Posts Tagged ‘Greece’

Roller coaster

UPDATE 13-11-2015: A new .pdf has been uploaded

I upload here an educational application of the standard Ramsey model of long-run growth, to show that it predicts correctly, in a qualitative sense, what has happened and is still happening in the Greek economy due to the recent crisis and current depression.

Even though the model is concerned with long-run growth rather than with short- and mid-term fluctuations, still it is important to see that by shifting our horizon-focus in economic analysis, we do not end up with incompatible conclusions.

Current Greek Depression and the Ramsey growth model 13-11-2015

Light My fire

Given an economy where production suffers from severe hypothermia, with a lot of productive resources unemployed (human and non-human), there are seven ways to rekindle quickly the fire and create growth dynamics in the short-run horizon. Five have to do with increasing demand.

1) The public sector could Increase its demand for goods, services and infrastructure. 2) Alternatively it could increase the wages and the value of other contracts with the private sector, increasing in this way disposable private income, and hence demand. Directly or indirectly, these would create primary deficits and would require incurring new debt. New debt could be covered by willing foreign creditors, or by having commercial bans lend the government or having the Central Bank do it. Currently, foreign creditors are not willing. Commercial Greek banks are very weak to perform such lending in the scale that would be required, and the Greek Central Bank cannot issue euros.

3) The Central Bank could inject liquidity into the economy, using various instruments.

4) Increase foreign demand for local products and services, i.e. strengthen exports. In the short-run this could have a chance only if one had a currency and could devalue it.

5) Have resources donated to the economy (however one wants to name it -Foreign Aid, EU transfers, whatever): here, past experience is not good: such resources have flown into the country in the past. They did not increase the productive base of the economy to the degree that they should and could have done. So there is no evidence that they will do so now.

6) Increase private disposable income by lowering the tax and social security chunk per unit of output: lower consumption and personal income taxes considerably (especially at low to middle levels of income), lower employees’ and freelancers’ social security fees considerably.

7) Increase production directly, because businesses consider it profitable and an opportunity and start investing and expanding (preferably in export sectors or imports-substitution ones): short-term this could be helped if corporate tax was lowered considerablysay, to 10%, and also if employers’ social security fees were reduced.

It is obvious that 6) and 7) would reduce the revenues of the public sector, and so they would require on the balance to shrink the public sector not by just cutting waste and inefficiency, but also by privatizing parts of it that many would consider unthinkable. I am saying this not as a “timeless-should” prescription, but as a “current situation-must” prescription: Personally I see no particular problem in having a public sector that offers extended services to its citizens. Only, this public sector should be able to afford it, and the Greek public sector is not. Now, even watered-down versions of such a prospect  have already met with exceptional resistance, not only from the current left-wing government of Syriza but also from the previous coalition of the two political parties that have dominated the political system for the last 40 years (once-socialist Pasok and always right-wing New Democracy). It bores me to death to explain why, but take my word for it, the political system is backed by the vast majority of the population on this one, irrespective of political ideology.

Now note that Light-My-Fire measures 1), 2), 3), 4) could in principle become available only if the country changed its international institutional position: if it left the Eurozone and possibly the EU, regaining the traditional government policy independence of a stand-alone country. Apart from any other offsetting disadvantages and risks this would entail, it is simply not relevant, when discussing any solution inside the Eurozone and the EU.

On the other hand, note that Light-My-Fire measures 5), 6) 7), in order to be implemented and have a chance to succeed, require seriously disrupting the internal structure of the country. “Reform” is a very mild word here.

But in the context of a negotiation inside the Eurozone and the EU, only this second package of “slash public sector and public revenues/slash public expenses/slash public payments for interest and debt principal” is relevant, as a solution with a chance to show result in the short-run also.

And it was never on the table.  Instead, what has been implemented and still under discussion is different ways to say “increase public revenues per unit of output a lot, while cutting public expenses (but not enough)  and easing the interest and debt burden (but not enough)” (some reductions in social security fees -that are now to be taken back- were anemic). But any package that increases public revenues per unit of output with the aim to just cover expenses and a part of financial obligations, and so results in a reduction of private disposable income, will certainly fail to Light The Fire, and has obviously already failed in the case of Greece.

In living beings with legs, legs come in pairs -either two or four. This is because pairs three legged ladderhelp with balance while moving – and moving around  is what life is all about. But if you want rigid stability, you need three legs – and this is because three points are always on the same plane, no matter how off-balance and steep the latter may be in relation to the force of gravity (if gravity is a force and not a space-time anomaly).

For the Greek post-War economy, a small static economy of a conservative society, the legs were none, then one,  then two, then three, and now we have lost two of them. 

“None” -as in civil war and poverty that led to massive emigration up to 1950’s.

“One-legged” as in Constructions Sector to support (and boost) the massive urbanization of the Greek population (1960’s onwards).

“Two-legged” as in add the Tourism Industry, exploiting a natural resource (1970’s onwards).

“Three-legged” as in “Expanding Public Sector”(1980’s onwards), to create a “modern European  state”, in terms of infrastructure and welfare policies.

(I do not include our Seafarers of Greek origin, because they always had a …bizarre relation and interaction with the domestic economy).

So we had two Supply-side legs, and one Demand-side leg.  And now we have lost two of them, with only the Tourism-leg remaining. The Constructions leg will take years to become again a driving force in the economy, if ever. Our new government envisions, at best, to provide a half-leg by re-hauling the Public Sector.

So we won’t have a “domestic Demand champion” to press Supply into action. Therefore we need Demand coming from abroad –and to do so we must have something to offer.

But nobody talks about the (at least) one more export-oriented Supply-leg that we need. Nobody is throwing wild ideas on the table, nobody is brainstorming publicly on the matter. We are just speaking foggily about  the need to restart the economy, and that investments are needed (for how much see here).

So, in what economic activity that produces a tangible good (or a service) that moreover can be exported, do we have a long tradition (so it suits us), do we have already trained human capital and labor in sufficient quantities, (so no large adjustment costs and time lags to kick-start)? An economic activity that could become one of the missing and needed economic legs of the domestic economy?

For a Greek living in Greece a first and very specific potential answer should be obvious -after perhaps a little  open-minded thinking.

Sisyphus determined

January 26, 2015

Let us assume that come daylight, all creditors of Greece’s public sector officially declare either that they completely write-off the country’s public debt, or at least that for the next ten years they freeze all principal payments and also, they freeze any interest accrual. Why am I making this impossible assumption? In order to focus on what is the real socioeconomic issue here, which is making the level of the economy’s operations analogous to the population: this is my fancy way to talk about unemployment.  And in Greece we have 1 mil unemployed more than we used to, before the crisis. Let’s approach this challenge a la Enrico Fermi.

Let’s say we have no public debt to worry about and all we want is to create 1 mil jobs (this is almost 9% of the Greek total (not working) population, to get an idea of what we are talking about), without splitting the current pie to more workers. And let’s say we ‘re reasonable and mid- to long-term : we plan to spread evenly these 1 mil new jobs over the 10-year period during which the counter on the public debt will be frozen, relying on (off-line) social networks and home production to take care of those people that will remain unemployed for all these years. In what follows all prices are 2013.

So we want to create 100,000 jobs per year for the next 10 years. Let’s put the figure of the yearly raw labor cost (full-time yearly equivalent) at 14,000 euros (including social security, income tax and disposable income). Since in the private sector we still pay out 14 salaries per year, this is 1,000 euros cost per salary (which if we subtract employer’s contribution to social security, corresponds roughly to where the new government has said it will set the minimum wage).

14.000 euros X 100.000 jobs = 1,400,000,000 euros (EUR 1.4 bil) yearly. Now let’s remember undergraduate production theory that states the self evident, that output is given to the factors of production as payments. Remembering also the lessons from Growth Theory, the “traditional” split 2/3 (Labor) – 1/3 (Capital) should be adjusted to ~50-50, especially if we include Human capital in Capital. Since we have calculated payments to Labor at the minimum wage level, it is reasonable to do so.

The important thing to realize is that this “split” is not just a distributional issue -it also reflects how much capital services flow is needed in order to make production happen. So we want another EUR 1.4 bil in value of capital service flows yearly to make production corresponding to 100.000 jobs happen (and let’s assume that local/international demand for this production is guaranteed).

1st conclusion: to create 100,000 jobs yearly we need EUR 2.8 bil. additional Gross Domestic Product yearly (2013 prices).

Let’s assume that Capital lasts on average 10 years (which is reasonable since we are not talking about buildings as we will see below). Adopt the straight line method to calculate capital flows, and we arrive at

2nd conclusion: to create 100,000 jobs per year for the next 10 years, we need 14 billions of new capital investment every year for the next ten years, while keeping also wages fixed for the duration.

Currently (2013), gross capital formation stands at EUR 21 bil. But this is EUR 13 bil. less than consumption of fixed capital. We need this to remain constant so as not to lose additional jobs. So

3d conclusion: to create 100,000 net new jobs per year for the next 10 years, we need Investment to jump from EUR 21 bil.  to  EUR 48 bil yearly (EUR 13 bil. additional replacement-Investment  + EUR 14 bil for the new jobs).  This is a mere (48/21)-1 = 128% investment increase from current level.

2013 Gross Domestic Product was EUR 182 bil. So current gross capital formation stands at 20/182 = 11% of GDP, and we want it to go to

4th conclusion: to create 100,000 net new jobs per year for the next 10 years, investment must rise to 26% of DGP (permitted to gradually fall as GDP increases over the years).

Greece has seen 25% of DGP of gross capital formation for some years during the 2000’s – but 15 percentage points out of the 25 were due to residential housing -and no one should expect anything remotely close to this figure from that sector in the years to come.

5th conclusion: to create 100,000 net new jobs per year for the next 10 years, we need 25% of GDP in traditional, directly productive new investment -machinery, equipment, technology, training -every year.

Granted, currently there is idle capital due to the crisis. But a large part of it is residential houses, office and retail space and equipment, and low-level machinery. Granted also, there are natural resources, starting from the natural environment itself and its touristic potential. I am not in a position to estimate how much these can contribute to the + EUR 27 bil. needed in investment, but my feeling is not critically much.

How boring: where are international economics, European Union, financial markets, quantitative easing, exports, and all the rest of the sparkling heights of the modern global economic system?

Well, all these are just ways to get what is needed and manage the process. We can fight it out regarding how to do it, but we must know what, and more importantly, how much is needed. We may baptize it as we want, we may envision whatever scheme, system, process, mechanism we want -in the end it is +EUR 27 bil, and EUR 48 bil. total, of productive resources that somehow must be invested in this land, yearly, for 10 years in a row.

But hey, in this modern international economy that we live in, productive resources can come from somebody else’s present in exchange for our future: this is my fancy way of talking about debt. And since in this scenario the public sector has no debt, we can borrow the funds, right? Isn’t this what “modern states do”? I will comment on this prospect, that I am pretty certain it is under consideration in some corners with the current debt being alive and well and not frozen, with another picture:

Sisyphus brain