My NYT column is here, here is an excerpt:
Consider the World Bank’s Doing Business index, which ranks countries according to the quality of their regulatory environment for commerce. The index places Greece at No. 109, just behind Egypt, Ethiopia and Lebanon. For the category of “high-income countries,” the Greek ranking is next to last, ahead of only Equatorial Guinea, which has oil wealth.
Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent.
As the World Bank index suggests, government funds are often spent hindering production rather than supporting it. This gives one clue as to why the numbers make Greece appear richer than it really is. Public expenditures are valued at cost when measuring gross domestic product, yet arguably the quality of Greek public services, per dollar spent, is less than that of many wealthy countries. Nonetheless Greece plunged ahead and joined the euro zone in 2001, with some unfortunate consequences.
A few scattered points which did not make it into the column:
1. Count the economic collapse of Greece as an intellectual victory for Douglass North and his brand of "institutions matter" economics.
2. I don't see any reason why a narrower Eurozone has to collapse.
3. Greece with a default and a floating exchange rate could do OK (though not spectacularly well). The real question is how to get from here to there.
4. I don't have any problem suggesting that Greece needed, and still needs, to collect more tax revenue. Yet many writers on "the left" will bend over backward to avoid uttering these simple words: "The Greek government spent too much money." It's true, the Greek government spent too much money. Be worried if you are reading a writer who does not admit (much less emphasize) that upfront.
5. In addition to greater wealth, here are some reasons why California is not like Greece:
The United States has rich and poor regions, but the 50 states are forced to run balanced budgets, and there is greater mobility within the nation, based on a shared language and culture. Major national policies, like President Obama‘s health care plan, are not judged primarily in terms of which states win and lose; in fact the largely opposed “red states” get a lot of the benefits through higher Medicaid subsidies.
Addendum: Arnold Kling comments.
>in fact the largely opposed “red states† get a lot of the benefits through higher Medicaid subsidies.
Most of the opposition is because many believe that almost everyone will lose over the longer term. Not because they don’t think they will benefit over the short term.
“The United States has rich and poor regions, but the 50 states are forced to run balanced budgets”
Oh, really? Is it not the case that, via the Federal Reserve, money is mooched from the future and funneled to State capitols to paper over some sadly imbalanced budgets?
Writers on ‘the left’ will bend over backwards not to say “The Greek government spent too much money.” When we talk about ignoring the elephant in the room, surely writers not on ‘the left’ ought to at least mention that exorbitant taxes promote tax evasion, capital flight, lower overall tax revenues, etc. But I suppose pointing out such elephants might preclude one’s articles from being publish in the NYT.
California is not forced to run a balanced budget. It’s forced to run a “balanced” budget. There are numerous ways California issues debt without explicitly issuing debt, which would require voter approval.
1) “smooth” (aka underfund) pension contributions. This grows the net liability; it’s equivalent to issuing debt.
Issue revenue anticipation warrants… This is last straw when the State doesn’t have the cash to pay its bills. California will pay workers, contractors etc… with revenue anticipation warrants in lieu of cash.
2) Grant corporate tax breaks this year in exchange for tax breaks in subsequent years… this is essentially borrowing against future tax revenue.
3) Raid local government accounts… this must be paid back in subsequent years, so again, this is just borrowing.
4) Shift government payday from late June to early July, shifting the obligation into the next fiscal year. (short term gimmick)
5) Assume higher economic growth, and therefore project higher tax revenue.
6) Hold onto income tax refunds.
7) Amnesty on corporate tax violations. It’s structured so corporations are encouraged to prepay any possible violation, and then the money is returned if it turns out not to be an obligation.
9) This hasn’t happened this cycle and requires voter approval, but previously, California has issued Economic Recovery Bonds or “pension obligation bonds” which rols some of the State’s shortfall into explicit debt.
“BUT THE 50 STATES ARE FORCED TO RUN BALANCED BUDGETS”. Tyler: Should I remember you of the concept of a hard/soft budget constraint? Have you considered the possibility that governments know how to soften a budget constraint? Ask or read Kornai but remember that the Greek Minister of Finance has a Ph.D. in Economics and the PM is also a Ph.D., son of a well-known professor of economics with a Ph.D from Harvard. Or ask any of the several Argentines that got a Ph.D. in Economics from Harvard or other U.S. university and turned out to be masters of the soft budget constraint. Or ask any of the UC’s professors of economics about how Californian politicians have been simultaneously softening and hardening the state’s budget constraint.
Now concerning the fundamental issue of what alternatives Greece has, you fail to identify them clearly, to define your selection criteria, and to argue for one alternative.
North’s ultimate intellectual success (not victory) was to eventually recognize that the defining characteristic of the transition to capitalism is the depersonalization of state institutions. Actually Michael Heller submitted that neo-Weberian idea in detail to Princeton University Press in 2003 and again in 2006, along with a Schumpeterian theory of intentional discontinuous institutional change. North’s book Understanding the Process of Economic Change published by Princeton in 2005 admitted the new idea that institutional change could be intentional and discontinuous, but did not yet join it to a theorization of institutional depersonalization. Prior to that, North’s discussion of ‘impersonality’ had been restricted only to economic exchange, and his analysis of institutions was simply a cultural explanation of economic development derived from Hayek’s evolutionary vision of continuous institutional change, and lacking intentionality. Core theory and terminology in North’s 1990 book Institutions, Institutional Change and Economic Performance, such as about the appropriation of property rights and the historical transition from informal to formal institutions, had been liberally borrowed from Max Weber without attribution. Economists and historians did not notice because they do not read Weber. North himself appeared not to have read or understood the reasons for Weber’s rejection of cultural determinism. Finally, however, North came to his senses. His breakthrough was the characterization of impersonal state institutions in Violence and Social Orders in 2009, the very same year Michael Heller published his own treatise on the same topic in Capitalism, Institutions, and Economic Development. North’s ‘victory’ (if such things matter in a world in which the main thing is intellectual progress) was tactical rather than intellectual. The final epistemic concession to Weberian and Schumpeterian economic sociology will come once North and his followers in institutional economic history complete the circle by accepting that institutional depersonalization is universalistic and culture-neutral, and that nothing except ideology and political leadership prevents it from being intentionally crafted or transplanted in countries like Greece.
However it makes a difference it may come to pass (and I put a >50% probabilty on it) that Greece will not default. Why? Does it make sense? Well, not necessarily. It might be better if Greece could go it alone, exit the euro (however that happens–most splitups of monetary unions in the recent past have been orderly events–e.g., CZK and SKK, and the former Soviet Union), and devalue. But the contagion effect is too much for the EU to handle. So, Greece can basically limp through and the EU will have to do its part to help support them, e.g., extra aid, perhaps in the form of ‘Brady’ bonds to smoothe out their 2013-15 repayments.
Does Greece have a fiscal hole? Yes, of course. Busy trying to fix it and there are positive numbers lately. Will it be able to do engough?
Maybe. Problem is it takes time. We won’t know for sure even if the IMF’s package is fully drawn down, by the time Greece has to go back to the markets. And the markets are not that foregiving. To have debt at 150% of gdp and say…yes, but it’s going down now….may not be looked upon that kindly. So, the EU has to do its part (and the EU this weekend in ECOFIN said that no default is allowed…it’s not part of the treaty but this is their general philosophy from now on for all EU sovereigns. Expect it to be a big fiscal consolidation. The ECB should be so happy for a change!)
The problem of tax evasion is so obvious even from the outside. Greece’s tax elasticity is 0.89 compared to say Italy’s 1.16 and Spain 1.15. What does it mean? As people get wealthier they pay less taxes? An ‘Anti-Progressive’ tax system. Effectively so. The evasion only gets more pronounced!
It was a dirty trick of those Greeks to suddenly stop paying their taxes.
“the depersonalization of state institutions” As an aside, I tell people around here this place runs like a 3rd world country. They have no idea what I’m talking about. That’s what I’m talking about. Picking winners. Idiosyncratic sycophancy. Fiat rule. Cannot convince someone of a better idea no matter what because I have no status. All that. If I had to pay taxes here, I’d evade them.
How would a weaker currency help the mismatch of prices between Greece and Turkey? Currency manipulations may affect nominal prices, but I’d expect real prices to be unaffected by changes in currency. No?
It’s true, the Greek government spent too much money. Be worried if you are reading a writer who does not admit (much less emphasize) that upfront.
Notice how this point is listed in the items that did NOT make the article. I’ll take your advice.
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