STATPORN, STATPIMPS, STATWHORES PART II: THE ROAD TO GREEK STATISTICS

In this second part to my post, I try to explain the factors behind the decline and corruption of Greek statistics leading up to the 2009 deficit revision, and what it can teach us about Greece, Europe, and the State.

Goodhart's Law

Let's start with the basics: Goodhart's Law. It's reason number #45608 why centrally planned economies do not tend to work:

Goodhart’s “law” [...] stipulates that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes” [...] (Koen and Van den Noord 2005)

"when a measure becomes a target, it ceases to be a good measure."
Dame Ann Marilyn Strathern 

Normally, Government deficits are among the most closely monitored government statistics out there, and come with monthly targets; if Goodhart's Law holds, then it makes sense that they should be some of the most prone to manipulation. We don't know how they compare to other statistics but we know they are tampered with, at least in the Eurozone, as a result of political incentives subject to both economic and political cycles, and within the scope allowed by incomplete fiscal transparency. A number of studies demonstrate this conclusively, but I would single out Koen and Van de Noord (2005), Beetsma et al (2011), de Castro et al (2011) or Alt et al (2014) as the most useful. Readers may have others to contribute; all are welcome.

It takes constant vigilance to keep deficit figures relevant and free from interference - in fact, it is a job for institutions of fiscal governance and transparency, not for the occasional do-gooder. You might think Greece's historical record in this has always been poor, but you'd be wrong. As the IMF acknowledges, fiscal transparency was written into Greece's first constitution and elements of it were in place even during the Revolution. This is because the Greek state, born as it was out of war and a concerted Western nation-building effort, was dependent on foreign loans from day minus one. Subsequently, we spent decades under fiscal monitoring and monetary straitjackets of some sort or other (on which, read Tuncer (2009) and Lazaretou (2004)).

The Stability and Growth Pact

But what happens when institutions are as wrong as the people they're supposed to control? In Greece's case, the key institution was the Stability and Growth Pact (SGP) and its infamous 3% deficit target. Pina and Venes (2007) demonstrate that the SGP increased the tendency of governments to flatter their deficit forecasts. Alt at al (2014), moreover, demonstrate that the influence of the SGP reduced headline deficits but increased stock-flow adjustments, and particularly the disguising of deficits as equity injections into state-controlled enterprises. This stock-flow adjustment effect only occurred in countries with low levels of fiscal transparency. Unfortunately for us, Greece's recent record in this regard was poor, whatever our history might have prepared us for.

Differences of degree and of quality

These were in fact Eurozone-wide problems. All studies mentioned so far find the same problems when Greece is removed from the data. So what was special about Greece? For one, there are differences of degree. Tables 4 and 5 here  and Figure 1 here demonstrate that Greece has been an outlier in terms of downward revisions to the deficit figures, ever since 1997, with revisions typically doubling our deficits. The effect of accounting distortions on Greek deficit figures was typically three times the size of the distortions of the next worst-performing country.

As you can see in the graph to the right, the SGP (in effect from 98 onwards) was an effective constraint mostly on Greek governments' planned deficits - these were indeed never above the 3% ceiling. First releases were also subject to SGP; and although these would always revise the planned balances downward (2000 and 2006 were the sole exceptions), the size of the revision was more or less random, or subject to unforeseen circumstances such as the 2004 Olympics running much further over-budget than expected. Such revisions occasionally breached the 3% target. But it was the ex-post reviews, based on methodological visits and Eurostat interventions, that restored Greek deficits to a persistent, downward trajectory. The reason for this is that ex-post deficit figures weren't just about revisions due to random events or
within the bounds of good practice. They were all about gimmicks. Pg 28 here details the full list of accounting gimmicks used in the years leading up to 2005, and it really takes the whole page to go over them.

So what was the hard constraint on our deficits?

If the SGP was not a hard constraint on Greece's true deficits, did politicians see anything as a hard constraint? An OECD review of budgeting in Greece, prepared on the very eve of the crisis and two years ahead of the 2009 deficit revision, is clear on how things worked. Budgeting was a bottom-up, line-by-line as opposed to programme-by-programme process, planning for only one year at a time, leaving almost no role for Parliamentary control and with no provision for ex post oversight. Accounting became increasingly poor as one moved away from central government. Even the OECD had to concede that accrual accounting was not an immediate priority since the state was bad enough at cash accounting. Audit needed to be strengthened. But perhaps most telling is the way the OECD describes the relationship between the SGP targets and the actual budget (see p 14):

"for the medium term (t+2 and t+3), forecasts are done annually for the Stability and Growth Programme that the Greek government must deliver to the EU in the autumn each year. The medium-term forecast is not updated as part of the budget preparation process in the spring. The overall position of the central government finances is updated centrally using the new forecast. One feature of the forecasting process is the overall fiscal targets that the Greek government decides to reach in the medium-term Stability and Growth Programme forecasts. If the fiscal targets (deficit, expenditures, revenues) are not reached according to an updated medium-term forecast, unspecified or partly specified “reforms” are added (such as a reduction in tax evasion or government expenditures), without these reforms being specified in concrete detail. The macroeconomic forecasts are not used in the line ministries’ budget preparations; rather, as discussed below, they develop their own forecasts. This practice naturally hampers the use of the estimates and indeed undermines the integrity of the budget." 

As K. Featherstone, a long-time Greece-watcher argues, SGP compliance did make a difference but of a very different kind: it strengthened the hand of Greek finance ministers against their colleagues, at least in their short term:

The Maastricht convergence criteria and the Stability and Growth Pact set clear policy parameters and created an external discipline for monetary policy in Greece. At home, the government was empowered: the legitimacy of the EU and the precision of the convergence criteria carried a difficult process of adjustment forward. [...] ultimately the strength of the domestic reform initiative would very probably have run aground without the Maastricht constraint. It was telling that, [...] in 2002 [...][t]he Simitis government did not call for a lessening of this external discipline: presumably, it saw advantages in having the corset. It was a means of strengthening its domestic position when pressing for difficult reform.  

I would argue that, in the post-Maastricht era, the ultimate constraint was not the SGP targets, or the government's deficit forecasts. The true targets were the Government's cash targets; these were constrained by a combination of tax revenue and 'safe' borrowing. Notice, in the OECD's 2008 review of Greek budgeting, how much more regular, robust, integrated and closely monitored the cash targets were than the actual budget and the SGP targets.

The process of cash management includes the preparation of the “budget expenditure implementation plan” and of the “cash plan”. Both plans are backed up by the monthly cash limit decision. The “budget expenditure implementation plan” shows monthly forecasts of expenditures. It is prepared for the entire fiscal year, and is updated and rolled over on a monthly basis. The plan is based on the budget appropriations. The monthly forecasts are prepared by using the assumptions underlying the budget preparation and monthly historical data. The “cash plan” puts the “budget expenditure implementation plan” in the context of the revenue forecasts. It is on a pure cash basis and shows daily cash inflows and outflows from the “Single Treasury Account”. [...] The “cash plan” is reviewed and updated every day for the whole month and every month for the whole year. [emphasis mine] The monitoring system includes a continuous flow of data from the Treasury’s departments, the Central Bank, the Fiscal Audit Offices, and the local Tax and Payment Offices. The “cash plan” is a tool for ensuring that there will be adequate cash balances to meet the budget obligations. The forecasts of the cash plan are used for decisions on borrowing and for investing the cash surpluses. The forecasts are elaborated and a ministerial decision is issued, defining a monthly cash limit for every unit involved. Fiscal Audit Offices and Tax and Payment Offices are required to ask for special approval before payments above a certain amount are made (EUR 3 million). The limits are checked against the monthly outcome data and crosschecked against information received on a daily basis by the Central Bank.

The cash constraint was much harder than the SGP's 3% target. But it was soft in another, more insidious way. Tax revenues may have looked steady but they were vulnerable to erosion and the political cycle; market financing was based on a colossal, global mispricing of risk.

We can test some of this insight empirically. A reasonable number of studies have looked into the causal link between tax revenue and government spending in Greece. The question common to all is whether we followed a 'tax and spend' model, whereby government sets its spending target based on what it can raise through taxes, or a 'spend and tax' model, whereby government sets its spending target based on politics and then scrambles to raise the taxes to pay for it. You can see my selection of studies for yourselves below:

• Richter and Paparas (2013):  spend and tax, years 1833-2009 (no typo!)
• Kollias and Makrydakis (2000) bi-directional causality, years 1950 - 1990
• Hondroyiannis and Papapetrou (1996): spend and tax, years 1957-1993
• Konstantinou (2004): tax and spend, years 1970 to 1997
• Trachanas and Katrakilidis (2013): spend and tax, years 1970 to 2010
• Afonso and Rault (2008) spend and tax, years 1960 to 2006, except for 1986 onwards 
• Mutascu (2015) tax and spend, years 1988 to 2014.
• Athanasenas et al (2014) fiscal synchronisation with asymmetric fiscal adjustments, years 1999 to 2010

This is by no means the last word on the matter, but it seems to me that Greece operated a 'spend and tax' model (i.e. government set a spending target first and then adjusted taxes to fund this) for most of our modern history - but  switched to a strange type of cash-and spend policy post-Maastricht, which counted any borrowing we thought we could draw on without inviting undue attention as equivalent to tax revenue. It was the sum of this plus actual tax revenues which led government spending post-Maastricht.

Un-gaming Europe's deficits

People often wonder why, if Greece was only an extreme case of a much wider problem, Eurostat called for changes to European countries' deficit calculations in such a piecemeal manner, review by review, rather than demand that everything be restored to the appropriate level of accuracy at once. Part of the story has to do with the fact that Eurostat's powers and capabilities changed as a result of the Greek crisis - it did not always know what changes needed to be made, nor could it impose changes.

You see, back when our original 2009 deficit figures and the first revised 2009 deficit figures were released, Eurostat did not have auditing powers over national statistics agencies. It only got those in June 2010, because, and I quote, 'in 2005 [when this was originally proposed] several key member states were opposed to a strengthening of Eurostat's powers.'

This new demand for auditing powers for Eurostat came, appropriately, from the European Parliament, and this time, strengthened by the evidence of statistics gone wild in Greece, it managed to get past the Council. Eurostat's September 2010 visit to Greece, which resulted in the final deficit figures which are currently being questioned, was the first time ever that the Directorate made use of its new auditing powers. This resulted in an unprecedented ability to zero in on unreported or misclassified spending and liabilities.

Even in the days leading up to June 2010, the struggle to deny Eurostat its new auditing powers and maintain Governments' 'right' to lie to their citizens was fiercely defended by the Council:

[...] ministers have watered down aspects of the Commission's original proposal. The Commission wanted to require member states to punish their civil servants with “effective, proportionate and dissuasive” sanctions if they deliberately misreported data to Eurostat. Ministers have removed this requirement, because they felt it was an unacceptable infringement of national sovereignty.

The Commission also wanted to place a mandatory obligation on member states to provide Eurostat with “experts in national accounting”. These experts would work with Eurostat on a temporary basis, to help it prepare visits. This was also removed by finance ministers.

The Commission had protested against the changes, but backed down because it did not want to threaten the chance of the legislation being adopted. The Commission also wanted to place a mandatory obligation on member states to provide Eurostat with “experts in national accounting”. These experts would work with Eurostat on a temporary basis, to help it prepare visits. This was also removed by finance ministers. The Commission had protested against the changes, but backed down because it did not want to threaten the chance of the legislation being adopted.

Who were the 'key' member states so opposed to further scrutiny of their accounts? Why only the UK, France and Germany. There is no record of how Greece voted but, by the looks of it, that first bunch of proposals was dead on arrival.

TO BE CONTINUED

ABOUT THAT "ODIOUS" DEBT ... A FURTHER CRITIQUE OF #DEBTOCRACY

Note 1: I am incredibly grateful to Aristos Doxiadis for citing this article in his excellent book, Το Αόρατο Ρήγμα.

Note 2: This blog was updated on 5 Dec 2014 to reflect new data on the size of bribes

Veteran readers will remember my epic slugfest with our new wave of defaultniks, a propos of the release of #Debtocracy. A central bone of contention was the defaultniks’ claim that much of the Greek debt was not attributable to the will of the people and was in fact odious. The defaultniks purposefully refused to offer even an approximation of what percentage of the debt they considered to be ‘odious’ in this way but pointed to excesses in public procurement and public investment costs as indirect evidence. When pressed on the matter of how much of the debt is odious, they flitted from ‘all of it’ to ‘some of it, surely we deserve to know how much!’ depending on their audience in any given moment. 

I argued, on the other hand, that with nearly two thirds of all spending going directly to the people in the form of direct transfers, pensions and public sector wages, it is very unlikely that most of the public sector’s debt in Greece was odious. Still, I acknowledged that someof it probably is.

The months have rolled past and the defaultniks are by now so convinced of their moral and intellectual superiority (or at least the physical muscle they can command) that they see no point in following up on this argument. If they've managed to put together a self-styled Debt Audit Committee, answerable to no one and selected by buddy-up, it has made no attempt at a figure and will likely not attempt one until after La Revolucion. Yawn.

Government, of course, has no interest in such calculations so I can’t count on them. 

So screw everyone. I have to do this myself. Like the defaultniks themselves, I will start with procurement because that's where the bodies are chiefly buried. 

First, I need an estimate of the actual procurement spending of the Greek government, going back as far as possible. Eurostat provides this (if you bother to divide % of GDP by % of total contracts) from 1995 to 2009, and you can find a link to this and other interesting datasets here.

The result – about 9 to 13% of GDP (about a fifth to a quarter of all government spending) went on public procurement annually. On a typical year, roughly 60% of this was under the radar spending that was never published in the official procurement journal of the EU because the contracts were (whether really or artificially) too small. The estimated amounts spent on everything, from the Rion-Antirrhion bridge to felt tip pens, are as follows:

Now we need an estimate of the percentage of this that went on bribes. The World Bank generally calculates that 3.7% of all procurement spending globally is spent on bribes, but I prefer to use the percentage admitted to by Siemens, whose executives have had their own run-ins with the greasy outstretched palm of the Greek government official. The typical Siemens bribe is 5-6% of the contract value. Let’s take 6% just to be on the safe side. According to this ratio, the Greek state must have paid between EUR1.5bn and EUR2.2bn per year on bribes. 

But of course bribery isn’t just about paying the actual bribe, it’s also about buying inferior services or paying over the odds. The bribe is meant to convince officials to allow this. These additional economic ‘capture’ costs come up to anything from 20% to 188% of the bribe itself.  Combining this calculation with the estimates on bribes it is possible to estimate an upper and lower bound for the cost of bribery and corruption in public tenders for Greece.

Now I realise that in applying these rules to all public tenders I am making a heroic assumption – some contracts will have been pimped to death, with contractors making incredible capture rents, and others will have been done by the book. I am also assuming that bribery and capture costs remained constant as a percentage of procurement spend every year, which can’t be true as there have been procurement bonanzas that will have been milked to death during this time, as well as some years when rents from bribery were low. 

I can’t help this miscalculation given the tools at my disposal. It’s just the best estimate I have. And it looks as follows. The total costs of capture (bribes and mispricing) ran up to anything from EUR900m to EUR5bn per year.

Now, in determining the extent to which these rents contributed to Greek Government debt, I must make some assumptions about their financing. To ensure I cannot be accused of bias I will make the most defaultnik-friendly assumptions possible, in the understanding that they may be biased in favour of overestimating the odiousness of the stock of Greek debt.

First, I will assume that all of this money came from the Greek public coffers. This is patently not true as EU money flooded into the country from 1995 to 2009 and much of it went towards procurement.

Then I will assume that all of this money came from excess borrowing and thus a) we are still saddled with the interest to this date and b) this debt is indeed odious. This is a very strong assumption and one that is moreover heavily biased towards the defaultnik case.

This means I need to calculate an acceptable interest rate for the excess borrowing. Given that Greece never paid down any debt but simply refinanced existing obligations throughout this period, I feel justified in calculating our effective interest rate by dividing the total stock of debt for each period with the total interest expenditure for each period. Both can be found here. I assume that costs before 2000 (when the Eurostat series begins) were constant at the same level as 2000, i.e. 7.2%. (Note: they were actually higher).

Now all that remains is to calculate compounding coefficients for each year based on the product of the (interest rate+1) for that year and all following years. They look as follows:

Now all that remains is to add up the up-to-date figures. The Grand Total comes up to a range of EUR29.8bn to EUR71.6bn, or alternatively 9.1% to 21.8% of our total stock of debt as of end 2010. 

 

Remember, these are very generous figures, and yet even on these assumptions, the amount of potentially odious debt is almost certainly less than the nominal 21% haircut agreed in July.

With procurement out of the way only straightforward graft and over-compensation of officials remain as possible avenues for the creation of odious debt. However, I believe that the contribution of these two is negligible compared to that of public procurement as indeed it is in almost any country not run by warlords.  

UPDATE: I realise in defending these estimates that there's just no pleasing some people. If you're not happy with my figures or my assumptions, let's at least agree on this: That it is possible, in theory if not in practice, to come up with a good estimate of the amount of debt attributable to things other than the will of the people; that carrying out such estimates is desirable; and that the extent to which Greece's debt is odious is a matter of fact, not politics. My assumptions are no doubt flawed but they are transparent, they come with some justification, and they are there for all to evaluate. In fact, you can just plug in your own assumptions and try to get an estimate that works for you.

2013 UPDATE: How fair is @talws' objection in the comments below? I explore the topic here.

2014 UPDATE: How accurate was my 6% assumption on the size of bribes, on which so much of this exercise depends? There is a new dataset for the researcher to draw upon: the recently released OECD estimates on the size of bribes as a % of contracts, based on records from 55 actual cases brought to justice between February 1999 and June 2014.

The average OECD estimate is 10.9%, which is significantly higher than my assumption. Bribes, of course, range widely by sector, from 14% for health- related spending (one of my Big Five deficit-drivers) and 17% for admin services, to 6% for scientific and technical consultancy, and 4% for construction. Ironically, the types of projects most commonly cited by defaultniks back in 2010 (Olympic construction for instance) attract relatively small bribes (less than my original estimate), while services- and consultancy-based projects are much worse. Anyway, please note these figures are based on a vanishingly small sample, involve foreign bribery only and do not seem to include any cases involving Greece. Still, if this estimate is accurate, then my estimate of our odious debt should grow by 81% to roughly 16.5% to 39.5% of Greece's 2010 debt. The mid-point of this range is now above our original creditors' haircut, but nowhere near the total debt jubilee defaultniks were after.

Once again, the facts simply don't bear out the Debtocracy story. They do reveal a good amount of debt we could have done without; and I wouldn't mind defaulting on that even now. But at least we would be seen as credible and honest, as opposed to opportunistic and hypocritical.

LAWYERS ATE MY COUNTRY

Anyone care to explain these graphs?

All data refer to Greece. I have omitted the period leading up to the first elections after the restoration of democracy, as well as the economic crisis and its aftermath. I've also omitted the first (failed) hung parliament of 1989.

If you think lawyers cause growing debt, here is your graph. Here the Y axis refers to the change in debt in the term of the current parliament. It suggest that once more than 35% of parliament are lawyers debt tends to rise substantially:

If you think lawyers are voted in after public sector waste sets in, here's your graph. Here the Y axis refers to the change in debt in the term of the previous parliament. It would suggests that once debt to GDP has grown by more than 20% or more in one term, the likelihood of a lawyer becoming an MP rises dramatically.

Public debt data from the IMF and election results data from the Interparliamentary Union.

I think this round goes to the people who think lawyers are the result of fiscal irresponsibility. Thoughts on a postcard as to the mechanism of this.

But more importantly, I intend to use this in future elections as a means of approximating Greek debt/GDP. Sure, it's a little excel regression I knocked together based on a small number of datapoints but I suspect that's still more rigorous than the actual statistics.

I DAREZ PAUL MUPPET KRUGMAN TO DEBATE TEH AUSTRIAN THEORY

This post is copied from Jeff Harding's post on The Daily Capitalist. I have matched Jeff's pledge and would urge you to do the same. At best, my guy loses and we help feed some hungry people over in NY. At worst, Paul MUPPET Krugman gets his ass handed to him in a symbolic defeat of Keynesian MUPPET running dogs the world over AND we help feed some hungry people over in NY. I'm happy either way.

========================================

I Dare Paul Krugman To Debate Austrian Theory

By Jeff Harding, on October 23rd, 2010

UPDATED

How much would it be worth to you to see arch-Keynesian Paul Krugman debate a top-notch Austrian theory economist on business cycle theory?

Krugman has prattled for years about Austrian theory being a flawed dead-end of economics. My guess he has never read anything by Mises, Hayek, or Rothbard, the greatest scholars of the Austrian School. He doesn’t understand it in any way; I have read his critiques and they are uninformed.

Robert Murphy, one of the bright young lights of Austrian theory economics, has challenged Krugman to a debate. Now let me say others have tried to draw Krugman out, but he won’t do it. Murphy, who got his Ph.D at NYU, has made an offer of debate that Krugman will be hard pressed to refuse. Here’s the challenge:

When Krugman agrees to debate Murphy at the Mises Institute, $100,000 will be donated to the Fresh Food Program of FoodBankNYC.org, a non-profit dedicated to feeding the hungry of NYC .

Murphy is soliciting donations for the debate through The Point, a web site that hosts campaigns. Launched only 4 days ago, they already have raised $22,000 $28,000 $32,000 57,165. I just pledged $100. If Krugman doesn’t accept the challenge, I will not be charged. If he does, I get a charitable donation deduction to the Food Bank of NYC.

Click the banner below to donate. Please join me. This will be money very well spent.

UPDATE: Murphy has put up this video of himself prepping for the Krugman debate:



Can you imagine a Keynesian High Priest taking himself this seriously?

ENTERPRISE SUPPORT FAIL

I'm currently attending a very interesting event on Microfinance held by the European Commission. You can access the programme and other material here.

What is even more interesting is that it's absolutely crawling with my fellow Greeks. Although some will be Eurocrats based in Brussels, most travel in groups of two or three and keep referring to 'our guys' in a very familiar manner. Many have that usual mixture of timidity and intensity in their faces - the mark of a person used to delivering fawning praise and then wallowing in impotent rage.

No doubt my compatriots are on a fishing expedition for even more yummy subsidies that we can continue to feed our clientelist regional investment structures despite being insolvent. I suspect they are particularly keen to hear more abour JESSICA.

For the last time Europe. Stop bailing us in!!!

UPDATE: It's actually JEREMIE they're into - this person, employed by our Department for Economics and Competitiveness and Maritime Affairs, (now Regional Development and Competitiveness) piped up in a Q&A section, and even managed to make an unintended 'racial' remark, thanking an Indian panellist for the 'spicy' note she added to the proceedings. Actually the panellist had been recounting how she managed to escape a life of domestic violence and overcome implicit and explicit racism in order to become a successful entrepreneur.

It's like watching Borat.

However, the manner of the question was not as bad as the content; my compatriot appeared exasperated at the discussion on microfinance and its supposed potential benefits to employment and growth in Europe. 'I want to talk about the elephant in the room. What are we talking about?' she demanded, 'We're talking about access to finance! About getting finance to people that NEED it, not about employment or growth.'

And that, my friends, is Greece in a nutshell. No point discussing how such a scheme might self-finance by reducing benefits payments or increasing tax revenues for member states [ed. personally I am sceptical of that anyway]. The point it that some people NEED money and must HAVE it! Give us our subsidies and shut up already.

I CAN HAZ POLICY DEBATE?

Still from my folks' TV the other day... a delegation of road transport unionists. 

Greece is one of the few countries where not only workers but also entrepreneurs are allowed to band together into Unions that collectively bargain on things like, say, their own prices. It's called a CARTEL and it should be smashed to pieces.

Here they are, in one of our seedier but powerful fora, the TV show Zougla (Jungle) hosted by Makis Triantafyllopoulos (to whom we also referred here). The caption reads: MPs with haulage licences.

Their quarrel with the government is that it is forced to liberalise road transport in Greece and has therefore decreed that their licences will now be worth a fraction of what they used to be worth. Which is only fair because while they used to confer monopoly power and they will no longer be able to. These people argue however, that they paid good money for their licences which they will now lose. That's EUR50,000 for trucks and EUR200,000 for fuel carriers (source here).

In an industry in which 31.6% of gross output goes into capital compensation (according to EUKLEMS) despite only moderate concentration in Herfindahl terms (according to the EUKLEMS linked dataset), it is pretty clear that anti-competitive strategies are already at play. Even so, surely the cost of the licence could have got amortised over the years? EUKLEMS tells me the average inland transport company is 21.1 yrs old;  a licence worth EUR200,000 amortised over say 20 yrs works out to EUR20,000 per annum, which the average company should have been able to make out of a gross output of EUR65,000 or so. 

Now something tells me this stuff hasn't been amortised and people have been paying themselves inflated directors' salaries all along. THAT'S THEIR PROBLEM. Meanwhile we're stuck with a loss estimated at ca. 0.5% of GDP per annum.

Of course, it's not just the cartel that's to blame. Ponder if you will the record of government intervention in road freight over the last decade, almost calculated to support this market structure. Comparatively, as of 2007, ours was the most price-regulated road freight sector in the OECD.

Now, there are those who fear that the signal might go out that the Greek state doesn't keep its promises to licenceholders. I'm not worried about that. Market participants are not stupid. The signal they will receive is that the State will not keep its promises to prop up cartels, and that a licence to monopolise must never be taken for granted. 

That can only be a good thing.

HIGHER EDUCATION FAIL (SQUARE)

The Hellenic Quality Assurance Agency for Higher Education has just released its report into Quality in Higher Education (surprise!). It is both a window into the crooked timber of Greek education and a glaring example of quis custodiet ipsos custodes?

Going only by the reception the report has received, one would imagine that the Agency is some kind of austere “expert group”, issuing tomes of doomed tough-love precepts that drip with lofty disdain for the world of mortals and their follies. How I would have welcomed that.

Instead, the Agency spends more than one third of its report listing all the rubbish presentations it’s given about its own work to “stakeholders” and whingeing about how the last two governments have not allocated enough money to itself and its contractors/consultants, or how audacious Treasury auditors have kicked back many of its requests for more taxpayer dough, thus getting in the way of the “absorption” of funds. In fact it spends more pages on this than on its findings, and the whole thing reeks of a sickening mixture of officiousness and advocacy. It runs something like this (pg. 11):

“[...] it is very difficult to absorb National Strategic Reference Framework funds without the necessary administrative infrastructure and the right institutional framework. Thus, the operation of the Agency essentially relies on the selflessness of its members (many of whom, it ought to be noted, must also travel outside Athens in order to meet their obligations to the Higher Education Institutions in which they teach) as well as that of its small but committed number of secondee officials and staff.”  

  

How these people have the nerve to publish this in an official document I don’t know – perhaps they are secure in the knowledge that no Greek taxpayer will EVER bother to read the actual report. Anyway, they have found room among all of this drivel to publish a few nuggets of gold – nothing original mind you, but at least it is finally in print for all in government to read:

• Vague human resource development goals at the national level 

• Geographic dispersion of Universities that is unjustifiable on quality grounds, with some small rural towns and islands hosting singular departments within a University, and others hosting “twin” departments duplicated at the University’s nominal seat.

• A proliferation of departments and degree programmes whose subjects are often vague and overlapping

• A disproportionately high number of departments, programmes and students compared to the country’s population.

• “Rubber-stamp” departments admitting students without having any permanent staff or infrastructure

• Arbitrary development of specialisms and cross-disciplinary departments at the undergraduate level which ought to have been pursued at the graduate level

• A large number of graduate programmes without clear admissions policies and no clear career paths, as well as poorly structured Ph.D. programmes., and insufficient specification of pre-requisite courses in either case.

The agency forgot of course to put their finger on the billion Euro question: are we spending taxpayers' money correctly? We know, for instance, that the basic reason for the pointless dispersion of universities is our conflicted and pointless regional investment policy. Universities = students = consumption and rented accommodation = natives of rural areas stay put instead of moving to cities and property prices go up. Want proof? Check out the latest stats. The only Universities in which enrollment fell lat year were in Athens and Thessaloniki.

As for the value of education itself, luckily some academics are earning their keep and looking into this subject - too bad they work and publish abroad. I am particularly indebted in this case to a certain Ilias Livanos (no acquaintance unfortunately), who has crunched reams of LFS data to estimate the returns to education by subject and type of institution. The report on this research, available here, includes the findings summarised in the table above. It also features the following amazing quote: 

“for most of the fields, besides those of Medicine, Law, Economics and Business and Social Sciences, the impact of a degree on the earnings of public sector graduates is strong at the bottom quantiles, yet declines as one moves up the ability/wage distribution. As the reverse seems to hold true in the case of the private sector, this indicates that an educational degree acts as a substitute for ability in the public sector, as opposed to the private sector. Such a result is consistent with the fact that market forces are less likely to affect the remuneration of individuals who are employed at lower-level state jobs, given that the latter offer automatic wage premiums to job candidates who possess certain academic qualifications.”

Are you getting a sense of déjà vu yet? You may remember one of my earlier posts on union membership:

" ... we’re the only EU country in which people with lower education levels are, ceteris paribus, less likely to be union members. So Union membership in Greece is not about protecting oneself from ruthless competition in a rapidly upskilling world where one’s place in the labour market is increasingly precarious. In fact, according to the same study, we are also the only country, along with Finland, in which people whose parents were educated to a lower level are more likely to be union members. Simply put, union membership in Greece is a means for those who invested in education in a bid to secure an advantage in the labour market to hold on to their status in the face of competition." 

The amazing thing is that, according to another one of Livanos' papers, the ridiculous wage premium secured by unions for graduates in the public sector are matched (not surprisingly) by substantial wage penalties in the private sector. The union-driven public sector wage premium sends more poor souls into degree subjects and specialisms that are useless to private sector employers, thus forcing the public sector to find positions for them.

CLIENTELIST STATE FAIL, DATA WIN!

Back to our data fetishism today with some of the best-ever data on the wastefulness of Greek public investment - the only type of government spending with a snowflake's chance in hell of producing growth. This paper comes straight from the LSE’s Hellenic Observatory, whose work I’ve cited before.

In his time as an NBG Senior Research Fellow, a certain Y. Psycharis (of the humble but clearly well staffed University of Thessaly) managed to piece together a complete and consistent set of Greek regional investment data over 30 years – a very formidable task. 

Psycharis' aim was to examine how much the allocation of funds varies between different regions, how it is determined, and how it has changed with successive governments. His key findings, thought tactfully delivered, are devastating. I reproduce the key findings with no additional commentary as none is needed:

“Neither a North-South/Mainland-Island/Urban-Rural divide nor ‘the needs based approach’ could carry sufficient explanation for the allocation of public investment.”

“Second, contrary to what many researchers have portrayed about history and inertia for the stability of the devolved spending in the UK and ‘the remarkable stability’ of regional spending pattern in the USA, the regional allocation of public investment in Greece is changing over time.”

“Third, the level of underdevelopment - and as result redistribution - does not appear to have constantly and systematically comprised the principal criterion to explaining the regional pattern of resource allocation in Greece during the period 1976-2005.”

“Fourth, the policy followed throughout the study period concerning the regional distribution of public investment does not seem to have been dictated by a higher-level strategic regional development plan.”

“Last but not least, the regional distribution of public investment seems to be affected by electoral geography. The electoral preferences of prefectures, even the place of origin of certain members of each government, seem to comprise explanatory variables for the regional distribution of public investment.”

Thank you Mr. Psycharis. More on our misuse of public funds here.

DEBT TIMELINE WIN

I don't know where this graph came from originally, so I'll credit Troktiko, where I saw the photo in the first place.

People around the interwebs seem to be taking this graph as evidence that Greece's Socialists are to blame for our huge mountain of debt. While I have endless sympathy for this sentiment, that is the wrong way to read the graph.

You see the Socialists actually paid off a good deal of our debt under Simitis and the Conservatives added to it (even above the purely cyclical effect) under Karamanlis Jr.

What actually happened was that the gravy train only stopped on three occasions: under dictatorship, during Papandreou's last (read: senile) days, and under Eurozone convergence. The three situations have one thing in common: the Greek people were unable to influence fiscal policy through clientilist politics either because no-one was listening, or because the people in charge were answering to a higher power.

Enjoy!

CONSULTATION WIN, TROUGHING PIGGIES FAIL

I am not the biggest fan of G-PAP and our current Government but I have to give them their dues on occasion. 

The decision to put all public consultations online was brave and, if followed up properly by policymakers, could change the country for the better.

At the very least, it will provide some badly needed LOLs.

The Government is currently consulting on the winding down of a number of quangos and other useless public organisations in a bid to save money and sanity. The consultation page (in Greek only, I'm afraid) can be found here.

As one might have predicted, it has prompted a torrent of self-serving comments from people employed in, supplying or otherwise benefiting from the entities being considered for closure. My personal favourite (and a heavily defended one at that) is the National Milk Committee. The problem with the NMC is that, the more they try to defend themselves through they Chairman, the deeper a hole they dig for themselves:

“How much does the NMC cost the State?

The NMC does not at this time receive a single Euro from the State. It carries out its work, whose significant is universally acknowledged, thanks to the funding it receives from the Hellenic Dairy and Meat Association, which in turn is funded entirely out of the money of Greek milk producers and manufacturers of dairy products in return for services rendered. It should be noted that, during the first 25 years of its operation it had no regular funding and was able to operate thanks in main to the contributions of the Greek dairy industry and other dairy stakeholders.”

Sadly, it is hard to corroborate this as the NMC does not feel any obligation to publish any financial information in Greek or English. However, it does appear suspect in light of what is mentioned under the “funding” tab of the NMC’s own website:

“Until 2004, the NMC operated with no steady funding. […] Over the last few years, some of its more significant  function were funded by the Hellenic Dairy and Meat Association, the association of Greek Dairy Manufacturers and the Ministry of Agricultural Development and Food to whom we express our gratitude.”

 “In 2004, Presidential Decree no. 89, established an annual €200.000 grant to the NMC, levied from the Hellenic Dairy and Meat Association.”

Let us forget for a moment the direct funding from the Ministry and focus on the HDMA money. It is clear that, contrary to the NMC's claim, this is not quite a quid-pro-quo model of funding – the NMC receives this money regardless of what services it has rendered. And it has a claim on this money by presidential decree – hardly a model of free enterprise. But even if the HDMA were paying out of genuine interest, this would also be problematic because they are not in fact spending “the money of Greek milk producers and manufacturers of dairy products in return for services rendered .” A look at the website of the august HDMA suggests where its own funding, of which it so generously gives to the NMC, comes from in the first place:

“The HDMA is not funded out of the State budget. Its revenues are derived from a 0.75% levy on domestically sourced milk, a 0.5% levy on foreign-sourced milk, and a 0.2% levy on domestically and foreign-sourced meat.”

In my village, this is called a tax. But I’m getting ahead of myself – back to the NMC for now:

“Since its establishment, the NMC has been housed free of charge in premises granted by the Senate of the Athens Horticultural University. This grant essentially allowed it to exist through its first 25 years of operation, during which time it had no steady source of income.”

Finally, as the NMC explains, its Chair and Vice-Chair are both University Professors, i.e. civil servants, whose wages, travel costs and expenses are paid out of the state budget. This last point is important because the NMC is based in Athens but the HDMA is based in Thessaloniki – an 8-hr drive apart. The other three Board members are all high-ranking industry association people.

That aside, why do we have an NMC? Why can’t the HDMA build its own resource? Because to have an NMC ties in nicely with the structures of the International Dairy Federation, of which the NMC is a member. The IDF’s job is, once one has read through the fluffy language, to act as chief self-regulator and lobbyist for the dairy sector.

From the above it is clear that the NMC is typical of the culture of the Greek quangocracy. Here they are, an organisation that receives EUR200,000 per annum levied by state decree, is housed free of charge in public property for a quarter-century, occupies the time of well-paid civil servants and taps into the state budget to pay for their travelling costs. Despite all of this they STILL DON’T REALISE THEY ARE BEING SUBSIDISED BY THE STATE.

That’s just not good enough. G-PAP has my vote on this one – make them, and everyone else like them, squeal!

PASS OR FAIL, WE IZ ALWAYS FAIL

The pompously-named Supreme Council for Personnel Selection (ΑΣΕΠ) has just released its 2009 annual report, of which the statistical annex can be found here (Greek speakers only, I'm afraid).

This is important because ΑΣΕΠ is the centralised agency (and process) whereby every legitimate public sector employee is hired in Greece. Even some publicly quoted companies, including the Greek water utility, ΕΥΔΑΠ, are obliged to run some of their hires past the Council.

Predictably, the annual report's annex reads like Stalin's own book of Sudoku puzzles. It is also highly resistant to the simple question of "how many people did you hire, who for and in what occupations". Thankfully we have data on that from our trusty National Statistics Agency. Er.

Anyway, the ΑΣΕΠ annual report does reveal a number of FAILZ:

• ΑΣΕΠ ran 3,324 selection processes in 2009, at an average of 11.8 vacancies per process, and 9.4 candidates per position.
• In case you're too lazy to do the math, this means that 369,709 Greeks applied for public sector jobs in 2009. That's 7.4% of the entire Greek labour force, applying to the public sector in ONE YEAR.
• 69% of all vacancies both announced and filled in 2009 were classed as "seasonal". There must be orange growers in California with a lower share of seasonal staff than our government. 
• Of these, 69% (that number again) were hired on 8 month contracts. This rather defeats the person of calling anything seasonal - 8 months must surely qualify as "most of the year". 

This is not the end of the story. I was amazed to see that the statistical annex to the annual report begins with an org chart of the Council, as if anyone cares.

However, I do care as it happens because it looks like this. That's right, zoom in.

The amount of duplication is monumental. The Directorate-General that actually does the hiring is split up into three nearly identical Directorates that run application processes. Each comes with its own process control function, presumably because pinning up two process control flowcharts on one desk goes against years of struggles for the labour movement, during which people invariably died.

The simplest of these Directorates by the way is, you guessed it, the one that deals with the 69% of seasonal vacancies.

WE NO CANZ BITEZ BULLET

A little aside from the drama of the past week.

Eurostat has just reported on agricultural employment and incomes across the EU. Its figures are a damning indictment of the subsidy-junkies that run Greek agricultural policy, and indeed much of the industry itself.

Europe lost one quarter (25%) of its workforce in agriculture between 2000-9. This is neither a good nor a bad thing. It simply reflects Europe's plummeting competitiveness in this sector. By way of (some) compensation, Europe's agriculture workers made 5% more in real terms, as less productive units were replaced with more productive ones. Overall, income was down by 21.25% in real terms

Not in Greece though. Our agricultural sector held on to almost all of its workforce, with a net reduction of only 2.6%, the lowest in Europe. The tradeoff is that income per employee (before benefits and subsidies) fell by 17% in real terms. Overall income fell by 19.2% in real terms.

This 2% difference over ten years is what we get for having the 121st cheapest agricultural policy in the world. It would be the worst return on investment in the world if not for everything else we spend money on.

To understand why, see my earlier roundup of facts and figures here.

QUANGO FUNDING CUT WIN

Very good to see Yorgo making a start, however timid, on savaging our tablescrap-plifering quangocrats.

Apparently, the Educational and Research Foundations named after past prime ministers (including Yorgo's own grandfather) are having their funding cut.

I will write more when I've done my homework.

I CAN HAZ JOB? NO THNX

Our latest Labour Force Survey Data are in and my, is it rich pickings or what.

Only about 54% of our population of working age is actually working. Of the 4.5m. that are working, half a million are directly employed in the public sector. Let's say for now that this is everyone on the public payroll. This means that 4m suckers have to pick up the tab for another 7m who are either children, retired, unemployed or working in the public sector. Except of course they don't because we're running a massive deficit that finances much of this. So it's the 4m and their kids. But it's a useful ratio nonetheless.

Unemployment is at 10.3%, a total of  514,000 souls. Most of these are victims of our perverse labour market and our structurally depressed economy. However, the LFS also suggests that 9.9% of our unemployed received an offer of employment in the last three months and turned it down - quite rich really, as vacancies are like golddust right now.

Of these 51,400:

• 11,300 didn't like the money
• 9,700 thought the job was too far to travel
• 9,500 didn't like the hours.

Now, presumably, you tend to check these things out before an offer comes in, so the mind truly boggles at what my workshy compatriots are thinking.

The government should also note that these happy-go-lucky folk cost us a whopping EUR18.7m per month based on current rates of unemployment benefit - or 224m, projected on an annual basis. That is, of course if they are single, because this rises by 10% for each dependent. Let's suppose 0.3 dependents per person - the bill rises to EUR298m per annum.

Now, I know this is not entirely accurate as many of our unemployed do not claim benefits - but even assuming only half of the workshy claim (based on the fact that our social expenditure is only about half what the unemployment rate suggests, the total expense implied rises to a full 5% of our projected benefits expenditure for 2010.

Even if that is the case, then presumably the other EUR149m is coming out of somewhere else - almost certainly some poor old bastard's savings. Even with our pretty chronic loan-to-deposit ratio of 81.3%, this means that those of the workshy being subsidised by the Bank of Mom and Dad (the unofficial Greek Central Bank)  are keeing EUR121m out of the market. With the median small-to-medium-sized business loan in Greece at ca. EUR100,000 (according to this survey), this could give a good 1,200 SMEs a much-needed loan, keeping possibly twice that number of people in employment, or it could pay for about half that number of hefty mortgages, fueling a 12% rise in construction permits.

Well done assholes!

WE IZ IN UR UNIONS, NOT GIVING A SH*T

As the new and improved SGP and rumours of bailout talks among our EU partners begin to shine some light on the fiscal hole Greece is in, our unions are girding their loins for war in a poorly-timed attempt to show “the markets” who’s boss.

As some of my compatriots are sympathetic to this cause, why not review the evidence a little?

Currently, union membership in Greece stands at around 30% of employees and has been falling steadily. It is now 12 percentage points lower than it was 15 years ago. Yet on last count (2004) their collective bargaining held power over the earnings of 65% of our workforce.

Worse still, they were effectively funded by 100% of the workforce – and their employers, as noted here:

"The state subsidy paid through the Workers’ Welfare Foundation, a scheme supervised by the Ministry of Employment and Social Protection, which collects funds from all paid employees (both union and non-union members) as well as from employers for the primary purpose of providing social services to employees, is the basic source of funding for the unions since in effect union dues play a part only in the public-sector unions."

In fact, our Unions can by law get up to 25% of the Workers' Welfare Foundation's budget, and no less than 15% per year.  This would suggest a 2008 budget of EUR 35m. (Weird source for me to cite, I know, but they know their stuff.)

What do we get for this? For one, we get the 147th most flexible labour market in the world. And deteriorating. We were 135th just a year ago. We also got a flatlining labour share of GNP, which should be the major benchmark for Union success. We got may one or two extra percentage points immediately after 1981 and that was that. 

But perhaps for all this we buy more security for our workers. Well the evidence is mixed but, according to at least one comprehensive review of industrial relations in individual EU countries (not by neoliberals but by the union-loving Germans),

"Stricter employment protection legislation [and a] higher […] minimum wage are likely to reduce both employment and activity rate[...] On the other hand, collective bargaining over wages and political orientation of the government do not have [a] significant effect on labour markets[’] performance."

So to recap, despite effectively representing less than a third of the workforce, the Greek unions get to earn against its totality and bargain on behalf of its majority. Or do they?

Well, although density of union membership is falling, the absolute number of union members is rising and in fact public sector union membership in Greece is rising much faster than private sector union membership. Note that overall membership is rising faster here than in almost any other OECD country. [Though it must be noted that many of our unions effectively inflate their membership figures by failing to strike off retired members.]

Why is the public/private divide important? Because the shift in Union power from the private to the public sector means that the union movement will increasingly act in favour of greater allocation of funds to the public sector.

Of course, most countries have a pro-union party and an anti-union party and that’s some kind of guarantee against this kind of influence as the two will inevitably alternate in and out of power.

Well, we don’t. Check this list of Presidents and General Secretaries of the private sector tertiary Union, GSEE, of whom there have only been four (!) since 1996. One is an on-and off Conservative MP, one a current Conservative MEP, one a member of the Central Committee and Political Council of our Socialist Party, and one a member of the National Council of our Socialist Party. Our Unions have, to borrow a dirty capitalist term, cornered the market.

All of this of course translates to, you guessed it, more government spending, and debt.

Ironically, the only country in which union membership (private and public) is rising faster than in Greece is the third most indebted EU country after ours and Italy, Belgium. (Comparisons here). In Italy, be it noted, membership has also been rising at a respectable 4.3% per annum. Unsurprisingly, Belgium is also the only other country with rising public sector compensation where the number of civil servants has also been rising in the past decade.

That’s the big picture. But if Union leaders are assured a long life in politics, what do the rank and file get?

The evidence is out there. Tellingly, we’re the only EU country in which people with lower education levels are, ceteris paribus, less likely to be union members. So Union membership in Greece is not about protecting oneself from ruthless competition in a rapidly upskilling world where one’s place in the labour market is increasingly precarious. In fact, according to the same study, we are also the only country, along with Finland, in which people whose parents were educated to a lower level are more likely to be union members. Simply put, union membership in Greece is a means for those who invested in education in a bid to secure an advantage in the labour market to hold on to their status in the face of competition. Sound familiar?

It’s not the best of news. Unfortunately, Greek Union power is not going anywhere soon. The reason is simple demographics. Union membership tends to peak in the mid-to-late 40s, which is predicted to be the dominant age group in Greece in 2020. After that, well, it might be too late.

Time to change the law.