Sunday, November 11, 2012

Austerity—Again

Readers have challenged my recent posts on austerity—and my argument that Greece has yet to practice it—in various ways. Either, people say, the data is incorrect or it is irrelevant. Let me try one more time.

This is the starting point. On one hand, we say “the state is being starved and cannot perform basic functions.” On the other, Greece still have a *primary* budget deficit, which means that we still cannot raise enough money to pay the bills even if we just ignored the debt. So we have a contradiction: we cannot both being starved and be eating too much. It does not add up.

There are two hypotheses: either revenues are too low or spending is too high. There is no other way for us to have a budget deficit.

By the way, since publishing my posts, I have found that ELSTAT publishes a pretty similar table to the one I constructed with government revenues and expenditures back to 2000 (p. 22—23). So let us use these numbers—which have a 2 November 2012 date on them.

Revenues are at a 10-year high as a share of GDP. Yes, there is tax evasion and it is important. But tax evasion did not appear overnight—we did not have more evasion in 2009 than in 2005 or 2003, at least not systemically more so. Tax evasion did not show up in the last two years, and so it cannot be used to explain why things got so much worse.

Revenues as a share of GDP
2000 43.0%
2001 40.9
..
2007 40.8
2008 40.7
2009 38.3
2010 40.6
2011 42.3

If not revenues, it is expenditures. The ELSAT table comes to the conclusion I did: wages (compensation of employees) and social benefits are much higher than earlier in the decade. Goods and services (which I researched to attribute to weapons procurement) and capital transfers (which is public investment) have been slashed from 2009—2011 and they account for most of the reduction in primary spending as a share of GDP from 48.8% in 2009 to 44.6% in 2011.

Spending on “social benefits” as a share of GDP
2000 14.8%
2001 15.4
...
2007 17.9
2008 19.6
2009 21.2
2010 21.3
2011 22.6

Confronted with that information, I can ignore it. I can say, no, this is not relevant, look at “real people on the ground.” I have no illusions about the quality of Greek statistics (after all, I have spent my fair share looking at and trying to make sense of the numbers—I understand the weaknesses). Yet this is the budget and government finances. How can you ignore it? It is like ignoring your bank account when making a plan. This is the ultimate data--it is the ultimate test.

It is also, I have pointed us, the data that the troika looks at and tries to negotiate over. They also see compensation being higher than in 2008 (or earlier) and they also see social benefits at record levels, and they wonder: how could that possibly be true? How can we reconcile all these cuts with all these measures being at record levels? Either the data is fake or the cuts are.

Is the data great? Probably not. Will the numbers be revised again? Probably. But look at the ELSTAT table—social benefits went up from 15% to almost 20% of GDP by 2008. Five percent points of GDP is a massive movement. Yes, maybe it is not 5 but 4.5 or 5.5. But the trend is too overwhelming to ignore.

At that point, you say, okay but look at the cuts that hear about. The issue here is relativity—what do you compare against? If your starting point is that 2009 was “fair,” then maybe the state has in fact been butchered (even though social spending is up as share of national income, which means that the spending cuts have not been proportional to our ability to finance them).

But if you look at these numbers versus what other European countries do, it helps you put the 2009-2011 adjustment in perspective. Look at this table, for example, on spending for old age in OECD countries:

Public spending on old age as a share of GDP, 2007
Italy 11.7%
France 11.1
Austria 10.7
Greece 10.0
Portugal 9.2
Sweden 9.0
Japan 8.8
..
OECD 6.4

This is up to 2007 only so it ignores the crisis. Only three OECD countries spent more on old age support than Greece did. Greece, in this measure, spent 10% versus an OECD average 6.4%. Perhaps we say that Greece has more older people. Fine. Let’s adjust for that by looking at how many old people countries have relative to their working age population (data from here). Here are the top countries (sorted by the ratio of old age dependents per 100 working age population from here):

Social spending and old-age dependency
Japan 8.8% / 31.9
Italy: 11.7 / 30.2
Germany: 8.7 / 29.7
Greece 10.0 / 27.5
Sweden 9.0 / 26.7
Belgium 7.1 / 26.2
Portugal 9.2 / 25.9
France 11.1 / 25.3
..
OECD 6.4 / 21.0

Greece spends more than Germany even though it has fewer old people per younger population. This is not a new issue. For the past few months, I have been read every single report on Greece that the OECD has written since 1962. For decades, it has been noting that Greece has some of the most generous (but underfunded) pensions around. This is not a new thing and the OECD data above confirms it. Our debt of 170% over GDP did not come from Greece being stingy. So yes, there are cuts, but these come only because: our past spending was unsustainable relative to what we earned, and it was also high relative to what other people spend or what Greece spent just a few years ago.

So unless the budget is irrelevant, what the state raises and spends is irrelevant, how much Greece spends relative to other countries is irrelevant, then we have to scratch our heads and come up with a convincing answer to explain the wide disparity between what we see in the daily news and what the ministry of finance has to say in its numbers. The only answer that convinces me is:
(a) we don’t fully understand how much we overspent in 2006-2009; 
(b) we focus too much on anecdotes and on income groups that do indeed suffer without appreciating how the totals look and how high total spending really is; 
(c) we don’t fully appreciate how much we spend relative to others in Europe; and
(d) we don’t see that our adjustment has not come from wages and pensions but from spending on goods and services (including weapons) and from investment.

19 comments:

  1. Ok, but Nikos, Greek GDP is also going down, hence social benefits as a % of GDP is bound to rise in any case. What are the absolute figures? If austerity is a sham, then the absolute figures should stay high over time, right? And I take it from other commentators that the public sector is "bloated", but without seeing the figures I don't really know. So what is the employment share occupied by the public sector and how has that changed since the crisis started? A job in the government is also a kind of social benefit, I'd say.

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    1. Here are the absolute figures for social benefits (from the Eurostat table):

      2005 31,814
      2006 35,625
      2007 39,941
      2008 45,758
      2009 48,972
      2010 47,220
      2011 47,210

      This is not just a GDP effect as you can see.

      On employment, Q4 2009 vs. Q4 2011:
      Public sector -7.8%
      Private sector -13.0%
      (http://www.greekdefaultwatch.com/2012/08/how-much-is-public-sector-tenure.html)

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    2. Sorry, ELSTAT, not Eurostat (it's the same, but just to avoid confusion).

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  2. Excellent piece. Nearly all "media" commentators ignore the simple but powerfull truth of your analysis. But it is not specific to Greece, in most EU countries the miss-leading media narrative continues. But the game is up, sanity will come slowly but surely that a society cannot live beyond it's means forever.

    Agamemnon
    He who learns must suffer
    And even in our sleep pain that cannot forget
    Falls drop by drop upon the heart,
    And in our own despite, against our will,
    Comes wisdom to us by the awful grace of God.

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  3. If 'social benefits' include unemployment benefits, it wouldn't surprise me that much if they remained high. I lived in Germany in the 2000s and remember that, in the severe crisis in the early part of the decade when unemployment sky-rocketed, unemployment benefits, of course, went through the roof and further burdened the budget deficit. But I take it from your posts that even salaries remained high in total.

    My gut sense is that the consequences of Greek austerity are so dramatic because they are so UNEVENLY distributed in society. How else could, in the midst of an alleged Weimar-ian austerity, the sales of mobile handsets be projected to INCREASE to 3,4 million in 2013???

    My other gut sense is that, in the last decades, much employment was not sustainable but, instead, carried by the tide of foreign funds flows. Now that the tide is going out, we are seeing who has been swimming naked (Warren Buffett).

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    1. Klaus, according to Eurostat, unemployment benefits fell in 2009—2010, and 3/4 of the social benefits budget in 2009-2010 was from pensions, sickness and disability payments. I don't think that's the driver--one reason is the jump in the number of pensioners. Since the mid 1980s, the number of “pensioners receiving principal pension from the social insurance organizations” was ~76% of the total population over 65. Within a year, from 2007 to 2008, it jumped to 82%, the highest rate ever.

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    2. Beats me how unemployment can go to record high's while unemployment benefits decline! But, then, there are many other things which I don't understand about Greece.

      One minor detail: I saw an industry report which projected the sales of mobile handsets to increase to 3,4 million units in 2013. One out of four Greeks is unemployed but one out of three can buy a mobile handset? Something is not in balance in Greece!

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  4. Nikos, your figures are OK.
    First of all the real question to answer is what really happened in 2009. Perhaps this might help in solving your puzzle. In that year the deficit went up by 5 points, without any apparent reason. What might had happened is a change in how statistics are calculated. What it is said here in Greece (but I cannot confirm it) is that results from public owened enterpises weren't included in the spendigns of General Gonvernment. There was great debate whether this was OK as other EU countries didn't take them into account. If this case is valid then you compare completely different figures (before 2009 and afterwards)

    Secondly, the public spending in social benefits is high as approximately 900.000 people have lost their jobs from 2009 until today. That means that public spending to pay for their unemployment benefits are expected to be high. Also public spending to counterbalance the loss of their contibution to social security funds is also expected. This has nothing to do with elderly citizens, as you also mention.

    The third issue is to look at the fresly published data for central gonvernment for Jan-Oct 2012 (Budget Execution Bulletins at www.minfin.gr -- sorry but the link is too long to post).
    In there you can see that for this period the revenues remain approx. the same as in 2011 (in a contracting economy of -6% in GDP in 2012) while the cuts in primary spending is almost 15% (from 58 BEU to 50 BEU). These are the changes that were enfornced by the previous austerity package.

    In any case let's hope that a primary surplus is underway for 2012. Sorry to correct you once more but for the general gonvernment the primary surpluss that was recorded for Jan-Sept. is in the order of 1.2 BEU. You can see it for yourself in the minfin.gr site. Let's hope that this is not just greek statistics. Also take look at this analysis in:
    http://subsurfacing.blogspot.gr/2012/11/greek-economy-figs-going-against-wave.html

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    1. Andreas--much appreciated.

      1. According to the OECD Survey on Greece (2011), the reclassification of public enterprises accounted for an additional 0.8% of GDP in 2009. These companies are loss-making but their losses tend to amount to ~EUR 2 bn a year, which is much below the EUR 36 bn deficit we had in 2009.

      2. Your instinct is correct. However, (a) unemployment benefits does not explain why the social benefits budget rose so much through 2009. And (b) according to Eurostat, unemployment benefits fell from 1% of GDP in 2009 to 0.8% of GDP in 2010.

      Maybe they rose in 2011. But even if they doubled to 2% of GDP, given that social benefits rose by 1.3% of GDP in 2011, that would mean that the rest of the social budget spending still rose!

      3. There are some good numbers, here, yes. But I look at the general government balance, not the state budget. That's closer to the full picture and the targets that we have (ESA 95). That does show an improvement year-to-date of about EUR 5 bn. But I am concerned that arrears have grown again by 1.6 bn in 2012, while the public investment budget is down by EUR 500 million. So 40% of the adjustment is about not investing and not paying the bills you owe... That's not how Greece should be adjusting.

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  5. Can someone explain to me in simple steps exactly what "austerity" really is? I hear everyone talk about it, even riot about it, but no one seems to have a clear idea what they are talking about.

    For a household, "austerity" would be consuming less and paying back debts -- that is debts that the household owes to other people outside the household. Well, we all know that Greece as a nation is not paying back debts to other nations, because Greece still needs constant cash injections from outside.

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    1. Austerity is the cut back on all state spending as well as the enforcement of greater tax revenues (VAT, direct taxes, etc).


      Yes, yes... I understand that "you all know".
      Perhaps that's the problem

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    2. So under austerity, the state collects more tax and spends less money. This should logically lead to at least two results: prices should go down, because taxpayers have less money to spend, and the state also is spending less. In addition, state borrowing should reduce.

      OK so far?

      But when I check the CPI value, seems that prices are going up and not down, and also Greece keeps needing to borrow. So why would that be?

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    3. Partly, it is taxes (VAT); if you look at inflation at constant taxes, it much slower (and at, various points, even declining).

      The other problem is competition and flexibility--much of Greece's inflation is the result of monopolistic or oligopolistic market structures.

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  6. I found this story interesting:

    http://www.nytimes.com/2012/10/11/business/global/chinese-company-sets-new-rhythm-in-port-of-piraeus.html?ref=greece&_r=0

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  7. All very interesting stuff. Some observations from Iraklion. Our city has 41 councillors plus 8 deputy majors. Comparable cities elsewhere manage with 14 - 18 total. When challenging one about this her response was 'this is Greece'. A beautiful pedestrian bridge was built across the river on the western edge of the city about 5 years ago. It has received no maintenance ever and the steel strucutre in now deeply corroded - possibly beyond saving. We have a fine national highway ledaing west. It crosses the Almiros River (an interesting and rare physical phenomenon!) If you walk under the 4-lane bridge (not easy) the concrete is flaking off the iron reinforcing which too is deeply corroded and may already be beyong repair. EU funding was used to install lighting of the Venetian Gates of Dermata about 5 years ago. There has been zero maintenance and nothing has worked for years; the wooden railing is rotting. On the other side of the road (we are near the centre of the city) the sea washes away the land fill unchecked - the council merely moves the fence back.

    So, there seems to have been a huge inflow of capital funding about 2007 - 2008 but no funds for mainenance or perhaps it is being used to pay pensions. It would be very interesting to see where EU transfer payments have gone in Greece. I have no doubt they have been a major stimulus for rent seeking. Does the Government pay any subsidies over those received from the EU? For agriculture? How much? Why?

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  8. 1. About these telephone handsets: in the thirties, the number of radio's owned by households increased sharply. Not everybody was unemployed in those days and when ownership of households with an income rises very sharply average ownership will rise too. Though Greek unemployment is reaching uncharted waters, i.e. waters not covered by economic models trying to predict the economy, some Greeks still have jobs.

    2. But the main thing: there is something like the circular flow of money, income and production, as shown and estimated in the national accounts. When spending falls, national income falls by accounting necessity, as less spending also means less income for companies and therewith lower profits and wages. This is clearly happening in Greece. However - debts do not decline in such a situation. When government debt is 150% of income and nominal income declines with 9% (i.e. at the moment 7% decline of volume and 2% decline of the GDP deflator, yes, prices in the whole economy are getting lower in Greece) this will mean that government deficit will go up, even if the deficit was 0%, to 164,8%. check Eurostat, for data on the GDP deflator.

    3. The idea that unemployed people will get a job when they lower their wage is more than a little wrong. During the last 150 years or so, employment ONLY GOES UP WHEN PHYSICAL OUTPUT GROWS BY MORE THAN THE RELENTLESS INCREASE OF PRODUCTIVITY (unless people start to work less hours). The way out is not 'save, save, save' but 'invest, invest, invest'.

    4. The way out is not simple, but Greece will have to introduce and additional currency, next tot the Euro, which has to be used for part of taxes and will pay part of the domestic bill of the government. Once that currency is introduced they can leave the Euro which they should do as fast as possible. Remember that Spain and Portugal also have unemployment levels NEVER, NEVER seen before, which is a result of the Euro system. The Euro is the problem, not the solution.

    Merijn Knibbe

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  9. Nikos

    The key point to make about austerity is the ex ante / ex post distinction.

    You don't spell this out, but it is what you are effectively referring to when you say "the problem is the inability to practice austerity". The government can tighten, but if the non-govt sector is also tightening, the govt deficit (which of course equals the non-govt surplus) will not budget.

    To point at persistently high ex post govt deficits and say that austerity hasn't really even started (as people also do for the UK), ignores the fact that the ex ante fiscal stance has tightened sharply in Greece and the UK.

    You seem to be pointing at social benefits, which presumably include automatic stabilisers and so reflect rising unemployment: ie they reflect increases in volume of benefits, not the individual level.

    What do you make of the stories about aspirin running out, kids being abandoned, and the rise of Golden Dawn? These anecdotes have to be worth something; or do you think such things happened also in 2007?

    Or to put it another way: your position seems a bit like saying "the beatings will continue until morale improves".

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    1. in second paragraph, I meant "...the deficit will not...budge"

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