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Monday, February 3, 2014

Re-Visiting May 2010

In a moment of boredom, I looked up the original Economic Adjustment Program for Greece of May 2010. Just to remind myself what the original plan had been.

Off the bat, I noticed that all numbers are in percentages instead of nominal figures. That's a cute technique to make future plan/actual comparisons difficult if not impossible. For example: GDP growth for 2014 was projected at 2,1%. Who knows? Maybe a miracle happens and GDP growth will turn out to be 2,1% in 2014. Everything ok? Of course not! This projected growth was based on the assumption that cumulative GDP declines in the previous 5 years would only be about 7%. Had the latter turned out to be true, things would be quite well in Greece today.

All divergencies from plan are attributed to using the wrong multiplier but how does one set the right multiplier? Can one do that without an indepth analysis of an economy's underlying structure and strength? Let me try an analogy.

Take two fireplaces. One is full of real wood and the other one has only artificial wood. Both are burning well. The former is burning well because there is a large glow of burning real wood. The latter is burning well because a pipe feeds gas into it. If one throws a bucket of water at the former, the fire will go down but, after the initial shock, the glow will rekindle the fire. In the latter case, the water will kill the flame.

What I am getting at is the productive capacity and potential of an economy. Put differently: Was Greece's economic fire of the 2000s the result of buring real wood or rather the result of having a good gas pipe? If it was the latter, no wonder that the flame went out.

I googled "greece productive capacity", hoping that I would find some statistics about it. I found some papers arguing general terms like 'Greece does not have much of a productive capacity' but I did not find any hard facts about what it is that Greece produces and what Greece could produce more of. What a shame! Here is a quote from John Maynard Keynes' book "The Economic Consequences of Peace":

"It is for those who believe Germany can make an annual payment amounting to hundreds of millions sterling to say in WHAT SPECIFIC COMMODITIES they intend this payment to be made and in WHAT markets the goods are to be sold. Until they proceed to some degree of detail, and are able to produce some tangible argument in favor or their conclusions, they do not deserve to be believed".

Preceding that statement is a most detailed analysis of the German economy's capacity to pay after WW1 and how that capacity could be increased. That is the sort of analysis which I would like to see about the Greek economy. One could easily take Keynes' analysis as a blueprint.

4 comments:

  1. Klaus, I couldn't agree more with both you and Keynes (at least, in that quotation). The tendency to use growth figures in place of real data is something that has infuriated me for more than two decades. Even the OECD presents completely useless and misleading tables with percentage growth figures. In all of my publications, I insist on real data and alongside growth figures in italics.

    As far as methodology is concerned, this problem is indicative of a very serious intellectual deficit, as you correctly outline. Since the base figure is the comparator, unless you know the base figure and have an exceptionally accurate statistical brain, you cannot grasp the reality. Therefore you are likely to be working with false data, which may even not be detailed enough anyway.

    This brings us to the second intellectual deficit, which I consider to be widespread in social science and economics, yet rare in the natural sciences. This the logical error derived from aggregation of discrete functions. Since we do need to know about overall impacts for macroeconomic purposes, we aggregate statistics for entire industries, sectors and even the total economy. Foolish and lazy people (apparently all politicians and many economic commentators) think that there is a short-cut and they do not need to know the micro-economic bases of these aggregations. They can get away with bluff and vague nonsense, because only serious hard work will reveal these lies and cheats.

    Such is a world where superficial impressions matter more than years of serious hard work. Maybe this is the result of television and the internet -- with entire generations that cannot concentrate more than a few minutes (or even seconds) on some of the most complex problems that mankind has to grapple with. I feel lucky that I am old enough to have been brought up on books and serious things, but also able to take advantage of technological developments when they arrived. But I despair with the weak computer skills generally of young Greeks and their equally poor ability in mathematics, logic and language.

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  2. The importance of what you say is exceptional.
    A suggestion only.
    Keynes for this remark he mention the letter of Sir Sidney Low, to explain the "misapprehension", which is logical as a estimation. Keynes also make 3 provisos and one is "to nurse the trade of Germany and industry for a period of 5-10 years. (We are not capable of very great productivity, as Germans, but there are some possibilities)
    Now, read again the program of May 2010. In page 13/90 the projections for debt 150 to 175 unemployment 15 to 30 but current account balance? -4.3 to +1.
    What this shows? What i m saying to blog that the only mistake of EU-IMF
    is that they do not seek full implementation to "quality issues" at 100%
    1. Meritocracy people from governing parties promoted as executives and not highly trained and educated people no matter what they vote.
    2.Public administration, Troika should evaluate every secretary in ministries, everyone work there. Many people do not know their profession as they should, for a very demanding job.
    3.Taxation system is a mess not only to find evators but to help new companies in practical issues. There is huge legislation for uneaded issues! You need IQ 300 to understand the feasibily, if still we want foreign investments.
    About taxation and the levels which are not practical for a labor intensive economy with less 25% income, the point is to make bearable the real costs.
    We have to examine with detailed manner -in taxation -what could possibly help in productive issues eg gas excise duty prices.
    Electronic services should be first issue.

    4 Real estate- land registry there is not a target.
    5.The most important what you said: Are we creating value?
    What is the productive capacity?
    Germans should take responsibility for that and Swiss for taxation ( and to conveince the many thousand Greeks depositors to give back some money...)
    Finally, asset prices in our case depend on with the plan but also on debt viability. Many assets are distressed but their value is huge if plan and debt.



    And something not bad

    http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A0508/PressReleases/A0508_DKT39_DT_MM_11_2013_01_F_EN.pdf


    MS

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    Replies
    1. I will state below the full proviso 1 because it is really interesting:

      "If the Allies were to 'nurse' the trade and industry of Germany for a period of five or ten years, supplying her with large loans, and with ample shipping, food, and raw materials during that period, building up markets for her, and deliberately applying all their resources and goodwill to making her the greatest industrial nation of Europe, if not in the world, a substantially larger sum could probably be extracted thereafter; for Germany is capable of very great productivity".

      This is the point which I have made since I started this blog, namely: the only way for foreign creditors to ever get their loans back from Greece is by making the Greek economy strong.

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  3. Great post as usual Klaus. That Keynes quotation was aimed at the chief British financial delegates to the Versailles peace conference, Lords Cunliffe and Sumner, whom he mocked as the "heavenly twins" - for their astronomically unrealistic estimates of Germany's ability to pay the crushing reparations bill.

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