APRIL 30 2010

Martin Feldstein, Project Syndicate: Why Greece Will Default. Greece will default on its national debt. That default will be due in large part to its membership in the European Monetary Union. Greece’s default on its national debt need not mean an explicit refusal to make principal and interest payments when they come due. More likely would be an IMF-organized restructuring of the existing debt, swapping new bonds with lower principal and interest for existing bonds. Or it could be a “soft default” in which Greece unilaterally services its existing debt with new debt rather than paying in cash. But, whatever form the default takes, the current owners of Greek debt will get less than the full amount that they are now owed.

Jacob Funk Kirkegaard, Peterson Institute: The Biggest Losers: Who Gets Hurt from a Greek Default or Restructuring. Spain are the principal losers from the “no policy action taken” European crisis management that would lead bigger losses as a result of their share of ECB capital. The banks in these two large countries have very little exposure to Greek debt (and hence have little to offload to the ECB). But through their substantial share in the ECB paid-up capital they would suffer sizable implied losses. Italy would be Europe’s “Greek loss” leader with an implied $23 billion loss, while Spain would suffer $18 billion in implied losses via the ECB route. Ironically, Europe’s inability to take action on Greece, and a resulting default or restructuring, would end up penalizing countries like Italy and Spain for having well-managed banks with limited risk exposure to Greece if the ECB ends up absorbing the brunt of the costs. France, whose banks took far higher risks, would benefit.

Felix Salmon, Reuters Blog: Is it now too late to save Greece? When Goldman Sachs noticed a pattern of regular losses in its mortgage book at the end of 2006, it decided to start going short, in a move which helped to position it as the most successful bank in the financial crisis. The markets have learned their lesson: now that Greece and Portugal have been downgraded, the rush to the exits is palpable: the flight to quality is on, and bond yields in the European periphery are going stratospheric.... The trick about going short an imploding asset class, of course, is that it only works if you’re in the minority. If everybody is doing it, you just get overshooting asset markets and chaos — which is what we’re seeing now. As far as the financial markets are concerned, if any bailout comes now, it’ll be too late: no country can sustain Greece’s combination of funding costs and debt-to-GDP ratio, no matter how much German money it burns through...

Paul Krugman, NYT Blog: How Reversible Is The Euro? Think of it this way: the Greek government cannot announce a policy of leaving the euro — and I’m sure it has no intention of doing that. But at this point it’s all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling. And if Greece is in effect forced out of the euro, what happens to other shaky members? I think I’ll go hide under the table now.

Alcidi Cinzia, Daniel Gros, VoxEU: The European experience with large fiscal adjustments. The key question for European policymakers and financial markets alike is now whether ‘Greece can make it’. This column reviews past episodes and suggests such huge fiscal adjustments have been possible in the past, but take at least 5 years and the debt to GDP ratio keeps on increasing during the process.

Robert D. Kaplan, NYT: For Greece’s Economy, Geography Was Destiny. THE debt crisis that caused Greece to ask for an international bailout on Friday has been attributed to many things, all economic: Greece’s budget deficits, its lack of transparency and its over-the-top corruption, symbolized by the words “fakelaki,” for envelopes containing bribes, and “rousfeti,” political favors. But there is a deeper cause for the Greek crisis that no one dares mention because it implies an acceptance of fate: geography. That Europe’s problem economies — Greece, Italy, Spain and Portugal — are all in the south is no accident. Mediterranean societies, despite their innovations in politics. The relatively poor quality of Mediterranean soils favored large holdings that were, perforce, under the control of the wealthy. This contributed to an inflexible social order, in which middle classes developed much later than in northern Europe, and which led to economic and political pathologies like statism and autocracy. It’s no surprise that for the last half-century Greek politics have been dominated by two families, the Karamanlises and the Papandreous.

Amartya Sen, New Statesman: The economist manifesto. The 18th-century philosopher Adam Smith wasn’t the free-market fundamentalist he is thought to have been. The nature of the present economic crisis illustrates very clearly the need for departures from unmitigated and unrestrained self-seeking in order to have a decent society. Even John McCain ... complained constantly in his campaign speeches of "the greed of Wall Street". Smith had a diagnosis for this: he called such promoters of excessive risk in search of profits "prodigals and projectors" - which, by the way, is quite a good description of many of the entrepreneurs of credit swap insurances and sub-prime mortgages in the recent past.

Emi Nakamura, Jon Steinsson, Robert Barro, Jose Ursua, NBER: Crises and Recoveries in an Empirical Model of Consumption. Our estimates imply that the probability of entering a disaster is 1.7% per year and that disasters last on average for 6.5 years. In the average disaster episode identified by our model, consumption falls by 30% in the short run. In the long run, roughly half of this fall in consumption is reversed. Disasters also greatly increase uncertainty about consumption growth. Our estimates imply a standard deviation of consumption growth during disasters of 12%. We investigate the asset pricing implications of these rare disasters. In a model with power utility and standard values for risk aversion, stocks surge at the onset of a disaster due to agents' strong desire to save. This counterfactual prediction causes a low equity premium, especially in normal times. In contrast, a model with Epstein-Zin-Weil preferences and an intertemporal elasticity of substitution equal to 2 yields a sizeable equity premium in normal times for modest values of risk aversion.

Gary Becker, Becker Posner Blog: Should the US Introduce a Value Added Tax? The greater efficiency of a VAT and its easy of collection is a two-edged sword. On the one hand, it would raise a given amount of tax revenue efficiently and cheaply. Since economists usually evaluate different types of taxes by their efficiency and easy of collecting a given amount of tax revenue, economists typically like value added taxes. The error in this method of evaluating taxes is that it does not consider the political economy determinants of the level of taxes. From this political economy perspective, the value added tax does not look so attractive, at least to those of us who worry that governments would spend and tax at higher levels than is economically and socially desirable. Since high taxes and high levels of government spending would discourage economic growth and raise rather than lower the overall distortions in an economy, I am highly dubious about introducing a VAT into the federal tax system unless accompanied by a major overall of this system.

Matthew J. Eichner, Donald L. Kohn, Michael G. Palumbo, Fed: Financial Statistics for the United States and the Crisis: What Did They Get Right, What Did They Miss, and How Should They Change? We agree that more comprehensive real-time data is necessary, but we also emphasize that collecting more data is only part of the process of developing early warning systems. More fundamental, in our view, is the need to use data in a different way--in a way that integrates the ongoing analysis of macro data to identify areas of interest with the development of highly specialized information to illuminate those areas, including the relevant instruments and transactional forms. In this paper, we describe why we are concerned that specifying this second stage generically and prior to processing the first-stage signals will not be fruitful: We can easily imagine specifying ex ante a program of data collection that would look for vulnerabilities in the wrong place, particularly if the actual act of looking by macro- or microprudential supervisors causes the locus of activity to shift into a new shadow somewhere else--something we argue occurred during the buildup of risks ahead of this crisis.

Badi H. Baltagi, Francesco Moscone, IZA: Health Care Expenditure and Income in the OECD Reconsidered: Evidence from Panel Data. This paper reconsiders the long-run economic relationship between health care expenditure and income using a panel of 20 OECD countries observed over the period 1971-2004. In particular, the paper studies the non-stationarity and cointegration properties between health care spending and income. This is done in a panel data context controlling for both cross-section dependence and unobserved heterogeneity. Cross-section dependence is modelled through a common factor model and through spatial dependence. Heterogeneity is handled through fixed effects in a panel homogeneous model and through a panel heterogeneous model. Our findings suggest that health care is a necessity rather than a luxury, with an elasticity much smaller than that estimated in previous studies.

Christopher Barrington-Leigh et al, VoxEU: International evidence on the social context of wellbeing. What accounts for life satisfaction differences across countries? This column presents new findings from the Gallup World Poll of more than 140,000 respondents worldwide. It suggests the happiest nations are those with strong social support from family and friends, freedom in making life choices, and low levels of corruption.

Welcome to mailtothefuture.org. Here you can send e-mail messages to your friends (or yourself) that will be delivered tomorrow, or next month, next year, next decade. It's all your choice.