Tag: Stiglitz

What Is the Real Greek Morality Tale?


NEW YORK — When the euro crisis began a half-decade ago, Keynesian economists predicted that the austerity that was being imposed on Greece and the other crisis countries would fail. It would stifle growth and increase unemployment — and even fail to decrease the debt-to-GDP ratio. Others — in the European Commission, the European Central Bank, and a few universities — talked of expansionary contractions. But even the International Monetary Fund argued that contractions, such as cutbacks in government spending, were just that – contractionary.

We hardly needed another test. Austerity had failed repeatedly, from its early use under U.S. President Herbert Hoover, which turned the stock-market crash into the Great Depression, to the IMF “programs” imposed on East Asia and Latin America in recent decades. And yet when Greece got into trouble, it was tried again.

Greece largely succeeded in following the dictate set by the “troika” (the European Commission the ECB, and the IMF): it converted a primary budget deficit into a primary surplus. But the contraction in government spending has been predictably devastating: 25 percent unemployment, a 22 percent fall in GDP since 2009, and a 35 percent increase in the debt-to-GDP ratio. And now, with the anti-austerity Syriza party’s overwhelming election victory, Greek voters have declared that they have had enough.

So, what is to be done? First, let us be clear: Greece could be blamed for its troubles if it were the only country where the troika’s medicine failed miserably. But Spain had a surplus and a low debt ratio before the crisis, and it, too, is in depression. What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance.

Greece has also once again reminded us of how badly the world needs a debt-restructuring framework. Excessive debt caused not only the 2008 crisis, but also the East Asia crisis in the 1990s and the Latin American crisis in the 1980s. It continues to cause untold suffering in the U.S., where millions of homeowners have lost their homes, and is now threatening millions more in Poland and elsewhere who took out loans in Swiss francs.

Given the amount of distress brought about by excessive debt, one might well ask why individuals and countries have repeatedly put themselves into this situation. After all, such debts are contracts — that is, voluntary agreements — so creditors are just as responsible for them as debtors. In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements. Indeed, we know that U.S. banks actually preyed on their borrowers, taking advantage of their lack of financial sophistication.

Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the 19th century were a failure — inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions.

At the international level, we have not yet created an orderly process for giving countries a fresh start. Since even before the 2008 crisis, the United Nations, with the support of almost all of the developing and emerging countries, has been seeking to create such a framework. But the U.S. has been adamantly opposed; perhaps it wants to reinstitute debtor prisons for over indebted countries’ officials (if so, space may be opening up at Guantánamo Bay).

The idea of bringing back debtors’ prisons may seem far-fetched, but it resonates with current talk of moral hazard and accountability. There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others.

This is sheer nonsense. Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors? If there is a moral hazard, it is on the part of the lenders — especially in the private sector — who have been bailed out repeatedly. If Europe has allowed these debts to move from the private sector to the public sector — a well-established pattern over the past half-century — it is Europe, not Greece, that should bear the consequences. Indeed, Greece’s current plight, including the massive run-up in the debt ratio, is largely the fault of the misguided troika programs foisted on it.

So it is not debt restructuring, but its absence, that is “immoral.” There is nothing particularly special about the dilemmas that Greece faces today; many countries have been in the same position. What makes Greece’s problems more difficult to address is the structure of the eurozone: monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there.

Seventy years ago, at the end of World II, the Allies recognized that Germany must be given a fresh start. They understood that Hitler’s rise had much to do with the unemployment (not the inflation) that resulted from imposing more debt on Germany at the end of World War I. The Allies did not take into account the foolishness with which the debts had been accumulated or talk about the costs that Germany had imposed on others. Instead, they not only forgave the debts; they actually provided aid, and the Allied troops stationed in Germany provided a further fiscal stimulus.

When companies go bankrupt, a debt-equity swap is a fair and efficient solution. The analogous approach for Greece is to convert its current bonds into GDP-linked bonds. If Greece does well, its creditors will receive more of their money; if it does not, they will get less. Both sides would then have a powerful incentive to pursue pro-growth policies.

Seldom do democratic elections give as clear a message as that in Greece. If Europe says no to Greek voters’ demand for a change of course, it is saying that democracy is of no importance, at least when it comes to economics. Why not just shut down democracy, as Newfoundland effectively did when it entered into receivership before World War II?

One hopes that those who understand the economics of debt and austerity, and who believe in democracy and humane values, will prevail. Whether they will remains to be seen.

Life as an irregular student: The pitfalls of deregulated universities

View image on Twitter

Deregulating university fees will penalise students with learning disorders, increase inequality and send Australia backwards as a nation, writes Tim Lubcke.

On the way to work this morning, as I write this, I heard Christopher Pyne again defending the deregulation of university fees on ABC local radio. I had to switch stations. It seems to me that those in favour of it have lived a fairly benign existence and are honestly unable to see how much they risk undermining further Australian prosperity.

I know what it’s like to come at education with an irregular brain.

I was perhaps six or seven when a teacher slid the piece of paper in front of me. It was the first test of my schooling life.

When he told us to turn over the page and begin, what would dominate the next 15 years of my life came crashing home. The page was unintelligible. I just didn’t get what was being asked of me. It was like being handed a foreign language with everyone around you expecting you to understand it.

I panicked and after some time, broke down. More than two-and-a-half decades later, I still vividly remember that moment.

Dictation was by far the most difficult task I experienced over those early years, however it wasn’t isolated to one subject. Year after year teachers lamented to my parents about my “stubbornness” in class and refusal to learn. One teacher said it looked as though I wrote with my feet.

If it wasn’t for the sanctuary of the private world of my bedroom, I would have believed that I was stupid, as I was being told in school. At least in that one place – and the support of my parents with text books and equipment – I could learn about the natural world, and play with electronics and basic mechanics.

From that, I knew that I was able, but needed to learn by myself.

By the time I looked towards tertiary education, in my early 20’s, an astute teacher recognised the traits of dyslexia. She insisted that I was tested, which confirmed as much. While some suggestions came of it ‒ such as using computers rather than hand writing ‒ the central point was that I had learnt how to learn for myself.

Successfully landing a place in a degree in environmental science, I was not a great student. In the first couple of years, I passed with the occasional credit. Yet when I was given autonomy in my final year of the courses, that’s when I began to prove my value.

Dyslexia is nothing more than a story of a square peg and around hole. When I was able to define my working style, I could flourish.

Since the completion of my degree, I’ve gone on to demonstrate my value.

Although I completed a degree focused on ecology, I quickly moved towards data management, and technical project development and maintenance. I’ve designed a number of automated data validation and analysis packages, project databases, websites, remote research facilities and portable chemistry devices.

Again, it has been in those roles where I have been granted autonomy that I’ve added the most value in environmental research.

The discussions regarding the deregulation of university fees, however, I recognised would have stopped me entirely from pursuing this path.

Schooling has been hard and completely unenjoyable from start to finish in my case. I went on because I saw the value to my career. That value would be lost if I had acquired debt that I would live with for decades; seven years on, I have just under half of my HECS debt remaining as it is.

I’ve also heard talk in interviews from senior figures of various universities suggesting that deregulated university fees would allow them to provide a range of scholarships to students from humble backgrounds. That sounds nice, but I know that an unremarkable dyslexic student such as I was would be extremely unlikely to receive this particular boost.

I come from a working class family, where I am the only one to have even completed secondary education. I am very conscious of debt and how debilitating it can be.

I can confidently say that I would not be where I am today if Howard deregulated university at the turn of the century prior to my application to my course.

Earlier this year, I wrote about the failing green sector — something that has led me to contemplate my career path and indeed the possibility of completing another degree to move into a more secure career. Yet, I am unwilling to start something that might grow in exponential cost as I go further along the course. Uncertainty has left me in limbo.

Deregulation of university fees strips the Aussie fair go from education and I feel for my children, who would be stuck with very difficult choices as young adults.

The value of a candidate is impossible to define on purely academic measures, as I hope my career thus far illustrates. Moreover, with the recent passing of Gough Whitlam, we are reminded just how much it changed the lives of Australian’s (especially women) in opening the doors to universities in the 1970’s through free education

Debt is debt and the most responsible students will be wary to take on too much of it. We risk generations of hardworking, diligent students avoiding such debt and in turn, growing skills shortage which inevitably will take us backwards as a nation.