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.

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