My dumb economics question for the day is regarding Greece. The country has a population that isn’t much larger than the Chicago metropolitan area. Greece, like Chicago, is part of a currency union. Greece, like Chicago and surrounding suburbs, has borrowed a lot of money via issuing bonds. Suppose that the citizens of Chicago decided that they didn’t want to work very hard and then retire at age 50 and probably weren’t going to bother paying back their creditors. Would that be a crisis for the entire U.S.? For the dollar? For worldwide stock markets?
If the U.S. could suffer the, well, relaxation of Chicago, why can’t Europe handle one country whose citizens take a more relaxed view of work than their creditors would like?
[Separately, events in Europe seem to reward caveman-style investing. Italians and Greeks have a wonderful lifestyle that doesn’t include too much hard work. England has a set of entrenched interest groups (see Mancur Olson) that would appear to make sustained economic growth impossible. Absent a lot of fancy data from investment banks such as Goldman Sachs, an investor would run away from any opportunity presented in these countries in favor of investments in Germany, Korea, China, etc. In the last year or two we find out that England is in fact more or less broke and that the numbers the investment banks and Greece put forward were simply false. Japan, I suppose, is the best counterexample to this caveman-style investing approach. People there are highly skilled and work very hard, but investors haven’t done well in the past couple of decades.]
Greece’s economy is less than 4% of the Euro zone, so by that mark it’s relatively small. The main worry is what would happen if this escalates out of control. The debt is mainly held by German and French banks who (incorrectly) assumed governments to be a safe investment and they are so exposed they will collapse (so they will need to be bailed out by the government). And then there is the risk that Italian and Spanish tax payers might get the idea that defaulting on their debt is actually a better deal than trying to pay it back.
When the euro area was first set up they never set up proper rules to deal with this. Lots of economists have forewarned of this happening eventually, but few people expected that the Greeks would produce fraudulent numbers on such a huge scale. However, if politicians would have dealt with it decisively when it came to light a year ago in an “IMF” like manner it would never have gotten out of hand this badly. Just about every economist saw this coming from the start (the Economist magazine has been pointing this out forever), except for the players involved. A “Greek tragedy” indeed.
Jan: I don’t think the “escalate out of control” argument is necessarily a winner. Suppose that the Greeks stop working entirely. That’s a 4% reduction in Euro zone GDP, something that should be survivable by any economy. As for spreading the idea of default, I wouldn’t think that Spain and Italy would need the example of Greece. Plenty of countries have defaulted over the years. The U.S. has defaults every quarter (see http://www.bloomberg.com/news/2011-10-20/u-s-municipal-defaults-declined-last-quarter-distressed-newsletter-says.html for example). California surely must default either on its $200k+/year public employee pensions or its debt. But nobody seems too scared by the prospect.
Maybe the politicians would be better off saying “We’re going to do nothing and let the banks and Greece work this out through standard legal means. At worst, everyone in Europe will be 4% poorer and have to cut vacation time by two weeks. Meanwhile we are going to move on to bigger issues.”
Aren’t credit default swaps against Greek default also a major risk?
So if banks throughout the US had sold lots of insurance against the default of Chicago, and if nobody knew the extent or magnitude of those policies, and hence the effect on the banking system should Chicago default, *then* all the US could potentially have a crisis on their hands.
(And, as Jan said, if most US cities were close to default, the consequences of Chicago defaulting could carry over to the entire US in contagion.)
I think a larger risk is what happens to interest rates when/if Greece defaults. At >6% nominal rates, Italy is toast. Then Spain. And on down the line. Once markets believe that struggling economies won’t be “saved”, then rates are headed higher.
To be clear, I’m not arguing in favor of bailouts. But that is the risk with which I believe the Eurozone is concerned. Thinking that “what happens in Greece, stays in Greece” is similar to the logic that “what happens in subprime stays in subprime.” In absolute terms, the size of subprime loans wasn’t the issue. It was the secondary and tertiary impacts that all the defaults had.
The larger question, in my opinion, is this: when do governments stop bailing out bad actors so that markets actually start assessing and pricing risk properly. If the markets didn’t believe that “there’s no way the EU would let weaker economies default” then rates would have been much higher in Greece and this charade would have ended much sooner (or never would have started in the first place), when it wasn’t as much of a problem.
Too Big To Fail is getting bigger…
Besides, Greece is part of the Euro zone. Let’s say it cranks up the printing presses to pay off its debt, doesn’t that devalue the Euro for everyone?
That would be possible as long as every single state in the union was ok with sending money to Chicago indefinitely. (That might actually not be a big taboo in the U.S. Alaska, Mississippi, Alabama come to mind).
If even a single states votes to refuse to send more money, Chicago must default. Chicago banks are loaded with Chicago debt, and most of them go bankrupt. Depositors are protected not by the FDIC but by the CDIC, the Chicago Deposit Insurance Corporation. Chicago is still spending more than it earns, even without interest payments, and nobody will lend anything to Chicago, so it reneges of its CDIC obligations and depositors lose their savings. It must also cut spending at once to the level of their income, leading to a sharp spike in unemployment, which increases the costs of unemployment insurance, which leads to even more job losses. As the police force is being cut, the crime rate jumps up. Hundreds of thousands of people lose their jobs and their savings, and cannot easily move abroad, since they only speak Chicaguese.
Outside of Chicago, California has significant exposure to Chicago debt, because even if Chicago is only 4% of U.S. GDP, they had 8% of the total debt. California loses a lot of money, increasing its already enormous debt burden, and now investors, having seen the Feds fail to support Chicago, are getting increasingly worried, and start dumping their California bonds. Interest rates spike, even as unemployment increases as the population of Chicago stops going to Hollywood movies and buying iPods and California wine.
And the whole cycle starts again, but now with a state with 13% of national GDP.
I’m puzzled too. It seems simple: the people who loaned Greece money have lost their investment. Even if the greeks just spent it all on lumber, piled it up and lit it on fire the net loss to the world is limited to what was burned. Is all the shouting just an attempt to transfer the loss from one set of owners to another?
Michiel,
Wish I had you as my Econ professor. Great explanation.
The problem isn’t about Greece. Greece is just the tipping point. It’s about the fact that, to a first approximation, the entire world is in the same boat, and Greece just got to the cliff face first.
You’re trying to think of it as if Greece were that one guy at the office who drinks too much. It’s not. That guy’s coworkers can team up to pick up his slack while he goes to AA meetings. It’s more like Greece is the guy who just won the “most dysfunctional junkie on skid row” contest. Even the folks who didn’t win the contest are still skid row junkies. There’s no one who can pick up Greece’s slack, because the best any government can say is that they’re slightly less broke than Greece. Not that they’re not broke, but that they’re a little bit less bad off.
One layman’s view … In a word, leverage.
In the last decade, the entire banking system in the U.S. and Europe treated all sovereign debt as if it carried absolutely zero risk.
In the U.S., after we did away with the last vestiges of Glass-Steagal with Gramm-Leach-Bliley the Fed (according to Phil Gramm) was left as the superregulator, who used its discretion to effectively remove all reserve limits on the banks that it ‘regulated’.
This had the effect of allowing a bank to hold 2% or less in reserve, in combination with the loan assets on its balance sheet, against its liabilities. Well, when your loan assets do not perform (non-payment) and the collateral loses value (home and commercial property prices), if you actually do the responsible thing and mark your assets accordingly (to market instead of to myth), you can only absorb a 2% loss in your book before the FDIC comes knocking to execute Prompt Corrective Action (but they don’t). This is why they were all panicking pre-TARP. TARP just gave them a bit of breathing room while they got the mark to market rules changed by having a bought and sold congress hammer on FASB to change the rules. Once changed, and their balance sheets miraculously ‘fixed’ they proceded to pay themselves from the biggest bonus pools in history.
In the U.S. when those losses accumulate on the books and we do things like suspend mark to market accounting in favor of mark to model (myth) you actually consolidate system risk instead of dispersing it. Those loses are there, and when foreclosures can no longer be stalled the banks will be forced to recognize the losses. The fact that there is a growing shadow inventory of homes in an ever lengthening foreclosure process is due, in part, to this fact as well as the large backlog in the courts.
Sooner or later, they won’t be able to hide the losses and when they can’t FDIC will take them in and have to pay back the depositors from the insurance fund. The insurance fund, which is essentially empty, is never supposed to be touched if the FDIC has done its job in executing on Prompt Corrective Action. The bank should be liquidated prior to the banks liabilities exceeding its assets. However, we know this not to be the case and that the impacts of mark to model are increasing the burden on the tax payer through the FDIC as there are banks whose books are good enough one month and then realize 20% – 30% losses to depositors when the FDIC liquidates them.
I write all of that to say this, in Europe, banks were allowed to lever up through similar means, the reduction of reserve requirements and willful blindness when it comes to assessing the real risks associated with these sovereign debt instruments. You can only absorb a 2% loss when you are that highly levered and it seems that they are all highly levered against assets that are constantly losing value.
If the tax payers of productive countries in Northern europe fail to pick up the losses of Greece and its sister countries in debt servitude, the banks holding that debt will be recognized for what they are, insolvent. The alternative is to spread the love amongst all Euro holders by printing the money to bail out the indebted countries. Again, at the expense of the productive and the prudent savers who for the most part, live within their means.
The talk of bailing out Greece isn’t really about bailing out Greece, it is about bailing out other European banks ( and U.S. ones too ). Those who claim to have no net exposure to this crisis over here in the U.S. need to be asked two questions ; 1) who wrote the CDS you are using to hedge? and 3) do they have any money?
The poor Greeks are just another group (there are lots of them) who forgot the history of the last 120 years and were convinced by their politicians and their bankster buddies that they could all live the good life at someone else’s expense. There is no free lunch in thermodynamics nor economics. Someone always pays.
And with that, I’ll cease rambling.
Chad: I can believe that leverage would make it more likely than an individual bank would fail. But ultimately not every financial institution can be on the wrong side of every bet. Some banks would evaporate, but their actual assets should be in the hands of another bank or insurance company, presumably very likely still somewhere within the Euro zone. So if Greece were to disappear tomorrow (all of its citizens Raptured, for example), I can’t see how that would make the rest of Europe more than about 4 percent poorer (presumably less since the Greeks consume as well as produce).
Isn’t there an argument to be made for real wealth consisting of the ability to produce stuff?
I’ll get my bias out in the open here. I see the policy decisions on both sides of the Atlantic as pure plays to protect the biggest banks and the folks with a vested interest in them. They will be protected / made whole at tax payer expense.
I view banks, with their virtual monopoly on the creation of credit, as a totally different class of business, from say those who mine, refine, plant, harvest, engineer, build, serve and create value / wealth in general. They should be reduced to a utility function for clearing transactions, but they somehow sit at the pinnacle of commerce and skim the cream at the expense of the rest of us. I don’t see them adding value in any true sense … to your point, enhancing ‘real wealth consisting of the ability to produce’. I see them playing a confidence game, pumping a market with credit during the booms, taking massive profit (perhaps with client deposits / funds if the reports on MF Global are to believed) and then crying poor and economic Armageddon when credit ponzi begins to unwind.
In their current form, with their political power (on both sides of the aisle) they are able to do what they please, taking massive percentages during the credit expansion boom in salary and bonuses while crying poor mouth when the inevitable credit bust occurs.
Phil : I agree, not every financial institution is on the wrong side. The question is how many are? Who is left holding the bag when they go under, both in terms of making good on deposits and insurance instruments written to hedge. If it falls to the sovereign and they can’t print it (EU member), they either have to collect it or borrow it. When no one will lend it and your ability to levy more taxes is diminished you see a tightening of the austerity noose and are well en route to a correction in GDP where you will experience the gap in production pulled forward during the credit expansion and the return to organic growth.
If, in the U.S., the top 4 banks are insolvent (folks like Chris Whalen seem to think they are), what will be the impact to the average man? What is the psychological impact of ‘Bank of America’ taking a dive or going through an ugly restructuring? What is the impact to the confidence game of pulling forward demand and production with consumer debt?
Personally, I’d love to see it. I’d love them to take their losses, have those who have been responsible buy the assets for pennies on the dollar. Shift the depositors around to more responsible banks and have us get a solid footing in reality as opposed to the Japanese zombie land we are currently in.
In the U.S. we saw the takeover of AIG by Treasury to consolidate the counterparty risk and write checks on behalf of the U.S. taxpayer to make sure the bets made by the Too Big To Fail crew were money good, 100 cents on the dollar. That put a halt to the ‘cascade’ of failures for a while, but further incentivized them continue their idiocy.
My view is that both in the U.S. and Europe this was the tip of the iceberg.
One major problem right now is that I can’t pick up a balance sheet of one of these institutions and tell you where they are at because they have been given license to lie. What was fraud two years ago is now ‘legitimate’ accounting practice.
The market has been trying to work out who is broke and who is not since August of 2007. The opacity of corporate balance sheets in this regard will cause even more uncertainty if the banking crisis were to ever get into full swing. In 2008 we saw bank runs. IndyMac, people standing hundreds deep. In 2008 not 1907. Northern Rock in the UK. When people don’t know who they can trust, they panic. When the confidence game falls apart and they realize what is at risk, they panic. With good reason. Then there is no telling which institutions will get hammered by rumor or heresay. That is, until the next hit of credit heroin is provided to calm / buoy the common man and the markets.
What has been done to fix this since August 2007? I would say nothing. More leverage. More lying (I say fraud but that word has no meaning in NY or DC anymore). An impotent president with a an even more impotent AG. They are beholden to the big banks. Is it silly to think that a guy like Bill Black could go and find one or two folks to haul up on charges? If this crisis is truly an order of magnitude greater than the S&L crisis, shouldn’t the number of prosecutions be an order of magnitude greater?
Does anyone truly believe that “no one could have known” or “no one did anything illegal, immoral yes, but not illegal”? My view is that the whole country was induced into a credit bubble and its known effects by policy choices.
My last incoherent thought, the 4% number you mention. I agree, if it is truly just 4% it is not insurmountable. If Italy, Spain and Portugal truly follow suit, we are no longer talking about 4%. The assets for real wealth production are encumbered by taxation and debt. They will not be effectively deployed until those encumbrances are removed. It would probably be better if they were to be raptured as one half of the encumbrance would be removed. The debt is one thing, but the level of taxation levied against production is quite another in a society where they are now convinced of their right to ‘relaxation’ as you put it. As we are witnessing, this isn’t easily resolved.
If you declare jubilee in order to free those assets for production someone will be wronged. If the slight is too great, they could start shooting. One man’s debt is another’s fixed income asset. If it isn’t a bank holding these assets it could very well be a retiree’s account. Even if it is not that great an offence and is acceptable to the retiree, their ability to live out their lives as planned will change. Their ability to consume will be diminished. I see this as inevitable, both for private pensions and public pensions, but who will tell the largest most powerful voting block this bad news? Resolving it politically will not be acceptable. When the market breaks the bad news to them (that they were lied to and misled) they will surely blame everyone except themselves.
In the cases of the banks, when those assets are offered as collateral they will only be freed when purchased for a price the bank thinks is worthy or are forced to be liquidated when the bank goes under. Given their recent behavior on assets that are rapidly declining in value, they act in their own self interests to hide those losses as long as possible to prevent their insolvency from being discovered. Actually completing the sale forces the recognition of the loss on their books.
My view is that forcing the liquidation by allowing the great credit unwind to take place will indeed free these assets, which would be bought at pennies on the dollar by those who have been prudent and saved.
In short, I am with the liquidationists. Let those with imprudent bets exercise their freedom to fail and we can sort this out on the other side when everyone has a clearer head. Wishful thinking I know. I see it as the most honest solution. It is unnaceptable though because it will make liars out of two generations of both politicians and their constituents as well as bankrupt some of the most powerful institutions forcing them to relinquish power. My view, these are the reasons it will never happen. Pride and Power.
Greece has a government debt of $355 billion. Does Chicago have that much debt? I think if we see municipal and states default on that much debt here in the U.S., it’s going to have ramifications as well.
First and foremost, there is the effect of contagion. If $355 billion worth of municipal bonds end up going bad, investors are going to start asking for higher interest rates from other municipalities, even if they have been OK so far. Since governments assume that they will be able to roll over their debt in perpetuity, a rise in interest rates causes problems, especially when you are already massively in debt (and still running more deficits). This is one of the chief concerns over in Europe.
Secondly, a lot of the Greek debt is owned by European banks – practically all of which are already bankrupt (they are just papering over the losses, just like Japan in the 1990s) – the same situation exists in the US. An 80-90% haircut on $355 billion in debt (which is where we will likely end up in the case of a hard default), will make it hard for banks to pretend everything is still OK.
Finally, you get these domino effects. There will be a run on banks, a flight to
“safety” (hard to find these days), consumers and corporations will reduce spending, etc. causing further bankruptcies and defaults.
That’s what everyone is worried about. Can this be fixed? I don’t think that’s very likely when you consider the constraints of the Euro-zone treaties and political realities.
Fabian: You raise a great question. I don’t think it is that easy to figure out how much debt a given city or state has and virtually impossible to determine the real indebtedness including pension and retiree health care obligations. I’m sure that you’re right that Chicago hasn’t borrowed a full $355 billion (if only because nobody would lend them that much). But we’re still left with the fact that Greece is not a big percentage of the Eurozone and people are wasting a lot of time fretting about Greece when they could instead be working to make up for the losses even under the worst case assumption that Greek bondholders get nothing.
@philg: We won’t be certain if escalating out of control really is a problem until it happens, but relatively small causes can have huge effects: See the US housing bubble that lead to the collapse of several European banks with the subsequent credit crunch that stopped the economy in it’s tracks. The same danger lurks here: nobody will be lending to banks that might collapse (and that’s many of the big ones) and you get a vicious circle slowing economy, worse problems, etc.
Jan: That’s a good point. I knew that houses were overvalued and even urged a professional money manager friend to bet against U.S. housing in the summer of 2006 (“the only way a house in Vegas can be worth $1 million in the long run is if that is also the price of a Diet Coke”, I said), but it never occurred to me that a fall in house prices could wreck the entire economy.
Philip, yes the EU rulers seem to insist that Greece defaulting on its bonds would somehow, magically, destroy the Euro monetary union. That’s nonsense, as John Cochrane has explained concisely in his articles on the Euro; see: http://faculty.chicagobooth.edu/john.cochrane/
However, since the European Union was first proposed, there has long been disagreement over whether the EU should be strictly a currency union and free-trade area, or should grow to become “The United States of Europe”. As actually adopted, the EU was a muddle between the two, with no clear choice made, and ever since, those in power in Brussels have been pushing the EU toward the latter. In other words, they want more power for themselves, the enlightened class who rule the EU apparat; a rather normal state of human affairs. And a Greek default DOES seem to threaten THAT…
Thus the model that seems to fit their actual actions, is that the folks in charge don’t care much about the Euro currency union per se, but care deeply about preserving their chance at increased hegemony over Europe. They’re quite willing to pursue paths that make it much MORE likely that the Euro currency union will fall apart, so long as their “remedies” shift ever more power to Brussels.
A possible hole in that model: Why in God’s name are the Germans willing to go along with that? The more powerful the EU, the more they pay, and yet it doesn’t seem to be Germans in charge of things. So something doesn’t quite add up there.
Jan and Philip, everyone assumes that “the US housing bubble” caused “the credit crunch that stopped the economy in it’s tracks”, but the evidence supporting that view is weak. Here’s Scott Sumner arguing that that’s NOT what happened at all, that the causation actually runs in the opposite direction:
Scott Sumner, Bentley University – What Can Asset Prices Tell Us About The Great Recession?
The other commenters have spelled out the main reasons why a Greek default would have bad financial consequences, and I agree with the general story: contagion effects causing a string of bank failures across Europe (and the US); huge losses for rich, influential people invested in those banks; and economic disaster because there isn’t adequate resolution authority to wind those failing banks down in an orderly and harmless way (witness Lehman Brothers vs Washington Mutual — I bet you never heard of the latter, because the FDIC handled its bankruptcy so smoothly).
Let me, however, point out four reasons why Chicago is not like Greece:
1) Size. The Chicago Metro Area may have an economy slightly larger than Greece, but it is not a political entity at all, and the cities and towns it consists of have far weaker powers to tax that economy than Greece. A cursory glance at the Chicago City budget shows $6B/yr moving through the City, around 1% of the GDP of the area. The Greek government, in contract, in 2010 had revenues of 38.8% of the GDP of Greece, and expenditures of 49.3% thereof. [1] In absolute terms, the Greek government’s revenue is 20x that of Chicago’s, so it has standing to borrow (and not repay) much more money.
In fact, because the individual states cannot issue bonds, the US has no political subdivisions close to Greece’s size that have any chance to accumulate and then repudiate debt.
2) Economic integration. Greece’s exports are $21B and imports $46.6B; 7% and 15% of GDP, respectively. [1] I don’t have data on Chicago, but I’m willing to bet that trade with the rest of the US is much, much bigger compared to Chicago’s value added (GDP). This means a far larger proportion of any dollar the Greek government spends stays in Greece and ultimately comes back as tax revenue than is the case for the City of Chicago; so tax raises or budget cuts have a more severe effect on the Greek economy, causing deeper recession, lower revenue, and ultimately being less effective. So once the bond market decides to stop giving Greece money at sensible rates, Greece has no choice but to default.
3) Social integration. Moving from New York to Chicago is a whole lot easier than moving from Frankfurt to Athens. This means Chicago is much less likely to have gotten into such a mess in the first place. Never mind the problems of excessive government spending, where Greece is more or less unique, the large common issue of Greece, Ireland, Portugal, and Spain is that the euro gave them a huge rush of capital inflows, which caused huge booms and huge surges in labor costs. Now their labor costs are too high relative to Germany, so they are stuck in recessions until German inflation makes up the difference; and sadly, Germany is refusing to play along. This sort of thing wouldn’t happen in the US, because if labor costs in Chicago started growing much faster than the rest of the country, people would move to Chicago in search of those jobs, and bring those costs back down.
4) Political integration. The US already has an institution that can come to the aid of a troubled subgovernment: US states have budget shortfalls all the time, and the federal Treasury often gives them money to help cover their shortfalls (and, e.g., not lay off schoolteachers). There is no corresponding pan-European institution with the authority to levy Europe-wide taxes, controlled by representatives from all of Europe. The analogous situation in America would be California, New York, and Texas deciding whether to sink a bunch of public money into Illinois so that Illinois can pay back its debts to large Californian, New Yorker, and Texan banks; in the absence of any meaningful taxation or transfer payments routed via Washington.
[1] Source: the CIA World Factbook https://www.cia.gov/library/publications/the-world-factbook/geos/gr.html
Others have covered the economics of the situation very well so I’ll just cover Phil’s hypothetical “relaxation”.
I don’t believe the rest of the USA would tolerate Chicago residents having different conditions which permit said “relaxation” for very long.
Just as German citizens don’t want to foot the bill for “relaxed” Greeks, someone in Atlanta earning minimum wage is not going to want to see his tax dollars paying for someone in Chicago to be “relaxed”.
There will be demands for more “equality”, actually “fairness” is probably a better word, and those demands will get stronger the longer the situation persists.
Given that anything labelled “welfare” is politically toxic in the USA right now, it’s hard to see the politicians letting something like this happen. I wish I could say the same about European politicians.
To your original question…
Chicago could go bankrupt and besides debt holders who will take a haircut (not greek level debt…) ,the people who would lose most would be those drawing pensions from the city of chicago. It would be a different issue if all of chicago relied totally on the city govt for all government services.. ie: social security, bank deposit gurantees, defense.. etc .. etc.. etc.. The city government only partly governs so the parallels to greece do not arise.
Banks failing is a danger.. Even One !!! – A Single large bank failing due to highly leveraged debt puts every other large bank in Europe and Worldwide for that matter at Risk depending on how much of the leveraged derivatives that float around the world the Bank is the counterparty Risk to. So .. bail out greece or countless banks ??
The system is set up that Big Banks cannot be allowed to fail not matter what they do. Until any bank that holds any depositor money that is guaranteed by any government or is a risk counterparty to any derivative held by any financial instuition that holds funds that the populace counts on.. ie: Retirement accounts, Mutual Funds, etc. are stopped worldwide from Trading any derivative financial instruments, the system is going to accelerate out of control.
Seriously Mr Greenspun?
Please define your term “lifestyle” in terms of data. But before that please have a look here: http://www.oecd-ilibrary.org/employment/average-annual-working-time-2010_20752342-2010-table8
Greece I am afraid is not like Chicago while considering the geopolitical background. Chicago isn’t neighbouring with Albania, Bulgaria, FYROM or Turkey. Please read between the lines: huge loans from France & Germany to buy military equipment from -guess who- France & Germany. Chicago is rather surrounded by Michigan, Indiana and Wisconsin.
The problem in Greece is not the Greeks’ lifestyle. It’s the currupted political parties’ inability to manage the state.
Please don’t be so naive and *relaxed*.
ik_
http://www.twitter.com/ik_
Paul Krugman disucsses this question in a couple of posts
http://krugman.blogs.nytimes.com/
@ik_
Citizens never want to look into the mirror, and consider that perhaps they hold some blame. In the US, it’s the banks, and the government. The personal savings rate dropping to zero, consumer spending beyond reasonable means, and gullible acceptance of 110% mortgages to get into unaffordable homes are all irrelevant.
The only quick thought I have on this is the libertarian economist Russ Roberts at George Mason University, before conducting his research on the collapse of 2008, said he didn’t believe it was possible for a foreclosure on only 10% or less of the nation’s loan portfolio to bring down the whole shebang. Something else was going on.
I remember he had a post at Cafehayek.com titled “I Was Wrong.” After doing a few months of study on the problem, he concluded that yes, such a small percentage could bring everything else down. I suppose this isn’t a very good comment because I didn’t read his research, but that’s the takeaway I remember.
Quote: “England has a set of entrenched interest groups (see Mancur Olson) that would appear to make sustained economic growth impossible.” What?
As you yourself write on the linked blog entry, “Olson wrote this book just as Margaret Thatcher was coming to power.” Thatcher became PM in 1979, off the back of a very troubled and unionised industrial landscape, and the book was written in 1982 (at the start of Thatcher’s very successful, if also very controversial, moves to crush union power). Olson is referring to the unions, and their role today is very different from 30 years ago… That’s quite a leap you’re making, linking today’s growth problems to a second-hand view of labour markets that’s genertions out of date.
As for the inference that the country is full of lazy, unskilled, workshy individuals, just like the rest of Europe… that renders me speechless.
IM Foreman: Olson listed a number of interest groups, not just the unions, that were bleeding the UK. My memory of the book is a bit fuzzy, but I believe that he specifically mentioned farmers and public employees. I don’t know where you saw an implication that the English don’t work. In the original posting, England was placed into contrast with Greece and has a different set of problems. England, actually, isn’t too different than the U.S. We have some folks here who are skilled and hard-working, but they have a hard time supporting the crony capitalist system, the 90 percent of Long Island Rail Road workers who retire on disability, the 82 percent of California State Troopers who become disabled in their last year of work (source: http://www.commongood.org/blog/entry/philip-k.-howard-in-the-wall-street-journal ), the hundreds of billions in farm subsidies, the ethanol producer subsidies, the solar power crony subsidies (cf. Solyndra), etc.