Why is a Grexit now likely?

Greece owes the IMF 1.6 billion euro that it doesn’t have but is supposed to pay by tomorrow. Unless the ECB lends it to the Greeks, effectively converting the IMF debt into an ECB debt, Greece is bankrupt tomorrow. In months to come, much bigger debt repayments are scheduled to the ECB-IMF in tranches of 4 billion, and Greece won’t have that money either as its economy is still contracting.

Greece didn’t have the money to pay off the previous debts in the last 5 years either though, and that just lead to more debts in return for symbolic reforms that weren’t implemented.

Why not muddle through then and let the Northern European politicians present a pretend-reform package to their population as a victory? And why would bankruptcy force a Grexit, given that there is no official mechanism to force any country out of the Euro, once it is in?

What is forcing it is the combination of the referendum on the symbolic reforms, together with the bank-run on the Greek banks that has this morning lead to capital controls. Let me explain how the two force a Grexit.

The referendum is called for this Sunday, one day before the banks re-open. The idea is that Greeks vote on whether to accept the current set of symbolic reforms, which would entail cuts to pensions and loss of employment of many civil servants. The government will campaign against them, and most of the Greek parliamentarians are with the government, successfully whipping the country into a ‘no austerity’ mood. There is hence no way that the Greek population would vote ‘yes’. And even if they did, the Greek government then would not implement reforms as its own backers would constitute the ‘no’ vote.

But the referendum also makes it impossible to agree on something symbolic beforehand: it binds the hands of the Greek politicians who called for it (almost surely so they wouldn’t be blamed for the coming Grexit). This means nothing can be offered to them that would prevent bankruptcy tomorrow.

Previous symbolic reform packages were not implemented, partly because the Greek governments didn’t want to implement them and partly because they couldn’t even if they wanted to. Tax collection, for instance, would take many years to clean up and, as a Greek economist told me recently, it is still normal to send Greek tax collectors home in an election year! But to the Northern Europeans, the Greek politicians at least pretended they were going to pay back the loans and reform. The referendum is now expressly fought on a platform of not even pretending either, taking away the much-needed fig-leaf that the Northern Europeans wanted.

Worst of all, the referendum is a slap in the face of the other politicians who were negotiating at this late hour with the Greek politicians on the terms of the next symbolic set of reforms. It is part of the rules of the game in Brussels that this was a real deadline that forced everyone to agree to some face-saving formula. The referendum has made this impossible: the Greek politicians won’t play by the European rule-book. No face saving, just Greek theatrics and grand-standing.

So the other European politicians have been sufficiently humiliated that they feel they need to be tough, an attitude you see most clearly in Christine Lagarde from the IMF who made it clear tomorrow’s deadline is not negotiable.

Hence the referendum will be followed by a continuation of the bank run next Monday by Greeks who calculate their country’s approaching bankruptcy, and this time there cannot be a bailout: the only bailout that is now possible within the Greek political system is one whereby the ECB lends money without symbolic reforms, an open loss for the Northern Europeans. That means there will be no bailout. In concrete terms, the Greek central bank will not be getting any more Euros to distribute amongst its banks. The Greek government wont be able to pay to its employees, welfare recipients, and other recipients of state money.

So the day after the referendum, neither the Greek central bank, nor the Greek government has money to prop up the Greek commercial banks nor pay its own workers. That is what will force the Grexit, I think, not the inability to pay back loans to non-Greeks: the slow bank-run, in which billions in deposits are withdrawn weekly from Greek banks, will force them into it.

If the Greek government does not introduce a new currency then it will have no means to prevent the bank-run and the Greek banks will run out of money and go bankrupt themselves. Without an intervention, that will wipe out all the savings in those banks and lead to a major disruption of the Greek financial sector and the Greek economy. Tax avoidance will go up as the visible money streams that go via the banks will stop and the remaining economy will go via invisible money streams that are harder to tax. Greek civil servants will not get paid, nor will welfare recipients get their payouts, meaning they will have no money either, forcing them to join the bank run to pay for groceries.

So the Greek government will face financial collapse the day after the referendum. Capital controls will slow the collapse down, but the only thing it can do, really, is to take over the obligations of the commercial Greek banks and pay its employees and welfare recipients with something else. That something else is a new currency, whether it starts life being called an I-Owe-You (IOU) or a Varoufakis-florint: it will have to be declared legal currency inside Greece so that one can make payments with it. Hence in order to save its own banks and thereby its depositors, Greece will have to Grexit.

Now, no-one can force Greece to give up the Euro, so Greece can in principle maintain a dual currency system for a long time, having both the Euro and the new currency. This is not abnormal, as Hong Kong airport has shown you can run a 3-currency system indefinitely: you can pay there with Honk-Kong dollars, Euros, and US dollars. Yet, if the state sector runs on fast devaluing drachmas and the rest on stable Euros then the Greeks will be incurring a lot of transaction costs.

It will not really matter whether Greece hangs on to two currencies or just the new one: with the re-introduction of a separate legal currency, Greece will have effectively left the Euro and become like Macedonia and Bulgaria, where you can also pay in lots of places with Euros but that are no longer official members of the Eurozone.

I wouldn’t be surprised if stacks of the new currency are already in Greece, ready to replace the Euro as the official currency, with contingency scenarios now being taken off the rack in the main financial European institutions (EIB, ECB, EU-C). This means a Grexit is also a physical possibility now whilst it probably could not have been done 5 years ago.

Is there a way to prevent the coming Grexit? Normally, I expect the political system in the EU to come up with a watery compromise at the last minute. The Greeks politicians have however, I think, made this impossible with a referendum that takes away the ability for compromises to be offered and accepted. Time will tell though.

Will the Grexit be good for Greece? In the medium-run, I do think so as the state-related sector takes a much needed price-correction vis-a-vis the exporting sector. In the short run, pain is coming though, I am afraid, particularly for the old and infirm in Greece dependent on the state. And the recovery will be hampered by the fact that the Greek economy is tied to the rest of Europe, whom they have just had a falling-out with.

Citizenship-stripping and the Constitution

TONY ABBOTT CITIZENSHIP PRESSERThe chorus of public concern over the constitutionality of the Abbott government’s citizenship-stripping proposal is growing.  Malcolm Turnbull has again been emboldened to break ranks with his Prime Minister while denying he is doing any such thing.

It will be ironically appropriate if the citizenship-stripping issue ends up derailing Abbott’s plans to revive his ailing leadership in the wake of the failed spill motion against him earlier this year. Abbott’s strategy ever since he achieved Liberal Party leadership in late 2009 has been squarely based on racist dog whistling and inflaming national security paranoia.

The fact that citizenship isn’t even mentioned in Australia’s Constitution flows in part from similar racist sentiments among our Founding Fathers. They couldn’t work out a plausible way to define Australian citizenship without conferring it on Chinese, Japanese and Pacific Island migrants not to mention Aborigines. As South Australian delegate James Howe put it: “the cry throughout Australia will be that our first duty is to ourselves, and that we should… make Australia a home for Australians and the British race alone.”[1] No sly Abbott/Howard-style dog whistling in those days; our forefathers were openly and proudly racist.

The solution our Founding Fathers came up with was to avoid mentioning citizenship in the Constitution, but give the new Commonwealth Parliament wide-ranging powers to make laws with respect to immigration and “aliens”.  The new Parliament proceeded to enact the White Australia policy.

This deliberate constitutional silence is one reason why it isn’t certain whether the Abbott government could now validly legislate to confer the power to strip citizenship on a Minister rather than a court.

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Wealth distribution in Australia

Net Wealth

Source: OECD. More here.

Wealth distribution is typically more unequal than income distribution – as inequality is cumulatively causative to some extent. I was alerted to the relatively equitable distribution of housing wealth by a recent Henry Ergas column which contains the amazing statement that there is ”very little difference in the housing wealth holdings of the bottom and middle-income quintiles for those aged 65 and over” which Henry defends in response to an email of mine to him seeking clarification that the words mean what I think they mean. They do. He says it’s true and I have no reason to doubt him. If so it’s an achievement we should celebrate and the way our cities are going it’s likely to be becoming less and less true with time. Be that as it may it corroborates the diagram above. Look at the US and Australia when comparing average and median wealth – chalk and cheese.

Sadly I would expect our better performance – close to or at best in world if you like your inequality in moderation – to fade, not just because of our cities but also because of our savings policies. Who was it that set up a flat tax on what is now $2 trillion of super savings? That would be the ALP and the union movement.

The HALE Index Q1 (Jan to Mar). 2015

Summary of the March Quarter

HALE Q1 2015

Above: NNI, GDP and HALE ($ bil) from Jun 2005 to the present (Q1 20015). The changes during the most recent quarter are contained inside the two vertical red lines at the right hand margin of the figure.

The HALE has recorded a reduction in wellbeing for the first part of 2015. In the March quarter it contracted by 0.4% which is against the long-term rising trend.[1] This is despite GDP recording above average growth this quarter. However, NNI was weaker than long-term trend as a result of continuing terms of trade declines.

The primary cause of the contraction in the HALE, despite the strong GDP performance, is the large reduction in human capital. This was driven by the significant skills atrophy produce by the rise in long-term unemployment. This quarter, long-term unemployment (LTU) experienced its largest ever jump, pushing it to its highest recorded level. The quarterly increase in LTU was so high; that it outweighed substantial increases in human capital from improving workforce qualifications that characterise most quarters.

  • GDP growth was above average (0.9%). Income (NNI) increased by significantly less, improving by just 0.2%, with the difference largely due to the continuing decline in the terms of trade.
  • Human Capital contracted this quarter by $1.3 bil (0.85%), reversing the continued growth it recorded in 2014. This was driven by increased skills atrophy.
  • Skills atrophy (the loss of skills from sustained unemployment) cost the HALE $3.9 bil more this quarter than last quarter. This is due to the substantial increase in the number of long term unemployed. This quarter, a record 51,000 additional people were considered unemployed for more than 52 weeks (an increase of 32%). This is significantly larger than quarterly changes over the last three years, where long-term unemployment tends to increase by just 2,400 people (which is equivalent to an average quarterly increase of just 2.4%).[2]
  • Adult Formal Education (AFE) continues to support Human capital as greater proportions of the adult population attain higher levels of education.[3] It is estimated that this quarter, an additional 63,000 people obtained post school qualifications. The value of AFE increased by $2.6 bil (3.4%) over the quarter, but this was not large enough to offset the decline in human capital caused by skills atrophy.
  • The weakness in the labour market, apparent in the rise in unemployment and underemployment, is also negatively impacting wellbeing through a reduction in Work Satisfaction.[4] This reduced wellbeing by a further $0.2 bill (2.1%) this quarter. The lion’s share of this is due to the rising unemployment level. The non-economic costs of unemployment experienced a significant deterioration this quarter, worsening by $0.26 bil (10.9%). This is due to a rise in unemployment which peaked in January at 6.8%, which constituted a decade long high. Recent improvements in unemployment however, are expected to at least partially reverse this in the next quarter. Although underemployment improved slightly this quarter, it remains high by historical standards and continues to detract from wellbeing.
  • The extent to which Health reduced non-economic wellbeing grew by $0.4 bil (3.8%). This is due to costs of mental illness and obesity growing by a greater amount than other indicators of health that continue to slowly improve.

[1] This quarter the HALE contracted by $1.29bil. This is $3.1bil below the quarterly trend for the HALE.

[2] The February figure from the ABS puts one person in 60 who is either in work or looking for work as someone who has been unemployed for 52 weeks or more. In February 2013 the ratio was one in 95 and in February 2009 the ratio was one in 124.

[3] In the HALE, the AFE contribution to human capital is measured by estimating the proportion of the population between 20 and 64 years of age who have attained a post-school qualification (Certificate III level or above). The recent growth in AFE is driven by both population increase and increased attainment of qualifications. We estimate that close to 60% of 20-64 year-olds will now have a cert III qualification or higher. This compares favourably to the results from a decade ago where only 47% of 20-64 year olds obtained post school qualifications.

[4] Work Satisfaction (previously referred to as “Job Satisfaction”) is an index in the HALE which examines the wellbeing impact of unemployment, underemployment and overwork over and above direct effects on earnings.

Performing expertise: Getting drawn into the showbiz

How to become an expert in your niche (even if you are not)In an earlier post I’ve talked about how ‘performing’ government drives a range of pathologies – in the case of the post I was suggesting it generates a kind of soft-secrecy. But it drives other pathologies – like bullshit. I put it thus:

Imagine you’re a journalist who has to cover a story on red tape and regulation. Or a politician who has to have something to say on it – or a bureaucrat within government or the BCA who has to come up with a policy on it. What are you going to do? You can’t just sit there and say “I don’t really know”, or “nobody knows more than a tiny part of the puzzle”. Deloitte will be putting its finger I the air and estimating the cost of regulation to the whole economy ($250 billion p.a. since you ask). Why saving just 10 per cent of it would be a huge micro-economic reform. What are you going to say? (Quick, you’re on Insiders on Saturday, cameras will be rolling. Remember, John Kerrin got sacked in the early 90s recession when journalists asked him when the recession would end and he said “Your guess is as good as mine”).

Well there’s only one way through.

And here’s an example of the power and the subtlety of the phenomenon. The other night I did an interview. I was rung at around 4.30 and asked if I’d talk about unemployment. The HALE index had received a lot of publicity about long-term unemployment the previous weekend. I was extremely pressed for time when rung, but said I’d be happy to do so when rung back at 6.15 when the program would be live. I’d been very busy ever since that weekend.

As the presenter voiced over the intro he said that new unemployment numbers had come out that day. “Holy crap” I thought. I didn’t know. What was I to do? Fortunately as the introduction went on, the announcer did introduce long-term unemployment as a major theme. But he’d be reasonably entitled to think that I knew that there had been some fresh numbers out. I was trying to work out what I’d do. The incentives were to brazen it out and bullshit on. But before it became clear that he was going to talk about long-term unemployment I had decided I would just have to come clean and say that I was there to talk about LTU and not the numbers that day. It turned out he was happy with me focusing on what I’d thought I was agreeing to talk about.

Of course one incentive I’m facing is not looking like a nincompoop myself. But I’m also trying not to embarrass the host. And that fact subtly draws one into a role play that isn’t entirely comfortable. In this interview the host said Lateral Economics had done a ‘study’ of long-term unemployment. Well the segment was only five minutes and everyone’s busy pumping out the programs. So that was said on the fly. It wasn’t true. We’d got ABS numbers and run them through the HALE methodology and the story was what that methodology told us – that long-term unemployment had cost the economy nearly $4 billion that quarter – more than the terms of trade. Obviously I wouldn’t have lied if pressed, but I let it go through to the keeper. And so was drawn into the not-entirely-accurate narrative.

 

Stripping Australian citizenship – the illusory protection of judicial review

Human rights lawyer Kerry Murphy has a very useful explanation of the weakness of judicial review as a safeguard against new laws foreshadowed by the Abbott government which would permit arbitrary ministerial stripping of Australians’ citizenship from those accused/suspected of terrorist activity.  However, if anything the situation is even worse than Murphy says.  Citizenship is arguably the most fundamental right any Australian possesses, without which no other human rights protection is assured, even the most basic application of the rule of law. And yet our citizenship right itself is not protected by our Constitution.

We don’t actually know exactly what provisions the citizenship-stripping law proposed by Abbott and his Immigration Minister Peter Dutton will contain, but you can bet they will include the following:

  1. A subjective opinion clause;
  2. A clause requiring national security or criminal intelligence information to be withheld from a suspect and his lawyers but nevertheless to be used against him.

These provisions have become increasingly popular with governments at both federal and state levels since the “moral panic” induced by September 11.  As a result, the combination of enthusiasm for greater power and less accountability on the part of both politicians and intelligence agencies, and a relatively supine response on the part of the High Court, has had drastic adverse consequences for the freedom and human rights of all Australians.  It is hardly an exaggeration to observe that in today’s Australia the right to impartial judicial review of executive government action, which was intended by the drafters of our Constitution to be a fundamental aspect of our system of national governance, is now an optional extra that governments can effectively negate almost at will.  And yet hardly anyone knows about it.

That is probably because some of the concepts are quite difficult to explain clearly to non-lawyers.  Nevertheless, bear with me. It’s important and worth “unpacking” the argument.

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Early Childhood Education by MOOC: Lessons from Sesame Street

MuppetsOfSesameStreet

Abstract:

Sesame Street is one of the largest early childhood interventions ever to take place.  It was introduced in 1969 as an educational, early childhood program with the explicit goal of preparing preschool age children for school entry. Millions of children watched a typical episode in its early years.  Well-designed studies at its inception provided evidence that watching the show generated an immediate and sizeable increase in test scores.  In this paper we investigate whether the first cohorts of preschool children exposed to Sesame Street experienced improved outcomes subsequently.  We implement an instrumental variables strategy exploiting limitations in television technology generated by distance to a broadcast tower and UHF versus VHF transmission to distinguish counties by Sesame Street reception quality.  We relate this geographic variation to outcomes in Census data including grade-for-age status in 1980, educational attainment in 1990, and labor market outcomes in 2000.

The results indicate that Sesame Street accomplished its goal of improving school readiness; preschool-aged children in areas with better reception when it was introduced were more likely to advance through school as appropriate for their age.  This effect is particularly pronounced for boys and non-Hispanic, black children, as well as children living in economically disadvantaged areas.  The evidence regarding the impact on ultimate educational attainment and labor market outcomes is inconclusive.

NBER Working Paper 1229 by Melissa S. Kearney, Phillip B. Levine  -  #21229 (CH ED LS)

Love, Love, Love by Red Stitch

The supreme vice is shallowness

Oscar Wilde to Bosie

I went to see Love, Love, Love by the terrific actor’s ensemble theatre company Red Stitch tonight. I’d previously seen Grounded which I thought was an Arthur Milleresque masterpiece which was very well delivered by the single actor. Most of Red Stitch’s plays are contemporary plays from around the world – mainly the Anglosphere. The theme of Love, Love, Love is the failure of the dream of the generation of the 60s – now quite a theme. There was another play on at MTC – Jumpy – with a similar theme which is the disillusion of the 60s generation with the way their lives turned out and their strained and uncomprehending relationships with their children.

I didn’t much like either play, though Jumpy was a bit better done I thought. Intriguingly the author of Jumpy was born in 1960 while the author of Love, Love, Love was born in 1980 and the latter play has a much more accusatory air. The basic plot is that a couple of shallow, privileged kids who fancy themselves as free spirits in the ‘Summer of Love’ get married (the guy pinches the girl off his more staid brother in the first scene). They’re both the embodiment of self-centredness dressing it all up in 60s guff about freedom and throwing off the shackles. This scene is full of subtle anachronisms. It’s supposed to be 1967. The word ‘chauvinism’ had barely begun its take-off but is presented as a well worn expression. More importantly there might have been some marketing hype about all that free love in the sixties in the sixties, but few people were really talking like that and except at the fringes, the vibe of the sixties mostly takes off towards the end of the sixties and into the seventies (this was particularly true in Australia, but also I think true elsewhere). The play captured virtually no sense of the immensely repressed nature of normal middle class life then. You get the impression that, with the exception of a few squares it was wall to wall grooviness. (Continued, with some mild spoilers over the page).  Continue reading

#SoftHeadsHardHearts on long-term unemployment

Image result for long-term unemploymentThe HALE index got a bit of attention this weekend owing to the way in which it highlights the cost of long-term unemployment. It’s certainly a graphic illustration of the way in which GDP hides important developments from us. Mostly what people like about the HALE is the way in which it tries to adjust GDP to take account of large and strong impacts on subjective wellbeing that are not picked up by GDP.

Because it’s an index and will ultimately be published as a single number, there’s no point in including things that are not large – as they’ll never get their signal through the noise of everything else. So the main things which are adjusted for known, large and widespread non-economic wellbeing effects are inequality, unemployment, obesity and mental illness. But these things rarely change sufficiently between quarters to generate much news unless the journalist covering the story decides to make them the focus of coverage in some way.

By contrast the things in the index that really drive substantial deviations from GDP are related to the ways in which GDP is a bad measure of economic wellbeing. Because it’s an index of wellbeing, the national accounts series on which the HALE is based is real net national disposable income. This picks up the terms of trade which has been an important part of our economic story particularly lately and the depreciation of capital. This quarter falling terms of trade reduced national income by around 0.7% reducing the quarterly GDP figure from 0.9% to 0.2%.

And one of the things I was most pleased to work out in the methodology of the HALE index was trying to take into account the growth and decay of human capital or the economic value of knowhow on a quarterly ‘accruals’ basis something GDP assiduously avoids as it measures recurrent or income transactions and not capital transactions. I had been highly critical of the leftist stitch up index – the GPI for this reason. Continue reading