Sunday, February 1, 2015


The thing you should always worry about in democracy is that you’re voting for a package deal: if you like the person/party and vote for them, you get all their positions … not just the ones you like.

And what if those positions are bizarrely dumb? What does that say about the rest of the package?

So, in Greece, Syriza … within a week of winning the election … has put limiting all-inclusive vacation resorts on its agenda of things to fix.

You can’t make this stuff up.

When a new Greek activist government — under pressure to look like it’s doing something — declares that they believe all-inclusive resorts are bad because tourists stay on property instead of benefiting the local town economies nearby but promise they’re only talking theoretically and you should trust them that they aren’t going to do anything about it… you should trust them as much as you do that they’ll repay all of their bonds in full.

Tourism represents about a fifth of GDP. All-inclusive package tours are a key segment of the European market, especially for tourists coming from the UK and Germany.

Since tourism is important to the economy, and the economy is doing badly, it must be tourism’s fault.

FWIW: That makes the tourism industries size in Greece comparable proportional to the largest industry in the U.S. That would be FREI: finance, real estate, and insurance. Except that the latter are difficult, and people get paid a lot to do them because they’re valuable.

Via Marginal Revolution.

Thursday, January 29, 2015


Attitudes in the EU are hardening towards Greece. Here’s the problem:

Greece already enjoys the longest debt maturities and among the lowest interest costs as a proportion of gross domestic product of any eurozone government, thanks to past bailouts. Some further easing of repayment terms is possible, but governments aren’t prepared to be generous to Greek taxpayers …

The thing is, the EU has been just as hard (if not harder) on other faltering members. And some of those members are seeing success from their austerity plans. In particular, Spain (the 4th largest economy in the EU) seems to have turned a corner.

… It is Spain rather than Germany that may prove Mr. Tsipras’s most implacable opponent. Madrid is clear that any deal with the Greek leader must be based on reform commitments at least as tough as those demanded of former Prime Minister Antonis Samaras. Anything less would represent a win for Mr. Tsipras and fuel support for Spain’s own new radical leftist party, Podemos.

The Spanish government believes that the turnaround in its own economy—growth is expected to reach close to 3% next year and unemployment fell by 400,000 in 2014—is proof that a robust pro-market reform program is the only way to exit the crisis. Madrid believes that it would be in Spain’s and the eurozone’s best interests to allow Greece to crash out of the eurozone …

Would the EU amputate a toxic Greek limb to keep its main body well? It seems like we may find out.

Read about it in “Why the Eurozone May Need to Sacrifice Greece to Save Spain” in the January 28 issue of The Wall Street Journal.

Syriza Wasn’t Bluffing

Syriza is the party that just won power in Greece.

Often in democratic elections, a party will make claims that are somewhat outlandish … and then back off of them once it wins the election.*

Syriza has only taken a few days to do just the opposite, rattling markets.

Within hours of taking office, government officials said they would stop the planned sale of the state’s majority stake in Greece’s largest port and dominant utility. They also pledged to rehire thousands of public-sector workers and reopen the country’s state broadcaster, which had been shut down by the previous government.

The moves scuttled the expectations of some European officials that Greece’s new leadership would retreat from its radical campaign platform after attaining power. Greek stocks plummeted more than 9%, with the country’s four main banks falling more than 25%. The yield on two-year debt rose by 2.63 percentage points—an enormous move by bond-market standards—to 16.5% as Greek bond prices tumbled.

What they are worried about in the EU is contagion, and a flight to quality. There’s already small signs of that:

Elsewhere in Europe, bond prices in Italy, Spain and Portugal also edged lower, giving up some of their gains since the European Central Bank announced a major bond-buying program last week. Meanwhile, German 10-year government bonds—seen as a haven in times of debt market turbulence—rose, driving the yield to 0.35%, close to a record low.

Read the whole thing, entitled “Greece’s New Leaders Act Swiftly to Reverse Austerity” in the January 28 issue of The Wall Street Journal.

* My name for this comes from a description some pundit made 20 years or so ago about why Bill Clinton was able to combine political and economic success: “he doesn’t believe his own BS”.

A Form of Inequality that Perhaps We Should be Concerned About

Inequality has been a hot topic the last few years, motivated in part by the after effects of the Great Recession.

Many economists don’t take this too seriously (and I’m among them). With more experience with the data, it’s harder for us to see that inequality has actually gotten worse, or to judge whether or not that’s a bad thing.

However, one aspect of inequality that I think is well-supported (although I’m not sure it’s a bad thing) is that over the last 30 years or so, we’ve increasingly moved towards an economy in which stars and superstars get paid more than they used to. Consider this chart:

5-01-29 Inequality from The WSJI think this is fairly accurate (and the source is 2 macroeconomists, unlike a lot of graphics you see in legacy media publications, or political discussions).

I have a lot of trouble with the common claim by progressives that the median household has seen no improvement in real income in 30-40 years. I think that’s ridiculous.

But I do think that the gains at the top have been larger, and this graphic supports that.

I’m agnostic about whether this is good or a bad thing though. I simply know of no concrete evidence that a pattern like this is harmful. So for me, it’s just a fact that I feel you need to be aware of.

Now, one argument that I do think you need to have command of, is that a problem in interpreting a chart like this, is that it’s unlikely that the top 5% are the same people from year to year. We do know that there is some churn in the top 5%, and that weakens any case that inequality is a serious issue.

I drew this chart from the article entitled “How a Two-Tier Economy Is Reshaping the U.S. Marketplace” in the January 28 issue of The Wall Street Journal.

“Every Silver Lining has a Touch of Grey”

Some U.S. firms are starting to have profitability problems because of the appreciation of the dollar.

It sounds kind of dumb at first, but when thinking about exchange rates, saying something like an appreciation/depreciation is good for everyone except those it’s bad for is actually fairly accurate.

In this case, the dollar is strong because some of the other big economies — the European Union and Japan primarily — have been doing relatively poorly.

See the article entitled “Strong Dollar Squeezes U.S. Firms” in the January 27 issue of The Wall Street Journal.

Sunday, January 25, 2015

Greece Has the Ball Today

Greece is holding its national election today. The polls are not closed yet, but the exit polls show a (not unexpected) victory by the Syriza party.

This party wants to end the fiscal austerity enacted over the last few years to help the Greek government get in a position to consistently pay its bills: basically, better tax collection, and less giveaways of government funds to the politically connected.

Syriza wants a haircut on existing debt, borrowed by the Greek government, from foreign lenders. A haircut means that the two sides will decide to revalue the debt principal at a substantially lower lever. I’ve heard rumors of a 70% cut. Syriza is ready to leave the Eurozone if no one agrees to the haircut.

Quite a lot of people in the Eurozone would gladly wave goodbye to Greece.

The problem is: what if this policy action is seen as beneficial by voters in other troubled countries? This is called contagion.

The thing you have to remember about macro is that there are no experiments to see how policy works. People may be voting on this when it sounds like a good idea before they can possibly know if it is a good idea.

Here’s one view: the way for the Eurozone to contain contagion if Greece leaves, is to do everything they can to make the situation in Greece look worse, so that voters will get the message.

A complementary view is that as we get to higher and higher levels of macroeconomic understanding, we come to appreciate that the public is better at anticipating crises, and covering their own a**es, than politicians and bureaucrats give them credit for.

In particular, we talk about self-fulfilling prophecies. For example, if people are worried about a future shortage of widgets, they’ll buy more widgets now, creating a shortage. We see this all the time with empty grocery store shelves in advance of potentially devastating storms.

So, what’s going on in Greece this winter? Hmmm. Greeks aren’t paying their taxes.* It’s almost as if people know that their taxes are going to pay foreign lenders, and they know their neighbor is voting for a party that will stop that, so they stop paying their taxes in advance, so that when that party gets into power they have no choice but to stop the payments.

The difference between a macroeconomist and a journalist is that the macroeconomist will cut those 4 words in italics off the front of that explanation.

* The link is from the Financial Times. They probably won’t let you see it unless you register. Don’t worry about, go and register. They are very good at asking you to be officially involved, but they do not make a hard sell to get you to buy their product.

Saturday, January 24, 2015

Tooting Our Horn for Us

Many of you are economics majors.

Good for you. It turns out that economics is the social science mentioned most often in The New York Times, and most often in the Congressional Record.

And yet, it’s not as popular as other majors nationwide, like psychology and history, and we barely beat out sociology.*

This won’t be on the test, but you can read the article entitled “How Economists Came to Dominate the Conversation” by (Dave Berri’s friend) Justin Wolfers in the the January 23 issue of The New York Times.

Via Greg Mankiw’s Blog.

* Economics isn’t a huge major at SUU, but we’re doing OK. Generally speaking, economics does better as a major, purely in terms of numbers of graduates, when the department is housed in a college of arts and letters. I’m not advocating that change for SUU, just pointing it out.