What Happens When (Not "If") Greece Defaults

Whatever European governments and the ECB say, Greece will default, as I have repeatedly explained in this blog, from the beginning. A British economist, Andrew Lilico, explores what will follow, after the default, in a Daily Telegraph blogpost, here .

I believe some of these events will indeed materialize, even if all of them don’t.

“It’ll be tomorrow, a month’s time, a year’s time, or two years’ time  (it won’t be longer than that).” 

Just wait for some more official denials ...

High Taxes and Income Growth

Michael Boskin is comparing the US, Canada, the UK and France in a Project-Syndicate post.

Excerpt:

“Real per capita income in the US is bout 40%nhigher than in France, 22% higher than in Canada, and 31% higher than in Great Britain.”

Relative histories of taxing and spending matter, he writes, to explain these shifting differences:

“ … the US advantage over France has expanded from 25% to 40% since 1980, a period in which the share of government spending in GDP was stabilized in the US (until recently), while it grew substantially in France. Likewise, French real per capita GDP exceeded the UK level in 1980, but was overtaken in 2000, and by 2007 lagged the UK by about 10%. These differences are the equivalent of an entire generation of economic progress.”

Read the post here .

The Coming Defaults

An excellent article – as usual - by Irwin Stelzer about the Greek, Portuguese and Irish debt crises in the Wall Street Journal, here.

Excerpt:

“… the eurocracy devised a plan for coping with a liquidity crisis when these countries were facing a solvency crisis. Diagnose the disease incorrectly, and the prescribed medicine will make the disease worse by prolonging the period before which a proper diagnosis is developed.”

And conclusion:

“In short, the initial view that we are all in this together, that to save the euro and, indeed, the European Project, everyone must provide support for Club Med and Ireland, is less dominant than it once was. The only serious question is what form the defaults should take.”

This, precisely, is the problem I try to analyze in my book “L’euro: comment s’en débarrasser”.

The End of Aid Watch Blog

Authors Laura Freschi and Bill Easterly write:

“The simple reason for ending the blog is that we want to free up our own time for writing longer and more substantive pieces, both academic and non-academic, on development.

The blog is a hungry mouth that always wants to be fed, and the longer projects we’d like to take on don’t fit with those constraints.

… we plan to move away from aid criticism as our main focus, and put more emphasis on the high-stake development debates going on now.  … there’s a lot more to development than aid.”

Something, definitely, is happening in the blogosphere: online newspapers, more and more, are restricting free access to their articles, while many bloggers find the cost of blogging to be much too high in the long run. After an initial phase of heady expansion, maybe this "industry" is now searching for a durable equilibrium. These are not good times for the consumer of immediate information.

The Euro As A Borrowers’ Cartel

My book “L’euro: comment s’en débarrasser” (How To Get Rid of the Euro) is now available at bookstores and on Amazon.fr .

Energetic Decentralization

Will households become independent from electricity distribution grids?  That would be the outcome of a new method of making electricity from sunlight, which has just been tested by two engineers, Gang Chen of the Massachusetts Institute of Technology (MIT) and Zhifeng Ren of Boston College. According to  The Economist, they suggest that a phenomenon called the thermoelectric effect can be used to generate a current through a material that is unevenly heated by the sunlight.

“They could be built into the solar water-heaters that adorn the roofs of an increasing number of houses. If such heaters were covered with thermoelectric generators … electric power would be extracted from them. Then the exhaust heat … could be used in the traditional way to warm water up. … This kind of combined heat and power might enable more people to declare independence from the grid.”

Generalized, it could significantly change the overall cost of energy, the quasi- monopolistic or oligopolistic power of energy suppliers, as well as the current geographical pattern of urbanization.   

Yes, Greece Should Reject the Euro

An excellent Op-Ed by Mark Weisbrot in the New York Times(May 9).

Excerpt:

“The experience of Argentina at the end of 2001 is instructive. For more than three and a half years Argentina had suffered through one of the deepest recessions of the 20^th century. Its peso was pegged to the dollar, which is similar to Greece having the euro as its national currency. The Argentines took loans from the International Monetary Fund, and cut spending as poverty and unemployment soared. It was all in vain as the recession deepened.

Then Argentina defaulted on its foreign debt and cut loose from the dollar. Most economists and the business press predicted that years of disaster would ensue. But the economy shrank for just one more quarter after the devaluation and default; it then grew 63 percent over the next six years. More than 11 million people, in a nation of 39 million, were pulled out of poverty.

Within three years Argentina was back to its pre-recession level of output, despite losing more than twice as much of its gross domestic product as Greece has lost in its current recession.”

Read the whole paper here .

My conclusion: Disequilibrium exchange rates are terrible for your (economic) health.

For an explanation of why economists, bankers and politicians inflict such harm to their countries, have a look at my new book “L’euro: comment s’en débarasser” published by Grasset (Paris) and available in bookstores next week.

Creative Destruction and the IT Revolution

Timothy B. Lee presents a cogent review of Tyler Cowen’s Kindle book, The Great Stagnation.

Cowen makes the case that the American economy is in the midst of a decades-long period of mediocre economic growth. Since the mid-1970s, in fact. While previous generations of Americans enjoyed and abundance of “low-hanging fruits” – cheap land, technological breakthroughs like electricity and the internal combustion engine, rising levels of education, an end to racial and gender discrimination – that allowed rapidly increasing living standards with relatively little effort, now big innovations have been few and far between, and this explains – according to his analysis -- the comparatively slow rate of GDP growth in recent decades.

This story is rather surprising however in view of the striking information revolution of the last few decades. But Cowen claims that the “Internet revolution” is overrated: most people don’t spend enough time on the web for it to significantly improve their standard of living, and blogs, Facebook and Twitter don’t create jobs or produce revenue for the government.

Lee, however, points -- rightly in my opinion -- to the fact that “by focusing on “the Internet” … Cowen trivializes an industry whose economic effects extend far beyond a few overhyped websites.”

He then argues that although software innovations often make relatively small contribution to measured GDP, this is less a reflection of a “great stagnation” than a sign that official economic indicators are a bad way to measure our generation’s benefits from technology. This is because they change the quality of existing products without increasing their price. And without an increase in price the measured GDP is not increased either.

Moreover, there is at the same time a decrease of GDP because of the products and services that disappear, made obsolete by the new software:

“The digital revolution … is rapidly displacing a wide variety of “revenue-generating” products and services: typewriters, newspapers, magazines, books, maps, cameras, film development, camcorders, yellow pages, music players, VCRs and DVD players, encyclopedias, landline telephones, television and radio broadcasts, calendars, address books, clocks and watches, calculators, travel agents, travelers checks, and so forth.”

Thus the digital revolution’s increases in the standard of living are not correctly recorded in GDP statistics, while its destructions are. Hence the low aggregate growth rates recorded.

My comment:

This is typically a case of Schumpeterian creative destruction. I add to Lee’s remarks that it is generally the case, in an innovation phase, that the value of traditional, established, firms goes down while the new firms using the new technology aren’t yet fully developed, creating a sense of overall stagnation.

And in the present case, the digital revolution brings about a “general purpose technology”, i.e. one that affects all other industries. It follows that its two effects, the unrecorded improvement in products’ quality and the recorded destruction of older products and services by obsolescence, are general and widely diffused in the economy.

This is why, I believe, the aftermath of the bursting of the bubble (itself due to inflated expectations, rather normal given the uncertainties of the new products and processes, and of their prospective profits) is characterized by an hesitant and jobless recovery. It takes time to transform travel agents and watchmakers into software builders or vendors. Nevertheless the change is taking place and the measured prosperity growth will accelerate when it is completed. The “great stagnation” could then, surprisingly for many, give way to a “great acceleration”.

The Lee’s post is  here.

Feldstein on How Individual Choice Can Save Social Security

Here is the system that Martin Feldstein suggests to complement the demographics-contrained Social Security pensions:

"An employer-based plan is less practical than one based on the individual (because) ... many individuals work in small firms, change jobs frequently, have multiple jobs, or are self-employed."

“Each individual would designate a broad-based mutual fund from a large list of funds approved by the government. The designation could be done on the individual’s annual tax return and could be changed once a year (my emphasis). Employers and the self-employed would send an additional few percent of wages to the Social Security Administration each month in addition to the current payroll tax. The Social Security Administration would then forward those dollars to the mutual fund chosen by the individual. The returns on those funds would be untaxed just as they are in an IRA or 401(k).

With a 3% payroll deduction, someone with $50,000 of real annual earnings during his working years could accumulate enough to fund an annual payout of about $22,000 after age 67, essentially doubling the current Social Security benefit.  …

Since every individual would have the option of requesting a refund of that payroll deduction on the following year’s income-tax form, the extra saving is strictly voluntary. It is not a tax.”

My comment:

Since there is individual choice and since the system is strictly voluntary, it would not create a disincentive to work, contrary to the current payroll tax based Social Security contributions.  

Such a system should prove especially worthwhile in the high payroll tax – high disincentives to work European countries.

Read the paper here.

Heath Care and Consumer Control

The Ryan Medicare Plan and the German experience explained by Ed Dolan .

My comment:

An important benefit from such a reform is not so much the reduction of spending, nor even a change towards “better” spending, but the reduction of the tax on labor, and thus of its large welfare loss.

Poverty Traps and Nutrition

Abhijit Banerjee and Esther Duflo have written a  remarkable article  for Foreign Policy (May/June 2011) : “More Than 1 Billion People Are Hungry in the World.” With a subtitle: “ But what if the experts are wrong?”

They open new perspectives on hunger and poverty, and what works – and what doesn’t – in development policies.

Excerpt:

“What we’ve found is that the story of hunger, and of poverty more broadly, is far more complex than any one statistic or grand theory; it is a world   … where more money doesn’t necessarily translate into more food, and where making rice cheaper can sometimes even lead people to buy less rice.”

A must read.