Martin Feldstein mentions Greece's three main economic challenges:
"So Greece faces a triple challenge: the fiscal challenge of cutting its government debt and future deficits; the price-level challenge of reducing its prices enough to wipe out the current trade gap; and the wage-productivity challenge of keeping future wage growth below the eurozone average or raising its productivity growth rate."
and a potential option, a temporary leave from the Eurozone:
"A temporary leave of absence from the eurozone would allow Greece to achieve a price-level decline relative to other eurozone countries, and would make it easier to adjust the relative price level if Greek wages cannot be limited. The Maastricht treaty explicitly prohibits a eurozone country from leaving the euro, but says nothing about a temporary leave of absence (and therefore doesn’t prohibit one). It is time for Greece, other eurozone members, and the European Commission to start thinking seriously about that option."
he does not talk about the signalling effect of such a potential leave on other Eurozone countries..
Keywords: Greece, Greek Economy, Greek Financial Crisis, Greek Debt
Menzie Chinn gives once more excellent insights on a US economic issue:
Keywords: US Economy, Forecasts
BusinessWeek has a good profile about Tyler Cowen, world reputed GMU economics professor and author of the famous weblog Marginal Revolution.
Tyler Cowen, America's Hottest Economist
The George Mason University professor has written a bestseller, The Great Stagnation, keeps an influential blog, and reads way too many books. read the May 26 BusinessWeek article
Keywords: Tyler Cowen, The Great Stagnation, George Mason University
During the global crisis governments made substantial interventions in financial markets, particularly in the banking sector. This column argues that one unintended consequence of bank nationalisations has been to reduce cross-border lending. After nationalisation, foreign banks reduced British lending as a share of total lending by about 11 percentage points and increased interest rates to UK residents by 70 basis points. This suggests foreign nationalised banks have engaged in financial protectionism. read more on Vox
Keywords: Financial Crisis, Financial Protectionism
Keywords: IMF, International Monetary Fund
The role of people is to keep ideas alive until a crisis occurs. It wasn’t my talking that caused people to embrace these ideas, just as the rooster doesn’t make the sun rise. Milton Friedman
"For economic ideas to take root and change history, a number of ingredients need to be present, ranging from individual agents to policy implementation. This paper identifies certain strategic levers that underlay the success of free market economists in promoting their approach in academia, society, and government. How did these economists move from a marginalized position where they could not publish or receive tenure and where their students were not hired at other leading universities, to a position of dominance? In particular, it examines the impact of F.A. Hayek, and of such institutions as the Mont Pelerin Society, the Institute for Economic Affairs (IEA) in Britain, and the funding arrangements. The paper draws on the wealth of secondary literature regarding the spread of free market economic ideas, particularly in the US, Latin America, and the UK, to identify five strategic activities and methods of transmission that were central to their advance, and will be relevant to others."
Keywords: Free Market, Free Market Economists, New Ideas
"Over 25% of the US population volunteers. Clary et al. (1998) devised a survey that identifies a volunteer’s primary motive for volunteering. We investigate the effect of tailoring the communications that volunteers receive from their organizations (e.g., printed newsletters, update emails) to each volunteer’s stated motive for volunteering affects volunteer performance. We find that in general, such tailoring has no effect, but that for volunteers who are motivated primarily by the pursuit of career-related benefits, such tailoring can have a substantial, positive effect on hours volunteered. We also find that the (in)effectiveness of this tailoring does not depend upon the volunteers’ knowledge of the tailoring. The tailoring of communications does not involve the explicit manipulation of material incentives. This renders it particularly attractive given the emergence of evidence on how extrinsic incentives can crowd out intrinsic incentives, especially in the domain of charitable contributions."
Keywords: Volunteering, Charitable Contributions
Kash Mansori about deficit reduction arithmetic and his views on why austerity doesn't work as well as hoped to reach budget deficit targets.
As austerity is a hot topic, reaction on Mansori's post came quickly. Here is one from Jim Lacey in National Review:
"Last week, a number of economics blogs fell all over themselves in a rush to post an article by Kash Mansori. In it, he creates a country called Austerityland, a tiny nation (GDP: $100) that decides to take dramatic action (a $5 cut in government spending) to reduce its budget deficit ($10), and doesn’t get the results it was hoping for. To show us why, Mansori treats us all to an Econ 101 lecture, which unfortunately leaves a few things out.
Mansori trots out one of the fundamental and most revered of economic formulas: GDP = C + I + G + (X − M). Please do not desert me, as this really is important. In this equation, a nation’s GDP equals the total of its consumption (what its people spend), investment (how they use their savings), government spending, and net exports (exports minus imports). Any reduction in any one of these will reduce GDP, thereby reducing the country’s wealth and overall wellbeing."
Keywords: Budget Deficits, Economic Growth, Government Spending, Austerity
"On average, the 55 economists, not all of whom answer every question, expect inflation to moderate through 2012. The Labor Department reported Friday that consumer prices increased 3.2% from a year earlier in April mostly due to higher food and energy prices. Economists expect that rate to throttle back to 3% by the end of this year and remain below 2.5% through 2012.
The majority—36 out of 52 economists responding—said the upswing in food and energy prices would be temporary. While they expect oil prices to remain elevated from last year's levels, they forecast that the rapid increases seen earlier this year weren't likely to be repeated. "We think any further rise in commodity prices will be small," said Bruce Kasman of J.P. Morgan Chase."
Source: Excerpt from article linked to above
Keywords: Economic Forecasts, US Economy, Inflation
McKinsey study about the value of the internet
and Tyler Cowen's assessment of the numbers:
Keywords: Internet, Value of the Internet
Cato Institute's Michael Tanner compares the US's public finance situtation with that of Greece:
He sees the US close to getting to a "Greek situation" - if no drastic measures are taken on the expenses side:
"It's not low taxes that caused the Greek crisis, but high spending. (Sound familiar?) The Greek government consumes more than half of the country's GDP. It is difficult for any government to collect enough taxes to support spending at that level.
But what about the United States? Our budget deficit this year is estimated to be roughly 10.8 percent of GDP. That's nearly one and a half percentage points higher than Greece's. We are slightly better off, however, in terms of national debt. Our official $14.3 trillion debt is only about 98 percent of GDP. Our debt won't hit Greek percentages of GDP until 2020 or so. On the other hand, if the unfunded liabilities of Medicare and Social Security are included, then our real total indebtedness tops 900 percent of GDP, putting us in worse long-term shape than Greece."
Keywords: US' Budget Deficit, US' Sovereign Debt, Greek Crisis
Andrew Lilico makes a scenario on what would happen if Greece defaults. Looking at the potential outcome of such a default, it can hardly be an option. Greece accounts for about 2% of European GDP and still, the consequences would be dramatic. The EU has a big interest to support an orderly restructuring of Greek debt. The question is when this will happen. Probably sooner than later...
"What happens when Greece defaults. Here are a few things:
- Every bank in Greece will instantly go insolvent.
- The Greek government will nationalise every bank in Greece.
- The Greek government will forbid withdrawals from Greek banks.
- To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.
- Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)
- The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.
- The Irish will, within a few days, walk away from the debts of its banking system.
- The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.
- A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.
- The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.
- The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)
- They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
- There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.
- This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.
- Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.
- Attention will turn to the British banks. Then we shall see…"
Keyword: Greece, Greek Crisis
Airtime: Wed 25 May 11 | 03:40 AM ET
Canada’s Prime Minister Stephen Harper, by winning an outright majority of seats in his country’s parliament for the first time since assuming office, continues a remarkable series of national election victories, backed by voters demanding at least a pause, and perhaps some reversal, of the growth of the welfare state. read more on Project Syndicate
Keywords: Welfare State, Will of the Voters, Sustainability of Public Expenses
Protest in Spain over high youth unemployment and a downgrade warning on Italy's debt highlight political problems in the eurozone. Lex's Edward Hadas and Vincent Boland discuss whether the lack of strong leaders (in Germany and Spain now, and soon in Italy) is pushing the sovereign debt crisis into a more dangerous phase.
Keywords: Eurozone Crisis, Eurozone Governance,
Looking at current economic circumstances in the US (mediocre growth, high unemployment, tremendous sovereign debt) Berkeley's Christina Romer sees positive elements in a weakening dollar:
She concludes in her NYT article:
"STRANGELY, every politician seems to understand that it would be desirable for the dollar to weaken against one particular currency: the Chinese renminbi. For years, China has deliberately accumulated United States Treasury bonds to keep the dollar’s value high in renminbi terms. The United States would export more and grow faster if China allowed the dollar’s price to fall. Congress routinely threatens retaliation if China doesn’t take steps that amount to weakening the dollar.
But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more in the current situation.
To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues."
Keywords: US Dollar, Dollar versus Renminbi Value of US Dollar
A bigger problem for entrepreneurs and investors can be short-term oriented actions of politicians.
Consequently, consistent institutions, defining "the rule of the game", are a key success factor for a society, as Peter J. Boettke and Alexander Fink point out in a paper:
Keywords: Private Property Rights, Institutions
"THE fear that Greece's sovereign-debt crisis might presage similar episodes elsewhere in the euro zone has been borne out. In November, Ireland joined Greece in intensive care, becoming the first euro-zone country to apply for funds from the rescue scheme agreed in May 2010 in concert with the IMF, and in April this year Portugal followed suit. Sovereign-bond spreads (the extra interest compared with bonds issued by Germany, the safest credit) are now much higher in all three of the bailed-out countries then they were in May 2010. Promises to tackle budget deficits through public spending cuts and tax increases have offered little reassurance to bondholders, who know that austerity will take its toll on growth." Source: The Economist
Keywords: European Crisis, European Periphery
Keywords: Portugal, Portuguese Crisis, Austerity
For a long time analysts have been arguing about whether Greece will default on part of its debt – leaving its creditors to take a “haircut”. This column argues that this prospect is becoming more and more likely. read more on Vox
Keywords: Greek Crisis, Greek Debt Level
Two good articles - though from last year - which deal with the subject:
Keywords: Japanese Economic Problems, US' Economic Problems
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