen", who uses mathematics (stuff like dynamic PDEs, not the crap econometricians use) to model this kind of stuff. It is probably worth noting that he's been predicting the Australian Property Bubble to pop any time for quite a while. He already had to walk to Mt. Kosciuszko (highest mountain in Australia, like 2000m or so) because he had lost a bet on a housing prices to another economist, but all his predictions still point out that house price bubble pops any day (I'm subscribed to his blog and I admire the way he uses mathematics btw).

Tomek_ 15y ago

Have you read the article you comment on? There's a paragraph or two about that there.

raganwald 15y ago

Every time I bring this up I get down-voted, but... Every time someone begins a comment or blog post with text that says absolutely nothing about what they are trying to say, they weaken their point. If you cannot resist including meta-commentary, I suggest putting it after your rhetoric, like this: p.s. I apologize for meta-commentary, obviously this has nothing to do with the Greek Economy.

lyudmil 15y ago
Agreed. If I had taken time to edit my comment I would've probably taken it out.

Symmetry 15y ago

But how was the government to avoid cutting spending? Even if we include the recent austerity measures and ignore the interest payments on the debt Greece is still spending more money than its taking in. Greece can't keep borrowing money from the market if the market doesn't think Greece'll be able to pay its loans back. Greece can't just borrow money from Germany with no string attached because German voters want Greek austerity. Greece cant' default without more austerity to bring its expenses under its income, like Argentina successfully did. And it can't just inflate away its debt because its part of the Euro. Austerity does really suck in bad economic times and its probably worse than inflation, but Greece doesn't have any other options.