Saturday, July 30, 2011

Understanding the Protest Movement in Greece

The Greek government is increasingly unpopular. Opinion polls show consistent disapproval and discontent. Whether the government’s medium term plan succeeds depends on whether people will tolerate the hardships imposed on them. To answer that question it is necessary to ask another: who is protesting in Greece and why?

Public Issue provides useful data on the protest movement in two recent reports. In May 2011, it offered a glimpse into the number of people who had protested over the last year, the number of times they had protested, their age, employment and affiliation. In July 2011, Public Issue also reported on the number of people that had protested over the past month, but with fewer details. Using these two reports, I have tried to offer a glimpse into the Greek protest movement. The May report is more useful because it provides details: 28% of respondents had protested at least once in the past 12 months.

How can we quantify the protestors? According to the latest census, Greece’s population is 10.8 million people – because the census is so recent, there is insufficient date on the age distribution. Since Public Issue reports that its polls refer to people aged 18 and over, it would useful to restrict the analysis to that segment. The UN provides an age breakdown for Greece, showing that around 86% of Greece’s population is over 18 years old (9.3 million). Public Issue’s estimate is 9 million. The Greek Statistical Agency reports an-over 19 population of 8.8 million. Let’s use 9 million for simplicity. At a 28% participation rate, we’re looking at roughly 2.5 million protestors. The simplest way to classify them is to look at their employment status against the participate rate estimated by Public Issue.

Public Sector employees. The Ministry of Finance, in its medium-term strategy document, reported roughly 700,000 people working for the government. At a 57% participation rate, that equals about 400,000 protestors.

Private sector employees. In 2009, there were 2 million people who classified themselves as employees in tax returns. If we exclude the public sector employees above (700,000), we get 1.3 million people. At 49% participation rate, that comes to 650,000 people.

Unemployed. Over the past year, there have been, on average, around 700,000 people who were unemployed - at 29% participation, we get roughly 200,000.

Pensioners. Tax returns reported around 1.6 million people as pensioners. Given joint tax returns, that number likely understates the true number. The Greek Statistical Agency reported 2.1 million people over 65 years old. Since some pensioners retire early, that’s possibly an understatement; still, let us assume 2.1 million. At a participation rate of 14%, that's about 300,000 people.

Self-employed. In tax returns again, there were 2 million people that could be classified as self-employed. At a 30% participation rate, that is 610,000 people.

Housewives. According to the Greek Statistical Agency, there were about 1.1 million economically inactive women aged 25 to 64 (assuming that fewer women would be married before 25 and that over 64, they would fall in the pensioners category). This is obviously a rough estimate, but at 13% participation, there would be 150,000 housewives protesting.

Adding these pieces together we get ~2.3 million protestors, just off the 2.5 million estimate above. Given the uncertainty in the data, the final figures are close enough. We can thus make some guesses on the composition of the protest class. The private sector accounted for over half the protestors: private sector employees made up 28% of the total, followed by self-employed people (27%). The public sector, although it had the highest participation of all (57%), made up just 17%. Pensioners were 12%, the unemployed 9% and housewives 7%.

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As I have written before, Greece’s protest movement can be divided into three groups: those who oppose reform because they stand to lose from it; those who outright repudiate the political system; and those who feel reform is not moving fast enough. Given the numbers above, what can we say about the protest movement?

Opposition to reform for self-interest. The first group includes people who see reforms as a threat to their privileges (see here and here). The group consists of public sector employees whose wages will be cut and whose ability to drain the treasury while offering mediocre services will be constrained. But this group extends into the private sector as well. No one should think of Greece as having an inflated public sector and a productive private sector: distortions in the private sector are just as pervasive. Opposition to opening up professions has been fierce, and strikes among truckers, taxi drivers, pharmacists, and others personify this. Pensioners fall into this category as well, although the legitimacy of their grievances is markedly different. If we add up public sector employees, the self-employed and pensioners, then we could allocate ~58% of the total protestors into this category.

Opposition to the political system as a whole. The second group is harder to define but it consists of two subgroups. First, it includes the perennial protestors in Greek society. This group is more left than right and is probably unappeasable – its opposition runs deep and is as much ideological as practical. It protests in the name of anarchism or socialism, and its opposition is almost independent of who is in charge and what they are doing. Such opposition far predates the current crisis.

These protestors are joined by a second sub-group, whose motives are vaguer. A deep sense of injustice from corruption is perhaps their most unifying rallying cry. Judging from opinion polls, however, this group has a peculiar view of how Greece got into its mess. Besides corrupt politicians, it blames speculators, banks and other European governments for Greece’s debt - much more so than Greek society, for example. By casting blame so widely, this group is almost casting blame nowhere at all. Its agenda is more destructive ("against" something) than constructive ("for" something). Before we allocate people here, let us look at the third group.

Frustration that reforms are too slow. This group forms the most constructive force in Greek society – it is also the least represented in the “street.” It is liberal, meritocratic and opposed to clientelism. It is likely well educated, possibly with time spent abroad, and it may be younger rather than older. It sees Greek society as too constricting and the Greek economy as offering too few opportunities. It struggles with whether to stay in Greece or leave. It sees momentum for change but it also sees politics hijacked by special interests and narrow minded politicians. It wants change but change is not coming rapidly enough.

We can say, roughly, that the balance of protestors (42%) are distributed between the two last groups, although my sense is that the distribution is heavily skewed to the people who are opposed to the system as a whole rather than to those who are upset that change is not happening rapidly enough. I say this chiefly on back of opinion polls on what Greeks complain about, which is rarely the slowness of reform.

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One more way to look at the issue is based on political affiliation. Public Issue reports two numbers that in combination give us a portrait of the protestors: the participation rate depending on one’s political affiliation and the voting intention of the respondents. Put the two together and you have a sense of the political leanings of the protestors.


What is remarkable is that roughly 36% of the total protestors are drawn from those people who reached the point that they want to abstain – so a third of the protestors are in theory up for grabs if a compelling political program were in place. The next biggest group comes from New Democracy Party (center-right), followed by a 28% block of the far left voters (KKE and Syriza). Voters of the ruling party PASOK actually formed less than 10% of the protesting class.

This last number is puzzling: one of PASOK’s problems is that it is implementing policies against its core constituencies. So how to explain such little opposition? One answer could be that PASOK has lost so many voters that its protestors show up in other buckets (KKE, Syriza or ND) or, more likely, are just absenting. Another explanation could be that PASOK voters exercise leverage through other means (strikes, direct pressure) rather than protests. Finally, it could also be that PASOK’s constituents are more dispersed geographically and hence may have had less of a chance to protest directly.

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What to make of all these numbers? First, a majority (~58%) of the protestors is likely to have some self-interest in protesting. Against such forces, the government can only respond with a counter-veiling political force of its own. If it tries to appease these protestors, it may lose the support of its foreign supporters. This is not an option.

Second, there is big force (~42%) that, possibly, has no “skin in the game,” meaning that its self interest could be served by either reform or a return to the status quo ante. This force consists of private sector employees, the unemployed and housewives – this may seem like an odd coalition, but it is a considerable force that could be used to counterbalance the self-interested protestors.

Finally, there is also a 72% of the total public that did not protest. This is the silent majority that can still be swayed. Its composition straddles the political spectrum from center-left (PASOK) to center right (ND) and far right (LAOS) as well as the self-proclaimed abstainers. Who that 72% supports, in other words, will be key in the country’s future. Given a countrywide abstention rate of 38%, there is a large share of the population that is up for grabs.

That is a long way to say that the political balance is held not by those in the streets but by those at home. And they have yet to pledge their allegiance.

Wednesday, July 27, 2011

Lessons for America from the Greek Debt Crisis

As a Greek living in Washington, DC, I am fated to spend much time reading about debt and default. Having lived in both countries, I find the notion that America's fiscal troubles somehow resemble Greece's to be ridiculous (see here). And yet as someone following two parallel debates in Greece and the United States, I cannot help but think that Greece is having a serious debate about government spending, while America is not.

Readers of this blog will note that I have criticized Greek politicians for failing to have a serious debate about debt – so how can I now say that Greece is having a serious debate? In fact, my critique is that they are failing to discuss honestly the origins of Greek debt and its foundation in the post-1974 political economy. I criticize them for blaming speculators when our problems are homemade. And I blame them for limiting their agenda to a “we should not default” platform and thus missing out a chance to challenge Greeks to do better (here and here).

The United States, by contrast, is having that “historical” debate aplenty – look, for example, at a graph released by the White House trying to apportion blame for the country’s debt between Bush, Obama and “other.” There is more than enough talk about how the country got into its current position – too much in fact. But there is not enough debate about what comes next. In truth, the US debate on raising the debt ceiling is just silly. Let me explain.

Imagine that America was a family spending beyond its means. What would happen? The family would get together, look at the numbers and ask itself two questions: “what can I live without” and “where am I spending too much relative to what I am getting?” From time to time, the US asks itself question number one. But it never really asks the second one.

Perhaps the best example is military spending. In theory, a debate on military spending would entail two questions: what is role of the military relative to other institutions in national security (relative to diplomacy, alliances, multilateral institutions, police work, etc.); and how much money should be spent on defense? Instead, in Washington, there is a group of people who think national security is directly linked to spending: more spending means the country is more secure, period. Of course, this is a preposterous belief: it ignores whether the money is well spent. This is akin to spending $10 rather than $5 on the same cup of coffee and yet somehow thinking that you got a better coffee just because you spent more. Pretty silly.

And yet this is exactly the debate America is having. Two parties are asking whether the country should spend more or less without asking what it gets in return. The spending debate is devoid from the “results” debate. It’s like asking whether the family should spend $100 or $200 less a month without asking what it should be spending it on. If America were having this debate, it would soon realize it’s no debate at all. As I noted before, America’s fiscal problems are trivial relative to Greece’s: all that America needs to do is cut healthcare spending, which it can without compromising health outcomes.

Greece, by contrast, is having this debate. I have no intention to idealize this debate, of course; it is not perfect. But it is still a debate around big questions: how big should the public sector be? How much should public sector employees be paid and how many should we have? How many companies should the state own? What assets should stay in state hands? How much should professions be protected, how and why? What is the role of the state versus the private sector? These questions are integral to a true debate because they link spending levels with results – they are asking now just “how much” but also “on what and with what results.” Not a perfect debate, to be sure, but a good start.

Of course, it took Greece having to stare catastrophe in the face to have this debate. Hopefully, America will get there sooner. It has to. 

Monday, July 25, 2011

Greece After the Second Bailout: Reflecting on a Remarkable 40 Days

In the middle of June, the Greek government faced a never ending protest movement. Dissent was rising in the streets and in the governing majority. News spread that the prime minister had resigned. Later we found out we had only offered to step down in favor of a grand coalition. Then, he retracted that offer and instead sacked his cabinet and said he would seek a vote of confidence with a new cabinet.

Within twelve hours, every analyst (myself included) was writing off the PASOK government. Deputies resigned. An urgent meeting of the government council was called - the government was falling. Spreads were going through the roof and there was talk that the IMF and the Europeans would not release the fifth installment of the €110 billion package. Greece would default.

Instead, the cabinet reshuffle did the trick: the new cabinet got a vote of confidence. Days later, the medium-term strategy, the cornerstone of the government's new reform agenda, passed amidst rolling blackouts and demonstrations outside parliament where protestors clashed with the riot police. Flames, tear gas and images of savage violence once again tarnished the country's image.

Then things calmed down. Foreigners praised the government for its resolve. The outburst of violence settled. The stage moved from Syntagma Square to Brussels. The new numbers underscored Greece's dire position. So far, it seemed that country had until 2012 to get a second bailout - that's when time run out on a couple of long-term bonds coming due. But increased bank support meant the country faced a growing deficit in 2011. The reckoning date was pushed forward.

And yet there was no consensus on what to do. Clearly, Greece needed either a second package or a default. But the Europeans could not settle on the terms for that second aid - chiefly, they were looking for ways to share the burden with Greece's current debt holders. Their decision - taken on July 22 - involved a new aid package but with private sector participation but not a technical default.

So where does Greece stand now? Greece's fortunes now depend on Europe's politicians rather than the market. Based on the first bailout package, Greece would need to satisfy quarterly criteria to secure each aid installment until 2012, after which time it would need to raise funds from the markets directly. That prospect has now been extended until 2014 or later. Greece can more or less ignore market sentiment for 2-3 years. That cushion should give the country more time to restore growth and return to borrowing from a position of strength. That is the good news.

The bad news is that the underlying challenges are no easier now. The reform agenda is still ambitious and requires a deep restructuring of the Greek economy and even of Greek society. If anything, the new debt projections - which put debt at 172% of GDP in 2012, make the task look even harder. The idea that Greece will somehow raise money in a few years when debt will top 160% of GDP could prove a stretch - the government needs to have accumulated plenty of goodwill by then to do so.

The deeper challenge is political. In a sense, the status quo of recurring uncertainty have been beneficial for both Greece and for Europe - any of the alternatives would have solved economic problems by creating political troubles. Without pressure, Greece would not reform; and without tangible reform, Europe would not release further aid. Europe's aims have been met by this belated second package. What about Greece's?

Greece is caught in a deep paradox: on one hand, the government's agenda hinges on demonstrable pain. Otherwise, the case for reform, at least among the public at large, will evaporate. On the other, the government needs some good news - otherwise, it could easily lose its mandate to keep governing. So Greece needs pain to reform but progress to keep reform possible. This will be a hard balance.

The extra time gained by the second package gives the Greek government more breathing room, but it could also alleviate some of the pressure for reform. In the end, it all comes down to whether the Greek people buy that their political system has failed and that radical reform is needed. It is still not clear that they do - less pressure could push them to resume their old habits and positions. The onus will be on the Europeans and the IMF to attach strict conditions to every installment and to remind the Greek government of the day that support is not unconditional and to remind the Greek political class and public that real default remains a possibility.

Thursday, July 21, 2011

Second Bailout for Greece: Explaining the Numbers

The European Union seems to have finally settled on what to do about Greece. In a communiqué released on July 21, the EU approved (a) an additional €109 billion (on top of initial €110 billion); (b) an extension to the existing and future loans, together with a reduction in the interest rate charged; and (c) a participation of the private sector to the tune of €50 billion for the period 2011 to 2014. Let us run through the details of the program.

To begin with, re-examine where Greece stood before this new package was announced. First, the main tenet of the first bailout – that Greece would be able to sell long-term bonds in 2012 – was untenable as borrowing costs continued to soar. Second, the latest revision to Greece’s debt profile – chiefly due to extra support for banks – had pushed the projected debt-to-GDP peak at 172% in 2012. Third, Greece’s time was running out: while the initial program covered Greece’s financing needs until March 2012, the capital injection into the banking sector meant that Greece needed extra funds in 2011. Hence the urgency to find a solution.

Now, let’s look at the numbers more closely. The graph below shows Greece’s borrowing need based on five pieces: (a) the actual budget balance (difference between revenues and spending); (b) the amortization (roll-over) of medium and long-term debt; (c) the amortization (rollover) of short-term debt; (d) the pay back of debt to official creditors (IMF and EC); and (e) other expenses. The orange line shows the totals during the latest IMF review conducted in May 2011.


Three things stand out. First, the country’s financing needs are driven by the budget deficit and the need to amortize long-term debt. Second, the 2011 financing need shot up by €26 billion, mostly due to increased support needed for banks. And third, in the outer years, the gross financing need has come down, mostly due to the extension on the maturity of EC loans (the IMF loans have remained the same). So Greece needed more money in 2011 but less in 2013-2015.

Turn now to the revenue side. According to the March 2011 estimates, Greece’s funding needs for 2011 were covered; for 2012, the country would need to tap markets for long-term bonds. But given the new financing needs to cover, in large part, the support to the banking sector, the country is now €25 bn short in 2011. What is more, without any hope to tap markets in 2012 and 2013, the gap for those two years is now €30.2 bn and €29.4 bn respectively. Collectively, the shortfall from 2011 to 2014 comes to €103 bn. This is just below the €109 bn announced for the second aid package, which could reflect a change in assumptions or, possibly, some provisions for any slippage (for example, lower privatization receipts).

What about the extension of the EC loans and the lower interest? The first extension had made these loans a non-factor to begin with: it was only in 2014 that Greece would have to start repaying its EC loans and in that year, the burden was a mere 1.4% of the total borrowing need. So the benefit is long term.

Finally, what about the private sector participation? The aim here is to shrink the amortization schedule in 2012-2014; after all, it was the inability to roll over these debts at reasonable interest rates that created the need for a second package to begin with. However, it is possible that the private sector is more cosmetic to gain political support than real: in theory, the €109 bn is sufficient to cover the country’s needs to 2014 even if it means using the funds to amortize the debt. What is more, given the option to buy back debt, this €109 bn could yield an even greater reduction in the total debt.

In other words, the main elements of the second bailout initially proposed in late May 2011 stand: the premise is to shield the country from having to raise money until 2014 and thus give the government more time to implement reforms. The amount of the bailout is bigger than first proposed because of the need to support the banking sector. But otherwise, Greece would get an extra three-years at least to get its house in order.

Wednesday, July 20, 2011

IMF Estimates for Greek Debt: July 2011

In its Fourth Review of the Greek program, the IMF revised (again) its baseline scenario for Greek debt to 2020 (see here and here for past estimates). The numbers in the outer years have not changed: the 2020 figure is the same at 130% of GDP. But the IMF has changed its 2011-2015 outlook. Based on the new numbers, the IMF expects Greek public debt to peak at 172% of GDP in 2012. To put this in context, when Greece first agreed to a bail-out package in May 2010, its debt was supposed to peak at 149% of GDP in 2012 and 2013. The latest revision thus marks a 23 percentage points worsening in 15 months, which is equal to ~€52 billion!
The revision, according to the IMF, comes from “higher estimated upfront FSF funding needs.” The Financial Stability Fund (FSF) is there to “ensure that banks in Greece remain adequately capitalized during the downturn to preserve stability.” According to the IMF, “The baseline assumes an additional contribution to the FSF of €16 billion. It is assumed that these funds are disbursed to banks in the near term, with the government recovering the resulting equity investment by 2014–15.” In other words, this extra debt comes from the need to shore up the banking sector which continues to face serious pressures (see here).

The sensitivities around the baseline scenario remain the same with higher growth (+1% above the baseline) yielding the greatest benefits and leading to a debt level below 100% of GDP by 2020. The one sensitivity that is new looks at a potential disappointment from privatization: “failures with privatization (only €10 of €50 billion realized) would see debt remain at very high and likely unsustainable levels—above 150 percent of GDP—right through 2020.”

These results are not surprising but they underscore certain underlying themes: first, the debt outlook has deteriorated almost every time that the IMF has issued a country review, and this time the number of 172% pushes Greece into highly unsustainable territory; second, the ability to return to markets looks progressively worse as the debt-to-GDP continues to both climb and stay high; third, liabilities towards the banking sector are a major downside risk; fourth, privatization is indispensible; and fifth, it always comes back to growth, growth, growth.

The Need for Reform in the Greek Private Sector

Greece’s public debt was born largely from a bloated public sector. But the Greek private sector suffers from as many distortions and absurdities – and is in need of just as much change.

The table below is a good starting point: it comes from the European Commission’s review of the IMF/ECB/EU program (from the Ministry of Finance) and it is called, “Indicative list of professions covered by the new law on regulated professions.” The “indicative” list covers over 100 professions ranging from accountant to baker, from beekeeper to diver, from newsboy to guide, and from interpreter to midwife. In other words, the restrictions cover any conceivable profession that one could engage in.

 A second visual shows labor productivity per hour worked in the European Union (EU-15). Greece is second to last just ahead of Portugal. It is also, paired with Portugal, the only country to get a score below 100 (100 is the EU-27 average), which puts in the company of the new European member states rather than any of the older ones. Greece has been in that position consistently over the last decade.

A third visual shows total factor productivity (TFP) since 1960, which is a proxy for how well an economy combines labor and capital to generate output. The series is indexed to 100 for the year 2000. TFP can be vague but, even so, the graph below shows certain important trends: first, there is a clear productivity gain growth from 1960 to 1979, when the index peaked at 99. Then, from 1979 to 1999, there is effectively a decline a productivity (1980s) and then a modest increase (1990s) so that by 2000, the economy ends up just where it was in 1979 (99 vs. 100). Only in the 2000s is there some modest growth in productivity again.

 
These realities – restrictiveness in competition and low productivity – are compounded by a cumbersome judicial system that is slow, erratic and non-transparent. Of course, there are companies that excel both domestically and internationally. And the average wage earner sees few benefits from these restrictions – if anything, he or she suffers doubly by low wages and higher prices. Yet this ailment is at the heart of the Greek condition – deprived of state spending, the hope rests on the private sector to be more vibrant, more entrepreneurial and more productive. And that task requires a clean break from the past.

Wednesday, July 13, 2011

Tax Arrears in Greece

I wrote recently about tax evasion in Greece. I wanted to focus on a related issue: tax arrears, which are taxes owed to the government but not collected yet (as opposed to tax evasion, which includes both arrears but also tax that is not reported to begin with). The Ministry of Finance estimates that arrears in June 2011 amounted to €41.1 bn, which is a staggeringly high number as the table below shows:
  • 12% of Greece’s year-end 2010 public debt
  • 18% of 2010 GDP
  • 36% of projected spending for 2011
  • 43% of projected revenue for 2011 
  • 82% of the €50 bn privatization target 
  • 90% of projected tax revenue for 2011
  • 242% of projected direct tax revenue for 2011
  • 246% of projected budget deficit for 2011.
Besides the size of the bill (which governments have offered various excuses as to why they cannot collect it), what is also astounding is its distribution. There are ~900,000 people or legal persons with tax arrears – this equals ~15% of all taxpayers in the country (the Ministry of Finance reported in 2009 5.6 million tax returns from individuals and 221,363 from legal entities). Of those arrears, 892,000 owe less than €150,000 each and 716,000 owe just €3,000 or less. The rest – 14,700 persons or legal entities – each owe over €150,000. When it comes to the total bill, however, those 14,700 (1.6% of the total) make up 90% of total at €37 billion. This is obviously where the government is focusing its efforts.

There is not much more to say about these numbers that is not obvious – the demonstration, once again, of a status apparatus that does not work, of political legitimacy and will that is lacking, and of the implications of such laxness for society’s sense of fairness. But there is also a broader point: one that is linked to the utilization of state assets and public property that is estimated to be as high as €500-€600 billion; of how much this country can accomplish with better management and more will. 
 
Gives the phrase «λεφτά υπάρχουν» (“there is money”) new meaning.

Monday, July 11, 2011

Should Greece Default? Revisited

Readers of this blog know that I do not think Greece should default. I stand by that call – but with progressively less conviction. Let me explain.

First things first. Debt is not the problem in Greece – it is a symptom but not the disease. Default without reform is like taking an aspirin for a toothache to avoid the dentist – it may help, but it’s no solution. That’s why I do not think default is good. But I also think that default should be constantly evaluated as an option. Our yardstick should be, will default help or hinder Greece’s transition to a more liberal, just, and market-friendly country?

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The question can be rephrased this way: Greece’s crisis marks the end of a political model where the state spent money it did not have, where political allegiance was purchased through state patronage, where the professional class did not pay taxes, and where the bill was passed on to future generations. This much is clear. What is not clear is whether the Greek public recognizes this crisis as such and whether it will accept the changes needed to correct it. Is the Greek public psychologically ready for change? Or does it need to hit rock bottom to see the need for change? And if it does hit rock bottom, what kind of change will it demand?

To think more about this, I want to draw on two sets of quotes. The first comes from the late Milton Friedman who wrote that: “only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.”

The second comes from Benjamin Friedman, who wrote the Moral Consequences of Economic Growth: “Economic growth – meaning a rising standard of living for the clear majority of citizens – more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy … but when living standards stagnate or decline, most societies make little if any progress towards any of these goals, and in all too many instances they plainly retrogress.”

This relationship – which Friedman demonstrates – has one big exception: the Great Depression in the United States. Friedman writes, “The socially corrosive power of more ordinary economic distress is overwhelmed by still stronger forces of a different kind if the distress is so great as to constitute an out-and-out crisis, which the Great Depression certainly was. Most people understandably exhibit generosity when they are doing well and defensiveness when they are doing badly. But they nonetheless pull together when they see their very lives threatened and the entire social and political structure in which they live thrown into imminent danger.”

Our questions then are: what are the ideas that are lying around Greece these days? What ideas will be lying around if Greece defaults? How will Greek society respond to further distress? Will it turn more inward and xenophobic or will it seek new directions and a new, liberal voice?

*

In a previous post, I noted that public discontent came from three corners: from those who stand to lose from reform; from those who are fed up with the political class as a whole; and from those who want to see more reform faster. A different way to think about Greece’s future is this way: how is the Greek public distributed among these three groups? And what political alliances may be formed between them?

If opposition from Group A – those who stand to lose from change – proves impossible to overcome, the reform agenda will collapse. Such an outcome would be triggered by the inability of the government to convince the public of the wisdom of its agenda or impose order when that agenda is challenged. Unable to pass reforms, the government would fall, leading to default. The only way to avoid default would be for Europe to keep lending money to Greece despite a political collapse – an unlikely outcome given already limited support for more loans.

If Group B – those generally fed up – sustained their opposition, the country is more likely headed towards a low-level attrition game where political support crumbles across the board and where support for any initiative decreases. Given the strong call for “justice” (broadly understood), the country could see a stronger populist turn. It is no coincidence that the far-right LAOS party got the highest share of “positive” votes in a June 2011 poll.

If Group C – the impatient reformers – grew in numbers, then the government would have to either toss out feeble reforms in exchange for a much bolder program, or it would collapse by its inability to move fast enough to win over the reformers. In such a scenario, an electoral victory by the opposition party would be most likely. Even so, it is quite possible that the reformers would find that few in the political class represent them – thus the reform vote may be split and hence find it hard to be articulated in a political program.

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To play out these scenarios we need to think about the day after default: what will Greeks think about it? A poll on who is responsible for Greek debt is instructive. Greek governments received universal rebuke – by just behind them to blame were speculators, banks and the big EU states such as Germany and France. Only much lower, at 52%, were the people really to share some of the blame themselves (up from 44% in November 2010). If a default leads to the lesson that banks and the EU were out to get Greece, then no healthy prescription will come of it.

In an ideal world, Greece would have serious leaders. Even in the current climate, strong leadership could go a long way to restoring hope (here and here). Alas, we have no such leaders. In their absence, the public may either repudiate politics as a whole and thus plunge the country into further crisis – or it may follow the lull of populists who offer the mirage of justice in tough times. In those moments of darkness, perhaps a sliver of leadership will shine – a person to speak truth to this country – a person to narrate how they country got into this hole, how it may get out, and where it may get out to.

Betting on that leadership is betting against the odds. Without it, Greece’s best hope is its current ineffective leadership with strong external supervision to sustain reform. Default could offer some economic reprieve once the country bounces back from its nadir; but the political nadir will be harder to bounce back from. At times, I wonder whether Greece can wake up without hitting a nadir, if default is necessary to allow the country to implement more radical change. But then I look at the body politic, at the ideas that float around in the country – at what the day after may bring. Default is not the path to political revival. It is the path to political darkness. And that’s why I am still against it.

Tax Evasion in Greece

James Surowiecki of the New Yorker has written an insightful column on tax evasion in Greece. Together with Mike Lewis – whose portrait on Greece contained a large section on the subject – he paints an accurate picture of the fact but does not answer certain key questions. I want to focus on three in particular: where did tax evasion come from; how important is tax compliance for Greece’s future; and if Greeks paid their taxes, would the country’s fiscal woes disappear?

Where did tax evasion come from? Judging from several accounts, it almost seems like Greeks woke up one day and decided to stop paying taxes. Lewis quotes a Greek tax collector who said, “The Greek people never learned to pay their taxes. And they never did because no one is punished. No one has ever been punished. It’s a cavalier offense—like a gentleman not opening a door for a lady.” Surowiecki notes that, “tax evasion is the national pastime.” Of course, both recognize that tax evasion has political roots connected to law enforcement and to electoral cycles. But I think there is a broader story that they are missing.

The place to start is to look at government spending and government revenues over the last thirty years (see also here). Three observations stand out: first, there was a long-term increase in revenues as a share of GDP from 1980 to 2000; second, that trend weakened from 2000 to 2004, after which point revenues started to rise again but without reaching their 2000 peak; and third, elections in the 1980s were highly correlated with a drop in revenues: notice the “v-shape” in revenues in 1985 and 1989. This is consistent with Surowiecki’s note that, “a recent study showed that enforcement of the tax laws loosened in the months leading up to elections, because incumbents didn’t want to annoy voters and contributors.”

This last observation is subject to two additional comments, however. First, the electoral cycle is highly noticeable in the 1980s but not since then. The only other electoral year where revenues decreased as a share of GDP was 2004, although the drop was part of a multi-year trend (in 2009, there was also a drop but a sharp recession could help explain that). And second, and most crucially, the electoral drops represented a cyclical rather than structural phenomenon. In other words, government revenues in the post election years of 1986 and 1990 were roughly on trend: lax enforcement had no structural impact from a high-level perspective (though it affected norms and corruption perceptions).

Looking at our chart again, one observation really stands out: it is easier to spend money than to raise it. That seems to have been the problem of the Greek state. It started to spend money in the 1980s, but it took a very long time to build the institutional capability to raise that money. In effect, it took twenty years before Greece was able to bring revenues close to spending – and the 1999 budget deficit remains the lowest one in the last thirty years.

That brings us to question number two: how important is it to plug this hole? Surowiecki writes that “the future of the European Union may depend on [Greece’s tax reform].” This is an exaggeration. The European Commission notes that tax compliance forms about 14% of the fiscal measures implemented in the medium-term strategy; plus, “no improvement in tax compliance has been considered in the projections through 2012 to reduce budgeting risks.” So the program hardly rests on cracking down on tax evasion.


What about the third question: would Greece’s fiscal problems go away if tax evasion were eliminated? Surowiecki notes that, “the gap between what Greek taxpayers owed last year and what they paid was about a third of total tax revenue, roughly the size of the country’s budget deficit.” Strictly speaking, he is right: if the government were able to collect all its taxes, its budgetary position would be greatly improved.

But such a diagnosis misses a broader issue: that the Greek government spends too much money not just relative to revenues but relative to the services that it provides to the Greek people and relative to the opportunity cost that such spending entails. In other words, if the budget hole could be eliminated by bringing revenues in line with expenditures, that would solve the fiscal but not the economic problem. A greater transfer of resources from the productive to the non-productive sector is not really an answer to Greece’s economic woes. For that reason, the government’s fiscal plan is focused on spending contraction rather than revenue enhancement (see here and here).

The reason that eliminating tax evasion is important is not fiscal but political. The public’s sense of justice would be significantly enhanced by increased perception that tax fraud was prosecuted and that those who cheat are caught and punished. In other words, fighting tax evasion matters not because it will bring money to the government (which it will) but because it is the right thing to do – and Greeks need at least some evidence that their government is willing to do the right thing from time to time

Monday, July 04, 2011

The Problem of Violence in Greek Society

The images of violence in Syntagma Square are remarkable because they are unremarkable. The speed with which peaceful demonstration turns into violent protest, the transition of a blue sky into a fog of tear gas and fire, where the baton meets the bat, and where stone and molotov cocktail are hurdled against the policeman's shield, who in turn fights back - these images are as tragic as they are familiar. In a country where protest is recurring, the riot police should have practiced itself to perfection by now. It has not.

Yet this is hardly a clash between a citizenry with legitimate grievances and a brutal police force. Besides the incompetent police lives a society with an excessive tolerance towards non-state violence; a society as tolerant of non-state violence as it is intolerant of police violence. It is a society that puts the police in an impossible position: damned if they do and damned if they do not. A society where peaceful demonstration is the exception, not the rule, and a society that condemns extreme violence but that struggles to repudiate those milder, in-between forms of violence.

In a broader sense, this inability to draw lines, to adjudicate gray areas, to separate right from wrong is linked to the fiscal challenge that the country faces. Unease with violence and fiscal indiscipline are both rooted in the weak legitimacy of the Greek state. The Greece that emerged after the 1967-1974 junta had two challenges: it first had to become inclusive and bring into the mainstream the left, the losing side of the civil war. And second it had to dismantle its repressive apparatus, turning the police into an institution tasked with law and order instead of internal control and violent suppression.

The state met its first challenge through extensive and under-funded state spending, countering favoritism with more favoritism, and enlarging the system of patronage that already existed to reach more people. The explosion of Greek debt was born from that political economy, and so was the state's limited but real legitimacy (see here and here).

But while the Greek state spent its way to legitimacy after 1974, the police as an institution did not. It had an uphill battle to be sure and its blunders have not helped. For those on the receiving end of its brutality (and for their sons and daughters) legitimacy would be almost impossible to attain. And in a country where democratic revival came from the heroic resistance against a military regime, the body politic had a clear sense of right and wrong when it came to protestors standing opposite the riot police.

And yet what started as (fair) resentment towards suppression morphed into a vaguer suspicion towards authority and finally into an all-out awe towards resistance. Such currents can be seen in all societies, but in Greece there has been no counter-current. So much of Greek society still inhabits an underdog-loving, resistance-praising, 1960s and 1970s leftistm without the counter-culture of a Reagan or a Thatcher. Over the years, Greece has found sympathy for “Yasser Arafat, Muammar Gaddafi, Abdullah Öcalan, Saddam Hussein, and Slobodan Milosevic. Karl Marx and V.I. Lenin sell well (though they are rarely really read), as does Noam Chomsky. The November 17 terrorist organization operated with relative popular support for years, and on the anniversary of that event, downtown Athens was burned regularly with impunity.

More tangibly, this was a society that tolerated violence week after week in its stadiums, the most frequent encounter between people and the riot police, and that struggled to cease that violence. Slogans against the police (chiefly the all-encompassing, “μπάτσοι, γουρούνια, δολοφόνοι,” literally, “cops, pigs, murderers”) are recalled on almost every encounter and they perpetuate an image of the police as a repressive force – an image, we should add, that police stupidity often serves to reinforce.

The bottom line is that the police have never been able to create a space for peaceful protest because they could never quell violence in a way that would be perceived by a large part of the body politic as legitimate. Of course, George Papandreou (the current) ordering the riot police into Syntagma is not the same as Papadopoulos or Ioannidis doing so, and while this elementary fact is understood in theory, it is not in practice. A casual read of how people talk about violence, and the word “junta” and “fascism” pop up quite a bit.

How is this linked to the country’s debt? Violence and fiscal indiscipline are two sides of the same coin. The inability to claim a monopoly on the legitimate use of violence is the most obvious manifestation of a weak state, as are lax tax collection or the ability to command popular support without buying that support. What Greece needs is a revival of legitimacy, the ability to move beyond mere patronage in exercising authority – and in that task, a competent police force that can be violent without being illegitimate is essential.

Sunday, July 03, 2011

America is Not a Greece Waiting to Happen

To someone who has spent his life living in both the United States and Greece, the idea that the United States is just a bad decision or two away from a Greek-style crisis is ridiculous. The differences between the two countries are too numerous to allow for a meaningful contrast. Yet since this is a serious concern, let us examine for a minute some of the relevant numbers.

First of all, Greece has about twice as much state as the United States. Between 1995 and 2010, government spending in the United States averaged 31.6% of GDP versus 46.2% of GDP in Greece. Even if one excludes interest payments – higher in Greece – the share of government spending was 41.5% in Greece and 30% in the United States (from 2000 onwards). On the revenue side, the Greek government receives 39.5% of GDP versus the US government which receives just 29.3% of GDP. And these numbers capture only quantitative differences. Americans enjoy real services for this money, including a world-class military, versus Greeks who pump money into loss-making enterprises and offices who deliver sub-part services (if they deliver anything at all). For someone who has dealt with both Greek and American red tape and bureaucracy, the comparison is a stretch. Additionally, in Greece, state spending is much more intimately connected to basic notions of party and state legitimacy in ways that make it harder to tackle than in the United States (here).

Lets us now look at debt. Public debt in the United States is expected to reach 69% of GDP in 2011 versus 156% in Greece (however, the US non-public sector is more heavily indebted than Greece's). But remember that in 2008, US debt was just 40% of GDP and that the rise in debt has been driven mostly by the cyclical effects of the 2008 economic crisis (plus fighting two wars). Of course, the concern is not with current debt, but with the forecasted growth in US debt. The benchmark forecast come from the Congressional Budget Office (CBO) which just released its latest estimates to 2035. The CBO presents two scenarios: a “current law” scenario (assuming no further legislative action) and a “current policy” scenario, where policymakers make probably changes to laws that preserve economic variables at historical or near-historical rates.

Under the current law forecast, US debt will rise to 76% of GDP in 2021 and to 84% in 2035. The rise is worrisome but not alarming. However, it is the current policies forecast that is scary as debt reaches 101% of GDP in 2021 and 187% of GDP in 2035. The CBO notes that this alternative scenario is more likely; “Many budget analysts believe that the alternative fiscal scenario presents a more realistic picture of the nation’s underlying fiscal policies than the extended-baseline [current law] scenario does. The explosive path of federal debt under the alternative fiscal scenario underscores the need for large and rapid policy changes to put the nation on a sustainable fiscal course.”

Such Greek-style debt dynamic suggests that the United States would be its way to becoming a Greece. But the United States does not face a fiscal crisis as much as it faces a health-care crisis, where the underlying problem is health care (forget non-fiscal challenges for now). Government spending on health care is set to rise by 3.8 percentage points relative to GDP in the current law scenario and 4.8 points in the current policies scenario. By contrast, social security (pensions), rise by a more modest 1.3 percentage points in both scenarios. Other spending decreases in both scenarios. As a result, around 66% of non-interest (primary) government spending in 2035 comes from either health care or pensions versus 45% in 2011. This is America’s fiscal challenge.

The United States thus faces a more clear-cut problem than Greece. Social tension in Greece comes from the need to cut pensions, raise taxes and shrink the public sector all in the midst of a recession. The US fiscal crisis, by contrast, will look different: at some point, the US government will need to cut medical spending or raise taxes (or both). This adjustment will be much simpler to accomplish. I say this because the United States can spend money in a much smarter way when it comes to health care. With no intention of getting into a debate on the matter, I base this statement on the following observations (I believe there is much support for this thesis).

In 2009, the United States spent 17.4% of its GDP on health care, a full 45% more than second place Netherlands and almost twice as much (85%) than the average OECD country (here). What is more, this gap has been growing steadily, a trend accelerated since the early 1980s. Despite this spending, the United States performs poorly on several metrics: it has the fourth highest infant mortality rate in the OECD just behind Mexico, Turkey and Chile; life expectancy at birth puts it, 24th out of 32. In life expectancy at 65, it ranks 22nd in females (out of 31) and 17th in males. These metrics, however incomplete, suggest that the United States could do much better.

As the CBO noted, “substantial evidence suggests that more expensive care does not always mean better care,” and that “Spending for health care varies substantially across the United States, mostly because of variation in the intensity of services provided, but Medicare enrollees in areas with higher spending do not appear to have better health outcomes on average than those in areas with lower spending. Those observations suggest that substantial opportunities exist to reduce costs without harming health overall…”

Of course, I have no illusions about the ease with which health care reform can pass – the evidence shows how hard it is to introduce meaningful changes to the system. But I would like to close with three statements: first, America’s fiscal challenge is overwhelmingly a single-track challenge; second, the curtailment of health-care costs is the major adjustment that will restore fiscal sustainability; third, there is reason to believe that such an adjustment could come without compromising severely medical outcomes and hence creating a massive deterioration in living standards that would cause outright popular uprising. Such a challenge – which the country could tackle by several targeted and sensible reforms – seems much more manageable than the tasks facing the Greek government today.