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Comment by cantastoria | Hacker News Reader

I think the real pseudoscientific idea is that debt-financed stimulus is the cure all for any economic ill. The argument that Greece needs to get further into debt to solve it's debt crisis seems insane to me. At this point how much good could a stimulus really do (even if they could find someone to lend them the money to do it). I know the standard Krugman/Keynsian style argument here but it doesn't seem to make much sense in Greece. As another poster said it seems the only real cure for Greece is going to be inflation, probably and unfortunately similar to what happened in Argentina.

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I don't think that's what Krugman et al are saying. You can make arguments for and against stimulus being the correct answer for a particular country's recession. There are valid points in both camps. However, cutting spending during a recession is another matter entirely -- this fix goes against some of the core things we've come to believe about aggregate demand.

I don't think Keynes' model is perfect. I'm excited to see what new kinds of models emerge after this depression -- we have a lot more data to play with. However, at this stage, it makes a lot more sense to stick with models that have kind of worked sometimes rather than to just operate off of pure, baseless speculation.

The problem isn't Keynes model. It predicts that when governments stop deficit spending, the economy slows. It says that if governments don't replenish those deficits in good times they'll build unsustainable economies.

The problem is ignoring the reality that at some point the government cannot issue more debt. The US government has been in structural deficit for all but a few of the past 40 years. If we look at the funny money of state and local pension assumptions there's even more stimulus. OF COURSE when that's withdrawn the economy slows.

It doesn't matter if the fiscal multiplier is 0.5 or 1.5 when the government simply can't issue more debt. Multipliers matter when a government has decisions to make, when it can't issue more debt there are no decisions to be made.

In theory, you have a good point. However, I think even at our ridiculous levels (> 100% of debt-to-gdp), there's still quite a ways to go before our major creditors stop buying US bonds entirely. If we can somehow pursue policies that could return us to constant positive growth in the next 2-5 years, then the benefits of getting there faster will give us a much greater ability to reduce our long-term liabilities.

The primary dealer banks will always be a ready funding agent for the US government--why wouldn't they be? Treasuries offer a risk free place for excess reserves to earn interest. It's literally free money.

It's instructive to remember that we match our deficit spending with debt issuance by legal fiat and not for any real operational reason. We could just as well deficit spend freely with no debt issuance (and no, it would not be more inflationary.

Of course, treasuries are a risk free savings vehicle for the private sector and world at large, and they play an important role in managing the payments system (though not one that couldn't be replace), so I'm not suggesting that we stop issuing debt. But it's important to understand how the system works so we can stop with the silly notion that we are just scraping by on the good graces of Treasury buyers.

What's the mechanism for this spending through legal fiat? It seems to me that any spending that doesn't come from taxes or debt would probably have some adverse affects on the economy. I'm still a student of institutional economics, so I'm eager to learn more about this whole process.

Go read zerohedge.com. There is a fair chunk of tinfoil hat baloney and traders talking their book, but they have some serious analysis on the government debt / banking / monetary system.

It sounds great. But when fiscal stimulus plays such a large and persistent role, and you're clearly nearing the end of the road for more borrowing / more stimulus, the expectation of stimulus withdrawal starts to play an ever larger role in forecast expectations. E.g. at some point businesses stop thinking about additional demand today and the demand shrinkage in the future. They start develering and stop taking chances. And the more the government counters with short-term stimulus, the more expectations anticipates the end of stimulus in the mid-term.

And, "constant growth" depends on a structurally sound economy. Well, if the economy has been shaped to meet demand from a necessarily contracting customer -- the government -- its structure gets distorted. Add in the distortions from crazy federal credit policy (Fannie / Freddie). Now we have an economy that must reallocate productive resources to meet real demand -- but no one has a clue where that demand actually will be because we're so distant from the environment supporting it.

tldr; 40 years of government stimulus, in various dimensions, has fundamentally detoriated the economy's ability to deliver "constant positive growth." We've gone past the point where we can outgrow the debt growth needed to fuel this government stimulus growth model.

You're arguing against a straw man. The only one size fits all ills argument actually being widely pursued is tax cuts.

The only thing that would probably help Greece is massive debt foregiveness (bankruptcy if applied to individuals or companies) which isn't a "stimulus" so much as a gift. Again if it worked like a regular bankruptcy they'd agree to pay off part of their debt on a plan, but be forgiven a bunch of it, and their credit would suck for many years to follow.

You're arguing against a straw man.

Really? Than tell me what other non-austerity policy is being proposed. We're not talking about what is being pursued. The discussion is about the merits of the alternatives to austerity. Massive debt forgiveness is one although at this point it's a complete fantasy. What else have you got?

My understanding is that Greece is different because they don't have their own currency. The real cure for unemployment and low production in Greece is a decrease in real wages, which happens very slowly without higher inflation or a fall in the currency (these are basically equivalent, but that's not especially obvious so I'll be redundant). Since they use the Euro, Greece can't choose either policy, hence a long and deep slump.

Intl macro isn't really my field, so there may be errors in that description.

> As another poster said it seems the only real cure for Greece is going to be inflation

i.e. stimulus, in Keynesian terms.

(Thinking about economics in terms of common sense and morality is generally unhelpful.)

The standard Krugman/Keynsian style argument is, that Greece should use inflation (but can not, since they do not have control over their money). And note, the more a country is indebted, the harder it becomes to get the deficit under control using austerity. The reason is, that you need to cut expenses in such a way, that GDP is not stronger affected by the cuts. For example, a country which has a dept/GDP ratio of 50% needs to cut its expenses such that the GDP is not reduced by more than twice the cuts in order to reduce its dept/GDP ratio. ( The multiplier for the austerity program needs to be smaller than two.) On the other hand, if it manages to have a stimulus program with a multiplier larger than two, then it can reduce its dept/GDP ratio using this stimulus program. For 100% the critical multiplier is 1 and in general it is 1/R, where R is the dept to GDP ratio.)

So you need less and less effective stimuli programs, the higher the dept to GDP ratio is. ( And I do not know if anyone does claim that dept-financed stimulus is the cure for any economic ill. But if not enough money is the problem, one can simply print that stuff.)

The thing is: Greece is NEVER going to repay its debts. NEVER. The sooner this reality is acknowledged and dealt with, the sooner the Greek people will be able to get on with their lives.

Who is proposing massive stimulus for Greece? Obviously they can't do it themselves because their credit rating is shot and they don't have the resources to do it without borrowing hugely. That doesn't mean their economy could not have been helped by stimulus, just that it wasn't feasible. It also certainly doesn't mean that austerity was the answer.

You're correct about inflation but unfortunately their in the Euro so they either have to leave it or suffer a very long and painful internal deflation.

Greece needs to start throwing millionaires in dingy prisons to make any headway with its problems. The Greek crisis, more than anything, is the result of massive tax evasion.

Fair enough. A policy of stricter enforcement of tax laws sounds like a better plan than stimulus to me. Maybe they should start there instead.

That's a hypothesis, but it seems unlikely since there are four other European economies facing identical problems - Spain, Italy, Portugal, and Ireland. Spain in particular was a very reasonably managed economy before the crash, running surpluses and growing. So, your hypothesis would require that you attribute the problem in each of these economies to separate causes, which is probably wrong.

This is not to say that there wasn't gross economic mismanagement on the part of the Greek government, but focusing on that distracts from the real solution.

UPDATE: I'm in complete agreement with everyone pointing out that the problems aren't identical. Perhaps the question is whether, if you were to summarize the causes Euro crisis in broad terms, you ought to mention Greece's economic mismanagement first or the overall crash of the financial markets as the more important factor. My assertion is the latter, mostly echoing Stglitz's analysis here:

[1] http://www.youtube.com/watch?v=GdP-Fab8JX8

[2] http://www.youtube.com/watch?v=4Ezn8Sgzxd8

The problems aren't identical. They may appear so because some of the symptoms are the same, but the root causes in Ireland, for instance, are far different than in Greece.

Spain is closer to Ireland in terms of housing market effects on economic downturn, but ultimately each economy functions on a different system, so it's not entirely wrong to attribute economic problems to separate causes. There is some overlap, of course, but it's definitely not identical.

I agree the situations aren't identical, but what theory do you think best explains all the observations?

Just to be clear, my answer is: Each country's problems are rooted in the collapse of the US housing market and the resulting financial crunch. The country-to-country variations are there and they're significant, but secondary.

I don't think the four are all the same, although there are obviously some common elements. Chief among them the easy money from the center during the boom years. But I think Greece's inefficiencies and mismanagement made a bad problem worse.

> The Greek crisis, more than anything, is the result of massive tax evasion.

[Greek/US dual citizen here]

Having lived in Greece for upwards of a decade, during the particularly transitional time from ~1988-2004, this is not in line with my experience. Hear me out before writing me off as an apologist :)

Greece has a large problem with collecting the taxes they claim citizens owe but not a large problem with collecting a large fraction of GDP. According to the World Bank, they are right in line with Sweden and France (http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS). These numbers are corroborated by the OECD (PDF warning http://www.oecd.org/newsroom/41498733.pdf). [Edit: I wrote Sweden and France when I meant to write Spain and France; I apologize for the error but I have left it lest someone think I am trying to whitewash :-)]

Greece has collected plenty of money; we overspent, and we spent stupidly i.e. in ways that obtained either votes or kickbacks, and not in ways that improved the economy or the life of the common person. As just one example, look at the paltry investment of the Greek government in its only competitive advantage, the tourism business. The cast and crew of "Mamma Mia" did a better job promoting tourism in Greece than any Ministry of Tourism effort. Spain, Italy, and Turkey are eating our lunch.

We also got used to almost five decades of "free" foreign money through the Marshall plan, post-communist hysteria leading to US military aid and military bases, EEC/EU growth funds, and having our debt priced as if it were of German quality.

In my opinion, the tax evasion is a serious social justice problem, but it is not a serious budgetary problem. The bulk of Greece's public budget is supplied by ordinary people making ordinary incomes, and it is a travesty that the wealthiest manage to dodge contributing proportionately. But that does not mean the government does not have enough money to do a good job.

I would love to believe that the government has failed due to being starved of resources; at least then a solution like taking on more debt would be plausible. With the situation as it stands, I can only respond with our poet laureate Seferis' exasperated lament, "Everywhere I go, Greece wounds me".

"but not a large problem with collecting a large fraction of GDP. <links>"

Part of my problem with the statistics you link is that the measure is limited because it's known that US revenues are in the 16-19% range but they are listed here at 9%. Loathe as I am to cite the Heritage Foundation they are the most complete figures on wikipedia and show Greece heavily lagging France and Spain.

http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenu...

Next, the black market in Greece is estimated at 25% of GDP which inflates official collection percentages even more.

http://en.wikipedia.org/wiki/Tax_evasion_and_corruption_in_G...

Finally, it really doesn't matter that they collect some nebulous "large share of gdp". What matters is that the scale of evasion is far greater than Greece's immediate problems.

But Nikos Lekkas, the head of the Greek tax inspectorate, the SDOE ... insisted that Greece could easily pay off its debts if taxes due for payment were paid into the Greek state's coffers.

”Tax evasion in Greece has reached 12 to 15 per cent of the gross national product... That is €40 to €45bn per year. If we could recover even half of that, Greece would have solved the problem.

http://www.telegraph.co.uk/finance/financialcrisis/9319799/G...

> Part of my problem with the statistics you link ...

You raise an interesting question, to which I don't have a conclusive immediate response. I'll have to dig deeper to really know. The numbers on the US do seem out of line with well-known facts. However, here's another ~30% estimate from Eurostat (http://epp.eurostat.ec.europa.eu/statistics_explained/index....). Given the conflicting reports, I can only say that it's theoretically possible that Heritage is right and OECD/Worldbank/Eurostat are jointly wrong. If I had to weigh Heritage's ideology and their likely expertise on European economic statistics, as compared to lined-up answers from OECD/WorldBank/Eurostat I know where I'd bet. Still, the 9% reported for the US does seem troubling. I have a research project for the evening.

As for the scale of tax evasion and whether it could plug the hole: it's really, really hard to have an objective opinion here. My inner Greek is saying of course SDOE claims that tax evasion is the main problem. I can't prove that they're wrong, and I don't want to pollute the discussion with personal anecdotes. I'll only add that the SDOE claims don't link to any examinable research.

Thank you for an interesting counterpoint :)

[Edit: the Eurostat data shows Greece parallel to Spain but way behind France... so at this point I'm going to tentatively retract the comparison to France pending further research, but I think I am still persuaded that Greece has a tax base that commands a significant-enough fraction of GDP for them to manage responsibly]

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