Greece is in big trouble, financially and in other ways.

Michael Lewis, best-selling author of “Liars’ Poker,” “Moneyball,” “The Blind Side,” “The Big Short,” and others, traveled to Greece to understand The Greek Way.  In the October 2010 issue of Vanity Fair, he writes about his findings in Beware of Greeks Bearing Bonds.

What Lewis found is a society in which honesty is a commodity in extremely short supply.

Individuals systematically under-report income for tax purposes, deal only in cash, insist on no documentation, and “buy” their way out of trouble if they are caught.

“What the Greeks wanted to do (…) was turn their government into a piñata stuffed with fantastic sums and give as many citizens as possible a whack at it.”

“The Greek public-school system is the site of breathtaking inefficiency.”

The pension system is a joke.

Hospitals are plundered by doctors and nurses.

Bribery is rampant, and often necessary to secure basic services.

Interestingly, Greek commercial banks are not the problem. “In Greece the banks didn’t sink the country. The country sank the banks.”

The Greek government is as corrupt and dishonest as its citizens.

For most of the 1980s and 1990s, Greek interest rates had run a full 10 percent higher than German ones, as Greeks were regarded as far less likely to repay a loan. There was no consumer credit in Greece: Greeks didn’t have credit cards. Greeks didn’t usually have mortgage loans either. Of course, Greece wanted to be treated, by the financial markets, like a properly functioning Northern European country. In the late 1990s they saw their chance: get rid of their own currency and adopt the euro. To do this they needed to meet certain national targets, to prove that they were capable of good European citizenship—that they would not, in the end, run up debts that other countries in the euro area would be forced to repay. In particular they needed to show budget deficits under 3 percent of their gross domestic product, and inflation running at roughly German levels. In 2000, after a flurry of statistical manipulation, Greece hit the targets. To lower the budget deficit the Greek government moved all sorts of expenses (pensions, defense expenditures) off the books. To lower Greek inflation the government did things like freeze prices for electricity and water and other government-supplied goods, and cut taxes on gas, alcohol, and tobacco. Greek-government statisticians did things like remove (high-priced) tomatoes from the consumer price index on the day inflation was measured. “We went to see the guy who created all these numbers,” a former Wall Street analyst of European economies told me. “We could not stop laughing. He explained how he took out the lemons and put in the oranges. There was a lot of massaging of the index.”

Let me give you another snippet from the article. Lewis made contact with a couple of honest Greek tax collectors:

I walked down the street and found waiting for me, in the bar of another swanky tourist hotel, the second tax collector. Tax Collector No. 2—casual in manner and dress, beer-drinking, but terrified that others might discover he had spoken to me—also arrived with a binder full of papers, only his was stuffed with real-world examples not of Greek people but Greek companies that had cheated on their taxes. He then started to rattle off examples (“only the ones I personally witnessed”). The first was an Athenian construction company that had built seven giant apartment buildings and sold off nearly 1,000 condominiums in the heart of the city. Its corporate tax bill honestly computed came to 15 million euros, but the company had paid nothing at all. Zero. To evade taxes it had done several things. First, it never declared itself a corporation; second, it employed one of the dozens of companies that do nothing but create fraudulent receipts for expenses never incurred and then, when the tax collector stumbled upon the situation, offered him a bribe. The tax collector blew the whistle and referred the case to his bosses—whereupon he found himself being tailed by a private investigator, and his phones tapped. In the end the case was resolved, with the construction company paying 2,000 euros. “After that I was taken off all tax investigations,” said the tax collector, “because I was good at it.” (…)

The Greek state was not just corrupt but also corrupting. Once you saw how it worked you could understand a phenomenon which otherwise made no sense at all: the difficulty Greek people have saying a kind word about one another. Individual Greeks are delightful: funny, warm, smart, and good company. I left two dozen interviews saying to myself, “What great people!” They do not share the sentiment about one another: the hardest thing to do in Greece is to get one Greek to compliment another behind his back. No success of any kind is regarded without suspicion. Everyone is pretty sure everyone is cheating on his taxes, or bribing politicians, or taking bribes, or lying about the value of his real estate. And this total absence of faith in one another is self-reinforcing. The epidemic of lying and cheating and stealing makes any sort of civic life impossible; the collapse of civic life only encourages more lying, cheating, and stealing. Lacking faith in one another, they fall back on themselves and their families.

The structure of the Greek economy is collectivist, but the country, in spirit, is the opposite of a collective. Its real structure is every man for himself. Into this system investors had poured hundreds of billions of dollars. And the credit boom had pushed the country over the edge, into total moral collapse.

A central part of Lewis’s story is that of the Vatopaidi monastery. The island on which it is located “has been regarded by the Eastern Orthodox Church for more than a millennium as the holiest place on earth.” But “in a perfectly corrupt society, it had somehow been identified as the soul of corruption.” Lewis tells how, through guile and influence, the Vatopaidi monks parlayed a worthless piece of inherited property into a real estate empire. I’ll let you read Lewis’s description in his article.

As my friend, David R., says, Lewis’s writing wraps technical information around stories of personalities. He is a marvelous raconteur so make yourself a cup of tea and settle in for a good (albeit long) read.

UPDATE: David R. points us to Jaime Lalinde’s interview with Michael Lewis regarding his article. Thanks, David.

-RichardH

In the New York Times on 7 September 2010, Benedict Carey wrote, Forget What You Know About Good Study Habits.

Alternate study environments, mix content, space study sessions, self-test.

-RichardH

In the New York Times on 7 September 2010, Peter Orszag writes, One Nation, Two Deficits, in which he argues to continue the Bush tax cuts for two years but end them for good in 2013.

In the face of the dueling [jobs and budget] deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned. (…)

Despite a dire fiscal outlook, many progressives want to make the tax cuts permanent for all but the very highest earners. Many conservatives are even worse: they’d make the tax cuts permanent for the likes of Warren Buffett, even though he’d prefer they didn’t. Making all the tax cuts permanent would expand the deficit by more than $3 trillion over the next decade.

Both approaches lock us into a budget scenario out of which there are few politically plausible routes of escape. Although hardly anyone wants to admit it, we’re not going to solve our budget problem over the next decade unless revenue is part of the equation.

Let’s look at the facts. The projected deficit for 2015 is 4 percent to 5 percent of G.D.P., depending on whose assumptions you use. A sustainable level is more like 3 percent or lower. So we need deficit reduction of 1 percent to 2 percent of G.D.P., or about $200 billion to $400 billion a year by 2015. (…)

How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.

The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagon’s base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.

It would be tough, then, to squeeze more than a half percent of G.D.P. from spending by 2015. Additional revenue — in the range of 0.5 to 1.5 percent of the economy — will therefore be necessary to reduce the deficit to sustainable levels.

How would we do this?

One possibility would be to establish a new source of revenue, perhaps through revenue-increasing tax reform, and possibly including a modest value-added tax (that is, a V.A.T. of 5 percent to 6 percent). This approach has many potential benefits, including the opportunity to improve our tax code by cutting back on loopholes and shifting toward a consumption-based tax system. It is also politically impossible, at least in the era of the 60-vote Senate. Those who fear a V.A.T. have little reason to worry — the votes aren’t there.

The beauty of extending the tax cuts for only two years is that canceling them doesn’t require an affirmative vote. It happens by default, so Congressional deadlock works in its favor. And it would essentially solve our medium-term deficit problem, reducing the deficit by $200 billion to $350 billion a year from 2015 to 2020. (…)

Finally, a key part of this deal is actually ending the tax cuts in 2013 — and that will surely require a presidential veto on any bills to extend them after that.

-RichardH

In his 18 August 2010 post on VoxEU [Mel Brooks and the bankers], Thorvaldur Gylfason tells us what Mel Brooks’s faux Broadway musical, Springtime for Hitler in his play “The Producers”, has to do with the 1980’s S and L crisis, Enron, WorldCom, and the sub-prime mortgage meltdown of 2007.

BTW, if you haven’t seen Brooks’s “The Producers (1968),” I suggest you check the DVD out at your public library.

-RichardH

I haven’t the foggiest idea what this means in the traditional sense, but musically, there is no question. Take your pick.

Psyc* K*ll*r.

S*mm*rt*m*.

-RichardH

Greenspan Calls for Repeal of All the Bush Tax Cuts, 7 August 2010, New York Times.

At the beginning of the George W. Bush Presidency, then Federal Reserve Chairman Alan Greenspan implicitly endorsed tax cuts.

While Mr. Greenspan did not endorse a specific approach, his broad support for the tax cuts nearly a decade ago was pivotal in securing one of the Bush administration’s top domestic policy goals and in providing political cover for members of Congress.

Now, in response to accusations of political expediency, Mr. Greenspan says his approach has been consistent: supporting tax cuts when surpluses loomed, and endorsing revenue increases now that deficits are the leading worry. He also says his earlier endorsement of tax cuts was made with important caveats that were later ignored by policy makers and the public.

To begin with, he says he believed the tax cuts in 2001 were primarily needed to avoid the economic distortions caused by “surpluses as far as the eye could see,” as many economists at the time projected.

Greenspan seems to have feared that the projected surpluses would lead to the reduction of US Federal debt to zero.

That, in turn, caused the central bank to worry that one of its primary levers for the conduct of monetary policy — the purchase and sale of Treasury securities — would no longer be available.

“I was against deficits, but I was also equally against surpluses,” Mr. Greenspan said.

Now,

Mr. Greenspan is calling for the complete repeal of the 2001 and 2003 tax cuts, brushing aside the arguments of Republicans and even a few Democrats that doing so could threaten the already shaky economic recovery.

“I’m in favor of tax cuts, but not with borrowed money,” Mr. Greenspan, 84, said Friday in a telephone interview. “Our choices right now are not between good and better; they’re between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.”

This appears to be quite a shift for the Republican libertarian Greenspan.

___________

David Stockman–Bush Tax Cuts Will Make U.S. Bankrupt, 7 August 2010, NPR-All Thinks Considered. Stockman interview with Guy Raz.

The Stockman NPR  interview aired on the same day that the above Greenspan article was published.  Both men are trumpeting the same song.

RAZ: In the early 1980s, Stockman became a kind of Washington wunderkind, the vanguard of a new type of economic thinking, supply side, deregulation, low taxes to stimulate growth.
As the White House budget director, Stockman was an architect of what would come to be known as Reagonomics. But a few years into the job, he became disillusioned.
Mr. STOCKMAN: The military budget got out of control and the tax cuts went to special interests as much as they did to the broad public.
RAZ: And he noticed a problem. The government wasn’t collecting enough money to cover its costs and he started telling that to Reagan.
Mr. STOCKMAN: As time passed, he was less and less enthusiastic about what I had to say.
RAZ: So, in 1985, Stockman left. Now these days, he’s still a conservative and still a Republican, but he doesn’t think his party is taking a responsible position on taxes any longer. At the end of this year, the Bush era tax cuts are set to expire. Republicans want them renewed, Democrats want to keep the tax cuts for the middle class but not for the wealthiest 2 percent of Americans.
Now, Stockman says they’re both wrong and he says extending either of those cuts is tantamount to the government declaring bankruptcy.
Mr. STOCKMAN: We’ve had a rolling referendum on what we want in government and what we don’t ever since the first Reagan spending cut program, which I was part of in 1981. And it seems pretty clear to me that by 2010, we’ve decided a lot of things that caused (sic!) a lot of money, the American people won. I might not agree with that, but apparently they do.
So we’re spending $3.8 trillion in defense, non-defense, entitlements, everything else, and we’re taking in only 2.2 trillion. So we got a massive gap, you have to pay your bills. You can’t keep borrowing from the rest of the world at that magnitude year after year after year. So, in light of all of those facts, I say we can’t afford the Bush tax cuts.

Raz and Stockman make implicit reference to the so-called Laffer Curve.

RAZ: You seem to suggest that many of our economic troubles are the result of Republican economic policies over the past few decades. You are a Republican. You are a conservative. Why do you think Republicans are largely to blame?
Mr. STOCKMAN: Because the Republicans abandoned their old-time fiscal religion in favor of two theories, which I think are now proving to be both wrong and highly counterproductive and damaging.
One was monetarism, which said let the dollar float on the international markets. Let 12 men and women at the Fed decide whether to raise or lower interest rates and use the Fed to try to run this massive economy. What they’ve done instead is run the printing press, they’ve flooded the world with dollars. The whole monetarist policy has been a mistake.
The second thing was the perversion of supply side. Yes, there was a good idea that in certain circumstances, lower tax rates will encourage economic activity and savings. But when you make it a religion, when you make it a catechism and you say you cut taxes no matter what the circumstance, what the season, what the condition, then I think the whole idea has been perverted.
By getting off track over the last 30 years, the Republican Party has basically given out (sic!) its historic view that the key thing was financial discipline, financial responsibility and that we had to live within our means. Today, we have two free lunch parties, and as a result, we’re borrowing ourselves into grave danger with each passing month and year.
RAZ: Now, Republicans, David Stockman, in the Senate led by, obviously, the Minority Leader Mitch McConnell, they say they’re simply following, you know, the Reagan philosophy of supply-side economics, a policy that you pushed. Do you think they’re being disingenuous?
Mr. STOCKMAN: Utterly disingenuous. I find it unconscionable that the Republican leadership faced with a 1.5 trillion deficit could possibly believe that good public policy is to maintain tax cuts for the top 2 percent of the population who, after all, have benefited enormously from this phony boom we’ve had over the last 10 years as a result of the casino on Wall Street.

-RichardH

In his 5 August 2010 blog post, Paul Krugman writes Bending the Curve about the most recent Medicare Trustees Report projection that the recently-past Health Care Reform Bill will substantially lower the increase in Medicare spending as a percent of GDP over the next few decades.

Krugman says, “In other words, the Medicare actuaries believe that the cost-saving provisions in the Obama health reform will make a huge difference to the long-run budget outlook. Yes, it’s just a projection, and debatable like all projections. And it’s still not enough. But anyone who both claims to be worried about the long-run deficit and was opposed to health reform has some explaining to do. All the facts we have suggest that health reform was the biggest move toward fiscal responsibility in a long, long time.”

-RichardH

In the 6 August 2010 NY Times, Paul Krugman writes The Flimflam Man.

[T]he innovative thinker [charlatan] du jour [is] Representative Paul Ryan of Wisconsin.

Mr. Ryan has become the Republican Party’s poster child for new ideas thanks to his “Roadmap for America’s Future,” a plan for a major overhaul of federal spending and taxes. News media coverage has been overwhelmingly favorable; on Monday, The Washington Post put a glowing profile of Mr. Ryan on its front page, portraying him as the G.O.P.’s fiscal conscience. He’s often described with phrases like “intellectually audacious.”

But it’s the audacity of dopes. …

Mr. Ryan’s plan calls for steep cuts in both spending and taxes. He’d have you believe that the combined effect would be much lower budget deficits, and, according to that Washington Post report, he speaks about deficits “in apocalyptic terms.” And The Post also tells us that his plan would, indeed, sharply reduce the flow of red ink: “The Congressional Budget Office has estimated that Rep. Paul Ryan’s plan would cut the budget deficit in half by 2020.”

But the budget office has done no such thing. At Mr. Ryan’s request, it produced an estimate of the budget effects of his proposed spending cuts — period. It didn’t address the revenue losses from his tax cuts.
The nonpartisan Tax Policy Center has, however, stepped into the breach. Its numbers indicate that the Ryan plan would reduce revenue by almost $4 trillion over the next decade. If you add these revenue losses to the numbers The Post cites, you get a much larger deficit in 2020, roughly $1.3 trillion.

… All it would do is cut benefits for the middle class while slashing taxes on the rich.

And I do mean slash. The Tax Policy Center finds that the Ryan plan would cut taxes on the richest 1 percent of the population in half, giving them 117 percent of the plan’s total tax cuts. That’s not a misprint. Even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population.

There is more in the article; read it all.

-RichardH

On 6 August 2010, Bloomberg reports Romer Resigns in 2nd Exit for Obama Economy Team. Similar report from the Washington Post.

-RichardH

In her 3 August 2010 post on Slate, Kathryn Schulz interviews Google Research Director Peter Norvig. Error Message.

There’s a story going back to the founding of Google: One of the venture capitalists came to [company founders] Larry [Page] and Sergey [Brin] and said “OK, the first thing you have to decide is, is this company going to be run by sales or by marketing? They said, “We think we’ll take engineering.” He laughed and said, “Oh, you naive college kids, that’s not the way the real world works.” And they said, “Well, we want to try it.” Ten years later, that experiment is still running; engineering is still the center of the company. And it seems like it’s worked.

And, like you say, it does create a very different attitude toward error. If you’re a politician, admitting you’re wrong is a weakness, but if you’re an engineer, you essentially want to be wrong half the time. If you do experiments and you’re always right, then you aren’t getting enough information out of those experiments. You want your experiment to be like the flip of a coin: You have no idea if it is going to come up heads or tails. You want to not know what the results are going to be.

Read on.

-RichardH