Tuesday, July 7, 2015

Greece: Politics Not Economics Redux

A great deal of the public bandwidth - that part not dedicated to well-deserved shout-outs to the USA Women's National Team - is being taken up with Greece and its future. This past Sunday's "No" vote took a lot of people by surprise, it seems, and has set off plenty of speculation and finger-pointing.

I'm not a good enough prognosticator to say how this is going to turn out. I'm also not a good enough economist to know whether the No vote was a "good idea" or a "bad idea", which seems to be what's driving much of the discussion. In short, I don't know whether the Greeks will be better off or worse off in the short or medium term - and neither does anybody else, whatever they may say.

But there are a couple of dimensions of the situation I haven't seen discussed yet:

• I heard a debate yesterday about whether the referendum in Greece would strengthen or weaken Greece's position in future negotiations. This is one of the few things I can comment on with authority, since I teach this stuff. It is incredibly rare that one side in a negotiation over unidimensional concessions (more vs. less austerity, to be simplistic) gets to make an almost ironclad commitment to its position. This is the proverbial "throw the steering wheel out the window" move in Chicken. Every game theorist will tell you it's a brilliant strategic move if you can make it genuinely credible.

So Greece has laid down a marker that says, this far and no farther. What if the rest of Europe won't agree to terms that are acceptable to the Greek public? What if the German public, or some combination of European power centers, refuses to meet the Greeks where they now stand immovable? Then from a negotiation standpoint the negotiations were always going to fail, because there was never any acceptable agreement there anyway. Bargaining is about revealing information to discover whether this is an agreement acceptable to both sides. We will soon find out. If the answer is "no", then there's no deal - because one never existed in the first place. Sometimes the sides are too far apart and you just can't create an agreement out of nothing. 

So what Greece did, by holding its referendum, was insure that either they get an agreement acceptable to their own public (and therefore the stability of their government), or no agreement at all. That's smart bargaining, however much some folks might not like it.

• Amidst all the argument about whether Greece should vote No or not, or whether they should stay in the Euro or not, we've lost sight of one very important thing: the whole debate is about politics, not economics

Much of the public discussion is focused on the economic impact of various scenarios, including the "Grexit" (Greece leaving the Euro), where "economic impact" is generally measured by GDP. But the aggregate size of an economy, or even the mean GDP per capita, is only one way of measuring outcomes - and not necessarily the most important one. While an economy generates wealth, it also distributes that wealth. And distribution is a fundamentally political, not economic, question.

It may well turn out that the outcome of the present crisis is that the Greek economy (GDP) shrinks by more than it would have had they accepted terms from the rest of Europe. But if, at the same time, the remaining economic wealth is shared more evenly across the population then that outcome will look far better to most Greeks than one in which the GDP is higher but the benefits flow only to a few. Voting for the former over the latter would actually be the most individually rational thing most Greeks could do, were they given the choice.

I have no idea if a Grexit will spread wealth around better, or if it will reduce Greek GDP farther than the alternatives. I'm not a good enough economist to be able to predict the outcomes of these various scenarios. What I do know is that the economics don't matter nearly as much as the politics do. If the choice is being poor and free vs. being rich (collectively) but enslaved through debt to others, what would you choose?

• Finally, I see some interesting parallels between the Greek situation and the collapse of the US housing market a few years ago. Both were driven by massive, unsustainable levels of debt brought on by extremely unwise borrowing. In the US, we had something of a debate (though with little real consequence) about whose fault this was - the borrowers who took out mortgages they couldn't afford or the banks who lent money knowing that the borrowers would never repay, only to repackage that debt and sell it off to other suckers. There was some blame on both sides, but the power (and therefore the greater responsibility) seemed to rest clearly with the banks.

I don't see a similar discussion with regard to Greece. There is plenty of agreement that the Greeks have borrowed way too much money, and plenty of finger-pointing at them for having done so. But who lent them that money? At what point did those lenders cross the line between responsible and irresponsible lending? The IMF apparently figured out that Greece will never be able to repay all of its debts; where were the other lenders when that calculation should have been done? It's easy to point fingers as the "lazy" Greeks, but somebody (mostly Germany, by most accounts) lent them the money. What responsibility do lenders have to do their homework and lend responsibly?

In all of this, I have a great advantage - I live far enough from Greece that the impact on my circumstances is likely to be small whatever the outcome, and I'm not so attached to any particular ideological tribe that I feel compelled to have a strong opinion about the situation in order to bolster my own views. Most Americans commenting on the situation share the former condition but not the latter - there's a great deal of self-serving going on as different people weigh in. For myself, I am content if the Greek people end up being able to influence their own future, even if it's not a future I would necessarily choose. For me, it's easier to celebrate freedom and popular sovereignty in action than to cheer for the growth in abstract numbers. As for the outcome, we'll just have to wait and see.

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