« Are Welfare Programmes Just Keeping People Out of Work? »

Tax to GDP ratios in the past 100 have risen substantially. One of the reasons for this is that taxes are used to fund welfare programmes. But what if giving people this access to these programmes, makes some of them want to try scam the system? A “moral hazard” effect.

A lecture at the LSE looks into it:

Let me summarize the claims in the lecture: Does this, moral hazard effect, make a difference? Yes. What is the magnitude if these effects? Mostly small. But have a look at the lecture. It’s worth it.

«Squeezing more and more […] hurting worse and worse»

when you have an economy  that is in a free fall there has to be a growth strategy and not simply an effort to squeeze more and more out of  population that is hurting worse and worse.

These are the  words of the US president Barack Obama in response to a question about the new developments in Greece. Indeed, the Eurozone’s economic strategy of the last fiver years has obviously failed: it is now arguably the most disappointing economic performer in the world. In that light, it is the duty of those who care about Europe and about the Greek people to stand in solidarity with real and honest attempts to re-calibrate European economic policy.

What happened

Before the 2008 financial crisis, Greece was already a fragile and regionally uncompetitive economy, trapped in  single currency which it could not control. To that poor context Greece added years of deficits and accumulating debt. In 2008 it ran a deficit of 10% of GDP and by 2009 that value was 16% of GDP. The debt to GDP ratio was higher than 100% even before the crisis.

After the financial crisis Greece was locked out of financial markets by lender’s unwillingness to lend. In 2010 it received money from the EU, ECB and IMF that it used to pay its private creditors. However, none of Greece’s internal competitiveness problems was solved or even addressed – this is the responsibility of all parts who played a role in the process. What happened was that debt rose (instead of declining), GDP tanked (instead of increasing) and unemployment skyrocketed (instead of of declining). Unsurprisingly this solved nothing.

Unemployment rate

Between the first announcement of a “bail out program” and now, there has already been a degree of debt default. It affected mostly private creditors. But since the logic of “squeezing more and more” money without changing the system is maintained, nothing is solved again. The happy march into the abyss has continued until late 2014 with money coming into the country, and going out into debt holders after the Greek people add some blood, sweat and tears to it.

What’s happening now

It’s hardly surprising, and in fact quite rational, that people wanted to try something different. After years of rising unemployment, decline in living standards, loss of hope, and no signs of any improvement (in fact quite the opposite) the Greeks voted out the establishment parties that collaborated into getting them in the tragic state they are in. One of the ugly outcomes of this, is a rise of Nazi parties in Greece. However a potentially fruitful outcome is the rise to power of a coalition, not tied to the old interests and establishment, which openly says what the vast majority of economists agree on for years: the Greek debt burden and payment plan is unsustainable. After the January 2015 Greek election, US president Obama said about austerity policies in Europe:

you cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts and eliminate their deficits. […] when you have an economy  that is in a free fall there has to be a growth strategy and not simply an effort to squeeze more and more out of  population that is hurting worse and worse.


This is what Yanis Varoufaks, the new finance minister of Greece has said he wants: to break the logic of pouring money into a black whole of debt repayments with a moribund economy. His detailed plans are, at the moment, still unknown but he declared the intention of making no unilateral moves. He did declare the wish to have time to come up with a credible plan (a “frenzy of reasonableness” he called it) , and to negotiate with European partners a different strategy for Europe. This why the establishment feels threatened by the Greek newcomers: because they challenge the dominant system, and wish to make some changes (which it obviously needs). The request for time for the new government some time to draft proposals, has already been shunned by the Eurogroup (whose president strikes me as a charming fellow), and the ECB. That’s a bad start.

The president of the Eurogroup on the left, and the new greek finance minister, Yanis Varoufakis, on the right.

We should support Greece’s request to sit and negotiate, and we should support Varoufakis’ stated intentions. For two reasons: (1) Because the European strategy of of neglecting growth has obviously failed: the Eurozone is now arguably the most disappointing economic performer in the world.  Fiscal discipline is required, as is keeping debt under control. At the same time so is growth and investment in the future. (2) Because we should have solidarity with our European partners, and long term vision.  After World War I, the absurd reparations demanded of Germany, plus the crisis of the 1930s created the climate for the rise of National-Socialism. However after World War II, Germany’s external debts were forgiven by the allies. Certainly not because Germany was without sin or did not deserve to pay reparations, but because the priority was a longer term vision for a peaceful and prosperous Europe. (It worked).

A modest appeal for total commitment

My European Friend,

I want to ask you something.

We both know Europe now faces incredible challenges. Some of these problems can be traced back to incompetent decisions made several decades ago (the poor set up of the Eurozone, and its banking supervision); while other problems can be specifically traced to bad policies in response to the financial crisis (like massive forced austerity to vulnerable semi-sovereigns).  But these challenges are nothing compared to the history of Europe.  Our antecessors of four or five generations ago took part in killing millions of each other across national borders. Yet now there is stable peace, and even freedom of movement for people. We cannot and must not, lose grip of this and start sliding back.

Look at what’s happening to us. Border controls are slowly coming back, extremist parties are on the rise, immigrants are seen as problematic and sometimes violently assaulted, and the support for the European project has sharply declined. For example, in the UK (where I now live) there is a totally empty debate about leaving the EU, and a strong feeling that immigration is a cost to the economy – despite the fact that immigrants, with their taxes, are net contributors to the welfare system, while national Brits  with their pensions, are net receivers. Stereotypes are commonplace: Greeks and Portuguese are lazy – in fact they work hundreds more hours per years than the average German  Germans are ruthless and unsympathetic – in fact they are more supportive of using their money to bail out the periphery than the French. There’s enough resentment to go around.

The main culprits of the mess we are in, are not the peoples of Europe  Of course we made mistakes: we voters, we the people. We turned our backs on European politics, on European institutions, and we were not vigilant – we took it for granted. As a consequence, some politicians, bankers, economists, and planners made much bigger mistakes and even crimes. These stupid mistakes and crimes are first and foremost their fault, not the fault of other European peoples. The fact that the banking sector of Europe grew out of proportion, and became much more leveraged than the american banking sector, is not the fault of the Greeks, or of the Dutch, or of the French as individuals or as a nation – this is the result of specific bad policies and bad or criminal decisions. Are we really going to let the elite erode the solidarity that we’ve worked so hard to create?

We also have to accept that European economic hegemony is a thing of the past. But this should cause no animosity between the European peoples. The rise of millions of highly skilled workers in the developing world, is not the fault of northern Europe or of the periphery. This is a challenge to be worked and solved as a group.

We should not be manipulated. Politicians are always, to some extent, anti-immigrant, and anti-outsiders: immigrants and foreigners don’t vote, and can’t get them in power. Blaming “the Other” is the oldest trick in the book to evade their own responsibility. Are we really going to let the specific mistakes of the last 20 years (particularly of the last 5 years) turn us against each other? We, other Europeans, are not an enemy. The Greek people did not cause the European recession, and the German people are not the cause of lack of competitiveness of the portuguese economy.  Protest austerity, demand competitiveness or fiscal consolidation, blame policies, vote people out of office, take control, take power!,… but let us not blame other peoples.

To conclude, my friend, the European project deserves our commitment. There is a group of politicians (that we, as peoples, voted for) that has failed us. We need to get them out of the way, and get back to work. We need to reshape the old European institutions and get our project going again. A project of solidarity among peoples, of progress, of culture, of technology, of education, of work. Slowly we need to rebuilt a shared vision for a multicultural, peaceful and open Europe. Once we’ve sorted out the current mess, there is still a lot of work to do.

So, let’s not blame each other. And please, let’s not give up on each other.

Who paints the picture

There is a strange contrast between the level of attention that we give to parts of our lives, and this is dangerous for all of us.

Details get our attention. If you are a musician you may spend dozens of hours debating and deciding which strings to put on your guitar; if you are a scientist, you will spend countless meetings and read dozens of papers trying to decide what is the best reagent to use on some experiment; If you are a designer you will spend days choosing the best font  for your text, etc. And you will  revisit these choices, change your mind, try something else, and change your mind again. And this will go on for years and years. Yet we do no such thing for larger scale projects.

For example, if you ask a scientist why he/she uses that particular item, you will get detailed explanations about the shape, the weight, the material, and how they all relate to the content of the experiment etc.. but ask the same scientists about the nature of scientific progress, the funding decisions of his/her project,  the forces behind it, the goals it serves, etc.. you will get a confused look like you are missing the point. “But look at the shape!”. This is dangerous.

We need more people to pay attention to the large scale issues, otherwise those who control large scale resources will be the ones making these decisions, or they will be made with no coordination and thought. This might be fine for some things, but it can have serious consequences for others. To quote Quinn O’Niell:

We didn’t decide that we’d like to have widespread poverty and great social inequality and then implement political and economic frameworks to make it happen. The climate isn’t changing because we decided we’d like a warmer planet and then put a plan in place to heat things up. And we never got together as a species and decided to organize ourselves into our current nations. These things just kind of happen while we’re preoccupied with individual and smaller group concerns.

To spell out the obvious: widespread poverty and social inequality happened because a few people at the top implemented it “over” us; the climate is changing because we haven’t been able to translate our individual concerns into massive collective action; Nations have the borders that they do, because the few who controlled armies made it so. Individual experts with no big-picture perspective, will mostly serve the interests of those who control the larger systems of decision-making and their implementation. The uncritical expert will be put to use as the tool that he/she is.

To be sure, for those parts of the population who are poor, who focus on making ends meet, large scale concerns are far from being a priority. If you have to worry daily about putting food on the table and paying rent, then legislation on tax policy won’t be your primary concern – but it will affect everyone including you. So whenever possible we need to take a step back from narrower concerns,  take a look at the bigger picture, and see how we like it… Before someone else paints it for us.

The Semi-Sovereigns (pt2)

(link to part1)

Semi-sovereign governments in the periphery of Europe had no choice but to implement austerity measures. Otherwise there would not have been loans, which would have meant no money to pay salaries. This is the consequence of the poorly implemented monetary semi-union.

Why did the governments with money required austerity from the semi-sovereigns? One reason is that their banks had bought government bonds which they wanted to be sure would be honored. Therefore the priority was repayment of debt at the expense of social payments.  However this does not explain the whole story. Another aspect is the need that lender governments had to cause the semi-sovereign populations to visibly suffer. Otherwise loans and cash transfers would have never been acceptable with the populations doing the lending. This aspect should not be underestimated. People do not easily transfer their money to others, and the need for parliament approved transfers requires the notion that the recipient is suffering and trying hard. In that aspect massive austerity does the job. A simple thought experiment should tell us that greeks and portuguese would be equally reluctant to transfer money to an hypothetical well-off south american middle class enjoying average-to-good living standards. Suffering is requirement for help (what else but constant visible suffering can explain the constant statements that Portugal is a success story in the implementation of the Bailout program?). Furthermore, given the association of debt with morality (see the views of David Graeber), suffering is seen as the just outcome for the accumulated debt (which is “immoral” and therefore deserves punishment). Finally, there is the ridiculous view that a national economy is like a family: I need not expand on this, but simultaneous mutual spending cuts everywhere, make everyone worse off.

Does this mean that weak semi-sovereigns have no responsibility? Of course not. During the Euro-years they happily navigated into the turbulent waters of unmanageable debt, low economic productivity, and disproportionally  high labor costs.

In other circumstances, this level of austerity would have not been necessary. But in countries that lost the necessary institutions to handle these situations somewhat more smoothly, there was hardly a choice. What this means for the European project is, from the point of view of an internationalist as myself and many others, unbelievably sad and tragic. European solidarity was proven to be a rare commodity. Only at the verge of total catastrophe for all  was Greece allowed to re-structure its debt, and anti-German slogans were easy to find everywhere in the periphery. The rift that was allowed to open between peoples, shows that Europe might be far from the warring days of the past century, but it is also nowhere near a real integration of peoples. It’s still us and them – from all sides.

Can semi-sovereignty be maintained? This is a political decision. It can, but it will require a strange co-habitation of peoples who are, evidently, not willing to support a real shared-sovereignty, but are also not willing to devolve  to separate states. For this group, the way back is depressing and dangerous, the way forward is uncertain and controversial, and the current position is unsustainable. It’s not looking good.