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Inflation and Coronavirus Monetary Policies

Is there any reason to think that inflation might increase in the near future after the current coronavirus lockdowns and stay-at-home orders end? The Federal Reserve is engaging in extraordinary policies that will substantially increase excess reserves in the banking system. That said, the Fed did similar things during and after the Financial Crisis of 2007-2008 and inflation has been benign since. Are the current policies as likely to have little or no effect on inflation?

There are contrasting views by experts, among them Tim Congdon in an op-ed in the Wall Street Journal and George Selgin on the Alt-M blog. Congdon says that “history suggests the U.S. will soon see an inflation boom.” Selgin says that “[I]f denying any risk of future inflation is unwise, so is exaggerating that risk, or claiming that it’s imminent when it isn’t.” Selgin quotes Olivier Blanchard as saying that the risk of inflation is “very small.”

In fact there is reason to be concerned that Federal Reserve policies will not work out so well this time.

The money stock increased substantially in March and April 2020One way of assessing future inflation is the quantity of money in the United States. Figure 1 shows that the money stock, M2, has increased substantially, even relative to the increase in the Financial Crisis of 2007-2009. Inflation, which loosely speaking results from “too much money chasing too few goods”, can result from more rapid growth of the money stock.

Lockdowns and stay-at-home orders and other disruptions associated with the coronavirus pandemic have reduced employment and output substantially. The size of the decreases remains to be seen but filings for unemployment insurance by roughly 30 million people in the United States certainly suggest a very large decrease in goods and services to be purchased by this larger stock of money. This decrease in goods and services available is likely to be temporary though, so it is the increase in the money stock that is a longer-term concern.

Is recent money growth likely to continue? To the extent that the increase in M2 is associated with stimulus payments and unemployment payments, that source of increases in M2 probably will not continue for more than a few months.

The Federal Reserve, though, is on track to increase its balance sheet and reserves in the banking system substantially by buying financial assets and making loans to private firms. Purchases of financial assets are little different than the Federal Reserve’s policy since the Financial Crisis of 2007-2008. What is there to worry about?

The Federal Reserve has been operating a system in which it pays banks to hold reserves over and above required reserves. The Federal Reserve has used those excess reserves, which are deposits at the Fed, to acquire assets, long-term Treasury securities and mortgage-backed securities. Figure 2 shows that excess reserves increased substantially during the Fed’s policy of quantitative easing (QE) implemented in QE1, QE2 and QE3 visible in the graph.

Current policy proposes to increase reserves and asset holdings substantially more in the near future. The size of that increase is not certain, but the Treasury has provided credit protection and equity investments of $235 billion in the financial vehicles acquiring assets and making loans. Excess reserves increased by 90 percent from March 25, 2020 to April 22, 2020. It would not be particularly surprising if excess reserves reached twice the prior peak of $2.7 trillion. They already exceeded that prior peak by over 10 percent on April 22 and surely will exceed it by 25 to 50 percent ultimately.

The outsize increase in the Fed’s balance sheet during and after the Financial Crisis of 2007-2008 quite obviously had little or no effect on the M2 or on inflation. Are there reasons to think that conditions now are different?

A major concern is that banks may not want to hold the additional reserves in excess of requirements. Why not? About a third of these excess reserves are held by U.S. branches of foreign banks. These reserves satisfy a recently added requirement for banks: the liquidity coverage ratio. Reserves at the European Central Bank (ECB) also satisfy this requirement but the Federal Reserve pays interest for holding reserves at the Fed while the ECB charges interest for holding reserves at the ECB. There is foreign-exchange risk associated with holding dollars instead of euros, but that apparently does not deter foreign banks from holding liquidity at the Fed instead of the ECB. Large U.S. banks also are subject to the liquidity coverage ratio.

Is the demand for excess reserves unlimited? There is a major constraint on banks’ desire to hold excess reserves paying a relatively low interest rate. That constraint is a required leverage ratio imposed by banking regulations. The leverage ratio is a minimum requirement of equity capital in a bank relative to assets. Expansion of assets by acquiring excess reserves eventually runs into the leverage ratio, at which point equity capital would have to be issued to satisfy the required leverage ratio and increase holdings of reserves. Given the cost of capital and the interest rate on excess reserves, any bank doing this would be reducing the value of the bank to shareholders. In short, banks will eventually stop adding excess reserves.

If a bank doesn’t want to hold an increase in its excess reserves, what can it do when its excess reserves increase? Instead of holding the excess reserves, the bank can loan the money out or buy a security after holding reserves equal to a fraction of its increase in customer deposits. Other banks would do the same. Through the traditional multiple expansion of deposits, the money stock would, unlike in recent years, increase because excess reserves are increasing. If the Fed does not reduce excess reserves, an increase in the money stock ensues.

Such an increase in the money stock due to Fed policy would increase the dollar value of goods and services produced. Printing money does not increase production of goods and services for very long if ever. Increases in prices and inflation ensue.

The recent and prospective increases in excess reserves are different because the creation of excess reserves did not run into the leverage ratio. Without running into the leverage ratio, monetary policy from 2010 to 2020 could let the demand for money determine the quantity of money. With low expected inflation, the growth of money was consistent with that low expected inflation and in fact low inflation followed. If the Fed increases excess reserves and holds fast to those increases, inflation can result if banks no longer find it advantageous to hold those excess reserves.

How big is this risk? It is fair to say that no one knows. As recently as Spring 2019, the Fed was reducing excess reserves and found that banks wanted to hold a much higher level of excess reserves than expected. Similarly, the upper limit to how much excess reserves banks want to hold is uncertain.

Not knowing the relationship between monetary policy and inflation is a risky way to conduct monetary policy. Maybe everything will work out fine; maybe not.

What Is Essential?

The recent government lockdowns and stay-at-home orders are long on lists of things that are essential and not essential without defining or saying what determines whether something is essential or not essential.

What does “essential” mean? A synonym in the Merriam-Webster dictionary is “necessary.” “Necessary” has the advantage of being less vague. It also raises a question: “Necessary for what?”

A good example of the arbitrariness of government officials determining what is essential is a recent dust-up concerning wrestling in Florida. Florida has determined that sporting events, including wrestling matches, are essential. The headline and subheading on a negative editorial show the split: “His explanation doesn’t make much sense” reads the headline with DeSantis’s explanation that “I think people have been starved for content … we’re watching, like, reruns [of sporting events] from the early 2000s” under it.

The headline was written by a true non-sports fan. To those of us who watch little if any sports on television, sporting events are not only not essential, they’re not even interesting.

On the other hand, for those who like to watch sports, the drought of sporting events has in fact resulted in people watching long-ago reruns of run-of-the-mill events because, for them, it’s better than nothing. They would be a lot happier with new sporting events.

Why pick on wrestling in particular? It is easy to make snide comments about wrestling matches, and wrestling matches have started. While the order concerns sporting events generally, wrestling matches do have an advantage that team sports such as baseball do not. There are few people in a locker room before a wrestling match. Before sports such as baseball and football can resume, they have to resolve a basic problem: How does one deal with many athletes preparing for a game? Even eliminating the physical audience or limiting the stadium to a fraction of normal capacity will not resolve that problem. Also, most sports are contact sports and definitely are not “socially distant” games. Wrestlers are in close contact with few people compared to the typical lineman in a football game.

Are wrestling matches or more generally sports events necessary? If you are a sports fan stuck at home worrying about when your life will resume, maybe so. It might be better than hitting the bottle.

Leaving aside sports, what is necessary? One person’s essential or necessary is another person’s unimportant.

To some people, going to church is essential to their salvation. To some people, going to a church is a waste of time.

Are “elective surgeries” essential? The shutdown of hospitals’ non-essential services, which includes bypass surgery, may already have increased deaths due to this apparently not-so-immediate ailment.

Is a lawn service necessary? If you don’t own a lawnmower because you employ a lawn service and can afford it, buying a lawnmower – if you can because lawnmowers are “essential” – is an expensive stopgap. Letting your lawn grow for a few weeks, a month or maybe longer might not be very attractive but might be the best thing to do. The worst part of declaring lawn services non-essential: Shutting them down in the name of “social distancing” reflects ignorance about how lawn services work. The workers mow the yard, do some trimming and leave. They are nowhere near the homeowner and not even close to each other besides in the truck.

Part of the argument for shutting down “non-essential” activities is that it is better to have fewer people going to work. This may have been a plausible argument while “flattening the curve.” It misses an important problem beyond that time frame.

It will take a year or more to create and produce a reliable vaccine in the quantity necessary for the United States. In the meantime, every activity accomplished with a stranger will involve the risk that the other person has coronavirus. Besides keeping most people in the U.S. at home until a vaccine is found for the coronavirus, the risk of contracting coronavirus while engaging in everyday activities will be a fact of life.

Taking care can limit the risk of contracting coronavirus. Wearing a mask might be a way to assure people that you are trying to avoid spreading coronavirus to them should you have it. Widespread and readily available testing can limit the risk because people will know whether or not they have coronavirus. Government edicts about “essential” and “not essential” activities are no help.

Coronavirus Lockdowns: When Will They End?

When will the lockdowns and business restrictions end? This is an extremely important question, the importance of which doesn’t seem to be widely appreciated or even acknowledged. Some others, notably The Wall Street Journal and John Cochrane are making related points about the importance of outlining when the lockdowns and business restrictions will end.

All the most recent developments are additional, severe closings of economic activity in much of the country. The governors of California, Illinois and New York issued decrees on March 20 similar to those in place in Italy and Spain and earlier in China. People are supposed to stay in their homes and not go out other than for “essential” reasons. On the same day, Pennsylvania ordered all “non-life-sustaining’ businesses to close and Florida ordered all restaurants closed for on-premises dining. This occurred after social distancing including widespread closures of businesses had been ongoing for over a week.

When asked about whether life might be close to normal by Easter, April 12, Dr. Fauci, head of the National Institute of Allergies and Infectious Diseases, responded “I can’t predict what the situation would be,” Fauci said. “I think we need to be prepared to modify behavior, even when it involves things that are very close to our hearts.” I do not want to over-interpret Dr. Fauci’s reply in an interview, but he certainly did not indicate that the end of these increasing restrictions is in sight. This is a profoundly disturbing state of affairs.

If the large-scale shuttering of businesses goes on for more than another week or so, many people’s lives will be ruined. While it is not entirely clear how many people in the United States live paycheck to paycheck, the number is far from zero. One estimate is that half of all people making less than $50,000 a year have no savings to pay the bills. Most people working in retail establishments and restaurants make less than $50,000 a year. These people have no way to buy food after not being paid for a short period. Some have credit cards, some don’t. Some have relatives who can help, some don’t.

There is no evidence that these grave consequences are being considered in a serious way. Instead, presentations tend to focus on technical issues and avoid the widespread suffering that soon will overwhelm many in the United States.

Discussions of the coronavirus need to change now and start focusing on when life can start to gradually return to normal.

The gradual lifting of these restrictions should be outlined soon. The lifting of restrictions should include measures taken by businesses and the government to limit exposure. The lifting also should take account of the costs of these restrictions on people. A gradual return of activity will occur naturally, no matter what. There is no evidence that people are ready to rush out to stores and restaurants right after restrictions are lifted. On the contrary, many restaurants decided to close to on-premises dining because few people were willing to venture out given concerns about the coronavirus.

In the meantime, the main preparation that will let people return to something like normal economic activity is testing. Testing anyone who thinks they might have coronavirus is the surest way to reduce infections and let people return to work with some confidence in their own health and others’ health.

Monetary Economists as Policymakers at the Federal Reserve

Several articles in recent years have claimed that more diversity in the sense of fewer economists on the Board of Governors and the Federal Open Market Committee (FOMC) would be a good thing (Fox “How Economics PhDs took over the federal reserve”; Zumbrum “Fed draws on academia, Goldman for recent appointees”; Calabria “Yes Fed has a diversity problem”; Ricketts “The Fed could use less book learning and more street smarts”). This is of some importance. There currently are three vacancies out of seven positions on the Board. One will be filled by the Vice Chairman for Bank Supervision. Several of the twelve bank presidents have turned over in the last few years and more may well turn over in the next few years.

This clamor seems to having an effect or at least reflects an opinion held by Reserve Banks’ boards of directors. The number of Ph.D. economists heading Federal Reserve Banks has fallen in recent years. Three presidents who were professional monetary economists and took strong stands have left, Naryana Kocherlakota, Charles Plosser and Jeffrey Lacker. The first two have been replaced by non-economists and the latter may well be also.

Positions at the Board are different than Reserve Bank presidents. Some positions at the Board are allocated to community bankers or bank supervision (Calabria 2016). The number of professional monetary economists who are community bankers is small and there is no reason to think that such a community banker would know more about monetary policy than other community bankers. The most important qualifications of the Vice Chairman for Bank Supervision concern knowledge about regulation (Davidson and Tracy 2017). There are qualifications for Board members based on geographic distribution that should be taken seriously (Calabria 2016).

These assorted criteria do not apply to Reserve Bank presidents. Furthermore, the operational work at Reserve Banks of clearing checks has disappeared and Reserve Bank’s most important roles concern monetary policy and supervision and regulation. Supervision and regulation at Reserve Banks is a Board function delegated by the Board to Reserve Banks. In the end, the Board is in charge of supervision and regulation.

If there is a reason to have Reserve Banks, monetary policy is it. Reserve Bank presidents have their own economics staff to brief them, a luxury that members of the Board of Governors do not have. Some of the Reserve Bank presidents who are economists have been quite effective at raising issues about monetary policy such as the desirability of the Federal Reserve’s holdings of mortage-backed securities.

Nonetheless, some think monetary policy would be better if fewer Presidents of Reserve Banks were economists. Would it?

There are two aspects of being a policymaker at the FOMC. Monetary economists have some expertise at one and substantial expertise concerning the other.

The FOMC sets the specific goals of monetary policy. The general goals are set by law but the specific goals in terms of inflation and real economic activity are determined by the FOMC. (I think it would be better if specific goals were set by Congress and the Administration but they are not.) Monetary economists have some expertise at determining the goals because they have thought about them more than most people, but staff assisting presidents provide this knowledge to some extent.

The FOMC’s other task is to use monetary policy tools to produce the goals. Whether or not members of the FOMC are economists, economists brief presidents of Federal Reserve Banks before FOMC meetings and monetary economists have particular expertise concerning these issues.

It takes serious economic analysis to understand how monetary policy worked even before the financial crisis. That is more true today.

There is not a consensus among monetary economists about how monetary policy works in the context of current policies such as interest on excess reserves and Quantitative Easing. (Or for that matter, even what the effects of Quantitative Easing are.) A Principles of Economics course is not sufficient to have the economics background to reach an informed judgement about how monetary policy works today and why alternatives are in error. An undergraduate economics degree twenty or thirty years ago is of no more use.

While it is possible for an economic advisor to teach a non-economist enough to understand the issues, it is difficult to imagine a policymaker ignoring the judgement of the economists who brief him or her. Some non-economists have been involved enough in monetary policy issues to have strong opinions before they are appointed. (Quarles is an example of someone who is being considered and has at least one strong opinion about monetary policy (Davidson and Tracy 2017).) Many if not almost all have not.

Economic advisors provide informed analyses and the FOMC meetings are informed discussion of the economy and monetary economics. Some policymakers are comfortable with briefings that reflect different opinions. Some are not. The judgements of the economists providing the briefing will play an important role in the choices made by a president, whether there is one point of view or more than one.

The economists briefing the President will play a far larger role if a President is not a monetary economist. The policymaker’s policy preferences might be different than the staff’s preferences on occasion but even these differences are unlikely to be important.

The argument is to appoint more presidents at Federal Reserve Banks who have no expertise in monetary economics and will be on the FOMC. Such appointments are unlikely to increase the level of discourse or the soundness of decisions at the FOMC. If such appointments have any effect, they most likely will enhance the importance of views held by the Reserve Banks’ economics staffs.

REFERENCES

Calabria, Mark. 2016. “Yes, the Fed Has a Diversity Problem.” Cato at Liberty. June 23, at https://www.cato.org/blog/yes-federal-reserve-has-diversity-problem.

Davidson, Kate, and Ryan Tracy. 2017. “Expected Fed Pick on Collision Course with Current Members on Rates.” Wall Street Journal, April 17, at https://www.wsj.com/articles/expected-fed-pick-on-collision-course-with-current-members-on-rates-1492469900.

Fox, Justin. 2014. “How Economics Ph.D.s Took Over the Federal Reserve.” Harvard Business Review, February 3, at https://hbr.org/2014/02/how-economics-phds-took-over-the-federal-reserve.

Ricketts, Joe. 2017. “The Fed Could Use Less Book Learning and More Street Smarts.” Wall Street Journal. April 10, at https://www.wsj.com/articles/the-fed-could-use-less-book-learning-and-more-street-smarts-1491864871.

Zumbrun, Josh. 2015. “Fed Draws on Academia, Goldman for Recent Appointees.” Wall Street Journal, November 10, at https://www.wsj.com/articles/fed-draws-on-academia-goldman-for-recent-appointees-1447177296.

Payday lending

An early payday lender.
Shylock
The Consumer Financial Protection Bureau (CFPB) has unveiled new rules for payday lenders. Payday lenders are the lenders that everyone loves to hate, modern Shylocks. It is doubtful that anyone grows up thinking “I want to grow up be a payday lender.”

Dave Ramsey, who provides generally excellent financial advice, has a page advising “Don’t do it.” While that is good advice, it is not an option for everyone all the time. His advice not to borrow on credit cards is good advice too.

Payday lenders make loans to people for small dollar amounts for short periods. Indeed, they get their name from a common practice of making a loan to people until their next payday.

Interest rates are quite high compared to say, a car loan. Interest rates on new car loans are in the neighborhood of 1.5 to 3.0 percent and payday lending rates range from 150 to over 500 percent per year. Payday loans are for small sums for short periods of time with a lump-sum payment in a couple of weeks.

If the loan is not rolled over, the annual interest rate is misleading. A two-percent interest rate for a week compounded for a year is 180 percent. If a $300 loan is taken out for a week at two percent, that is $6. That is hardly an appalling amount.

Studies have found that payday lending often is the cheapest source of short-term credit available to people in short-term financial difficulties. They are not stupid; they have an emergency or have fallen on hard times.

The reason for some people’s concern is the failure of some people to pay off the loan, instead borrowing the $306 for another week, and so on until, at the end of year, they owe $840 for the $300. Not a good outcome for sure.

Restricting the availability of these loans means that some people will no longer have this source of credit available. They are worse off as they see it. They have to rely on more expensive sources, miss payments on debts they owe or adjust some other way.

It is of course possible to think that the government and some of its experts know better than low-income people with bad credit. I think that is just arrogance speaking.

If restricting credit is a bad answer, what is a better way to help low-income people with bad credit and financial difficulties?

A better answer is to make more credit available to low-income people with bad credit. This will drive down the interest rates.

More personalized lending can get around some of the difficulties of loans reflected in payday loans. I don’t know how successful it has been, but the Church of England has the right idea. In 2014, they proposed making credit available through churches. (I learned about this in the excellent book For God and Profit: How Banking and Finance Can Serve the Common Good)
Credit unions in the United States used to make short-term loans to members in small-dollar amounts. I know; I got one while in my twenties after a car accident.

The more rules and restrictions are put in place, the more difficult it is for institutions to make loans such as payday loans. The simple economics indicate that increasing the supply of such loans is a solution, not restricting supply.

An economist’s encounter with contemporary theologians

I went to a Lumen Christi conference last week (may 19-20), a meeting mainly of economists and theologians. The general topic was Catholic social thought and the specific topic was the the environment. At breakfast, I was sitting at a table with three theologians. Somehow it went all wrong and I don’t understand it even after thinking it over.

I mentioned that I had been at the Federal Reserve Bank of Atlanta and had left partly because of dissatisfaction with the increases in regulation after the Financial Crisis of 2007-2008. It seemed that they immediately assumed that I thought there should be no regulation of banks or financial markets.

One of the theologians gave a talk later that day at which he said that people should live in smaller, more densely situated homes, ride bikes instead of drive cars, and in general have a standard of living similar to what they had in the 1950s. He mentioned in particular that he thinks it is a waste to have so many resources devoted to improving phones, for example from the iPhone 5 to iPhone 6. He thinks a house of 1500 square feet should be more than adequate for people and decried McMansions of 3000 square feet. (In Atlanta, it takes more like 5 or 6 thousand square feet to get that barb.)

Apparently he didn’t really mean it about the 1950s lifestyle.

At his session, I brought up the comment about a 1950s lifestyle. I used the enormous advances in medical care for heart disease and the general increase in life expectancy of older people as an example of dramatic improvement since the 1950s. I asked him who should decide whether such research is important. He merely replied that it is obvious that medical research is important while some other research (on phones I am sure) is unimportant.

He did not understand that I was asking how his preferences about research would be implemented. That problem is harder if, as I thought, some research would be fine and other research not.

To me as an economist, “who decides” means whose preferences get implemented and how. Some people might agree that some research is more important than other research in some sense. I was not merely asking if some people could agree.

He most likely does not know that those advances are related. Digital imaging is incredibly important in modern medicine including treatment of heart attacks and preventive medicine. My mother-in-law’s pacemaker has digital storage of its activity that is uploaded to the doctor once a month.

I found all of this unsettling in an odd way. One of the theologians commented later about me that “It takes all kinds.” The complete inability to find any way to discuss things despite, at least at the start, some good will is a shame.

Bitcoin and government regulation

Governments are starting to regulate Bitcoin and other cryptocurrencies. Is this good or bad? Why? Norbert Michel and I wrote a Heritage Backgrounder piece on Bitcoin and other cryptocurrencies, Bits and Pieces: The Digital World of Bitcoin Currency. We discuss the main aspects of Bitcoin without getting into technical details. We also discuss some of the possibilities for the future and indicate ways that the government can adapt to stay out of the way.
We don’t really take a stand on whether Bitcoin itself will succeed; time will tell that.
We do point out ways that the growth of Bitcoin and other cryptocurrencies could be throttled by government regulation and laws and suggest ways to avoid that outcome.

Immigration and refugees

In the United States, we tend to focus on immigration issues in this country. The system – if it can be called a “system” in any sense – is functioning in a way that almost no one would recognize as sensible.

Increased immigration is not unique to the United States. There are many more immigrants in European countries than just 15 years ago. It is fairly common to see people of Asian origin speaking Italian or Spanish on the subways in those countries.

Illegal immigration is not unique either. In fact, it is a massive problem in Europe right now similar in some ways to migration from Cuba to the United States. In the mid-1990s, as the Congressional Research Service summarizes, many Cubans died in small boats escaping to the United States and this was widely reported in the press. It is little reported, but about 25,000 Cubans travel in small boats to the United States each year even now. (I am not sure how many are returned to Cuba by the U.S. government due to an almost incredibly horrible policy.)

Europe has a similar problem today. Thousands of people are fleeing the violence in North Africa. The simplest way is to sail in a boat across the Mediterranean. European countries are confronted by some of the same problems as the United States was then.

The first point of entry for many of these refugees is Greece. Greece hardly is in a position to help the refugees much. Permanent employment for an immigrant is a fantasy in a country with an unemployment rate of about 25 percent for the last seven years. So they move on from Greece.

Because of the open borders in the European Union, people can travel from Greece to many more attractive countries. Many of these other countries are concerned about the implications of many refugees ill equipped to live outside their native lands.

An opinion piece in the Greek newspaper Kathimerini suggested “To solve, Europe’s migrant crisis, give them a place of their own.” This sounds interesting for an instant, but not longer than that. In fact, it is a ridiculous proposal. The proposal is

The United Nations should … identify large areas where migrants could both live and work while retaining their nationality. Granted an indefinite stay, these migrants would also have the possibility of attaining citizenship. These areas would, by definition, be empty and probably inhospitable; the UN’s aim would be to make them comfortably habitable.

A short version of this: Let them live in the Sahara desert. But wait, that’s in the neighborhood of where they’re leaving. In Europe, I know of no such even relatively “empty and … inhospitable” area. Moreover, it would have to be owned by a government I guess or the owners would have to be expropriated.

The U.S. version of this would be: Let them live in Death Valley. What would keep them there when the bright lights of Los Angeles and Phoenix are where they can find gainful employment? “Empty and inhospitable areas” are not a great place to try to make a go of it.

What is the solution, or even a good solution? I don’t know. Arguably, free migration with private charity and no guaranteed benefits from the government would work reasonably well in many ways. The current world is so far from this. There are big arguments about immigration, of course.

There are two arguments that appeal to me. One argument: with current welfare in place, free migration would be a massive drain on taxpayers in the United States. Another argument: two wrongs don’t make a right. The existence of welfare should not stop a commitment to free migration of people. I incline to the former argument: free migration of people from Mexico and Central America given current institutions in the United States is a recipe for a big new burden on taxpayers in the United States.

Actually, under current arrangements, sponsored migration of refugees arranged by private groups seems to work reasonably well when it is feasible. I don’t know of such efforts underway now, although it seems that would be the ideal resolution for these refugees in the United States. It might work reasonably well in Europe. It also would deal with a complaint in the United States right now, that the U.S. government is not doing nearly enough to help Christians being raped and killed by ISIS.

Greece: Taking Stock

The third bailout of Greece is in progress. What can be said?

First, beware those forecasting what politicians will do. The Greek Prime Minister, Alexis Tsipras, got a 61-39 vote against an austerity program offered by other eurozone countries. He then promptly agreed to a more demanding program just a week later.

There are a variety of ways to view Tsipras’s about face. I find it most plausible that the other eurozone countries held fast and he found himself staring into an abyss with serious hardships for Greek people. And he did not want to be responsible for that. Whatever the reason, the real lesson is that politicians’ actions are hard to predict.

What can be learned more broadly?

It is worth starting out with a basic observation: This is a road that should not have been travelled in the first place. As part of the bailout programs, Greece has defaulted on private creditors already. It would have been better for Greece if this had been done immediately without piling on yet more debt.

Being in a monetary union does not require that member states not default. U.S. states defaulted in the 1840s and the commonwealth of Puerto Rico is very likely to default in the near future. Cities in the United States have defaulted on their debts as well. A default by Puerto Rico will not provide any evidence about the willingness of the U.S. government to service its debt and will have at most a negligible effect on the U.S. dollar or its use anywhere in the world.

A beneficial result of an immediate default by Greece might have been a widespread recognition in Greece that things could not continue as they were.

That said, bygones are bygones. That is not the path the eurozone has been on for several years.

Still, Greece will not have growth leading to incomes similar to other European countries without major changes in the economy, whether Greece defaults explicitly or it defaults implicitly by a restructuring of the debt.

There has been a lot of ink spilt about pensions in Greece. Government pensions in Greece allow people to retire and receive checks when people are younger than in Germany or the United States. Pensions currently are equal to one-quarter of Greek GDP and are expected to grow faster than even relatively high long-term predictions of GDP growth. Tsipras made the point that change was inevitable as part of a speech in Parliament this week. To the best of my knowledge, politicians in Greece have avoided even suggesting changes were necessary until now. Previous governments have blamed changes on the insistence of eurozone governments lending funds to the Greek government.

Instead of necessary reforms, politicians in Greece have been good at raising taxes, maybe lowering spending some but have made too few reforms that can have long-lasting effects.

While not suggesting it’s the most serious problem, Greece’s railroads are a good example of problems that affect much of Greece’s economy. Greece’s railroads are government owned and have a substantial debt and deficit. The railroads have borrowed a lot in the past leading to a large debt and they add to it every day they operate. The railroad union has secured relatively high pay and pensions.

One part of the proposed reforms in Greece is privatization of the railroads. Short of changing union contracts, it is hard to see Greek railroads having a positive value in a sale. Changing union contracts would be likely to mean a costly strike, and the difficulties facing the owners would only be worse if the new owners of the railroad were foreigners.

It is hard to see privatization of the railroads being successful without widespread support by Greek citizens. As things stand, there is no evidence such support is there.

It is hard to see the current bailout being more successful than the earlier two agreements. The major issue for Greece’s long-run growth is not taxes and government spending, although government spending and taxes are quite high even by European standards.

The major issue in Greece is an economy with little scope for private enterprise, which is the driver of long-term growth.

A note: I have not posted in while but will be more systematic now.

Greece’s sovereign-debt crisis heats up, a lot

I have been following the financial crisis since its beginnings in 2007. While in the United States it seems that the crisis is all over and has been for a while, the private financial crisis blended into and partly became a sovereign-debt crisis in Europe.

Everything calmed down for a while but things have heated up recently.

To summarize developments a bit as I understand them. I do have to assume some familiarity with Greece’s problems.

Greece has an extremely serious problem with deficits and debts, very high government spending, and a tax system with high tax rates but ineffective tax collection.

A new Greek government has been voted in, at least partly based on resentment against the terms imposed by the Eurozone, the European Community and the IMF to provide assistance to Greece. Today a meeting to agree on any new terms for the Greek government fell apart. There are no plans for a further meeting. The current bailout program ends on February 28.

If the Greek government is to attain its objective of getting better terms, there must be more meetings in the near future. Otherwise the Greek government will run out of funds in the next month or so, unless it goes along with an extension of the current agreement. But the new Greek government ran on a promise not to extend the current agreement and has said that extending the agreement is unacceptable.

A related development at the same time suggests that there is another problem. Greek people are withdrawing euros from the banks and storing them against the possibility that Greece will go off the euro. The banks have about 14 weeks of collateral to get funds from the Central Bank of Greece at the current rate of withdrawal, according to one estimate. This drain of funds from the banks will only accelerate.

The Greek politicians think raising pensions, employing more government workers and raising the minimum wage will lead to growth. The Germans and most other European politicians don’t agree. Not many economists would agree either.

I think the Greek government will stick to demanding they be able to institute these three policies. They are ideologues, Marxists actually. I also think the drain of cash from the banks will accelerate. I am not sure when they’ll have to limit withdrawals. I think capital controls are quite possible.

Then it depends, but I think the other Eurozone governments have relatively little wiggle room. They have voters too.

Any forecast is a forecast of what the Greek and Eurozone countries and politicians will do. I doubt the Eurozone will go along with the three demands by the Greek government. Maybe Prime Minister Alexis Tsipras will rise to the occasion; maybe not.

It’s a forecast. This whole thing has dragged out a lot longer than I thought it would. The Greek people do not realize how serious the problem is. No politician is telling them. The problems are the evil “troika” and especially the Germans (who conquered Greece during World War II), and this has been the story all along.

To illustrate the level of discussion in Greece,

A Greek leftist newspaper close to the ruling party in Athens published a cartoon last week which showed [German Finance Minister] Schaeuble in a Nazi uniform. He is quoted saying “we insist on soap from your fat” and “we are discussing fertilizer from your ashes”, references to the fate of Jews in Nazi death camps.