Wednesday, July 25, 2012

A good Greek story

Matt Jacobs sent along a link to a great story from Greece on Reuters,  "Lessons in a shrimp farm's travails." The whole article is worth reading, but here are a few tidbits:
Just over a decade ago, Napoleon Tsanis set out from Sydney with 11 million euros and a dream to build a shrimp farm in his ancestral homeland... What he got was years of wrestling Greek bureaucracy and a court battle with a civil servant...

it's the civil servants that are throwing you into this labyrinth on purpose," Tsanis, 44, said. "The law gives them the latitude to delay you or punish you."

...A process that would take just two or three months to complete in Australia got stuck in a maze of official opinions and permits across several ministries. Greek politicians assured him that the paperwork would be done in 18 months, but that date came and went with no progress.

... then, though, another law change that sought to keep aquaculture projects small meant Tsanis had to break up his farm into sections to go ahead.

...One of the main obstacles to more investment is the legal jumble that dictates how Greek businesses work. Even government officials admit the lack of clear laws and the endless requests for opinions, studies and permits are there to give work to unionized specialists.

"There are whole businesses and technical offices employing engineers and experts specifically for the purpose of licensing," said Tsakanikas at the IOBE think tank.

Red tape often leads to corruption.

Tsanis said he steadfastly refused to bribe anyone. In one incident, in 2005, he appealed to a minister in Athens to get a permit unstuck. "The minister called in the public servant who was refusing to give us the permit and ordered him to issue it the next morning," he said, declining to specify the minister or ministry involved. "When we went back to get it, the civil servant told me: 'Australian, that guy is a politician and he'll be gone tomorrow, but I'll be here waiting for you.

The only European Union country not to have a fully functioning land registry - despite collecting EU funds to set it up and then paying penalties when it failed to do so - Greece still lacks a comprehensive zoning law and building rules.

"Several interests prefer a fuzzy system they can manipulate," Papaconstantinou said. "We must simplify building permits, which are a hub of corruption."

After his shrimp farm opened, Tsanis had hoped to build a 120 million euro golf resort. But when the local authorities decided they didn't want it, he opted not to fight.

This story rings with several of the themes on this blog, and I can't resist hitting you over the head a bit.

The nature of "regulation." In the popular discussion "regulation" means a wise system of rules that keep order in markets. Here is regulation in action.

There are different kinds of regulation. This is "regulation" by a deliberately vague forest of laws and rules, which give great discretionary power to the functionaries who administer those regulations. And clearly, they and their cronies like to keep it that way.

This is not "regulation" by clear rules, which you can quickly appeal in court if they are misapplied. The lack of title, zoning, and property rights falls in the same bucket.

Let us not feel superior, fellow Americans. This is the system of regulation to which we are crashing. Dodd Frank and Obamacare look a lot like Greek zoning laws, as far as the power of appointed officials vs. the rule of law are concerned.

Currency. Many of my macroeconomics colleagues think the main problem with the Greek economy is an "overvalued" exchange rate and thus too high wages. Rather than see high unemployment drive down wages that are "sticky" by some magic mechanism (even Paul Krugman admits he doesn't really know why wages are "sticky"), they would like to see Greece have a Drachma to devalue, or what the heck, devalue the whole euorozone, as even Anil Kashyap and Martin Feldstein have recently argued, along with Austan Goolsbee and more reliable liberals.

How much of Mr. Tsanis' troubles does this analysis describe? Not zero, in fact. The article says
He survived, he said, thanks to the 30 percent appreciation of the Australian dollar versus the euro in recent years
He doesn't even mention wages. I guess you have to open a factory before you have to start paying people.

You assign a percentage. Add up whether, faced with this story, the first thing you want to do is devalue the currency, or maybe if as economists we should be writing opeds about "shock liberalization" instead. Decide if this economy will liberalize on its own, given time, and "breathing space" by more German subsidies.

Micro vs. macro. In Greece's slump, as in ours, how much is this, "microeconomic" problems solveable only by micro liberalization, and how much is "macroeconomic," solveable by central banks, "stimulus" programs and the like?


  1. Greece and Italy have to be primarily responsible for their own salvation by internal reforms (including small matters like paying their taxes.)

    The problem with Dodd Frank is the exemptions the industry has bargained for. It would have been much more straightforward to pass a law on the principles:
    1) Glass Steagull is back
    2) if you are too big to fail, you are too big
    3) if you publish a misleading prospectus or financial statements, you are going to prison for the rest of your life and so are all of your superiors and being stupid or ignorant is no defence
    4) if you manipulate Libor, you are going to prison for the rest of your life and so are all of your superiors
    5) if you do not have accurate and complete records (a la MF Global) or take or "mis-place" client money (a la MF Global) you are going to prison for the rest of your life.
    6) naked interest rate swaps are illegal
    7) naked credit default swaps are illegal

    1. Don't forget golden circles

    2. To sum up: finance should be illegal and "Steagall" should be misspelled.

  2. Uchicago undergrad 2015July 25, 2012 at 2:26 PM

    Professor -

    While Greece certainly has these massive, horrendous regulatory issues and other supply-side problems, did Greece not have these issues back in 2002, 2003, 2004, 2005, 2006, and 2007? And in the years before that? Yet, it did experience depression level unemployment and GDP growth then.

    What changed? A drop in demand in 2008. This is why a currency devaluation would be a good thing - it would boost (foreign) demand.

    Would scrapping regulation help Greece significantly? Undoubtedly. But it also would have helped back in, say, 2004. Can it really be source of the country's current ills?

  3. "Uchicago undergrad 2015July 25, 2012 2:26 PM
    Professor -

    While Greece certainly has these massive, horrendous regulatory issues and other supply-side problems, did Greece not have these issues back in 2002, 2003, 2004, 2005, 2006, and 2007? And in the years before that? Yet, it did experience depression level unemployment and GDP growth then.

    What changed? A drop in demand in 2008. This is why a currency devaluation would be a good thing - it would boost (foreign) demand.

    Would scrapping regulation help Greece significantly? Undoubtedly. But it also would have helped back in, say, 2004. Can it really be source of the country's current ills?"

    Exactly. What I dont really understand is the inability of conservatives to follow Milton Friedman example and to admit that aggreagte demand matters. The supply side is extremly important as well, and it would undoubtedly help if Greece were to massively liberalize. But why didnt these massive unemployment problems manifest before, when demand was higher? (As Uchicago says)
    Somehow, Europe has managed to choose the atrocious WORST of both worlds. In my view, the great weakness of conservatives and liberatarians is the fetishitic devotion to hard money, which has ironically inflicted more harm on the free market than anything. (By making people desperate enough to try horrid statist solutions. It was Chancellor Bruning's hard money policies that lead to the rise of Hitler, not the Weimar hyperinflation. It was the tight money policies of the Fed that caused the catastrophe of the Great Depression, and the purgatory of the Great Recession. {Read Scott Sumner to understand why!}) Combine the hard money fetishism with the ineptitude of the welfare state, and we have disater in the Eurozone.

    It seems that the inflation hawks and the hard money fetishists lack any compassion, symapthy or understanding for what their policies have wrought. I doubt any of them have suffered through unemployment. (I have) I see Richard Fisher and Charles Plosser on CNBC, and I'm unable to get thorugh interviews without shouting at them Or whishing I could punch them both in the nose, shake them until their teeth rattle, and bring them to an unemployment office, and talk to people who are unemployment. WHAT IS WRONG WITH THESE PEOPLE!?

    An when, when when, are you going to do a post analyzing NGDPLT and reading Scott Sumner's website. (Hopefully this millenium please.) :-)

    1. I think Thomas McFadden ranted on this subject. The connection between our fed and Germany.

    2. Funny, but the US Federal Reserve has pumped many billions of cash into the market and that hasn't helped much has it? Maybe something is wrong with your prescription as well.

    3. The Federal Reserve has been paying interest on excess reserves and sterilizing monetary injections. The explicit purpose of those measures was to avoid causing inflation. If you take Ben Bernanke's "credit" view of the causes of the Great Depression and recent recession, that can make sense. But if you take a "money" view, its pointless. The "confession of deflationary intent" implicit in such measures prevent them from having an effect. And sure enough we actually had deflation for a time and below-average inflation from the beginning of the recession up to now.

  4. They were able to borrow and spend their way out of it for a number of years. Anybody can live high on the hog on debt until the bill comes due. Now that door is closed.

  5. John,

    Do you think recessions have monetary roots or real ones?

    do you agree with Nick Rowe here?

  6. Uchicago Grad 2015 and Edward

    The problems in Greece are more than just the recession in the developed world. Greece has structural problems:
    1) they misrepresented the state of their public finances to get into the Euro (with help from an American bank)
    2) entering the Euro made it easier for them to continue bad deficit spending habits
    3) entering the Euro made it harder for them to adjust by depreciating the currency.

    Bailing out Greece involves the responsible parts of Europe subsidizing the life style choices and indulgences of the Greeks. While a case can be made that Europe should provide some bridging support, the current situation in Greece is unsustainable. There is no point or reason in Europe subsidizing Greece going forward if Greece is not willing or able to make the necessary changes to bring production and consumption into line. If Greece is not willing to change then it will exit the Euro and default on its debts.

  7. KyleN

    "Funny, but the US Federal Reserve has pumped many billions of cash into the market and that hasn't helped much has it? Maybe something is wrong with your prescription as well."

    This is a common fallacy that I've heard again and again it it drives me crazy. I call it the "unprecedented" and "we've done enough" fallacy. It typically goes like this. the U.S Federal Reserve;s "unprecedented expansion of its balance sheet **** shows that it has done enough. "We have held interest rates down to zero, what more can we do? Again, for the 1.6 quadrillionth time, MONETARY POLICY IS NOT ABOUT INTEREST RATES!. Interest rates were low in the thirties and there was massive deflation. They were high in the seventies and there was massive inflation. (Milton Friedman made this point again and again.) Monetary policy SHOULD be about the money supply, specifically MV, PQ, or NGDP.
    Also, if you have a raging infection that requires 100 doses of antibiotics, It doesn't matter that your ridiculously overcautious doctor gave you an "unprecedented" sixty doses. History should be completely irrelevant here. Nothing less than the full hundred doses will do.
    P.S. Also, who gives a flying f*** about the Federal reserve's balance sheet? By law, losses only must be accounted for if the fed sells its securities. The Fed could hold bad assets to maturity and tighten monetary policy by raising IROR (interest rates on reserves.). The fed is a public institution that has public responsibilities. It has a DUAL mandate (not just price stability, as John Taylor would wrongly like) The Fed's goal should not be to make a profit

  8. Professor Cochrane,

    A very good useful post by you.

    I hope the purpose of the post is not to say this story explains Greece, for it doesn't.

    In fact, the story is misleading as to Greece for sooner or later Greece was destined to fail by reason of it joining the Euro, due to location economics, but that is another story. The wise reader knows this has been explained many times by Martin Jacomb in the FT or needs only to ask, why is the sterling at 1.4+/-%?

    Second, the story is not new. Mark Twain wrote the same story in his Life on the Mississippi:his tale of the obsolete Gov't Gator boats roaming the river thinning alligator reefs.

    Those of use who are literate and liberal and from Missouri have known the lesson since early high school!

    But, some sort of regulation of shrimp farming is required, if nothing else to keep others from farming in the ocean where the Australian wanted to farm and to prevent him from polluting competitors.

    Thus our question is not whether but how do we govern or regulate? Circumstances force us to regulate and generalities are meaningless on the topic.

    Next, let us give credit where credit is due. Our Founding Fathers applied a great deal of time and energy, applying the best wisdom they could muster, toward solutions. Unfortunately, our thinking about the problem of governing hasn't advanced much past our Constitution.

    Let us give further credit to our Founding Fathers. They foresaw the exact problems that you describe, principally capture by factions and special interests. They even tried to anticipate who would align with whom.

    Now, let us fast forward 225 years. Not much has happened to improve our thinking on the subject. Why, because since 1790 Modernity has been constantly forced to fight reactionary forces and special interests (Slavery, opponents of civil rights, social security, universal health care, Austrians, Libertarians, the Kochs, etc. The list has no end.).

    And let us not forget the killer app for assuring that regulation and gov't cannot be made to work or to be effective, the dead Constitution of Scalia. Since the Constitution is seriously flawed, all Scalia has done is set those flaws intellectually in cement. If learned judges cannot occasionally have wisdom not possessed 225 years ago, how can anyone claim legitimacy who advocates change by amendment? Scalia doesn't even know how to assure privacy in your home against technologies not known in 1790.

    And, if you think the Court isn't intent on killing thinking about this problem read again how the Court refused to overturn the Civil Rights Cases in the Second Amendment case and instead incorporated the Second Amendment under the Due Process Clause.

    In sum, conservatives don't want us to find ways to corral the beast of bad government, mostly because they want to govern badly.

    Your foes intellectually are conservatives like Scalia, not liberals like Soros or myself. You may think you dislike regulation. You have never talked to me and you haven't watched Soros when he talked at CATO.

    And, now we arrive at my point. If the point of your story is that we need to stop and go back and do the serious work of filling in 225 work thinking about how to better design gov't, then I am in agreement with you.

    I have one simple example,

    Once elected, why shouldn't Presidents would remain in office until they loose a retention election, with an electronic election held on a Sunday, once a year?

    The Founding Founders never even heard of a retention election, voting on Sunday, or electronic direct election, nationwide. In that same election, the President could put non-binding points on the ballot. Should we break up the Banks that are too big to fail?

    Now are there flaws in my suggestions. Absolutely. But the point is that we have serious matters to talk for our present scheme is seriously flawed (there are many better ideas) and I hope you are in agreement.

  9. Professor,

    I saw the quotation below, please enlighten us about the dangers of inflation circa 2009.

    "[T]he danger now is inflation. And I would say it's a greater danger than most of the other people [who have mentioned it] have said. Our danger now is a run on Treasury debt. It's not just can the Fed soak this stuff back up again, but can it soak this enormous amount of debt back up again when people don't want either money or Treasury bills or anything labeled "U.S. Government." The danger is not 1932; the danger is Argentina, a massive run from Treasury debt. And then monetary policy will not be able to do anything. You can fool around with interest rates all you want. When people don't want Treasury bills or money you're stuck.

    Many things are depressingly the same [as in the Great Depression.] Policy is chaotic. Who would invest in this climate? [The problem is] not about toxic assets; [The problem is] about who wants to go in on a deal with Darth Vader [the government], who can change his mind at any moment? That's the uncertainty that's keeping things from getting going and that's what's slowing the rebuilding of financial markets. We're facing growth-destroying marginal tax rates, an excuse for the government takeover of large and completely unrelated sectors, class warfare, vindictive ex post taxations. This is the chance for a credit crunch -- which normally resolves itself fairly quickly -- to turn into a Great Depression. And perhaps most of all there is the danger of learning the wrong lessons; that our grandchildren will have to come back to the next meeting to say, what were the lessons -- the lessons mis-learned of the last time around?

    My great hope is that the bounce-back will be quick before the quack medicine can be said to have worked. (Chuckles.) Just as we sort of -- as people think that this insane idea of fiscal stimulus -- which I'll go on with later if I get a chance -- came from Roosevelt's experience with no reason why it should work, there is a danger of thinking all of the crazy stuff they're doing now will have caused the bounce-back, if that happens, in five years, but my only hope is that it happens quickly and doesn't leave us with another Great Depression…"

  10. Professor Cochrane,
    A country can have incredibly ineffective "regulation", rigid labor markets and whatnot. That will make the country poorer than it would otherwise be, but it does not necessarily put it on a slide towards depression and bankruptcy.

    All the things we currently observe are IMO a result of nominal frictions, fixed exchange rates and asynchronous shocks. Sure, it would be great if Greece and Spain would suddenly become Sweden or Finland, but if that is what it takes to make the euro work, we might as well give up.

  11. Better, let me rephrase that last post as a question: if a monetary union can work for two countries that have an equally efficient economy (I am not saying it does), why shouldn't it work for two countries at different levels of effectiveness?

  12. Like the earlier commenters I also do not see the link between regulation, rule of law, etc. and cyclical variations in GDP. I come from a country that suffers from the same problems you have identified with Greece. The country is poorer because of these problems and has had slow long term growth as a result. But in any given year, there are good times or bad times. So two questions:

    1) How does the institutional environment (regulations, courts, etc.) that does not change frequently affect short term cyclical variations?

    2) Why should there be a link between short-term and long term policy? That is, why should the need to do structural reforms have any bearing on policies to smooth out short term fluctuations?

    It seems you are suggesting that unless the institutional env. is fixed, short-term adjustments will lead to even worse outcomes in the future, but some clarification would be useful.

    1. If anyone could believe that Greece's problems were "cyclical" and "short run", that it would bounce back to trend eventually even if nothing much were done, I think we would not be talking about it. Greece looks a lot more like "structural", "permanent" "long run" and "growth disaster" to me. Lots more happened than a mysterious fall in "demand" (what, did Greeks suddenly want to start saving too much like Chinese?) A minor little sovereign debt crisis for example, followed by an austerity program focused on higher taxes, especially on anything that looks like investing in a new business, and the clear expectation of confiscatory taxation or regulation of anything left in place. You can sustain quite a boomlet on borrowed money driving up real estate prices until the bill comes due. Notice in the story not once does he complain about wages, nor about the inability to sell shrimp due to lack of demand.

  13. John, I don't understand the false dichotomy. The greeks need devaluation AND structural reforms. However, if structural reforms happen, they will happen gradually over many years. That is just how democracy and cultural issues play out in practice. In the mean time though, something should be done that is helpful in the short run.

    Here is another issue: if you don't take care of the short run, all the capable people will not wait for the long-run: instead of waiting for the long run reforms to materialize, they will simply emigrate, thus leaving Greece even worse off for the long run, and they won't necessarily come back.


  15. Professor C, You're doing battle with a straw man. Who favors absurdly stifling regulations? Naturally businesses want the widest possible latitude, but that can open the way to dangers and abuses. Corruption and abuse are a given in every facet of human affairs, and countervailing regulations are very reasonably very much in place in private enterprise and everywhere else. Mr. Tsanis, the sympathetic subject of this anecdote, says that things must change or "you are not going to see any investment in Greece." But before the current financial crisis there was plenty of, actually too much, investment in Greece. And as others here have pointed out, "regulations," however inappropriate, don't account for the present Greek tragedy. Remarkably, there is no mention of a housing bubble or debt crisis. To you this is a "great story" because you get to beat the same well worn drum. One could wish from you something more helpful.

  16. Hi John -

    Not to belabor this subject, but I thought you might find the linked story from Der Speigel interesting, about the corrosive effect of institutionalized nepotism and corruption in Sicily. While this example of a 'captured' political process is (hopefully!) anomalous in its extremity, I think it may be instructive nonetheless.
    Matt Jacobs


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