The Fairness Trap: Greece, The Euro and Behavioral Economics

With Europe’s economic woes dominating the headlines once more, it’s hard not to think of Yogi Berra’s dictum “It’s déjà vu all over again.” As usual, the turmoil centers on Greece, which is in its fifth year of recession and struggling beneath a colossal debt load. This year, in exchange for drastic austerity measures, Greece’s government agreed to an aid package (its second) with the European Union and the International Monetary Fund, totalling $174 billion. But three weeks ago furious Greek voters tossed the ruling parties out of office; attempts to form a coalition government failed, and new elections are scheduled for next month. Now Greek politicians are talking tough about renegotiating, but the E.U., led by Germany, which is the largest contributor to the bailout, says that there will be no more money for Greece if it doesn’t live up to its promises. So policymakers are seriously discussing a so-called Grexit—in which Greece would default on its debts and abandon the euro.

This isn’t an outcome that anyone wants. Even though a devalued currency would make Greece’s exports cheaper and attract tourists, it would do so at a terrible price, destroying huge amounts of wealth and seriously harming the country’s G.D.P. It would be costly for the rest of Europe, too. Greece owes almost half a trillion euros, and containing the damage would likely require the recapitalization of banks, continent-wide deposit insurance (to prevent bank runs), and more aid to Portugal, Spain, and Italy, which seem to be the next countries in line to default. That’s a very high price to pay for getting rid of Greece, and much more expensive than letting it stay.

Rationally, then, this standoff should end with a compromise—relaxing some austerity measures, and giving Greece a little more aid and time to reform. And we may still end up there. But the catch is that Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair. German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay. They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform. But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration. The grievances aren’t unreasonable, on either side, but the focus on fairness, by making it harder to reach any kind of agreement at all, could prove disastrous.



Read more http://www.newyorker.com/talk/financial/2012/06/04/120604ta_talk_surowiecki#ixzz1x8yUwW3N

Very good summary.

(via uncdan)

groovyjones: The Pie Argument with Pie Charts Supply-side economics i.e. The Trickle-Down Theory that became a widely known idea in the 1980s among business and politicians alike was really only a hypothesis; theories have to be tested.  The trickle-down hypothesis guesses that if you make the richest in a population even richer, they will invest more into business creating more jobs and growth so that everyone benefits… eventually.  They respond to criticisms of inequality with a pie metaphor: In one case, a worker makes $50,000 and his boss makes $55,000.  In another case, a worker makes $500,000 and his boss makes $1 million and these people want to complain “Oh the boss is so greedy that’s so unequal” but who wouldn’t prefer the more unequal situation?  The pie is divided less equally but it’s a much bigger pie. The one rebuttal to that very good argument is that - the bosses have gotten that giant growth in wealth but the median income for American workers is not $500,000; or any bigger at all.  The major financial deregulation in 1997 and Bush era gigantic tax breaks for the wealthiest put the trickle-down hypothesis into effect, and you can see in the pie chart who did and didn’t benefit from it (until that same system collapsed on itself in an economic meltdown that took everyone down with it).  The hypothesis has been tested.
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groovyjones:

The Pie Argument with Pie Charts

Supply-side economics i.e. The Trickle-Down Theory that became a widely known idea in the 1980s among business and politicians alike was really only a hypothesis; theories have to be tested.  The trickle-down hypothesis guesses that if you make the richest in a population even richer, they will invest more into business creating more jobs and growth so that everyone benefits… eventually.  They respond to criticisms of inequality with a pie metaphor:

  • In one case, a worker makes $50,000 and his boss makes $55,000.  In another case, a worker makes $500,000 and his boss makes $1 million and these people want to complain “Oh the boss is so greedy that’s so unequal” but who wouldn’t prefer the more unequal situation?  The pie is divided less equally but it’s a much bigger pie.

The one rebuttal to that very good argument is that - the bosses have gotten that giant growth in wealth but the median income for American workers is not $500,000; or any bigger at all.  The major financial deregulation in 1997 and Bush era gigantic tax breaks for the wealthiest put the trickle-down hypothesis into effect, and you can see in the pie chart who did and didn’t benefit from it (until that same system collapsed on itself in an economic meltdown that took everyone down with it).  The hypothesis has been tested.