Home > economics, Guest Author, international > Is Krugman Right About Greece?

Is Krugman Right About Greece?

By GreeceDefaultWatch

Krugman has written another column arguing that the European crisis is really the fault of Brussels. All the things that are wrong with Greece are “beside the point” and have little to do with “the crisis that is tearing Greece apart.” Rather, the “the origins of this disaster lie farther north” with the creation of a “deeply – perhaps fatally – flawed monetary system” and with Europe’s inability to respond to the crisis. Krugman’s view is almost mainstream among economists, and since he is both eloquent and influential, he matters. But is he right?

Krugman spends two paragraphs on Greece before moving on to critique Europe. In those two paragraphs, he makes four points:
He writes that, “Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means.”
He notes that “Greek labor productivity is … about 25 percent below the European Union average,” although he notes that this is no different than Mississippi relative to the US average.
Then, he turns to the unfair comments about Greece. Greeks are not lazy because “they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular.”
Finally he notes that Greece does not have “a runaway welfare state, as conservatives like to claim” because “social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany.”
Even so, these facts don’t matter, says Krugman. Of course, dispensing of such a complicated economy and society in 163 words before giving it a cleanish bill of health is like your doctor telling you don’t need to come in for a check-up because you sound “just fine” on the phone. This is not a serious analysis of Greece. Let’s look at each claim in some detail.

Claim #1 is that while corruption is in fact high in Greece, this is not a material fact. Yet corruption is essential in understanding how Greece reacted to this crisis. It tells us a lot about what reforms have not happened and why. It tells us why the public’s response to austerity has been explosive as people see their tax bills grow while tax evasion is rampant. The inability to collect taxes undermines a government’s commitment to change. And, the country’s fiscal hole would be smaller if the country could collect taxes. Insofar as healthy public finances are essential to regain market access, this is not a trivial fact.

Claim #2 is that Greek productivity is as low as productivity in Mississippi. Let’s come back to Mississippi later on.

Claim #3 is that Greeks work longer hours than Germans. As I have written before, this is a statistical artifact, which says only that part-time employment in Greece is low. Nor does longer mean harder: in fact, per working hour, Greek labor is much less efficient than German labor. The stereotype that “Greeks are lazy” is in fact a stereotype; but Krugman’s effort to refute this idea is poor. An economist of Krugman’s erudition should know better.

Claim #4 is that social spending is not too high relative to the European countries and, thus, it is not a big deal. But looking at social spending as a share of GDP tells you little. Greece’s problem is not, strictly speaking, the size of the state which is not unprecedented. Rather, the problem is quality: because social services are so poor, there is a parallel system that is draining resources. Middle class parents pay for tutors and evening schools (“frontistiria”). In healthcare, people either bribe to get quality services or they bypass the system altogether and rely on the private sector. These are real costs to households that do not show up – and they matter because many Greeks pay for these services twice thus draining resources.

Having said all this, Krugman then turns to Europe. He makes two points: first, when Greece joined the Eurozone, “people started believing that it was a safe place to invest. Foreign money poured into Greece, some but not all of it financing government deficits; the economy boomed; inflation rose; and Greece became increasingly uncompetitive.”

This is true, but Krugman is missing something here. Greece being a safe place to invest was in fact an illusion – but it was an illusion that has since been corrected. Basically, markets assumed that all countries in the Eurozone were equally creditworthy even though they were not. The euro was partly to blame but only indirectly – there is nothing in the common currency that says (public) borrowing should be the same for all countries. As I have noted before, our current crisis is partly driven by markets trying to re-price European sovereign debt correctly. Without the euro, Greece would have suffered an economic crisis that would have come sooner and would have been milder. But the fundamentals of the economy would not have changed much nor is there any reason why normal market forces – higher interest rates – cannot work in a currency union.

The second critique is that a monetary union cannot work without a strong central government. Krugman says “Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.”

Well, Greece is not Florida. First, Florida pays billions of dollars in federal taxes ($136 billion in 2007; for 2009, individual income taxes, a subset of the total, were $57.6 billion). Florida gets federal money because it also pays federal money. Balancing Florida’s $58 billion (2009) budget would be much easier if Florida were not sending this money to Washington. To compare Florida’s finances to Greece you need to refund Florida lots of money (Europeans do pay indirectly for an EU budget, but its size is small relative to the US federal government).

But this is a trivial objection. There are two more basic objections. First, let’s look at Mississippi. In 2009, its $14.1 billion spending included $7.6 billion from the federal government (since it also sent money to the federal government, the net transfer is smaller). Is this transfer helping the economy in Mississippi? Would the economy be more productive if this amount of money were not available? In general, “rentier economies” that receive a steady flow of money tend to reform slowly. Mississippi is not a rentier state, but in some ways it is. Would Mississippi be better off without this federal money? This is a key question to ask for Greece as well and one that Krugman ought to answer. We need to think about the political economy implications of these transfers not just state that the economy would be in less hardship without them.

The second objection is Greece’s access to capital markets is not the same as Florida’s. When a country hits a crisis, it can cut spending but it can also borrow. Greece’s problem is not that it is in the euro, but that no one has faith in the government’s ability to repay back the debt that it wants to borrow. Now you can argue that this crisis of confidence is linked to the euro and to the doubt that markets have about how Greece will grow. But this is fundamentally a political suspicion, not an economic one. It is a doubt about the country’s ability to change.

Krugman assumes that membership in a common currency means that this elementary market system will not work. But why not? Why can’t two countries with the same currency have different borrowing costs (as they do now) and hence receive different market signals on the need for change? If Greece had compelling politicians, its ability to borrow and weather this crisis would be greater – interest rates are the market’s way of communicating this to the government.

Krugman ends up by saying that, “the Greeks can’t solve this crisis anyway.” They cannot solve the European crisis, no. But they can solve the Greek crisis. They can collect taxes and cut wasteful spending. They can fight corruption in public and private life. They can fix health care and education, both of which are broken. They can privatize industries and reform the private sector to combat monopolies and oligopolies. They can establish rule of law and make the country safer for entrepreneurs. All this Greece can do by itself. Krugman is letting his anger at the European elite give Greece a free pass. He should know better.

  1. Rogue Trader
    July 2, 2012 at 3:14 pm

    OK so you spent a 2 page writeup to confront Krugman’s arguments 1 by 1,
    and then you end up with an all-greek “wishful thinking” paragraph, posting a romantic, completely unrealistic …christmas wish to the Santa Clauss, which of course does not stand a chance of becoming true, ever: “But they can solve the Greek crisis. They can collect taxes and cut wasteful spending. They can fight corruption in public and private life. They can fix health care and education, both of which are broken. They can privatize industries and reform the private sector to combat monopolies and oligopolies. They can establish rule of law and make the country safer for entrepreneurs. All this Greece can do by itself.”
    Ha ha ha,,,
    Well, NO, Mr. Konsta, they just CAN’T. And WON’T. The things that you mention, are exactly the ones that Greece will NEVER attempt to resolve. Neither do they ever wish to engage with (real, not rhetoric) CHANGE. These are EXACTLY the plagues that Greece is not willing to cure ever. Why ? Because if it did, it would then NOT be Greece, in essence. Welcome to planet earth. You are (trying to) give Greece a free pass, NOT Krugman

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