hard heads soft hearts

a scratch pad for half-formed thoughts by a liberal political junkie who's nobody special. ''Hard Heads, Soft Hearts'' is the title of a book by Princeton economist Alan Blinder, and tends to be a favorite motto of neoliberals, especially liberal economists.

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Friday, December 02, 2011
Violet Socks - Success!

Hilary - Update 3: The goal has been reached!

Paul Krugman - Debt History

Atrios - They Know Even Less Than What They Say

Suburban Guerrilla (odd man out) - Reich’s radical proposal — decent wages

Obsidian Wings (Doctor Science) - The The Labor of the Harvest

Corrente (Lambert) - It's live! (What happened....)

dsquareddigest talks about a culture of tax avoision in Greece, but it's revenue is not that low: 40% of GDP. It's spending is high but not outlandish: 50% of GDP, but a lot of that is debt servicing. What is eye-popping is the debt/GDP ratio: 140% of GDP. Has any country ever gotten out of a debt/GDP ratio that high without defaulting? How did they do it? Japan, I guess, but their solution is to have very, very, very low interest rates, an option that does not seem open to the Greeks.

Anyone have strong opinions on where on the 40-50 scale Greece should aim for? (i.e. assuming a balanced budget, aiming for 47% GDP means 3% spending cuts, 7% tax increases, 42% means 8% spending cuts, 2% tax increases, etc).

In any case, all other countries except Greece and Ireland are liquidity problems, not solvency problems. For Italy, the ECB can solve the problem in a day by announcing that it will not allow the Italian-German spread to rise above 2.5%, and it will not allow the Italian bond to rise above 5.5%. It should do so, and should implement similar policies for other countries. If the ECB won't do it, the Fed should. Just like Clinton's Treasury in 1994 for Mexico, the Fed should not hesitate to intervene in a foreign credit crunch, if it is in US interests.

To those opposed to a simple & easy solution to a not very difficult problem, it should perhaps be suggested that if the desired goal is to teach discipline, continence & sacrifice, coked-up bond traders are not the ideal vehicle for delivering that message. Also, that there are better, truly difficult problems for humanity to attack, rather than inventing, then dealing with, the artificial problem of how to handle a bank run without activist policy to prevent interest rates from getting out of control.

That leaves, Greece, which is (possibly) a solvency problem. 3 numbers the political system needs to find: 1) the maximum GDP number the Greeks can be expected to spend on debt servicing. (my guess: 6-8%) 2) the minimum amount the debt/GDP ratio needs to decrease annually (my guess: 2%) 3) the acceptable range of interest rates the market will demand/ECB will allow for Greek bonds (no idea)

Together, these 3 numbers determine the minimum amount of principle reduction Greece may need in order to make life in the Eurozone tolerable. The hit to principle should be absorbed partly by bondholders, partly by wealthy Greeks. If the ECB/political system wants to prevent bondholders taking losses, that's fine, possibly desirable.

An aside: the one fact about Greece that has captured the public imagination is the "retiring in their fifties" theme. Everyone seems to think that if the Greeks retired at 65, their problems would be solved. No idea if it's true.

An interesting Wikipedia page:

National debt by U.S. presidential terms

which in turn links to an interesting excel file:

White house 2012 budget - Table 7.1 — FEDERAL DEBT AT THE END OF YEAR: 1940–2016

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