Can we as­sist in bring­ing Odysseus home?

Greek politi­cians are re­spon­si­ble for solv­ing the debt prob­lem – no­body else can do this, says Bob Traa in his lat­est Note for Dis­cus­sion

Kathimerini English - - Focus - BY BOB TRAA *

ANAL­Y­SIS

GGGGGOdysseus is stuck in the 180-per­centof-GDP debt land. He dreams of his beloved Ithaca, which is be­low-60per­cent-of-GDP debt land. Life is much sweeter where he came from, and he wants to go home. For­tu­nately, Odysseus is cun­ning and coura­geous and is will­ing to travel long, with dis­ci­pline and flex­i­bil­ity. He has many more men and women to take home now, about 10.5 mil­lion, rather than the group that ac­com­pa­nied him on a sim­i­lar trip from Troy so many years ago. Can we help to bring Odysseus home?

He knows a few things. The jour­ney will not be easy. He will be taunted that his voy­age is im­pos­si­ble. He will get all sorts of ad­vice. Some will make sense, oth­ers will be self-serv­ing. And, oh, at ev­ery turn, there will be the sirens, the agents of debt, to tell him that if only he took on some new debt, he could make prom­ises to his pas­sen­gers on their long jour­ney to have things easy. Lis­ten­ing to the sirens of debt, Odysseus knows that he would not need to pay back all this debt; that would be for his young pas­sen­gers to do. So, he would re­ally be play­ing with OPM – other peo­ple’s money, or, as we might say, TPM – tax­payer’s money. If you can prom­ise sweets and never per­son­ally have to pay for it, that is what makes the sirens so se­duc­tive. So, we need to stop up the ears of the crew and bind Odysseus to the mast of sound agree­ments and con­stant mon­i­tor­ing; one should not be se­duced by the sirens again – the agents of debt.

Odysseus has cho­sen well his mo­ment to set sail. The flow im­bal­ances are in bet­ter shape: The fis­cal and ex­ter­nal bal­ances are caus­ing few new debt pres­sures at the mo­ment, so there are no leaks of wa­ter again ris­ing in the boats. The sun is shin­ing and part­ner coun­tries have promised to lend a help­ing hand if the seas were to turn rough again.

Odysseus called on all pas­sen­gers the evening be­fore de­par­ture on this ar­du­ous trip to give a rous­ing speech. He star­tled them by ex­plain­ing that the voy­age would take 62 years, about the chal­lenges they would en­counter, and that he would no longer be alive when they ar­rive at Ithaca. But, he said, “we need to do this for the new gen­er­a­tion who will then be in charge.” He had one piece of good news that calmed the peo­ple some­what: The stan­dard of liv­ing would slowly in­crease, on av­er­age, dur­ing this voy­age, even though the head­line rate of growth would be mod­er­ate. “This is pos­si­ble if we stick to the plan and stay flex­i­ble,” he said. “If we suc­ceed, con­di­tions will grad­u­ally im­prove as we get closer to our des­ti­na­tion.” Then, for a smaller group of com­man­ders, he laid out his plan in more tech­ni­cal terms.

He went through the pre­lim­i­nar­ies and as­sump­tions once again:

De­mo­graph­ics can­not be de­nied; the pop­u­la­tion would grad­u­ally de­cline.

With it, em­ploy­ment would de­cline, lim­it­ing head­line growth, af­ter an ini­tial re­cov­ery.

Re­form poli­cies need to im­prove em­ployee pro­duc­tiv­ity growth to 1.5 per­cent a year.

Com­pet­i­tive­ness poli­cies need to keep in­fla­tion at or be­low 1.75 per­cent a year. These con­di­tions im­ply log­i­cally

Gthat real GDP and nom­i­nal GDP will grow mod­er­ately. “Steady and pre­dictable is bet­ter than fast and dis­as­trous,” said Odysseus. The fis­cal bal­ance starts off in much bet­ter con­di­tion, with some caveats:

* Some debt is gen­er­ated out­side of the fis­cal perime­ter; this needs to stop;

* The ef­fec­tive in­ter­est cost of debt will rise over time;

* Aging costs are man­age­able as long as the re­forms hold; Odysseus warned against easy prom­ises that these re­forms could be can­celed with­out any dam­ag­ing ef­fect – “this is not cor­rect,” he said.

Based on this frame­work, the cap­tain had plot­ted the fol­low­ing course, which, given the lim­i­ta­tions on growth and other ca­pac­ity con­sid­er­a­tions, would take un­til 2080 to com­plete:

With the planned near-term fis­cal ex­pen­di­ture plan, and the re­cov­ery in nom­i­nal GDP, pri­mary ex­pen­di­ture (yel­low line) was on track to de­cline to 41-42 per­cent of GDP in the 2020s (Fig­ure 1). Rev­enue (red line) would ease to 45 per­cent of GDP as some tax re­form would aim to lessen un­fair dis­tri­bu­tional bur­dens and broaden se­lected tax bases for im­proved rev­enue sus­tain­abil­ity. These ob­jec­tives are al­ready in the gov­ern­ment’s medium-term plan. Over the longer run, rev­enue would be kept at 45 per­cent of GDP and pri­mary ex­pen­di­ture could very grad­u­ally in­crease as growth ad­vanced and the debt ra­tio to GDP starts com­ing down.

“The chal­lenge,” noted Odysseus, “is to keep the bud­get in bal­ance (no new debt) un­til we have passed the most treach­er­ous part of our jour­ney” (yel­low line in Fig­ure 2). “Thus, the pri­mary sur­plus will ease only grad­u­ally, and will be kept pos­i­tive un­til we ar­rive at our des­ti­na­tion.”

“But, cap­tain,” said one of the com­man­ders, “peo­ple say that this has never been done be­fore and can­not been done.” “Our choice seems rather straight­for­ward,” noted Odysseus. “Would you pre­fer to drown in debt for sure, or es­tab­lish that we will de­ter­mine what we can do, rather than oth­ers de­ter­min­ing on our be­half that we will fail?” “Any other ques­tions?”

“Cap­tain?” asked another, “Does a bal­anced bud­get mean that we can­not prac­tice coun­ter­cycli­cal fis­cal pol­icy? Surely, the voy­age is long and there may be mo­ments that we need sup­port for ac­tiv­ity as the boats may be dead in the wa­ter. At other times, there may be squalls and we need to ease off the speed, lest we hit some rocks.” “We can still prac­tice coun­ter­cycli­cal poli­cies,” ex­plained Odysseus, “but this must be done with a bal­anced-bud­get mul­ti­plier. Thus, if we want more spend­ing, we need to raise taxes to pay for it. If we cut spend­ing, we can cut taxes by an equiv­a­lent amount. The in­crease will sup­port growth, the re­duc­tion will slow it down, but the fis­cal im­pulse will be less pow­er­ful than an im­bal­ance fi­nanced by new debt.” This caused a stir among the men; never heard of this be­fore – if you want more spend­ing, you need to pay for it, rather than pre­sent­ing the bill to the chil­dren!

“The lead­er­ship may say they fa­vor a bal­anced bud­get, but will they do it, cap­tain?” said the men. “This is where we need to stop up our ears and ig­nore the sirens,” said Odysseus. “Sound agree­ments on the course of ac­tion, and good mon­i­tor­ing are of the essence.”

“How can the peo­ple see that we are on course and keep our prom­ises?” asked the men. “With­out some­thing re­ally vis­i­ble and easy to mon­i­tor, we may lose their sup­port.” “We must mon­i­tor one vari­able above all oth­ers,” said the cap­tain. “If we run a ‘true’ bal­anced bud­get, then the debt, in eu­ros, will not grow.” “So, the real test of our course is whether we can say whether the stock of debt is grow­ing or stays the same, or even comes down.” “If we stay on course, the debt in eu­ros will not grow, and the debt ra­tio to GDP will de­cline, even­tu­ally to be­low 60 per­cent of GDP, with the pol­icy ob­jec­tives ex­plained above,” said Odysseus. “Fig­ure 3 shows our course.” “Only when we get closer to our des­ti­na­tion will we be able to place some net debt again,” he added.

The men only now fully re­al­ized the chal­lenges that would await them

GGGon their way home. “It is go­ing to take long and we must stay the course,” they said, but they were re­as­sured that a path ex­ists that would get them home.

The job now was to im­ple­ment it and mon­i­tor any de­vi­a­tion closely. Out of his log book, which con­tained the nav­i­ga­tional co­or­di­nates for this long voy­age, Odysseus then con­jured up a sum­mary ta­ble that he dis­trib­uted to all the com­man­ders of the fleet, each be­ing re­spon­si­ble for a ves­sel in the ar­mada (Ta­ble 1). “This is the plan,” he said. “There are a few con­clud­ing re­marks that I wish to make:

This plan looks lin­ear and smooth, but the voy­age will not be. There will be volatil­ity and ups and downs. If we look through this noise and stay the course, we will ar­rive at our des­ti­na­tion.

If we can use our pri­va­ti­za­tion pro­gram to sell some as­sets and re­duce the debt, then we can ar­rive early; and/or we can ab­sorb some sur­prises that may still come. Debt is not what makes an econ­omy grow. Pro­duc­tiv­ity and com­pet­i­tive­ness

GGare. That is why we need to ig­nore the sirens and in­stead strengthen our struc­tural poli­cies to be most ef­fi­cient.

If the crit­ics say that ‘this can­not be done,’ we need not say any­thing, but only do. It will not be the first, nor the last, time that Hel­las was un­der­es­ti­mated. Our voy­age starts to­mor­row; watch the nom­i­nal debt.”

Some clos­ing thoughts

GGGGGGGSome friends who were kind enough to read this story to give me feed­back asked me whether, per­haps, I had been to Am­s­ter­dam, sat in a cof­fee shop, and smoked some­thing il­licit? Sixty-two years for a plan in a coun­try that has hardly demon­strated po­lit­i­cal cohesion and co­op­er­a­tion? What is the like­li­hood that Greece can do this?

Au con­traire, I told them. Greece should not try to rush a solution. Greece could solve this prob­lem much quicker, but this al­ter­na­tive is a ter­ror regime to squeeze the pub­lic for money un­til the pips come out. The debt may come down quickly at first, but whether this is sus­tain­able or in any way so­cially op­ti­mal is very much in ques­tion. A third al­ter­na­tive is to de­fault, or ask for more debt for­give­ness. Does Greece re­ally want that? The exit from the pro­grams was to demon­strate that the coun­try can be its own guardian of the fu­ture, not driven by the pref­er­ences of oth­ers. So, that does not seem as­sur­ing ei­ther.

In­stead, I would place this co­nun­drum on its head:

Rec­og­nize the re­al­ity of de­mo­graphic tran­si­tion which slows economies down.

De­cide that if you bor­row money, then you have to pay it back, lest you pre­fer to play fast and loose with your rep­u­ta­tion, which never ends well.

Be re­al­is­tic, dis­ci­plined, and yet flex­i­ble. If a prob­lem has taken 200 years to evolve into the debt sit­u­a­tion of to­day, then it is OK to plan for 62 years of grad­ual res­o­lu­tion.

It is not aus­ter­ity if per capita in­comes con­tinue to ad­vance at a steady, al­beit mod­er­ate pace (which is in any event de­ter­mined by real fac­tors, not the debt).

Take 62 years be­cause that does not squeeze the pub­lic un­til the pips come out; thus, we need a hu­man­i­tar­ian solution that is mon­i­torable and ac­cept­able to most rea­son­able ac­tors that ac­com­pany Greece’s voy­age.

Work with part­ner coun­tries to find ways and op­tions to get the debt down in an op­por­tunis­tic (faster) man­ner along the way. Pri­va­ti­za­tion for con­di­tional debt re­lief (I will ex­plain later), and pos­si­ble agree­ments to roll over the in­ter-coun­try debt with EU part­ners at fa­vor­able in­ter­est rates un­til the hori­zon date of 2080 should be ex­plored. There is still room for all part­ners to help Odysseus come home. Mon­i­tor­ing by the Greek pub­lic is easy: no more in­creases in the nom­i­nal stock of debt. If and when this hap­pens any­way, the gov­ern­ment needs to ex­plain why and what for, and also in­clude what the re­turn ticket from this de­vi­a­tion looks like. * Bob Traa is an in­de­pen­dent economist. This is the 13th in a se­ries of ar­ti­cles by him for Kathimerini ti­tled “Notes for Dis­cus­sion – Es­says on the Greek Macroe­con­omy.” must rec­og­nize the re­al­ity of de­mo­graphic tran­si­tion which slows economies down. Pol­icy mak­ers must ac­cept that if you bor­row money, then you have to pay it back, lest you pre­fer to play fast and loose with your rep­u­ta­tion, which never ends well.

Greece, Traa claims,

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