Posts Tagged ‘ Greece ’

Really? Ireland/Iceland/Greece Outperform Germany?

Friday, December 17th, 2010
Michael Mandel



Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

Is it true that the three basket-case countries of Europe–Greece, Ireland, and Iceland–have outperformed Germany on real GDP and productivity growth? Or do the implausible official numbers demonstrate the bankruptcy of the global economic statistical system?

I was nosing through the just-released OECD Economic Outlook (top secret project, don’t ask), and I noticed something very interesting.  The Outlook includes forecasts through 2012 for all sorts of macroeconomic variables,  so we can now look at a 15-year time period (1997-2012) which includes the ten years of  tech+housing boom (1997-2007) and the five years of the financial bust. Here are two charts comparing the strongest economy in Europe, Germany, with the three basket cases, Greece, Ireland, and Iceland. We’re looking at real GDP growth and total economy labor productivity growth:

and

These charts show that the three basket-case countries of Europe–Greece, Ireland, and Iceland–substantially outperform Germany during the boom years, which is to be expected (blue bars).  For example, Greece had productivity growth averaging 2.4% per year from 1997 to 2007, compared to only 1% per year for Germany.

What is more surprising is that  Greece, Ireland, and Iceland continue to outperform Germany, even when we factor in  the 5 years of the bust, including forecasts through 2012 (the red bar).  For  example, average real GDP growth in Iceland is projected to be 2.7% annually over the 1997-2012 time period, almost double the 1.4% growth rate of Germany.

What can we make of these disparities? After all, we economists have been trained to believe that productivity growth is an essential measure of the health of an economy. Here are four possible explanations:

  1. OECD forecasters have drunk too many bottles of wine, leading to overoptimistic forecasts
  2. Five years post-bust is too short: The basket-case countries will be suffering for many years.
  3. Boom-and-bust beats slow-and-steady in the long-run.
  4. The usual way of measuring Gross Domestic Product overestimates  both debt-fueled growth (Iceland, Greece) and growth fueled by supply chains (Ireland).

As anyone who has been reading me for a while knows, I lean towards #4.  I think there’s a first-order problem with the way we measure GDP growth, because trade–including flows of knowledge capital–is being incorrectly counted, or not counted at all.   That’s a big gotcha, since bad macro data have and will distort decision-making by policymakers,corporate leaders, and investors.

This piece is cross-posted at Mandel on Innovation and Growth

A Deficit of Common Sense

Thursday, November 18th, 2010
Elbert Ventura



Elbert Ventura is the managing editor of Democracy: A Journal of Ideas. He formerly served as the managing editor of the Progressive Policy Institute.

by Elbert Ventura

‘Tis the season for deficit commissions. The past week has brought not one, not two, but three stabs at solving America’s looming fiscal crisis. And just yesterday, the Brookings Institution hosted a panel discussion on “The Politics of Entitlement Reform and the Budget Deficit,” featuring a murderers’ row of budget experts across the ideological spectrum. All the activity underscores just how much concerns about the deficit have taken over the Washington conversation.

But will all that hand-wringing lead to anything concrete and enduring? I have my doubts. The substantive merits and faults of the plans aside, what’s striking is, frankly, how unlikely any action seems to be.

Too pessimistic? Perhaps. But at the Brookings event, there was a subterranean motif that tempered any enthusiasm one might have for any ideas put forward. Isabel Sawhill, director of Brookings’ Budgeting and National Priorities project, at one point said, “The public is in denial about the scope of the problem.” Meanwhile, Eugene Steuerle of the Urban Institute sounded another note of consternation: “Both political parties are afraid to ask the middle class to do anything.”

There, neatly stated, are two fundamental problems that stand in the way of fiscal balance: a public in denial, a politics in retreat. Simply put, the American public simply has no idea how much the government that they like to have around costs. They may profess to hate big government, but ask about cuts to the entitlement programs – by far the largest contributors to our long-term deficit – and what do they say? Hands off! Even 62 percent of Tea Partiers say that Social Security and Medicare are worth the cost of the programs; the general public is even more supportive, at 76 percent.

Recent research by Cornell political scientist Suzanne Mettler underscores the disconnect between the kind of government Americans say they want and the government they actually use. In a recent paper that takes a look at Americans’ relationship with the “submerged state” – federal policies that incentivize and subsidize behavior by individuals – Mettler found that most Americans have little awareness of how the state affects their lives. Most alarming were the results of a survey of program beneficiaries who were asked if they had ever used a government program. Forty-four percent of those collecting Social Security retirement and survival benefits said no; 43 percent who had benefited from unemployment insurance said no; nearly 40 percent of Medicare said no. There’s more: 47 percent who took home earned income tax credit said no; 53 percent of those who took Pell Grants said no; and 60 percent who benefited from the home mortgage interest deduction said no.

So the governed don’t know. What about those who govern? Alas, our political elite seems to have lost all sense of responsibility at steering the ship of state to calmer waters. The fault lies mainly with the right. Yes, Nancy Pelosi’s declaration that Social Security and Medicare cuts are off-limits is easily caricatured as liberalism at its worst, but let’s face it – Pelosi faces a lot of opposition on her side on that front. There is a genuine debate going on under the big progressive tent about just how much entitlements should be touched, if at all, and it’s testimony to the vibrancy – and fractiousness – of progressivism.

Contrast that with the right, which has become an all-tax-cut, all-the-time movement. Grover Norquist, in whose image today’s Republican Party has been modeled, dismissed the Bowles-Simpson report, with his organization, Americans for Tax Reform, calling it “a plan to raise taxes cloaked in the veil of bipartisanship” – this in response to a plan that, by any objective measure, by far does more on the spending side than the revenue side. If their starting point is no revenue increases at all, then the right has all but written the obituary on any attempt to narrow the budget gap.

So there you have: a failure of government, a failure of the governed. Until the American public begins to accept responsibility for the current fiscal straits – and it begins by asking serious questions about what they’d like to see from government and how much they’re willing to pay for it – there really is little hope that we’ll see movement on the issue. Meanwhile, the only institution that can give them that nudge, our political class, isn’t up to the task.

When asked about the worst-case scenario that would finally force policy-makers’ hand to do something, Brookings’ Henry Aaron had a one-word response: “Greece.” Americans may profess to hate European-style states, but the disconnect between their hatred of taxes and love of benefits may well hasten the day of a European-style collapse.

Photo credit: nflravens

Euro-zoned Out

Thursday, February 11th, 2010
Mike Derham



Mike Derham is chair of PPI's Innovative Economy Project.

by Mike Derham

Things in Europe are looking grimmer than my chances of getting a taxi in blizzard-slammed New York City.

Today’s announcement that Germany and France are going to provide financial aid to Greece — with stringent IMF oversight — caps off weeks of speculation that the EU would have to bail out the Hellenic Republic. The newly elected left-wing government in Greece has come clean with what the previous conservative government had been hiding — Greece’s budget deficit for last year was a whopping almost 14 percent of GDP, and this year’s is looking not better. The new government, in a bid to reassure the markets — and the other members of the Eurozone that have all sworn to adhere to the deficit limits of the founding Maastricht Treaty — has promised to get government deficits down to three percent of GDP by 2012. Seeing the coming of severe austerity measures in the wake of what wags have been desperately trying to tag the “ouzo crisis,” Greek civil servants have unsurprisingly gone on strike.

The news is no better outside the Eurozone, where, to take the most latest example, Latvia is putting up numbers that are even grimmer. The Latvian economy shrank by 18 percent the past year, and it’s not likely to rebound anytime soon. (To put that in perspective, U.S. GDP fell by 30 percent over four years at the start of the Great Depression.) Latvia has pegged its currency, the Lat, to the Euro through the Exchange Rate Mechanism (ERM), in hopes of joining the Eurozone like Slovakia did last year, and like its neighbor to the north, Estonia, might do as soon as this July. The Baltic countries want to join the Euro, as adopting a strong currency is a surefire way to control inflation and make it easier for the government to borrow on the international markets (this is why several small economies have unilaterally adopted the Euro or the U.S. Dollar as their currency).

These two cases are emblematic of the issues facing several European countries. Greece has been lumped in with Portugal, Italy, and Spain to form the “PIGS,” southern Europe’s sluggish economies (Ireland is occasionally added to the group as a second “I”: “PIIGS”). Latvia’s problems are similar to those seen all over Eastern Europe, with Lithuania, Poland, the Czech Republic, and Hungary all facing similar — if less dire — straits. But while it looks difficult all over the EU, if I were a small business owner (or finance minister), I’d rather be in Latvia than in Greece.

Why? Because it could be a lot easier for Latvia to get out of its situation than Greece’s. Latvia has been facing a choice: aim for the Eurozone or faster recovery. While the benefits of a small country joining the monetary union make sense over the long term, when faced with a recession a currency devaluation might make more sense. This would immediately make domestic products — now cheaper to make — more competitive, stoking exports and, with them, job and GDP growth. Leaving the ERM would postpone joining the Euro for several years, which could make inflation a problem, but other countries, notably the UK, have been forced to leave the ERM before, and in the UK’s case it helped fuel a strong decade of growth in the 1990s.

The alternative to devaluation is deflation, a painful process where you ratchet down the prices of everything in your economy, from raw materials to salaries, to the point where they become competitive. This is the prospect that Greece is facing. In the Eurozone, Greece cannot lower it’s exchange rate against the markets it exports to — they all use the Euro. Devaluation also makes local currency-denominated debt much easier to pay. And this is where Greece is also getting hammered. As it looks increasingly unlikely to be able to pay its obligations, the yield on Greek debt has jumped. Greek debt is trading for less in the secondary market because investors are less sure that the government will be able to meet it’s obligations. As Greek banks hold significant amounts of Greek government debt, they are teetering on the edge of bankruptcy.

In the end, why should these issues in Europe be a concern to the U.S.? Surely problems in Athens will have limited impact on the largest economy in the world. Well, it’s worth remembering that the bankrupcty of Creditanstalt in Austria following the crash of 1929 was one of the sparks that turned a recession into the Great Depression.