Lawrence Economics Blog

Creative Instruction

Dividing the Pie — Made in China, Sold in the U.S.

This just across the Marginal Revolution wire, via the Federal Reserve Bank of San Francisco, is an estimate of who gets what piece of products made in China:

Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label.

So who gets what?

Table 1 shows that, of the 11.5% of U.S. consumer spending that goes for goods and services produced abroad, 7.3% reflects the cost of imports. The remaining 4.2% goes for U.S. transportation, wholesale, and retail activities. Thus, 36% of the price U.S. consumers pay for imported goods actually goes to U.S. companies and workers.

That’s a potentially interesting figure that suggests something we probably all know intuitively — that the firm that makes something isn’t necessarily the same firm that captures the value from its sale.

Last year I poked around for information like this when we were looking at what went into the price of shoes and found Rodrige, Comtois, & Slack’s breakdown in The Geography of Transport Systems.They split up the “cost of a $100 shoe made in China” (click to expand) to the various factors of production, and provide an  explanation here.

The analysis suggests that a $100 shoe has about $12 worth of labor and materials in it, almost none of that paid to labor ($0.40). I assume “profit” goes to the corporation (e.g., Nike, Earth Soles) and the “retailer” percentage includes both retailer costs and retailer profits.

Here’s an important point — the difference between Walmart and Footlocker for a given pair of shoes would probably come out of that 50% retailer percentage. Lower rent, lower personnel costs, lower profit per unit. So where does the difference in shoe quality come from? It seems to me it comes out of that $12 in labor and materials.

Do you see what I mean? If a typical $100 pair of shoes has $12 of parts and labor, then how much does a typical $37.50 pair of shoes have in terms of parts and labor? Somewhere between $0 and $12, I suspect. For the sake of argument, let’s say you could cut those by 25% to $9. That suggests Walmart could offer the same quality shoe (that is, a $12 shoe) by bumping the price up by $3 to $40.50…

Why can China produce at such low “costs”? The chart at the right shows the figures for manufacturing generally — 40% of the cost advantage stems from lower labor costs. My intuition was that labor costs were a major portion of the product costs, but that was incorrect. It is, however, a substantial source of the lower costs. So, to illustrate this point, suppose Indonesia could assemble these shoes for $12.50 — $0.50 more. Of the $0.50 Chinese cost advantage, 40% ($0.20) would be due to lower labor costs.

I would guess that the cost advantage is nowhere in the neighborhood of $0.50. If China produces 8 billion pairs of shoes annually (16 billion total shoes), then a penny per unit in labor savings is $80 million into someone’s pocket. An $0.08 labor cost advantage translates into well over a half billion dollars.

And here’s the iPod for comparison.

Of course, the lesson from the Fed and from Rodrige et al. is that the total amount paid for imported goods is not the same as the amount actually being paid to the country of origin.

English Major Downgrades U.S. Credit Rating

Sam Tanenhaus is the editor of the New York Times Book Review, and he, unsurprisingly, majored in English literature.  His old buddy, John Chambers, is the chairman of S&P’s sovereign rating committee, and Chambers, (perhaps) surprisingly, also majored in English literature. The two were friends at Grinnell College back in the day, and Tanenhaus takes time out to tell us about it at Slate.com.

For those of you completely uninterested in world affairs, Chambers has been making news because the S&P recently lowered America’s credit rating from AAA to AA+, causing something of a stir in world financial markets.

The article only hints at how Chambers got from Grinnell to Wall Street.  Instead, Tanenhaus gives us a taste of spending time in the cornfields of Iowa, the midwestern psyche, and the joys of hashing out the intricacies of Proust.  He then concludes with a more general meditation on the liberal arts:

John has told me the most important thing Grinnell taught him was how to write a well-argued paper. He learned his lesson well. The S&P report, whatever one thinks of its conclusions, is a model of clarity. Even an English major like me has no trouble making sense of the following: “The effectiveness, stability, and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges.” Or: “The fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

So keep that in mind next time you worry about whether you have the “right” major (or majors).  Clothes don’t make the man.

Add Germany to the List

Michael Lewis continues his Vanity Fair series with a rather disturbing article — disturbing on many levels — about Germany and the world financial crisis: “It’s the Economy, Dummkopf!”

Tyler Cowen at Marginal Revolution calls the piece ” funny, one-sided, slightly offensive, somewhat true.”

I agree with everything except the “slightly” part.  Not for the faint of heart.

ADDENDUM: Walter Russell Mead weighs in.  Paul Krugman expresses some optimism.  Follow his blog for much, much more on the nuts-and-bolts of what’s going on.

Some Non-Random Investment Advice

So, the Dow is down 635 Monday, then up 430 Tuesday, then down 520 again Wednesday?  What’s a member of the investor class to do?  Should I go bargain hunting and drop my kids’ college funds into Sears stock?  Is it time to buy gold? Or should I get out of the market all together and just park my cash in a bank somewhere?  (Are banks really charging to hold money now?)

Burton Malkiel, author of the extraordinarily influential A Random Walk Down Wall Street, advises you to take a deep breath and let it ride. Here he is in the Wall Street Journal:

My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world. Indeed, it is in times like this that investors should consider rebalancing their portfolios.  If increases in bond prices and declines in equities have produced an asset allocation that is heavier in fixed income than is appropriate, given your time horizon and tolerance for risk, then sell some bonds and buy stocks. Years from now you will be glad you did.

This is hardly a surprising message coming from Malkiel, who tirelessly points out that index funds routinely outperform professionally managed portfolios.  Indeed, I would say that the median economist believes this to be true. If you haven’t read him yet, you should think about picking up a copy of his book and getting to know it a little bit.

For more on the epic market volatility, check out the always-awesome Political Calculations blog.

Meet your textbook author, Jonathan Gruber

It’s time again for us to profile one of our favorite textbook authors, today featuring Jonathan Gruber of Public Finance and Public Policy fame — the text from Econ 271 last term.  I certainly endorse everything about the book aside from the $200 price tag, and Alex Tabarrok calls this one of the best textbooks ever.  If you don’t want to wait around for me to teach 271 again, you can go straight to the source through MIT’s open courseware program.

As I pointed out in class a few dozen times, Gruber is a big deal in health economics, and Slate.com has a nice profile as part of its “most innovative and practical thinkers of our time” series. The dog bites man here is that Gruber has his hands both in Massachusetts health care reform (Romneycare), as well in the recent federal health care legislation (Obamacare).   Slate’s contrarian instincts find the potential 2012 presidential showdown between Romney and Obama too delicious a prospect to pass up.

Hi Guys!

Also included is an interview with Professor Gruber, along with a preview of the forthcoming health economics comic book, er, graphic novel.  Wow.

Perhaps it is different this time

On my daily rounds of the econosphere, including Professor Finkler’s post here, I note that Ken Rogoff’s Project Syndicate post is getting a lot of traction.

A perusal of the NYT website shows Rogoff here on the USA credit downgrade:

Europe’s plan was to have growth fix the problem. America’s plan was to have growth fix the problem. And that’s not going to work… I think it’s really starting to sink in that we’re not anywhere near an endgame.

And NYT columnist Thomas Friedman cites Rogoff here:

Why is everyone still referring to the recent financial crisis as the ‘Great Recession?’ … The phrase ‘Great Recession’ creates the impression that the economy is following the contours of a typical recession, only more severe — something like a really bad cold. … But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation. … In a conventional recession the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend. The aftermath of a typical deep financial crisis is something completely different. … It typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. … Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a ‘Great Recession.’ But, in a ‘Great Contraction,’ problem No. 1 is too much debt.

As for economists, Tyler Cowen thinks Rogoff’s contributions have legs:

I don’t expect anyone to change their mind at this point, but the “we should have had a much bigger stimulus” argument is unlikely to go down in intellectual history as the correct view.  Instead, Ken Rogoff and Scott Sumner are likely to go down as the prophets of our times.  We needed a big dose of inflation, promptly, right after the downturn.  Repeat and rinse as necessary.  But voters hate inflation and, collectively, we proved to be cowards.  Too bad.

And Peter Klein also cites Rogoff favorably, though Klein conditions his response with respect to what he believes should be the central implication:

The main point is that a recession like the present one is structural, and has nothing do with shibboleths like “insufficient aggregate demand.” I wish Rogoff (here or in his important book with Carmen Reinhart) talked about credit expansion as the source of structural, sectoral imbalances that generate macroeconomic crises.

It’s almost enough to make you want to pick up the vaunted Reinhart and Rogoff book.

UPDATE: Rogoff in the Financial Times

The Triumph of Ed Glaeser

You know you’ve hit the big time as an economist when the Appleton Public Library starts featuring your stuff.   Those of you who follow the LU blog have probably heard of Ed Glaeser and his recent book, The Triumph of the City. And now, readers of the Appleton Post Crescent have as well, with Bill Coan featuring Glaeser in his discussion of the impact of local libraries.

For those of you who missed it, here’s Glaeser talking about his book at one of our more trusted news outlets.

Is Time on Professor Finkler’s Side?

As you may have noticed, Professor Finkler and I are both keeping one eye on the doings in Washington, with the likes of Summers and Roberts weighing in on the deal.  To add to that lineup, Time Magazine has another five economists weigh in on the debt deal, including LU Econ Blog faves Alex Tabarrok and Simon Johnson.

It’s too bad we don’t have a macro course going on right now.

The Second Great Contraction

Professor Gerard’s posting on the debate about the role of fiscal policy starts with the Larry Summer’s point that the debt deal “solves the wrong problem.”  As pointed out previously (see here), I agree with that conclusion.  So, what is the “right problem?”  Kenneth Rogoff’s answer requires  that we understand that this recession is not a typically recession.

The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.

Rogoff and Carmen Reinhart (R & R), along with others such as economic historian Harold James, emphasize that economic growth built upon too rapid a credit build-up cannot be sustained with expansionary monetary and fiscal policy. It requires de-leveraging (perhaps, you prefer credit build down), a process that cannot be accomplished quickly and offers little positive in the short run that can be gained to soften the blows. The only solutions require that the real level of debt must be reduced to a sustainable level.  As noted in the Rogoff quotation above, somehow creditors must bear some of the burden (a “haircut” in Wall Street parlance.)  The dynamics of this process lead R & R to deem our most recent period as “The Second Great Contraction.”

Rogoff’s suggests that inflation might be the least costly way to address problem – one might argue it is THE “time honored” policy of choice when governmental commitments exceed its ability to meet them.  Of course, this suggestion is not met with great enthusiasm (see “Kids Prefer Cheese” which argues that Rogoff proposes “theft, pure and simple.”)  Is it the least bad approach?  The answer depends upon one’s view of the functionally of our governance structure.  Let’s just say that “dysfunctional” would not egregiously mis-characterize U.S. governance at present.

Recognition of the right problem and a useful framework for policy discussion must come first.  As Rogoff puts it in the article linked above,

The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were.

Acknowledging that we have been using the wrong framework is the first step toward finding a solution. History suggests that recessions are often renamed when the smoke clears. Perhaps today the smoke will clear a bit faster if we dump the “Great Recession” label immediately and replace it with something more apt, like “Great Contraction.” It is too late to undo the bad forecasts and mistaken policies that have marked the aftermath of the financial crisis, but it is not too late to do better.

Economists Weigh in on Debt Deal

Former White House economist, Larry Summers, gives his take on the debt deal, concluding that it “solves the wrong problem.”  These seem to be the takeaway points:

Despite claims of spending reductions in the $1 trillion range, the actual agreements reached so far likely will have little impact on actual spending over the next decade.   The deal confirms the very low levels of spending already negotiated for 2011 and 2012, and caps 2013 spending about where most would have expected this Congress to end up.  Beyond that outcomes are anyone’s guess—the reality is that Congress votes discretionary spending  annually and the current Congress cannot effectively constrain future actions…

Remarkably for a matter so consequential the agreement that the Supercommittee will seek to reduce the deficit by $1.5 trillion comes without any agreement on what the baseline is from which the $1.5 trillion is to be subtracted.  Is the $1.5 trillion from a baseline that includes or excludes the Bush tax cuts? Includes or excludes tax extenders and the annual AMT fix?

Reuters also provides some space for alternate viewpoints, including those of Cafe Hayek bloggers Russ Roberts and Don Boudreaux.  Roberts doesn’t seem to buy Summers’ claim that spending is “low” this year:

Spending in 2011 is estimated to come in at $3.8 trillion or just over 25 percent of GDP. That’s the highest ratio since 1945 — in 2005, the ratio was under 20%. Calling $3.8 trillion dollars “very low” is very hard to understand, unless you see a crying need for an even larger number…

What does it matter? As regular readers probably know, Roberts is in Hayek’s corner in the Keynes v. Hayek dust up, with Summers in the Keynesian corner. Hence, there is some disagreement as to what’s likely to happen here:

And that brings us to the essence of Summers’ worldview… The key problem, says Summers, isn’t that we spend too much, it’s that we spend too little to reduce the unacceptably high level of unemployment. According to Summers, growth is driven by aggregate demand and aggregate demand is driven by government spending. What is the evidence that increases in government spending lead to growth? Very little, unfortunately…

We’ve plowed this ground before.

Schumpeter a Marxist? “Not so fast,” says Galambos

Nathan Rosenberg explicates Schumpeter’s Marxist proclivities in the most recent issue of Industrial and Corporate Change.

Was Schumpeter a Marxist?

Abstract: This article explores the degree to which Joseph Schumpeter may be regarded as a follower of Karl Marx. It argues that Schumpeter and Marx shared a common vision, including agreement on the growth in the size of the firm and in industrial concentration, the inherent instability of capitalism and the inevitability of “crises”, and the eventual destruction of capitalist institutions and the arrival of a socialist form of economic organization as a result of the working out of the internal logic of capitalist evolution. Schumpeter’s main qualification is his insistence upon the importance of temporal lags, i.e., social forms that persist after they have lost their economic rationale, and he suggests that the essence of capitalism lies in the inevitable tendency of that system to depart from equilibrium. The article emphasizes the continuing importance of economic history for economics.

In one of the two responses to Rosenberg’s piece, Louis Galambos doesn’t think the shoe fits:

Was Schumpeter a Marxist? My own answer is “No.” Why? Because I have a simple standard for judging who is in and who is out when Marx is the subject. To be a Marxist, I think you need to use the labor theory of value; you need to use social classes as a central element in your theory; and you need to believe that the end point of capitalist development is the inevitable economic collapse of a system that cannot sustain itself even with desperate political and military measures.

Since Schumpeter did not use the labor theory of value, did not employ social classes as a central element in his grand theory, and certainly did not see economic collapse as the end point of capitalism, he cannot be a Marxist.

Each of these is available through The Mudd via the campus IP address.  Those of you who slogged through Capitalism, Socialism, and Democracy should find these very illuminating reads, indeed.

The Debt Ceiling Is At Best Superfluous

In today’s New York Times Economix column, former advisor to presidents Ronald Reagan and George H. W. Bush Bruce Bartlett argues persuasively that the debt ceiling and debate about it accomplishes nothing constructive that is not already contained in the Congressional Budget and Impoundment Control Act of 1974.  Former Fed Chair Alan Greenspan made this point emphatically in his 2003 testimony to Congress.

In the Congress’s review of the mechanisms governing the budget process, you may want to reconsider whether the statutory limit on the public debt is a useful device. As a matter of arithmetic, the debt ceiling is either redundant or inconsistent with the paths of revenues and outlays you specify when you legislate a budget.

Current Fed Chair Bernanke put it even more starkly when he noted that the debt ceiling legislation is equivalent to using a credit card to buy things and then refusing to pay the bill when it arrives.

Innovation and Entrepreneurship Ride to the Rescue

Although there is some disagreement amongst economists, many argue that traditional monetary and fiscal policy will not take the US economy from its current relatively stagnant state to the robust growth needed to employ many of the 8 million who were unemployed during the recent recession as well as the new entrants into the labor force.  As those in Intermediate Macroeconomics learned, since we add roughly 1.5 million people to the work force each year, we need about that number of jobs just to keep  unemployment from worsening.

As several studies from the Kauffman Foundation have shown, the vast majority of new jobs created in the United States come from new firms (that is firms that are five years old or younger),  not from large firms or small firms and not from governments.  In recent years, fewer new firms have been created than  in the past, and each of these firms has generated fewer jobs than in the past.  The Kauffman Foundation has put together a non-partisan “Startup Act Proposal” to jump start the economy.  It is entitled “Access to Capital: Fostering Job Creation and Innovation Though High-Growth Startups.”   The four key provisions are as follows:

1.  Provide a permanent capital gains exemption to investment in startups held for at least five years.

2.  Reduce the corporate tax burden for new companies in the first three years they have taxable income. (This may be already doable under subchapter S of the corporate tax code.)

3.  Reduce Sarbanes-Oxley requirements for firms with less than  $1 billion in market capitalization.

4.  Subject federal regulation to 10 year sunset.

Carl Schramm and Robert Litan, on behalf of the Kauffman Foundation also argue for removing the caps on skilled immigrants and immigrant driven entrepreneurial ventures.

These are intriguing ideas.  They should encourage Lawrence students to sample our Innovation and Entrepreneurship courses.  Check out Schramm and Litan’s presentation last week to the National Press Club.

Alan Greenspan on Excessive Risk Avoidance

In today’s Financial Times, former U.S. Federal Reserve Chair Alan Greenspan opines that we can carry risk aversion too far.   Greenspan’s discussion parallels that posted by Professor Gerard related to the interview of Vernon Smith.  In particular, Greenspan argues persuasively that the more we set aside to protect against once in 50 year or once in 100 year adverse events, the less capital we have to devote to productive activities.  He cites bank reserves in excess of $1.5 trillion as excessive private risk aversion.  Regarding public policy, he argues as follows:

What is not conjectural, however, is that American policymakers, in recent years, faced with the choice to assist a major company or risk negative economic fallout, have regrettably almost always chosen to intervene. Failure to act would have evoked little praise, even if no problems subsequently arose; but scorn, and worse from Congress, if inaction was followed by severe economic repercussions. Regulatory policy, as a consequence, has become highly skewed towards maximising short-term bail-out assistance at a cost to long-term prosperity.

This bias leads to an excess of buffers at the expense of our standards of living. Public policy needs to address such concerns in a far more visible manner than we have tried to date. I suspect it will ultimately become part of the current debate over the proper role of government in influencing economic activity.

Sustainable China Initiative

Speaking of web interviews, check out Professor Finkler talking about the Henry Luce Foundation grant for the Sustainable China initiative.  A fluid speaker, indeed.

You can get the full story on the Lawrence homepage.  The initiative includes this fall term’s Econ 209, Water, Politics, and Economic Development, which includes a trek to China in December.

Interview with Vernon Smith

Last week I had a discussion with Professor Azzi about the classic piece, “Market contestability in the presence of sunk (entry) costs,” where Vernon Smith and his colleagues examine the dynamics of market structure.  They find that even with the same initial conditions, an industry sometimes winds up competitive and sometimes winds up characterized by market power, a finding that we may well flesh out in IO this fall.

With that in mind, I was pleased to see a link to a ReasonTV.com video interview with Smith making the rounds on the econ blogosphere.  In the interview Smith — the pioneer of “experimental” economics — talks about how asset bubbles show up in the lab whether you want them to or not, and his assessment of the government’s bailout of many homeowners:

Forgiving debt is not a good idea, but you have to realize that we don’t face any good options. If it hadn’t been done, the banking system would likely have collapsed.

Aside from that note, Smith also touches upon the marginal revolution, The Theory of Moral Sentiments, and growing up through the Great Depression.  An interesting half hour all around.

I recall seeing him speak about the troubled state of electricity regulation a few years back, where he said something to the effect of: “the regulators’ solution is to set average revenues equal to average costs, and it’s this sort of average thinking that got us into this mess.”

Great line!

On the Brink

There has been much consternation these past few weeks about the federal budget and the debt ceiling, with the possibility that the ratings agencies could downgrade the U.S. credit rating.    While some cheer the possibility of a U.S. default as a necessary step to reign in spending, MIT economist Simon Johnson writes that such a default would yield rather unhappy consequences.

A government default would destroy the credit system as we know it. The fundamental benchmark interest rates in modern financial markets are the so-called risk-free rates on government bonds. Removing this pillar of the system—or creating a high degree of risk around U.S. Treasurys—would disrupt many private contracts and all kinds of transactions.

The result would be capital flight—but to where? Many banks would have a similar problem: A collapse in U.S. Treasury prices (the counterpart of higher interest rates, as bond prices and interest rates move in opposite directions) would destroy their balance sheets. There is no company in the United States that would be unaffected by a government default—and no bank or other financial institution that could provide a secure haven for savings. There would be a massive run into cash, on an order not seen since the Great Depression, with long lines of people at ATMs and teller windows withdrawing as much as possible.

Yikes.

But that’s not all:

Private credit, moreover, would disappear from the U.S. economic system, confronting the Federal Reserve with an unpleasant choice. Either it could step in and provide an enormous amount of credit directly to households and firms (much like Gosbank, the Soviet Union’s central bank), or it could stand by idly while GDP fell 20 to 30 percent—the magnitude of decline that we have seen in modern economies when credit suddenly dries up.

With the private sector in free fall, consumption and investment would decline sharply. America’s ability to export would also be undermined, because foreign markets would likely be affected, and because, in any case, if export firms cannot get credit, they most likely cannot produce.

Not exactly a rosy picture.

Does China Invest Too Large a Portion of Its Income?

A recent blogpost by Professor Gerard (with the supporting observations from Dr. Doom (Nouriel Roubini) suggests that the answer might be yes.  At some point, this will be true, but I’m not sure that it will happen in the next few years.

As a recent visitor to the Middle Kingdom (last two weeks in June) and to the western part of the Middle Kingdom in particular (Guizhou Province), I observed an incredible amount of building.    Housing construction continues its rapid pace and not just in the biggest cities (such as Guiyang) but in regional (within the province) outposts such as Kai Li and even fast growing  counties (such as Danzhai.)  Furthermore, the links among these places are made by new toll ways and long tunnels through the mountainous countryside.  Airports and local road improvements are also underway.

Is it too much?  Has the marginal product of capital become small or even negative?  It’s too soon to tell.  It must be noted that China is approaching 50% urbanization which suggests that interurban transport and urban housing will be needed along with other critical infrastructure pieces such as water filtration and waste water facilities.  These items certainly have found their way into provincial budgets.

In a recent article in Seeking Alpha, Shaun Rein, the Managing Director of the China Market Research Group, begs to differ with Dr. Doom:

“However, most of Roubini’s conclusions are based on phantom facts, as is his evidence for why China will have economic problems. There is no direct flight between Shanghai and Hangzhou, nor is there a maglev train system connecting the two cities. Shanghai has two — not three — airports, and the last new one opened a dozen years ago, in 1999. Both the Hongqiao and Pudong airports have been adding runways and terminals because the airports are too crowded, contrary to Roubini’s suggestions of emptiness. Pudong’s passenger and cargo traffic grew 27% in 2010, to 40.6 million passengers. It is now the third busiest airport in the world in terms of freight traffic, with 3,227,914 metric tons handled every year. Continue reading Does China Invest Too Large a Portion of Its Income?

“The closer you look, the worse it gets”

The economic situation in Greece is downright gruesome, and I have to wonder how bad the social unrest is to become there.  The principal source of my pessimism is a piece from last October where Michael Lewis essentially argues that the situation is hopeless:

But beyond a $1.2 trillion debt (roughly a quarter-million dollars for each working adult), there is a more frightening deficit. After systematically looting their own treasury, in a breathtaking binge of tax evasion, bribery, and creative accounting spurred on by Goldman Sachs, Greeks are sure of one thing: they can’t trust their fellow Greeks.

I saw a couple of updates to that unhappy picture this week.  First up, James Surowiecki in the New Yorker gives an accounting of Greece’s rampant tax evasion, a point Lewis also makes rather starkly. Indeed, the Surowiecki piece reads like an Executive Summary of Lewis’s article, with each arguing that the social and cultural aspects in Greece are broken and are effectively impossible to fix.

The second piece is from Tyler Cowen in the New York Times, where he argues that the situation is pretty dire even without factoring in the social difficulties of implementing meaningful policy reform. Cowen’s piece discusses some of the difficult choices facing the EU, and reminds us that lurking in the background are the potentially large problems of EU members from Italy to Portugal to Spain.  Cowen doesn’t have much hope, concluding that “There’s a lot of news on the way, but probably very little of it will be good.”

Well, enjoy your weekend!