Sunday, March 14, 2010

The Greek Experiment

Who wud have thunk it of Greece?

The country with Europe's most reactionary political tradition (around 15% of voters still go for outright communist and sundry left-wing parties, plus another 10% vote for right-wing/populist ones) is presently implementing a Chicago School economic blueprint in everything but name.  The nominally "socialist" government is lowering wages, freezing pensions, increasing retirement ages, imposing higher consumption taxes, downsizing the bloated public sector, etc.

All  of this in a  rather chimeric quest to mollify lenders and obstinate rating agencies by transferring peoples' wealth, previously borrowed from mostly foreign lenders, back to those same lenders.  It's yet another bailout plan characterized by money flowing from the "poor" masses to the "rich" financiers, albeit with a well-justified and heavy dose of salt being rubbed onto old, self-inflicted wounds.  Still, I can hear Milton Friedman chuckling in the heavens.

The Greek government is betting that it will be able to reform the country's astonishingly inefficient  and unproductive economy.  For example, labor productivity per hour worked is the lowest in EU-15, at only 70% of average.  Greece needs to resume growth (4Q2009 GDP was -2.5%), before the rising tide of debt sinks it to the bottom.  It's a fair wager and I would have given them a better than even  chance of success - if it weren't for the aforementioned reactionary nature of Greek society.  As it stands right now, I'd say 40-60 are better odds.

While most Greeks understand that tough measures are necessary to avert national banruptcy, they are also really pissed-off at the long-standing tradition of widespread tax evasion, corruption and back-door dealings between politicians, businessmen and high-income professionals.  As the Minister of Finance himself recently said there are only 5,000 Greeks who declare annual income over 100,000 euro.  Absurd, of course, given bloated asset prices in Greece (see further down).  

Greek society is currently precariously balanced between grudging acceptance and outright rejection of the government's course of action.  If people do not see quick results on the economic front their patience will be sorely tested and the balance may well tip into another Greek tradition: revolution and violence.

So, let's look at the economy.

Despite recent moves to diversify into the wider Balkan economy through banking, retailing and telecoms, the Greek economy still stands on the same three-legged stool it has used  for many decades: tourism, shipping and agriculture.  It is, thus, very far from being a "modern" global economy.  As I frequently quip, "It is time for Greece to, finally, enter the 20th Century.."

Let's look at each "leg":
  • Tourism - the largest sector - is geared towards low-income group travellers from Britain and Germany who seek sea, sun and cheap booze.  Yes, there are boutique hotels and classier customers than  400 euro/week all-inclusive types, but they are a small percentage of the lot.  Given the recession and price sensitivity of lower-income travellers, Greece faces stiff competition from destinations  offering the same product at cheper prices (e.g. Turkey and North Africa).
  • Shipping is not exactly a domestic business, but it generates thousands of well-paid jobs and demand for high-value financial, legal and technical services.  Besides, the country had  until recently benefited from the investment of surplus capital from rich Greek shipowners wallowing in the biggest-ever bull market in shipping rates and vessel prices.  They were buying everything that moved, from housing and hotel properties to retail chains and private hospitals - but no more. Shipping has recovered somewhat from the abysmal lows reached at the end of 2008, but it is still very far from "healthy" (see chart below).
                                                                     Time Charter Rates                                Chart: Dryships, Inc.
  • Agriculture accounts for a huge 12.5% of Greek employment  vs. an average of just 3.5% in EU-25 (Eurostat 2006 data).  This is indicative, among other things, of a low value-added economy, particularly in times of global recession and depressed commodity prices.  Furthermore, the EU is about to sharply reduce all agricultural subsidies, a matter of  overarching concern to Greek farmers who are greatly dependent on them.
The Greeks and their government well understand these dismal fundamental facts, though they may not all agree on who is to blame.  They also know that they carry an onerous debt load, which expanded sharply  in the years after Greece adopted the euro.  The total of government, corporate and household debt is set to reach 220% of GDP in 2010 (120% government, 50% corporate, 50% household).   And this does not include short-dated trade debt that circulates in the form of post-dated checks, a uniquely Greek form of shadow finance.  (No one really knows how much that is, but some estimates range upwards of 250 billion euro, or 100%+ of GDP. I find that number too high to be credible, but what we do know officially is that "bounced" checks reached 3 billion euro in 2009, up from 1.3 billion in 2008 and 630 million in 2002).

Households, in particular, got into a fast and furious borrowing spree after entry into the euro.  Completely unfamiliar with debt in the past environment of double digit interest rates and tight banking regulation that made consumer borrowing well nigh impossible,  they went from  nearly debt-free  in 2000 (30 billion euro, 22% of GDP)  to now owing 120 billion euro or 50% of GDP.

The Greek economy fell victim to the South Med strain of the Anglo disease.  Greeks got rid of production and manufacturing (gone to China, where else?) and, instead, borrowed to improve their lifestyle and pump up "assets", mostly real estate.  It may surprise you to know that a simple 100 sq. mt. apartment in a middle-class Athens neighborhood  costs upwards to 350,000 euro, while in a tonier suburb it goes for up to 800,000.   Detached houses? One million euro and up is standard for euphemistically-called "villas" built on postage-stamp plots of 250-300 sq. mts.  Dreaming of a real villa by the sea in Attica?  Be prepared for a shock: eight figures.  

How do these sky-high prices square with low incomes? Simple:  Debt Bubble.  Mortgage credit expansion was running wild until last year, with amounts outstanding rocketing a torrid eightfold within ten years (see chart below).  By comparison, the U.S. mortgage industry was a popgun.

                                                          The Greek Mortgage Bubble                      Data: Bank of Greece

There are inefficiencies everywhere you look in the Greek economy, from the way the government collects  revenue  (dozens of tax  and social security offices, one each for every town), to hundreds of  thousands of small and tiny businesses all offering the same products/services at similarly-high prices.  For example, there are some 8,000 gasoline stations in Greece, one for every 1,400 residents.  In Germany there are less than 15,000 - one for every  5,500 residents.  

Another example: if you need anything done in Greece, you are required to produce a bunch of official certificates, signatures, stamps and permits. (A friend tells me that he needed to suspend his annual membership to a private gym for a few months because he was going out of town.  That way he wouldn't have to pay for the time he missed.  He had to procure an official declaration form, fill it out with everything including his mother's maiden name and to have his signature officially verified.  Don't ask why, the answer is too.. Byzantine.  One can only shudder at what is required to open a business, say something as substantial as a newspaper kiosk...?)

So, endless hours and days are spent going back and forth to various "offices" collecting a trail of bureaucratic debris.   A few years back another government decided to do something about it.  Great! What do you think they did?  Did they pass a law saying that citizens are considered to be telling the truth prima facie, did they stop the paper-trash war?  Oh, no!  Instead, they established a new official service, with hundreds of bureaus across Greece that will do the paper collecting for you.  Naturally, thousands upon thousands of new bureaucrats were born.  Pricelessly Greek..

Before the euro, the country coped with its structural problems the "easy", monetary way: high inflation and constant currency depreciation.  Obviously, such an economy had no business adopting the hard-currency euro without a prior major overhaul to make it more efficient and competitive.  But Greece completely punted this opportunity when it chose, instead, to gild its statistics lilly in the mid-to-late 1990's and to enter the eurozone at a politically convenient timeframe.  There were several reasons why the rest of the euro-group allowed this to happen, most importantly because its banks, pension funds and speculators made a huge pile of money during the years-long euro - drachma convergence period.

It is highly ironic and disingeneous that Germans (and many others) are now pointing their fingers accusingly at "Greek Statistics", claiming to be "shocked".  What utter, undiluted  nonsense.  They knew all along what was going on, but there was lots and lots of profit in looking the other way. At the root of the Greek Crisis olive tree there lays a huge, smelly manure heap of convenient ignorance, if not outright complicity.

Be the past as it may,  what is important to Greeks, other Europeans and, indeed, the rest of the world is the outcome of the Greek Experiment.  Can fiscal neo-conservative rectitude a la Chicago rapidly solve Greece's deeply ingrained problems, so that pain in its real economy is short-lived and social unrest does not boil over?

Let me provide just one troubling fact: Greece is home to at least one million economic immigrants (10% of the population), most of them undocumented and working off the books.  This acts to mask the real unemployment situation;  while the official unemployment rate was 10.2% in December 2009 vs. 8.9% in December 2008, the actual number of people out of work is certainly much higher.  What's more, the makeup of illegal immigrants has radically shifted in recent years.  There are now many more Iraqis, Afghans and Pakistanis who are essentially impossible to repatriate, instead of the neighbouring Albanians, Bulgarians and other Balkans of years past.  Crime is  on the rise, with armed bank and shop robberies a daily occurrence.

Despite all of the above, I still give the whole thing a 40/60 chance of success - higher than most others, including CDS traders who score the five year cumulative probability of Greek default (CPD) at 22% - ninth highest in the world.  The reason for such relative optimism is... fat.  Unlike uber-efficient Germany, Greece can trim away layer upon layer of economic fat and embark on a crash course of reform, finally bringing the country into the core of Western Europe, if not the 21st century just yet.

Let me put it another way: Greece's cup is, indeed, half empty.  But this is exactly what opportunity is made of, the chance to succeed in filling it to the top.

Here's, then, to the ultimate success of the Greek Experiment.  Bottoms up! Literally.

Oh, and P.S. ..

Look at the Greek government bond maturity profile in the chart below.  Explains a lot, in my humble (but particularly informed) opinion.  If ever a picture was worth a couple hundred basis points to greedy lenders, this is it.
                                                Greek Government Bond Maturity Profile       Chart: Greek MOF - PDMA


A Parable As Epilogue 

Once upon a time there lived in the Kingdom of Hesperia a chubby belle, Olivia was her name.  She was a vivacious lass and enjoyed a good party, as well as a good meal.  Or two. Or three.  All at once.  But she had an infectious smile and a bubbly personality so she was quite popular despite her girth.

Before long she became favourably known to the Palace and the courtiers decided to invite her to the reception to celebrate the Kingdom's founding.  The gala event was to be held in exactly one year, and the copperplate invitations which went out to Hesperia's citizens of note, Olivia included, specified formal dress and ball gowns.

Olivia was overjoyed and immediately went shopping for a dress with her best friend Greta.  As women frequently do when vanity rules and time permits, Olivia chose a fabulous, knock-your-socks-off gown three sizes too small for her present Raphaelesque-plus curves.  This is my coming out party, she chirped to Greta, and damned if I won't slim down and look simply gorgeous, darling.  After all, she had a whole year ahead of her.

But, Olivia loved her food and try as she may she found it nearly impossible to resist her craving for treats.  As happens in parables, time flew oh woe, and found  on the Gala's eve Olivia's curves  two sizes too big for her fabulous gown.

What can I do? poor Olivia cried to Greta who was thin as a rake and would wear a dinner napkin to the ball.  Well, I told you so, sniffed Greta who had done no such thing a year ago, but no matter.  I know this corset-maker who does wonders with cases such as yours.

And before you knew it Olivia was fitted with a steel-reinforced truss, squeezed into the fabgown and arrived at the Gala all smiles, if somewhat paler for the effort.  Oh joy, she beamed and sparkled under the crystal candlelight. She flirted with the beaus who feigned amazement at her instant transformation.  Experienced courtiers had seen it all before, of course.  (Waggish tongues hinted they got  kickbacks from the corset-maker.)  The night is young, thought Olivia, and... and... the tables are simply groaning, laden with delicacies untold!

So, Olivia succumbed once again.  She nibbled at first, then bit and finally gorged on the royal offerings on display.  It would be a shame to let such luxuries go to waste and, after all, she quibbled, am I not three sizes thinner than a year ago? conveniently forgetting the hidden doohickey under the frilly gown that made the mirage possible.

Alas, royals tend to have a wicked sense of humour and Hesperia's Prince was no exception.  At the stroke of midnight the orchestra struck a fanfare and the young Prince bounded onto a raised stand.  Hesperians!, he cried as a cheshire smile creased his face.  We ate and drank, we danced and romanced.  It's now time to play "follow-your-leader"It's good for our constitution, our national fitness.  And  off he went into the gardens and up the hills surrounding the palace. A gaggle of partiers followed, some laughing and whooping, others wheezing and gasping for breath.

Olivia was aghast.  I can barely move, never mind follow this..this billy goat of a prince, cursed be his youthful arrogance.  But what could she do? It was one thing to smile deprecatingly, quite another to disobey a direct royal order.  She edged closer to the double doors leading to the manicured gardens which were already full of people and torch-bearers.

She weighed her options: if she stayed behind she was likely never  to be invited again.  If she attempted to run up the hills in her present state it was sure that her corset would tear apart and her  hitherto artificially hidden curves would burst forth in all their plentitude.
Thus, we leave Olivia gazing wistfully, once at the ladies' powder room where she can rid herself of the corset and the too-small gown, so to join the revellers-turned athletes;  and again, to the rapidly emptying ballroom.

What to do? What to do?  And that damned Greta is nowhere to be seen...


    You forgot that staid, bourgeois, po faced DEMOCRAT in your little fairy story.
    The one who modestly stays on the sidelines, right hand on his heart, EARNESTLY PROCLAIMING that he is JUST a DEMOCRAT, and that he could NEVER TELL anybody what to do, ALL THE WHILE MANOEUVERING to control by just lifting his little pinky finger in the background.
    WHERE DOES HE FIT IN in your little story ??

    Your American PREJUDICES just ooze through in this post.
    As though... an industrialized world were THE UTOPIA that we are all just DYING to live for.

    In my book, it is shameful that WE EUROPEANS spend so much time paying MORE than lipservice to the American way of doing things.
    Fawning over the current American "solutions" to age old problems.
    When we have a LONG history behind us that could enable us to look elsewhere for the answers to our problems. (Yeah, I know, and remember that I said not so long ago that the American experiment is an integral part of French history. I know, I know. Sometimes I wish it were not quite so true...)

    For the bureaucracy problem, my friend, you (and many others on this blog) are protected from it, living as you do right smack dab in the middle of the current Empire.
    Now... if you were living more on the fringes of said Empire, you would be forced to SEE (from another viewpoint) the depth and breadth of the Empire's bureaucracy. It's there. YOU just don't see it.

  2. Someone was burning the midnight oil- nice post!

    Do you know what percent of Greek GDP is public and what % is private? And whether there has there been a relative shift in one sector vs. the other over time?

    I am sure you are probably aware but the 10% foreign born number you quote for Greece is in line with the rest of the world right now; I am not sure Greece gets any more of a pass for more complex "complexity management issues" than anyone else.

    As a benchmark, I think EU is around 9%, Sweden 18%- but 9% if you exclude other Scandinavian countries of origin, UK 10%, France 9%, Germany 10%, US 12%, Canada 20% and Australia 23+%.

  3. re: immigrant %

    The difference with Greece is that for a century or so, until the early 1970s, Greeks were immigrants themselves, mostly to those countries you mention (US, Australia, Sweden, Germany, Argentina, etc.)

    The incoming wave of immigrants, particularly from Asian regions, is a brand new development for Greeks used to ethnic/national homogeneity.

  4. Nice story !!

    - Greenie

  5. Dear Hell,

    two comments:

    What if they end up trimming the muscle instead of trimming the fat? Here in Portugal, they are thinking in privatizing the post (which happens to be... profitable and pay an yearly dividend to the state). The argument is that a set of one off operations will bring the deficit to levels that will shut up Brussels.

    Structural things (long termish), seem to be off the table: like going against tax evasion (restaurants and stuff like that evade grossly) or controlling the salaries of the upper-middle and top civil servants (the president Portuguese National bank is the second best payed in OECD - after Mr Bernanke). Or public school teachers at the top of the career make 7x the minimum wage. Or managers of public companies make ... you get the picture.

    My gut feeling is that Greece is even worse.

    Yes, there is a lot of fat to trim, but I am betting that they will dent mostly the muscle in order to placate Brussels.

    My second point is that exporting countries (Germany et al) happen to be as guilty: a set of countries can only be constantly in trade deficit if another set is constantly running a surplus.

    In some sense, people in the South are more aware of their part in this mess. German/Scandinavia still don't understand that it takes 2 to tango in the structural trade deficit/surplus dance.

    Anyway, as always you are the best thing to read in the tubez!

  6. Isn't one man's fat another man's muscle by definition?

    Taxing a private citizen to pay for a public citizen is zero-sum. It may make the public sector's books look a healthier, but it will not make a country's books look healthier one bit.

    And it is the country's books which are in trouble.

    ... But I agree it would be nice if it worked this way.

    These countries have money black holes in which money is being poured and the flow needs to slow.

    Who is doing the most net consumption relative to what they are putting in?

    And I suspect it is quite non-linear.

    Why do you think totalitarianism has been so hypnotic over the centuries? It is not hard to see who consumes the most resources net. It is just very painful when you actually realize who they are.

    There is a reason societies have a hard time on these issues.

  7. H, Nice post! That growth bit? Needs 'food' inputs, like credit and energy and other finite resources.

    But credit begets DEBT. And debt does grow - like geometrically! And when you pay down the debt, money (you recall telling me to learn about money!) well, money gets destroyed. No money, no consumption, no demand, no production, no growth! Oops!

    Need a new model. One where debt growth is analogue. Think this is feasible?

    Brian P

  8. By the way Hell Greece's version of the Chicago School Experiment

    I came across the following post and thought it rather apropos

    Maybe they heard what it did for for their southern nautical neighbor and decided they too would get in on the action?

  9. re: one man's fat being another's muscle.

    The "fat" I am mostly referring to consists of "bad" lipids, such as graft, corruption,massive tax avoidance and theft, pension fund shenanigans, etc.

    In no society should this be considered "muscle", or any kind of healthy tissue.


  10. Yes, it really is a very good post. Kudos.

    I wonder, do you know if a Greek immigrant in the US or Sweden is more likely to completely pay his/her taxes than he/she would be if he/she still lived in Greece?

    And re: "While most Greeks understand that tough measures are necessary to avert national bankruptcy, they are also really pissed-off at the long-standing tradition of widespread tax evasion, corruption and back-door dealings between politicians, businessmen and high-income professionals."

    This is one of the reasons I was wondering if you knew what % Greek GDP was public. For isn't this the essential cognitive dissonance of most nations?

    IF the public sector is not very large, then there is not be much need to tax and tax evasion becomes a minor issue. Further, if the public sector doesn't control much of the economy (say less regulation), then wouldn't there be minimal need to fear corruption since there would be minimal power in the hands of government officials.

    Of course it immediately raises the issue of caring for the weak, poor, infirm, etc... But in my opinion, this is always where the discussion should have been all along.

    Remember, we have exactly the same issue in health care here in the US (sorry to keep on about health care, it is simply the thing I understand best so I use it as my illustration). We may or may not have so much "corruption" in health care (though things like Medicare fraud are apparently a significant issue), but we definitely spend lots of resources on administering our health care system.

    PS- People tend to confuse this issue with insurance, which it is decidedly not, though there is obviously a relationship. Just like "if you need anything done in Greece, you are required to produce a bunch of official certificates, signatures, stamps and permits", see if you can one day get permission to look at the chart of someone who comes to a hospital with symptoms potentially referable to stroke. I kid you not, most of the EDs I work in have their own full time nurses who do nothing but track stroke paperwork required by the state, JCAHO, EMS, etc... as but one example. And this drive towards centralized computerization in health care is making things even worse imo since complexity simply begets yet more complexity; once someone has a little data, all they want is yet more info about that data.

  11. Thai,

    State consumption of generated wealth:

    Public debt burden (Suggest sorting by OECD)

    Note that PIGS is useless in terms of both public debt and tax burden. It almost seems like a racist slur promoted by parts of the nationalistic British press...

    Though PIGS is not totally inappropriate in terms of trade imbalances (if someone knows of nice summary stats on trade imbalances, a pointer would be appreciated).

    Anyway, I think that the usage of creative accounting (like Greek/Goldman CDS trades) has been pervasive and endemic in Europe (I would venture and say that the EU is less transparent that the US in this regard). I would not be surprised if something very ugly is hidden from the above charts.

    Hell, I think I share your definition of fat. I just don't share your optimism. Take corruption: it is a cultural thingy, one does not change it overnight.

  12. Thanks. I can't find a link that compares relative national trade imbalances by %GDP either.

    Looking at your links, it appears "a Greek immigrant in the US or Sweden is more likely to completely pay his/her taxes than he/she would be if he/she still lived in Greece" is a better explanation than percentage public spending per say.

    Though after reading the following article, I did find the idea of both % public spending AND regulatory burden an interesting thing to remember- I guess Hell was making this same point. It did lead me to
    the following rather interesting Greek ranking.

    Portugal by comparison is here

    I would be interesting to link this index with what the market says it thinks are the same risk of national default by say credit default swaps.

    ... Of course we know how fickle the market is being that Greek CDS trading at 35 bp two years ago yet are now going for 300-400 bp.

    But have country relative standings in the CDS beauty pageant changed so much? If we don't know absolute risk, are we at least better at assessing relative risk?

  13. I will freely admit to having lost my temper in my reaction to Hell's post.
    Coming back here after cooling off, I still agree with much of what I wrote (which was NOT insulting, in MY book, at least...)
    Tiago's comment, in my opinion, shows up what APPEARS to be at work in the supranational institutions at work here.
    The name of the game is.. PLACATING Brussels.
    At any cost. And placating Brussels=reducing deficits.
    Blindly. With no reflection. Reducing in order to reduce.
    Because the economic caste has decided that REDUCING TO REDUCE IS A GOOD THING.
    But...WHERE IS THE PROOF THAT REDUCING TO REDUCE is a good thing, and WHO has the legitimacy and authority to decree this ?
    WHO says it is true ?
    (And no, dink, I am not saying not to follow the rules JUST to not follow the rules, it is not that simple...)
    On the issue of what appears to be a zero sum issue in the delimitation between public and private through taxation, I say that... the French state has dramatically reduced the capacity of its government to assume the FUNCTION of government by... reducing the taxation of the upper and upper middle classes, the people who have the money to finance the State, and the people who ALSO stand to benefit from what the State has to offer.
    Hell did a post here a while ago about taxation and its function, I seem to remember.
    Because the issue of taxation can NOT be reduced (lol) to an account sheet one.
    The more you reduce those taxes, the more you.. reduce the LEGITIMACY of taxation itself.
    And reducing the legitimacy of taxation means that you are going to shift your society's perception of the difference between public and private (public and private, as in... what IS public, and what is private, as in... the relationship between the individual and society/the State).
    And at a certain level... taxation is fundamental in CREATING the collectivity, the SOLIDARITY of the collectivity, at the same time that it... finances the State, and enables IT to fulfill its mission.
    So... NO, this is NOT a zero sum issue. Not at all.
    It IS, only if you look at it in a flat perspective, on a horizontal level. NOT if you look at it as a question taking place on different levels, different places.
    But.. the entire accountant spread sheet FLATTENS OUT our world into the zippy one that Milton Friedman was talking about.

  14. By the way... the founding fathers (the East Coast, predominantly New England elite) did not question the legitimacy of taxation IN THE SAME WAY that we are questioning its legitimacy.
    They were against... taxation without representation. Not taxation.. Neither were they preoccupied about just WHAT they were "BUYING" through their taxation.
    Now.. we COULD say that that prickly issue of taxation without representation, or even the legitimacy of so called democratic government is once again on our plate in our national history.
    We COULD say that.
    But definitely NOT in the way that it was on our ancestor's plates.

  15. Around here, to placate Brussels, they are thinking in privatizing the post and the trains. Precisely how that helps in a structural way to reduce the _trade_ deficit is beyond my limited comprehension. And regarding the state deficit, it only helps in masking structural things for a couple of years.

    And this is being done by a political party that has "Socialist" in the name.

    The only good thing is the massive investment in renewable energy (which will not be cut).

    Corruption, bloated parts of the public sector, tax evasion: not really addressed.

    Trimming muscle, not fat.

  16. I really know nothing about trains, much less trains in europe, but in the context of discussions on corruption, it would seem the basic issues would not be that complex.

    Ask yourself, how many people are on the payroll of the state train system whoes job elimintation would not effect either service or timeliness or safety, etc... to any appreciable degree?

    If this is not true, and everyone is necessady, AND there is adequate demand for current train service, then privatization should not negatively impact employees.

    Bur if it is true, then it is the same old game of musical chairs- either the non-productive workers are eliminated or you keep them on payroll and everyone makes less.

    Or they are made redundant but then placed on government support programs and the remaining rail employees pay more in taxes so everyone still makes less.

    Or it is the same as above but instead of taxing the remaining rail workers, the government borrows the monies from abroad and your nation's children end up making less (this is a particularly popular approach in most of the developed world).

    Or ANY permutation of any of the above.

  17. Thai,

    You seem to assume that private management is perfect in efficiency. While I would agree that public management has problems, that idea that private is perfect, strikes me as odd (assuming that it is implemented by the human species).

    There was an experience in privatizing the trains in Europe, the UK (which happens to be the country where I live most of the time). I would suggest getting some information on the results of that. Hint: not very good.

    But the orders from the European commission are to liberalize and privatize. Mind you: worked very well for planes, where competition really is possible. For trains where most routes end up being a monopoly and with a shared single rail track (where you can blame you company's problems - delays - on other companies trains jamming the way): the result is UK trains.

  18. But.. why assume that the GOAL of government is to do things the same way as private enterprise, or even to do THE SAME THINGS ?
    Why not encourage the division of labor so that government and private enterprise are NOT competing with each other ?
    Or.. encourage the division of labor so that government sectors are NOT BUSINESSES.
    Why not admit that there are sectors of human activity which are different, and that engage the solidarity of the collectivity in a way that does not EXCLUDE the possibility of making money, but does not make making money the PRIORITY of such activities ?
    The airplane industry may be doing OK, but I am not sure that the MAINTENANCE NECESSARY to keep up the airplanes is doing so OK. Nor that it is a priority.
    As for public service... for many years now, French public service is basically public service IN NAME ONLY, as it is run EXCLUSIVELY TO MAKE A PROFIT, and in a way that apes private enterprise.
    This may APPEAR to be complexity... but it looks more like.. a loss of complexity from a certain standpoint. (More.. rules and regulations for everybody, more paperwork, but... fewer differences in mission, and goals...)

  19. Tiago, I do read this way so thanks for calling me on this- touche.

    PS- government can often be my slang for "inflexible", which I readily admit can be an unfair label.

    I read up on your suggestion. Amazing how similar this issue is to so many we face in health care.

    I would think the biggest issue would be keeping non-profitable routes open. Politically they might be popular (to some), but they make no economic sense except to the small number of people who need those routes.

    ... But if a lot of non-profitable routes got together and cooperated on this issue, they might have the political power to remain open through solidarity.

    And the most fascinating thing of all would be how this paradox would appear as one of these fat-muscle-corruption paradoxes we are talking about which entirely depend on which side of the issue you are on.

    If you live in a small town that needs non-profitable rail service to exist, you might very much want the route subsidized. To you this is a real muscle issue.

    Yet if you lived and played only in a big cities, you might see the smaller non-profitable routes as fat. And to the extent you are frustrated that there is not enough funding in the school system to treat your child's dyslexia, you might also begin see the issue as a form of political corruption as you believe (with some legitimacy) that a small non-profitable rail route is taking precedence over your child's reading development.

    And even if the route were run highly efficiently by any benchmark but still run at loss, still the issue would piss you off.

    No matter how the government tries to solve the issue, it gets a black eye.

    Indeed, thinking on this, I am not sure there is a right answer- again, simply a matter of vales.

    This is health care in a nut shell and why I think economics is simply the endless study of zero-sum paradoxes.

    Deb, you are missing the essential zero-sum nature of your religious mysticism's message of cooperation. I completely agree that cooperation is absolutely more efficient, this is classic non-zero sum economics. Yet cooperation has it's "Achilles heel". For the benefit of cooperation is ALWAYS exactly offset by the risk that cooperation will fail and you were better off having never cooperated in the first place. It is fine to look at one side of the coin- and truthfully much prefer that side I as well. But denying its existence simply because you don't like its message is... I'll let you decide.

  20. I forgot to say that in this setting, wouldn't privatization be the European commission's way of using the private sector as cover of darkness for closing non-profitable routes that it doesn't have the political ability to close on its own.

    This would be your muscle.

    Sadly, there appears to be a reason why Zipf's law holds universally for city sizes world wide.

    We keep looking for a way to escape the prison of the conservation of energy... Maybe they should offer an X-prize for the person who does figure a way out?

    Isn't Hell the one who is always reminding us to focus on feeding more energy into the system? ;-)

  21. Thai, Asimov's paradigm in the Foundation series addresses exactly your paradigm.
    Factoring risk into your calculations (the "reasonable" thing to do) skews the outcome of your prediction from the outset.
    Tiago, your comment shows how vital it is to create the sense of inclusion/community so that.. the people in the cities will feel community with the people in the countryside and WANT THEM TOO to have access to roads, because they feel... community or kinship with them, they do NOT feel as though they are.. competing for parts of a fixed "pie".
    It again comes down to WHAT is federating us at this time ? What can we rally around COLLECTIVELY AND INDIVIDUALLY to create community ? Without community we risk.. going after each other savagely to get that piece of the pie that we INDIVIDUALLY feel entitled to, right ?
    Funny... all I have to do is mention Christian anarchist mysticism and all of a sudden I am a wacko pariah here...
    That's what it feels like, at any rate.
    See what a "label" can do ? My fault for sticking one on me.
    When you reason in terms of zero sums, you can NOT take multiplication into account.
    Neither multiplication of resources, nor.. multiplication of... debt (much more evident at this time).
    Addition is NOT multiplication.
    Not at all. Addition and multiplication are in different universes (of meaning).
    And what if... reasoning in terms of sums were keeping us from seeing the effects of multiplication ?
    In my book, at any rate, that would require TINKERING WITH OUR MODEL in order to make it more in synch with what we are observing RATHER THAN.. trying to chop an arm or a leg off of what we are observing to make it fit our... model.
    That would be the scientific way of doing things, at any rate.
    Saying that every advantage has its disadvantage is not the same thing as saying a + here = a - elsewhere. I don't believe so, at any rate.
    Finally, I do not believe that I am attacking you personally on this issue, Thai.
    I am questioning your theory, as it seems to me to be a theory which is shared by many other people on this blog, and outside of this blog, and that it needs to be questioned.
    As you say, be well.

  22. This comment has been removed by the author.

  23. Fabulous! John Stewart explains Wall St. practices...

    John Stewart explains Wall St. practices

    (PS sorry for prev two deletes, was testing html linking)

  24. Very enlightening post and addendum once again Hells. Best finance blog around!

  25. @Tiago:

    Help? What good is privatizing? If a private company takes over an aspect of the government the government still pays that company to do the work don't they? How does that reduce taxes or the money the government spends?

    For instance, In Iraq and Afghanistan there are more military contractors than soldiers. The contractors have no oversight and are paid much much much more than the soldiers. Their money still comes from the same source the government through the collection of taxes.

    What does privatizing anything do except move taxpayer money from one group of people to another group of people? I honestly don't understand so any help would be appreciated.

  26. Off topic, but thought it is somewhat related to one of the topics here:

    How Iraqi Oil Is Changing the World

    "If Baghdad's own projections are to be believed, Iraq could match Saudi Arabia's daily crude output of 10 million to 12 million barrels within the next seven years, up from just 2.5 million barrels today. That means price stability, OPEC's sine qua non, could go from being Saudi Arabia's solo prerogative to a shared franchise of two states: one an entrenched monarchy, the other an unruly democracy with an uncertain future. And since Iraq held a successful tender for new oil exploration work in December, the country's oil minister, Hussain al-Shahristani, has made it clear that Baghdad will ramp up production regardless of any restraints agreed upon by the world's oil cartel."

  27. I may be reading Tiago wrong, and we will see what he replies, but.. I do not think he is particularly keen on privatizing the rail system, the postal service, both semi public services (in name only in France..) that are being privatized in the "European" rush to bow down to economic orthodoxy.
    What does privatizing do other than shifting money around ?
    It changes our perception of public/private.
    It changes the mission of government in our eyes.
    It delegitimizes government. Saps its authority (well, any authority that does not simply consist of the punitive, repressive sort...).
    Is that enough ?
    It's not because you can't... measure these things or chalk up statistics on them that they are not there.
    And they produce... consequences. Definitely.

  28. Debra is reading me right, I think.

    Privatizing things that are natural monopolies (i.e. are very difficult to have real competition and choice), strikes me as odd.

    Big government is bad. Big corporations is worse.

    On a somewhat related issue, I note that the fundamentalist church of Marxism has been replaced with the fundamentalist church of capital, free trade and globalization. By this I mean that there was time where people (who were Marxist) thought and behaved as they were the owners of truth, now the same catastrophic mental pattern is to be seen on pro-free-trade-and-globalization proponents. With the added problem, in the Western world, that these guys actually do have a lot of power.

    I would be fun to see if Greece defaulted on their debt (Argentina style)... I am starting to believe that that Creditanstalt moment is both terrible and also a necessity for real change. What would come next?

  29. re: "I note that the fundamentalist church of Marxism has been replaced with the fundamentalist church of capital, free trade and globalization."

    To some degree I deserve this based on my comments; I really do not see any real difference between capitalism and socialism at a certain level FWIW.

    But you have not really answered the question on how you would solve the paradox of allowing "inefficient markets" to exist in in the first place by fiat, which is what nationalization permits.

    Say you decide to subsidize rail service to a small town in order to keep the service going. Perhaps it is a beautiful town with a lot of emotional sentiment to voters. Further, British rail runs the most efficient rail service in the world based on things like labor costs per mile, etc... Yet still only a few people use the route and so it loses money despite its commendable efficiency.

    Now without the route the town is unreachable and would likely close down. But because it is subsidized, the town remains with a larger population than would otherwise exist.

    Now imagine one person in the town develops renal failure for whatever random reason and needs dialysis in order to live. Again normally a population so small could never support a nephrologist- much less a dialysis center- at a cost that is anything close to what is found in higher density areas.

    But by fiat, there are additional rules to "a right to life".

    Further, to make the discussion simpler and use Britian since you live there, NICE has a global budget and based on this total amount, decides how it wants to allocate scarce resources.

    The net effect of the decision to keep a rail open is that a Londoner would be required to ask that their wife dies a little sooner when she gets her breast cancer (might not be much, say a few days on average) in order that the small town dialysis patient also be treated in a less efficiently manner.

    Some people might like this trade off. But not the mom's two little girls.

    Yet a politician representing London looking at the relationship between these issues can't necessarily even change things as the politician from the rural community literally cancels out his vote.

    Privatization is often the only political way that the route (and therefore the town) can be shut down and residents forced to move to higher density areas, etc... if they want their town AND dialysis, etc...

    And yes, the owners of the industry reap the profits unfairly for what is really a simple decision- a total privatization "give way" as it were. But it could not be done any other way.

    ... So I might agree with you if the political body did not have the ability to borrow, and so was slowly forced to see the connection between various decisions, but it is easy to borrow money and spend it in ways that disproportionately benefit a few of us yet permit socialization of the costs of that borrowing.

    If you hold your position, it would certainly be unfair to be upset at the bankers for the bailout they received.

    ... Unless, as Deb says, we are not "rational" animals. ;-)

  30. Thai, your response to Tiago is the illustration of what I was talking about in my comment above on the thread.
    Your privatization gig destroys COMMUNITY.
    It SEPARATES OUT the community so that you are seeing things in terms of a trade off between TWO INDIVIDUALS.
    YOU are the one who says that the whole is more than the sum of its parts ?
    OF COURSE the whole is more than the sum of its parts. That means that the community means something different than the sum of all of its individuals too.
    But you are seeing the whole EXCLUSIVELY as the sum of its parts.
    I don't know why we have spent some much time inventing alternative algebras, geometries, what you will, WHEN WE STILL DON'T UNDERSTAND THE FOUR BASIC OPERATIONS AND their implications.

  31. We are not rational animals. By most definition of rational, we are not.

    But one thing that we sometimes are is preoccupied with the welfare of others. A Londoner might have no problems in supporting a rail line to "a small palce" just out of generosity. In fact British are fantastic with this: Many prefer to buy more expensive fair trade products (to the point that even brands like Nestle or Cadburys have their chocolate flagship products - Kit Kat and normal Dairy Milk - available as fair trade as STANDARD in the UK). I am not suggesting that human beings are all pure and generous, but that facet DOES EXIST.

    But one of the problems with modern capitalist-fundamentalist thinking is that is it an utmost disaster (dare I say, irrational?) in the _long_ term. Let me give you an example, using trains in my original country (Portugal).

    20 years ago, the government decided to cut "un-economic" lines (mainly rural lines). They were to be replaced by roads, if at all.

    This (along with other decisions in this line) had some interesting side-effects: internal migration from rural places to the 2 biggest cities (as rural areas became unattractive by lack of basic transportation). Abandonment of rural areas (literally entire villages were abandoned). Increase in the population density of cities (with spiraling living costs). Massive use of roads to transport goods (not nice if you believe in peak oil). But above all it increased our dependency on foreign energy and food (Lisbon, the capital, actually had a food surplus as it was surrounded by very productive fields, which were converted to housing and thus disappeared).

    It would have been of the interest of urbanites (like me) that rural places were still attractive. Cheaper housing, liveable population densities, less dependency of foreign food. The point is: nobody though about possible side-effects, especially in the long run.

    My point is that capitalist-fundamentalist reasoning has 2 clear traits: short termism and humans as solely a greedy entity. Let me concentrate on short termism: In fact, from a rational point of view, fundamentalist-capitalism is proof that humans are not rational: I would argue that short term views are intellectually very dime and limited.

    As a final note: I am not endorsing any alternative solution, just noting issues with the current order of things. I have nothing against capitalism, as long as it is short scale and where conditions for it apply (eg, there is conditions for real competition and alternative providers)

  32. If that were true then how do you explain evidence for human longevity vs. (say) other primates before civilization really even got going?

    I certainly agree that there are all kinds of tensions within a system including those with a short term view vs. those with a long term views, but I am not sure you can hand this on capitalism vs. any alternative.

    I certainly agree that most people are concerned about the welfare of others as well. The problem of course is just getting agreement on what welfare actually is.

    I also agree that Brits might be more in agreement with each other than other places on this planet. But Brits also queue at public bus stops.

  33. No, no, no. Brits do no queue at bus stops ;) . That is a myth.

    You should see the behaviour of Brits when they are under the influence of alcohol. ;) Their cognitive and emotional dissonance from their non-alcoholic state is massive (much more than, say Gringos ;) )

    There is a lot to be said about supposed British civility and politeness. Most of it is not that good ;)

    Don't get me wrong, lots of interesting things to experience in the UK. But British politeness is up there with the other false myth of Swedish suicides: Not very true ;)