“Greek workers work 48% more hours than Germans”


From credit writedowns


Understanding public debt

Paul Krugman on debt:

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

But isn’t this time different? Not as much as you think.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.

And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.


Matt Yglesias adds:

I think the point can maybe be more clearly made in reverse. Imagine a country with a balanced budget  and a large outstanding debt, all of which is held domestically. Tax revenue, in other words, exceeds spending on programs but the extra revenue is needed to pay down the existing debt. If the stock of debt is burdening the country, then it ought to be able to enrich itself by defaulting. Will that work?

Well, no. Certainly a default could set the stage for enriching specific people, since it would create budget room for a tax cut or new spending on a shiny supertrain. But the funds flowing into the pockets of taxpayers or train-builders would be coming out of the pockets of bondholders. A government borrowing money from its own citizens doesn’t gain access to any resources that wouldn’t have been available by conscripting them or raising taxes, and by the same token a country doesn’t enrich itself by refusing to make promised interest payments to its own citizens. It’s only when borrowing from or repaying foreigners that the country as a whole is gaining or losing access to real resources. None of which is to say that debt dynamics are a matter of indifference. Obviously people care quite a lot about which specific people possess the real resources, and how you arrange them can have profound implications for human welfare and long-term growth. But it’s bad growth policy or natural resource depletion that can immiserate the next generation, not the prospect of the next generation’s taxpayers transferring money to the next generation’s bondholders.


And finally, there is Nick Rowe giving us a helpful illustration:

I visit Matt Yglesias’ house (HT JeffreyY). I drink one litre of milk from his fridge. I write Matt an IOU for one litre of milk.

1. If Matt subsequently tears up that IOU, then I am richer and he is poorer. Taking the two of us together, in aggregate we are neither richer nor poorer if Matt tears up the IOU. Tearing up the IOU doesn’t bring the milk back.

2. Therefore there is no aggregate cost to me and Matt of me drinking more milk from Matt’s fridge and writing Matt another IOU.

1 is of course true. But 2 does not follow from 1. 2 is false.

We can’t do anything about the existing stock of national debt. “It’s no use crying over spilt milk”, even if it was spilled down my throat rather than spilled on the floor.

But that doesn’t mean there is no cost to spilling more milk. True, there’s also a benefit, if I’m thirsty, and it’s spilled down my throat rather than on the floor. But there’s a cost too. If the government runs a deficit now, there is a cost to future taxpayers. Sure, there’s a benefit too, depending on what the government does with the funds it borrowed. And we should compare those benefits to those future costs. But we shouldn’t pretend those costs don’t exist.

The existing stock of debt represents the costs of past deficits that cannot be undone. We can’t turn back the clock. But the fact that we cannot turn back the clock on past deficits says absolutely nothing about whether we should run a deficit now. We need to compare the benefits to the cost to future taxpapers.




Is Germany a flawed role model?

We read a lot about various indicators of debt and fiscal policy.
The most flawed ones are those dealing with the absolute value of debt, which is, obviously, the highest in the USA. Those indicators typically tell us nothing about the debt load of a country, because what really matters is debt to GDP.
Here we have some data provided by “Der Spiegel”.

The difference between Greece and California

By Dani Rodrik:

The European Union, and the Eurozone in particular, has impressive institutional achievements to its name. We have a European Parliament, European Commission, European Court of Justice, a set of common regulations that exceeded 100,000 last time I checked (acquis communautaire), and of course the European Central Bank. These institutions are meant to underpin its unified market.

Yet we have now become all too aware of how incomplete these institutional arrangements are. To see the point, it is instructive to compare what is going on with Greece today with how a truly unified nation, such as the United States, deals with crisis in one of its constituent units, say California.

California shares a common currency with the rest of the U.S., just as Greece (or Ireland or Spain) does with the Eurozone. But when the state government in California goes bust:

  • Californians automatically get welfare checks and other transfer payments from Washington.
  • Californian borrowers do not get shut out of credit markets and those with healthy balance sheets can borrow from the rest of the nation. This is because there is no “California risk” the way there is Greek sovereign risk; borrowers in California operate under a federal legal regime and the state of California cannot force them to hold California paper or prevent them from repaying their debts to non-Californians.
  • The Federal Reserve stands ready to act as a lender of last resort to any Californian bank. (Why? Well, because it is one country after all…)
  • California has representatives and senators in Washington, D.C., who can push for remedies for California’s economic troubles through political channels (e.g., fiscal spending, federal assistance, debt relief)
  • Californians can easily move and seek jobs elsewhere in the U.S.

The flip side of these benefits is that there is no expectation that Washington, DC must bail the state government.

A subtle point here is that Washington’s “no bail out” commitment is rendered credible by the direct support residents of California get from Washington, DC. This support limits the economic/political fallout in California. By contrast, the bankruptcy of the Greek government condemns the entire Greek financial system and sends the entire Greek economy down the drain.

In other words, because the state of California has no “sovereign powers,” it is effectively just like any other moderately large borrower. The consequences of its bankruptcy are no more or less serious.

The political quid pro quo in the U.S. is this. California has given up its sovereignty and has accepted the reach of federal laws and regulations. In return, Californians are part of the governance structure in Washington. Neither of these is true to quite the same extent in the Eurozone.

Consequently, a crisis within the Eurozone is more costly both in economic and political terms. We get ad hoc arrangements to extend credit (rather than automaticity), protracted financial crises and deeper economic recession, and mutual resentment on both sides. Greeks complain about “German selfishness” while Germans resent the creeping “transfer union.” Ultimately, the survival of the Eurozone itself is threatened.

In short, the euro’s institutional incompleteness has left the Eurozone badly exposed to the crisis. Euro-skeptics say “we told you so.” Others, like me, will argue that it was the EU’s misfortune to have been caught halfway in its institutional integration process by a financial crisis that was not its own doing.

But that is all water under the bridge now. The main lesson from the debacle is that economic union requires political union. The EU needs either more political union if it wants to keep its single market, or less economic union if it is unable to achieve political integration.

At this stage, the former path looks by far the less likely. If it has to come to it, the more orderly and premeditated the coming break-up of the Eurozone, the better it will be.

Interesting Links: 18.10.2011

Economic research and beyond:


The multidimensional individual vs. the unidimensional collective


My sense, after 11 years of punditizing, is that people are complicated, but gangs of people less so. Individuals are often mixed in their behavior: incorruptible politicians may cheat on their spouses, political scoundrels may have impeccable personal lives. But groups, like a politician’s inner circle or the management team of a media empire, tend to behave similarly on multiple fronts. If they lie and cheat routinely in one domain, they tend to do it in others as well.

People born after World War II are more likely to binge drink and develop alcohol disorders

Columbia University’s Mailman School of Public Health :

In a review of 31 peer-reviewed and published studies, researchers at Columbia University’s Mailman School of Public Health looked generational and gender differences in alcohol consumption, alcohol disorders, and mortality. Findings indicate that people born after World War II are more likely to binge drink and develop alcohol use disorders. Researchers also found that the gender gap in alcoholism and problem drinking is narrowing in many countries.

Findings will be published in the December 2011 issue of Alcoholism: Clinical & Experimental Research and are currently available at Early View.

“The literature on alcohol consumption indicates that younger birth cohorts, especially women, are increasingly at risk for the development of alcohol use disorders,” said Katherine M. Keyes, PhD, a post-doctoral fellow in the Department of Epidemiology at the Mailman School and first author of the study. “Given that alcoholism among women is increasing, there is a need for specific public health prevention and intervention efforts. Further, results suggest the environment increases the risk for alcoholism. While genetics play a substantial role, the generational differences between those born before and after World War II indicate that factors in the environment such as policies, laws, social norms, availability, and broader social context also contribute substantially to the underlying risk for alcohol use disorders in the population.”

Although younger birth cohorts in North America, especially those born after World War II, are more likely than other cohorts to engage in heavy episodic drinking and develop alcoholism and/or binge drinking, this effect was not found in Australia and Western Europe. The investigators note that the U.S. differs from Europe and Australia in that we have a fairly large number of people who do not drink at all, although over time, the number of non-drinkers in the U.S. decreasing.

“The results on gender highlight the need for increasing research on the social etiology of alcohol use disorders,” noted Dr. Keyes. “Traditionally, gender differences are explained by biological differences in the ability of the body to metabolize alcohol and other biological mechanisms. These results suggest that the magnitude of gender differences changes over time, highlighting an important role for societal factors.”

The review is among the first to look at many individual studies on alcohol use disorders and provides evidence that problem drinking among young women is still increasing, an important finding for public health professionals to note. The authors point out the importance of making young people aware that heavy drinking poses unique health and social risks for women. Because of differences in average body size, for example, a woman becomes more intoxicated than a man consuming the same quantity or alcohol. Women who drink heavily also face a greater vulnerability to sexual violence and greater risks of chronic diseases.

A new phase?

The Economist writes:

Amid the deepening euro-zone crisis, Moody’s downgraded the credit
rating of both Societe Generale and Credit Agricole, two of FRANCE’S
LARGEST BANKS, over concerns that they hold insufficient capital to
withstand a Greek default. BNP Paribas, France’s biggest bank, denied
reports that it was having trouble raising funds in the markets.
French officials insisted that the country’s financial sector was
sound and did not need a further injection of capital from the

I believe that this is the beginnning of a new chapter in the euro crises.
It’s not that I overestimate the role of rating agencies, but I think that this is a first symptome of contagion effects in the euro zone.
We wrote about that before.

New currencies for South and North Sudan

According to Reuters:

Sudan will start circulating its new currency on Sunday, the central bank said, days after South Sudan started rolling out a currency of its own.

South Sudan, which declared independence on July 9 under a 2005 peace deal that ended decades of civil war, said last Monday it had started circulating its new South Sudan pound, pegging it one-to-one with Sudan’s existing pound.

In a brief statement, the northern central bank said the new currency would go into circulation on Sunday.

It previously said it would take up to three months to replace the old Sudanese pound, describing the currency move as “precautionary measure” following the southern plans.

The Sudanese pound has been falling on the black market in Khartoum for weeks as economists say foreign currency inflows needed for imports will decline alongside falling oil revenues.

The old pound has also fallen in the south on worries the old notes will be worthless if both countries do not reach an agreement to coordinate their currency launches.

The south took about 75 percent of Sudan’s 500,000 barrel-a-day oil reserves with it when it left.

North and South Sudan have yet to work out a large range of issues from sharing oil revenues to ending violence in some parts of the joint border.

Shortcomings of the "adverse" EBA stress test scenario

The results of the stress test conducted by the quite young European Banking Authority are out now. As expected, not more than 10 banks failed the test and, in a nutshell, the results are quite relaxed putting little further pressure on European financial institutions.


* At the end of 2010, twenty banks would fall below the 5% Core Tier 1 Ratio
(CT1R) threshold over the two-year horizon of the exercise. The overall
shortfall would total EUR 26.8 bn.
* Between January and April 2011, a further net amount of some EUR 50 bn of
capital was raised.
* Taking into account these capital raising actions implemented by end April
– Eight banks fall below the capital threshold of 5% CT1R over the two-
year time horizon, with an overall CT1 shortfall of EUR2.5 bn.
– Sixteen banks display a CT1R of between 5% and 6%.

The tests were construed to examine “the resilience of a large sample of banks in the EU 1 against an adverse but plausible scenario” (EBA).

But what does this tell us? The informative value of the stress test relies on the choice of the scenario. And there a some goods reasons to doubt its quality.

For instance, The Economist points on two shortcomings of the construction of the scenario:

  1. The test ignores the severeness of the euro crisis: It only takes a moderate haircut of sovereign debt into account, 15 percent for Greece, for example. What will happen if there is a real default in the European perphery, the test cannot tell us.
  2. The test ignores the typical structure of such crises: It only regards the direct effects of, for instance, a Greek default. it does not take possible contagion effects into account.

That is, the scenario might be not “adverse” enough to forecast the potential problems that the EU banking sector will face within the next year.