Why is a Grexit now likely?

Greece owes the IMF 1.6 billion euro that it doesn’t have but is supposed to pay tomorrow. Unless the ECB lends it to the Greeks, effectively converting the IMF debt into an ECB debt, Greece is bankrupt tomorrow. In months to come, much bigger debt repayments are scheduled to the ECB-IMF in tranches of 4 billion, and Greece won’t have that money either as its economy is still contracting.

Greece didn’t have the money to pay off the previous debts in the last 5 years either though, and that just lead to more debts in return for symbolic reforms that weren’t implemented.

Why not muddle then then and let the Northern European politicians present a pretend-reform package to their population as a victory? And why would bankruptcy force a Grexit, given that there is no official mechanism to force any country out of the Euro, once it is in?

What I think is forcing the Grexit now is the combination of the referendum on the symbolic reforms, together with the bank-run on the Greek banks that has this morning lead to capital controls.

The referendum is called for this Sunday, one or two days before the banks supposedly re-open for open business. The idea is that Greeks vote on whether to accept the current set of symbolic reforms, which would entail cuts to pensions and loss of employment of many civil servants. The government will campaign against them, and the majority of the Greek parliamentarians are with the government, successfully whipping the country into a ‘no austerity’ mood. There is hence no way that the Greek population would vote ‘yes’. And even if they did, the Greek government then would not implement reforms as its own backers would constitute the ‘no’ vote.

But the referendum also makes it impossible to agree on something symbolic beforehand: it binds the hands of the Greek politicians who called for it (almost surely so they wouldn’t be blamed for the coming Grexit). This means nothing can be offered to them that would prevent bankruptcy tomorrow.

Previous symbolic reform packages were not implemented, partly because the Greek governments didn’t want to implement them and partly because they couldn’t even if they wanted to. Tax collection, for instance, would take many years to clean up and, as a Greek economist told me half-jokingly recently, it is still normal to send Greek tax collectors home in an election year! But to the Northern Europeans, the Greek politicians at least pretended they were going to pay back the loans and reform. The referendum is now expressly fought on a platform of not even pretending either, taking away the much-needed fig-leaf that the Northern Europeans wanted.

Worst of all, the referendum is a slap in the face of the other politicians who were negotiating at this late hour with the Greek politicians on the terms of the next symbolic set of reforms. It is part of the rules of the game in Brussels that this was a real deadline that forced everyone to agree to some face-saving formula. The referendum has made this impossible: the Greek politicians won’t play by the European rule-book. No face saving, just Greek theatrics and grand-standing.

So the other European politicians have been sufficiently humiliated that they feel they need to be tough, an attitude you see most clearly in Christine Lagarde from the IMF who made it clear tomorrow’s deadline is not negotiable.

Hence the referendum will likely be followed by a continuation of the bank run by Greeks who calculate their country’s approaching bankruptcy, and this time there cannot be a bailout: the only bailout that is now possible within the Greek political system is one whereby the ECB lends money without symbolic reforms, an open loss for the Northern Europeans. That means there will be no bailout. In concrete terms, the Greek central bank will not be getting any more Euros to distribute amongst its banks. The Greek government wont be able to pay to its employees, welfare recipients, and other recipients of state money.

So the day after the referendum, neither the Greek central bank, nor the Greek government has money to prop up the Greek commercial banks nor pay its own workers. That is what will force the Grexit, I think, not the inability to pay back loans to non-Greeks: the slow bank-run, in which billions in deposits are withdrawn weekly from Greek banks, will force them into it.

If the Greek government does not introduce a new currency then it will have no means to prevent the bank-run and the Greek banks will run out of money and go bankrupt themselves. Without an intervention, that will wipe out all the savings in those banks and lead to a major disruption of the Greek financial sector and the Greek economy. Tax avoidance will go up as the visible money streams that go via the banks will stop and the remaining economy will go via invisible money streams that are harder to tax. Greek civil servants will not get paid, nor will welfare recipients get their payouts, meaning they will have no money either, forcing them to join the bank run to pay for groceries.

So the Greek government will face financial collapse in the days after the referendum. Capital controls will slow the collapse down, but the only thing it can do, really, is to take over the obligations of the commercial Greek banks, guarantee the deposits of the population, and pay its employees and welfare recipients with something else. That something else is a new currency, whether it starts life being called an I-Owe-You (IOU) or a Varoufakis-florint: it will have to be declared legal currency inside Greece so that one can make payments with it. Hence in order to save its own banks and thereby its depositors, Greece will have to Grexit.

Now, no-one can force Greece to give up the Euro, so Greece can in principle maintain a dual currency system for a long time, having both the Euro and the new currency as legal tender. This is not abnormal, as Hong Kong airport has shown you can run a 3-currency system indefinitely: you can pay there with Honk-Kong dollars, Euros, and US dollars. Yet, if the state sector runs on fast devaluing drachmas and the rest on stable Euros then the Greeks will be incurring a lot of transaction costs.

It will not really matter though whether Greece hangs on to two currencies or just the new one: with the re-introduction of a separate legal currency, Greece will have effectively left the Eurozone and become like Macedonia and Bulgaria, where you can also pay in lots of places with Euros but that are no longer official members of the Eurozone. It will be sufficient excuse for the ECB to declare that Greece has exited from the Eurozone.

I wouldn’t be surprised if stacks of the new currency are already in Greece, ready to replace the Euro as the official currency, with contingency scenarios now being taken off the rack in the main financial European institutions (EIB, ECB, EU-C) and in the individual countries. This means a Grexit is also a physical possibility now whilst it probably could not have been done 5 years ago.

Is there a way to prevent the coming Grexit? Normally, I expect the political system in the EU to come up with a watery compromise at the last minute, and you hear plenty of rumbling to that effect. The Greeks politicians have however, I think, made this impossible with a referendum that takes away the ability for compromises to be offered and accepted. Time will tell though: the ability of the EU to muddle through is astounding.

Will a Grexit be good for Greece? In the medium-run, I do think so as the state-related sector takes a much needed price-correction vis-a-vis the exporting sector. In the short run though, pain is coming, particularly for the old and infirm in Greece dependent on the state. And the recovery will be hampered by the fact that the Greek economy is tied to the rest of Europe, whom the Greeks have just had a falling-out with.

Observations on a possible Grexit

[this was first posted on Clubtroppo 9 days ago. Since everything went to script after that, the text below is unchanged]

After two weeks of a new government in Greece, a Greek exit from the Euro (termed a ‘Grexit’) looks more and more likely. The betting markets give it about 30% to happen this year, and Greece is the out and out market favourite to exit the Euro before any other country.

Though I have not followed it super-closely the last 2 years, I have some observations to offer:

  1. Greek politicians are very used to being in the situation of owing other countries money and negotiating more favourable terms. In a way, their hand is the easy one to play as they can credibly claim not to be able to pay back the debts and then offer to promise to pay back something, with the alternative being open bankruptcy for which they would then blame the lenders. If the lender is owed enough money, the lender often reluctantly plays along in the hope of getting something back. This strategy has worked well for the previous Greek governments, which have quite successfully in the last 7 years gotten 3 bailouts, and the current government should be favourite again in the current situation to come out with an even better deal than before.
  2. The political imperative to pretend that Greece will pay back its loans is diminishing on both sides of the loan relation because of increased concentration of debts. The Greek state now directly owes the rest of the EU in that 80% of its debt is mainly to tax-payer owned entities outside of Greece (EU governments, the ECB, the IMF, etc.). This puts Greece into a great position to get a better deal as the Greek state has taken over many of the debts owed by Greek banks (meaning bank collapses are less of a worry), and European tax-payer institutions can rationally hope to simply have the ECB print the equivalent amount of money that they would have to write off as lost Greek debts. This printing-to-cover-debts is already starting to happen as the ECB has announced it wants to buy up government bonds, effectively a form of money printing for governments. For Greece, this means that an official bankruptcy would save the Greek state close to 150% of GDP in terms of liabilities, without the Greek banks being as exposed as in 2007 (Greek banks owe the ECB around 75 billion euro in fairly low-interest loans).
  3. Previous Greek governments have successfully sabotaged many reforms they agreed to. The most glaring example is tax evasion, where Greece was ‘forced’ to increase the number of tax audits, the severity of the punishments, and the transparency of tax duties and tax arrears (read here). Yet, tax arrears still increased from 45 billion in 2011 to 70 billion at the end of October 2014, as the previous government made it simpler to have taxes declared uncollectable. There is also no indication whatsoever that the 2000 high-profile Greeks who were named and shamed in the famous ‘Lagarde’ list of tax frauds have lost their influence in Greece or in any other way been held to account – though the Greek journalist who leaked the list that the Finance minister had kept secret for years had to fight off 2 court cases. Similarly, the story of the supposed privatizations of state assets in Greece is one whereby Greek politicians were keen to ensure a lack of transparency and impartiality in the sale of their assets and frustrated any real privitizations (you can guess why!). Somewhat humorously, Germany has again offered the new government to send 500 tax collectors to Greece.
  4. The plan floated for some years now by the Greek finance minister Yanis Varoufakis and his friends in Europe (such as Jaques Delors) to have a large EU-wide spending spree via an accelerated spending of the ‘structural funds’ strikes me as deeply naïve. For one, the budget of the structural funds, some 40 billion Euro per year, makes up no more than 0.3% of EU GDP, making it small biscuits in the scheme of things. More importantly, the whole idea that there are lots of big projects to be identified by central bureaucracies that will engage the masses of unemployed in meaningful activities, smacks of a bygone belief in central socialist planning. The European Investment Bank and the structural funds are already struggling to find meaningful projects to finance, often accused of funding expensive goat tracks, so one should not expect the same European bureaucracy to suddenly find a large flood of meaningful things to do for the Greek unemployed. I personally think the way to go would be to have all citizens of Europe have a direct account with the ECB which can the create liquidity via those accounts, bypassing banks, a proposal you now see more often in European economic debates.
  5. The new Greek government is floating silly stuff, like a claim for German war reparations, unnecessarily berating the Troika, threatening to become friends with Russia, and grandstanding about democratic values. Whilst this might appear cool for the home front, it is essentially empty bluster that will alienate the decision makers in the capitals of Northern Europe and Washington. It will make it harder for the ECB and European leaders to be seen to agree with further Greek bailouts and thus increases the probability of a Grexit – European leaders have shown in the last 7 years they don’t mind subsidising a hopeless cause but to do so whilst being publicly berated would make that choice dangerously visible.
  6. If one considers what the fundamental difficulty with a single currency is in Europe, then the only ‘deep’ reason I have been able to come up with in the last few years is a difference in the ability of some political systems to curtail the wage increases of public sector employees and welfare recipients: one needs an asymmetry in market distortions across Europe to explain why market price adjustments haven’t yet ‘cured’ the problems of a single currency, and asymmetry in the price policy of governments is the key candidate. The story is that in Southern Europe, including France and Italy, the introduction of the Euro was followed by large real increases in the wages and welfare payments of those connected to the state, whilst in Northern Europe these increases were more modest since they followed a longer tradition of low inflation and negotiated central bargaining. Before the Euro, these increases in prices set by central governments in Southern Europe were simply off-set by bursts of inflation, maintaining a healthy ratio between public sector payments and private-sector wages, and hence not destructive. Being in the Eurozone took away that natural market reaction though, which then lead to increases in debts, property bubbles fed by these debts, distortions in the allocation of talent in the economy (the talented were queuing up for the over-priced and safe government jobs) and eventual collapse. The only real way to redress the price imbalances within the Euro system were then to openly reduce public sector wages, fire public sector workers, and reduce state payments across the board, which reluctantly happened to some degree, but of course lead to levels of unemployment and unpopularity that inflation (which has the same effect) would not have led to. Outside of the Eurozone, inflation could have returned relative prices to sanity much quicker and to levels not pre-determined by governments, which is why in hindsight I think it would have been much better for Greece, and perhaps also the other Southern European countries, to go bankrupt in 2008 and re-introduce their currencies. Btw, I never for a moment bought the line that Southern European governments could escape this ‘austerity’ via some nirvanic Keynesian spending spree that would lift all boats and prevented this tough relative price decline.
  7. How bad would a Grexit be for Greece? In the early days of 2008/2009, it would have been pretty bad, with massive capital flight and a string of banking collapses. Currently, I think it would only have a short-run negative effect on Greece, followed by a strong upsurge, much like what happened in Iceland after its bankruptcy (tellingly, Iceland unemployment rates currently stand at below 5%, compared to over 20% in Greece). You see, Greece already has a primary government surplus and much of the savings and the capital already left in 2010 and 2011, with capital flight reappearing in the last 6-months in anticipation of a possible Grexit. The internal relative prices in Greece are still out of whack though (see here for comparisons of public sector pay across the OECD, which identifies Greece as having levels of pay for teachers close to that of Sweden, on a GDP per capita close to the Check republic with roughly 30% lower wages), for which a bout of inflation would be the obvious solution that its membership of the Euro is preventing from happening.
  8. The main internal problem in Greece is that it has been run by the wrong crowd for a long time now – the very people who were avoiding taxes and abusing their political power were being asked by European governments and institutions to solve the problems they had created, and you can guess how they worked that to their advantage! The main thing you can accuse the Germans of is naiveté with regards to the Greek elite leading to their de facto support of the wrong crowd. The new government has promised to take this old elite on, which will be a mammoth task as they will occupy local councils and be dominant inside most of the public institutions. Inside the Euro or outside, that will be the main battle and the rest of Europe will, I think, have little effect on the outcome: imperative in the political struggle to increase accountability and the rule of law throughout the upper echelons of politics, business, and ministries, will be the emergence and maintenance of a group of new political leaders who start out with the right intentions and who face the right incentives. That requires mobilisation of a whole generation of new leaders who see little alternative. European money in many ways creates the wrong incentives in that it increases the value of simply being in power and hence being the first in line to receive foreign aid. Without European subsidies, increasing the size of the local pie will become more important to Greek politicians, and it takes away the ability to blame outsiders for failure.

In short, hurray for a Grexit! May it happen sooner rather than later, though if I had to bet I would gamble on further muddling through via additional Greek bailouts. The real game is inside Greece though and I wish the new government all the best with their endeavours to dislodge the old elite and put a more accountable one in its place. I do hope Yanis and his friends stop grandstanding though about stuff like German war reparations and being holier-than-thou when it comes to democracy, for it makes them look decidedly shabby.

An MYEFO mystery: what’s with the resource tax?

It’s the time of the mid-year Economic Fiscal Outlook (MYEFO) and we’re told that we’re about 11 billion deeper in the red this financial year than we thought, with the treasurer blaming the dropping iron price and the reduced wage growth. I have gone over the MYEFO documents (which are an exercise in obfuscation if ever I saw one), found that wage growth and the dropped iron ore price would ‘only’ cost us 2.3 billion each in this financial year (2014-2015), noted that this was far short of the 11 billion headline, and thus went looking for the ‘real story’.

This threw up the mystery of the resource tax. Here is what it says on table 3.2:

Table 3.2: Impact of Senate on the Budget (underlying cash balance)
Estimates Projections
2014‑15 2015‑16 2016‑17 2017‑18 Total
$m $m $m $m $m
Impact of decision taken as part of Senate negotiations(a)
Repeal of the Minerals Resource Rent Tax and related measures -1,684 -2,334 -1,670 -947 -6,634

which seems to means that the repeal of the minerals resource rent tax (and related measures) is costing us around 2 billion per year. Yet, in the ‘Overview Part’, the MYEFO says “The repeal of the Minerals Resource Rent Tax and other related measures will save the budget over $10 billion over the forward estimates and around $50 billion over the next decade.”.

What is going on?

Update (thanks Chris Lloyd): it seems to be a language issue. Part of the story seems to be that the MYEFO is counting the repeal of the mining tax, which was an election promise, as something the Senate inflicted on the budget, so the 2 billion a year is ‘revenue foregone’. So the MYEFO is blaming the Senate for the outcome of an election promise, using an odd formulation to say that the repeal will save us 50 billion when it seems to imply it would cost us 50 billion. Weird.

What was unexpected about Syria and Egypt?

Middle-East watchers have been surprised by the events in Syria and Egypt the last 2 years. The betting markets in 2011 and 2012 expected the collapse of the Syrian regime, but it didn’t happen. The West and most Al-Jazeera commentators thought the coup that deposed the Morsi-government was unsustainable and that some accommodation with the Brotherhood would have to be found. Even Israeli analysts, who by and large were against the Morsi-government, predicted that the new military regime could not survive. Both judgements seem incorrect so far: the Syrian regime looks safe and the Egyptian military junta is now as firmly in charge as ever. What did the watchers miss, ie what should we pay more attention to in the future that we didn’t see before?

And let me honest and say that I too was wrong on both counts: I have been making a point of giving predictions on many aspects of European and Middle Eastern politics for about 4 years now. I called lots of things right, from the chaos in Lybia, to the continued Greek bailouts in the EU, to the rise of the Egyptian brotherhood. Nearly everything, except for the developments in Syria and Egypt. As I said in December 2013, I thought in 2012 that the Americans would arm some part of the Syrian opposition and thus bring down the Assad regime. The betting markets scored it around 85% likely that Assad would be gone by the end of 2013. Similarly, in August of 2013 I thought there was no way the Egyptian army could so clearly assume total economic and political control (I thought this alongside 15 Al-Jazeera commentators at the time and, apparently, the Israeli intelligence community thought the military junta very fragile too). What did I/we fail to see?

In the case of Syria, it now appears that the missing ingredient was the psychology of the US president. As expected, the US state department did indeed want to pick a winner in the Syrian civil war. At least, Hillary Clinton claims to have argued for it strongly. But Obama vetoed it according to her, apparently not able to see the tremendous disruption that would ensue in the whole region of a failure to interfere. Obama might have been following his father’s belief that to interfere was neo-colonial and would only lead to more future trouble. Obama might have thought that others in the region, such as the Turks, would not tolerate any mayor disruption and take control. Obama might have simply miscalculated the brutality that the Syrian regime was willing to inflict on its own population, or the brutality of the many groups who were being sponsored by other countries. Whatever the reason, it seems Obama won the internal fight and kept the US out of it.

The muddled strategy of the US was pretty hard to foresee in 2011/2012 and it seems to have involved the particular psychology of the president, so on that one the main lesson is that some presidents mean what they say and can deliver when they say they don’t want to involve the US in foreign adventures. To see that coming would require an intimate level of knowledge of the actual psychology of lots of world-leaders, something that is not reasonable to expect from any individual observer because politicians and their entourage make a point of creating an appealing image of themselves which makes it nigh impossible to know what they are really like, so as a mis-predictions go there is little structural to be learned there: a particularly unusual draw of the statistical error term!

In the case of Egypt, what was missed seems more fundamental: no ‘random error’ in sight to explain what has happened. No single individual has behaved unusually, rather the Egyptian population has reacted differently from expected. At least, no one I have read called all the developments before they happened.

Before the Morsi-government came into power in 2012, the military had failed to quell two popular uprisings against its power, once leading to the overthrow of Mubarak and once leading to the old military establishment giving way to younger generals (the failed Supreme Council of the Armed Forces, SCAF). Following the analogy of European pro-democracy movements in the mid-19th century, it seemed that on an ideological level the battle for democracy was won and that restoring a military junta would lead to mass-opposition and couldn’t be sustained. The widespread popular support for the Muslim brotherhood and the many decades of discontent with the military ownership of much of the economic resources of the country surely would not fade by the way-side?

Well, fade it did, and spectacularly so. The new dictator was ‘voted’ in by a 96% ‘popular mandate’; thousands of Morsi supporters have been sentenced to death without any real evidence, or were simply gunned down in the streets in an apparently deliberate bloodbath to show who was boss; new provincial governors from the military establishment were installed almost overnight and the judiciary became a puppet of the regime. Worse, it is now clear that the supposed popular uprising against Morsi was to a large degree orchestrated in that the business part of the regime was deliberately creating shortages, electricity outages, and frustrating any reform that the Morsi government was pushing through. The popular discontent that was the excuse by the army to overthrow Morsi was thus only partially due to mismanagement by the Brotherhood, as it was also partially pre-cooked by the military establishment.

Whilst the Morsi-government was genuinely unpopular with the majority of the population, and many ordinary Egyptians seem happy to go along with the indiscriminate killing of Brotherhood supporters, the mystery remains why the general population has been so happy to accept a new and more brutal military dictatorship wherein even more of the economy is under control of the generals and there is even less hope for the millions of young unemployed.

One school of thought has it that the military never truly did relinquish control at all and that there was effectively a changing of the guard within the military: the story goes that the old guard, led by a Mubarak who wanted his son to take over, was purposely abandoned by the younger generals when it came to suppressing popular discontent. Whilst the older generals got the point and made way for the younger generals, the rest of the population was allowed to squabble and argue about the future of Egypt. Once firmly in charge though, so the story goes, the new military leadership systematically plotted the overthrow of the Brotherhood under circumstances that would make the military both popular and undisputed: the unpopularity of the Morsi regime was seen to be useful to the younger generals in order to secure support from the business community, from rich Muslim countries ideologically opposed to the Brotherhood (like the Saudis), and large parts of the population whom it had previously alienated in the failed attempts by the old generals to sow discord (such as via the oppression of the Kopts). In this version of things, the West was caught napping and completely blind to the real power balance in Egypt, leading it to protest at the coup and to demand negotiations with the Brotherhood. Western governments must have seemed like ignorant fools to the generals.

Jim Rose, to his credit, pushed this line of thought immediately after the military coup at the end 2013 on the Club Troppo blogs. I didn’t think it likely because the repression by the military (SCAF) in 2011/2012 (post-Mubarak but pre-Morsi) seemed pretty real and brutal to me, and the population weathered that oppression, making the ‘revolution’ real. The intergenerational dynamic within the military might have played a role, but the idea that some group of generals thought through everything in 2011 seems too much of a conspiracy theory to me: you can’t convince hundreds of business leaders and military leaders to let go of power for 2 years under the promise that you will get it back with interest 2 years later. Your co-conspirators wouldn’t believe you and would fear that what was given up wouldn’t come back. Also, it negates the real hold that the old generals had on the military: they had the torture chambers on full throttle in 2010/2011, so the supposed reluctance of the younger generals to dirty their hands was not that strong. So yes, the changing of the guard within the military would have given rise to a new group of generals who were happy to drag their feet a bit when it came to the interests of the elderly generals, but part of the story has to include the true disappearance of the belief in democracy within Egyptian society.

Another school of thought has it that the experience of the Morsi government was traumatic for the general population and that the population concluded that democracy was merely a recipe for trouble and that you were better off with a clear dictatorship than with the constant upheaval and conflict that you got if you had democracy: a disillusionment of the masses with the democratic experiment. Within this version, even the liberals and the many state bureaucrats who wanted change pragmatically recognised that real elections were not going to be won by competent and liberal political managers, and simply opted for the better of two evils: autocratic control by elected religious zealots or autocratic control by unelected economic parasites.

What ‘jars’ with this version are the indications that many in the population are not happy with the extreme repression of the Al-Sissi regime: it has a very slim current support base following the jailing of human rights campaigners, journalists, social media activists, students, and other members of the intellectual elite. The army didn’t just declare war on the Muslim Brotherhood, but on Egyptian civil society at large.

The quick acceptance of the new regime and hence the abandonment of the previous dreams of inclusion, jobs and bread for the poor, are puzzling. The regime is prepared to jail children and has now freed the hated former dictator. That regime seems to be able to survive without support from anyone but what they call the ‘deep state’, ie the security apparatus and the businesses associated with the army. Apart from the usual followers of fashion, the rest is just oppressed, but they dont just seem to be ‘living with it’, many seem to be surprisingly supportive.

So what is the fuller story? As far as I can ascertain, there are two competing stories that are roughly equally probable from my information set: one is that the military regime is riding its luck at the moment, creating internal enemies all over the place, surviving on foreign money and the desperation of its core supporters, with its seeming popularity being a mere front without real substance. Within that version of events, Egypt could be heading for a civil war – a real shake-down between the entrenched elite and the disenfranchised majority, with religious, ethnic, and social class fault-lines. This seems to be the scenario the Israeli security analysts are thinking about. From that point of view the surprising stability of the military junta is due to its willingness to use extreme violence, as well as having the generous backing of some Gulf states who are bankrolling the regime.

The alternative ‘somewhat probable story’ is that the economic realities in Egypt do not yet conform with a large support base for power-sharing and that the military regime is not as friendless as it may seem: that Egypt is (still) a winner-takes-all society at all levels whereby the identity of the persons at the top are relatively unimportant and where it has simply returned to normality after a brief experiment with a political power-sharing system that did not fit any local habits and conspicuously did not work out.

Things that would have to be true in this second story is that whilst some of the urban intellectuals may dream of Western-style democracies, on the ground, most jobs would still be allocated on a clientelist basis; almost nothing truly would get decided on a democratic basis in cities and villages; and the security apparatus would be a coalition of the winning local militias, each individual militia supported by the local power-brokers. The flirt with democracy was then a curiosity, born from a desperate youth and a momentarily complacent military junta that has now got its act together again and re-established the political system that fits the reality in Egypt better.

I honestly do not know enough about Egypt to say which of those two stories of the Egyptian population, repressed-but-biding-its-time or welcoming-the-return-of-the-masters, is true. Perhaps a third story explains what has happened in Egypt the last 2 years. Observations on the ground might make it possible to discern between those stories, so the main lesson I take from the all-round failure of pundits such as myself to foresee the dynamics within Egypt in the last 18 months is that observers had unrealistic views of local power habits in Egypt. This includes the Egyptian pundits I read at the time (including the 15 pundits Al-Jazeera paraded in August 2013), who all failed to foresee events as they happened and thus were either also oblivious of the strength of various factions and ideologies, or didn’t say what they really thought.

The reasons for the internal Egyptian dynamics thus remain mysterious to me. General historical knowledge and awareness of Egyptian political theories, and even of its internal debates, was not enough: something about Egyptian power culture is not captured by what is generally said about it.

Does increasing the legal age for buying alcohol reduce traffic accidents?

Does increasing the legal drinking age reduce traffic accidents caused by young drivers? The idea is that if you increase the legal age at which people can drink, young people are going to quietly abide by the law, not do anything stupid, read the bible, contemplate their sinful natures, and stay out of trouble.

Hang on though, one thinks: drink-driving is already illegal at any age, so what exactly does one expect to change when one restricts the sale of alcohol to 21 years and over, instead of having the current age limit of 18? If you were worried about them breaking the law before, why would you think changing the drinking laws would help? Breaking 2 laws is harder than 1?

In a recent letter to the Medical Journal of Australia, Jason Lindo and Peter Siminski, two economists from Texas and Wollongong respectively, point out that the more recent and more authoritative economics studies find that raising the age limit on buying alcohol does not help reduce serious traffic accidents at all. They do this in reaction to a completely one-sided account by medics who call for the drinking age increase, citing mainly cross-sectional studies (find attached the letter by the two economists and the reply of the authors of the offending article, which basically admits the cherry-picking that they originally engaged in:Lindo and Siminski 2014 with Toumbourou et al reply).

Lindo and Siminski point out that in New South Wales, changes to drinking laws did not change the accident rate of young people. Neither did a recent reduction in the drinking age in New Zealand, where the drinking age reduced from 20 to 18, increase accident rates amongst the 18-19 year olds (their behaviour was changing already, but not after the law change). Moreover, they point to studies that show that people indeed do substitute alcohol for other drugs that also affect their driving, which helps explain why there is on balance neither a positive nor a negative effect on traffic accidents from changing the age drinking laws. The studies they quote, which include the only studies on Australia on this topic, used the latest techniques based on analysing changes in behaviour of young people just before and after the introduction of the laws, which is what one wants to do. Prior studies are less convincing because they compare behaviour between regions within a country or over long time periods, which comes with the problem that regions and periods differ for many other reasons than merely the drinking age.

More generally, one can doubt the wisdom of a puritanical attitude to alcohol simply by looking at differences across countries. Central Europe, and in particular France, Italy, Spain, and the other Southern European countries, have much more relaxed attitudes to alcohol, with kids learning much younger to be responsible with alcohol. The more repressive attitude in the UK and here in Australia, on the other hand, is associated with binge drinking, very high rates of teenage pregnancies, and extreme risk behaviour. Once the kids do get access to alcohol, often by illicit means as the forbidden fruit is made so enticing, they dont hold back, which should make one wonder about the wisdom of declaring the fruit so forbidden.

Lando and Siminski thus try to inject a bit of common sense and self-reflection into our debates on alcohol laws, apparently having to fight a rather puritanical bunch of medics that insists we cannot trust young people and should ban them from buying alcohol till they are 21. Yet, we allow those between 18 and 21 to drive, to vote, and to die for us as soldiers in foreign battles, but we are supposed to declare them incompetent when it comes to drinking?

Lando and Siminski are hence right, both on the latest science that says there is no real relation between the drinking age and traffic accidents, and on the larger issue of consumer choice: if we abandon the idea that all voters are equal and that we should proscribe the behaviour of some of them, where do we stop? Should we lock up all young people from the age of 15 to 25 to prevent them from doing anything we did ourselves but do not want them to do? I have heard medics argue this at conferences….

So it is a very paternalistic and holier-than-though brigade that wishes to control the lives of others, without any regard to the joy they are destroying, using selective studies to argue their case. Why did the MJA publish the original one-sided piece by medics, one wonders? Economists are right to resist such reckless and blinkered destruction of consumer surplus.

PhD Scholarships on “The Behavioural Economics of Undesirable Cooperation”

Some people engage in socially disruptive behaviour on their own, such as when they free-ride on paying taxes. Others cooperate with others though when they are socially disruptive: cronyism, corruption, nepotism, gangsterism, and favouritism are all examples of cooperative behaviour that benefits a clique but comes at the expense of larger organisations and societies. How does such socially detrimental cooperation arise and is it done by the same people who would be disruptive on their own? What adverse consequences does it have for other members of society? What can be done to counter such behaviour?

An international team of top scholars at the University of New South Wales, the University of Queensland, and Duke University has obtained an Australian Research Council Discovery grant to find out. Fully funded PhD scholarships are available for students interested in these questions.

Students would be involved in devising and running laboratory experiments, as well as possibly running field experiments in developing countries. There will also be opportunities to help construct theoretical models of clique formation in diverse contexts, and to conduct micro-econometric modelling of the incidence and consequences of undesirable cooperation.  Outcomes of interest might include output, income, mental health, happiness, social cohesion, job mobility, and entrepreneurship.

Successful applicants will need to have at a minimum an undergraduate degree with Honours in economics, good written English, and excellent analytical skills. Proven interests in experiments, panel data econometrics, micro-models, and/or behavioural economics are desirable. Willingness to travel internationally and conduct research in developing countries would also be beneficial.

Students would be based in Sydney, though supervision would be shared with the University of Queensland. PhD scholarships of up to AUD$30,000 per year for 3 years are available.

Applications should be sent to Dr. Gigi Foster at gigi.foster@unsw.edu.au.   Want more information?  Contact Ben Greiner ( bgreiner/at/unsw/dot/edu/dot/au) or Paul Frijters (p.frijters@uq.edu.au).

Where are we with Geo-Engineering in 2014?

Geo-engineering is increasingly looking like the only politically viable way of averting temperature rises above 2 degrees in the coming century. This is for three interlocking reasons: i) Any mayor country can try geo-engineering on its own without permission from anyone else, meaning one does not need a world coalition sustained for centuries to have an effect; ii) It holds the promise of immediate relief because ‘natural Solar Radiation Management’, ie volcanic eruptions that add lots of light-reflecting particles into the atmosphere, were found to cause immediate worldwide temperature drops, which compares favourably with the lags of decades and centuries that hold for CO2 emission reduction plans; and iii) It might be exceedingly cheap compared to any policy involving emission markets. For instance, according to a 2012 piece by McClellan and co-authors, we could keep the planet at current temperature levels at a cost of merely 10 billion dollars a year by having a fleet of planes deliver reflective particles high in the earth’s atmosphere.[1]

Given that continued global warming is predicted to happen in the next century no matter what emission policies are adopted, geo-engineering by some impatient large country is starting to look nigh inevitable. I reported in 2012 on the research efforts funded by the Royal Society, the Gates Foundation, and others. You now have dedicated institutes on this issue (eg. http://iagp.ac.uk ), and lots of new proposed experiments. With a large glut of published studies in recent years, it is time for an update: how far are we now in the world of geo-engineering?

The honest answer is that the scientific community is pussyfooting around when it comes to geo-engineering. Field experiments are largely stalled as scientists are awaiting regulatory frameworks that will protect them from criticisms of other scientists and environmental groups. Proposed regulatory frameworks designed to deliver this, such as by Nordhaus and colleagues, find it hard to get much political traction because politicians seen to support regulatory frameworks themselves become targets for criticism, both by those who pretend there is no climate change and by those who insist there is climate change but who also insist on emission reductions as the only way to return to our current climate some 300 years from now. Voters who agree the world is getting too hot and who would like it cooled down in their own lifetime rather than that of their great-great-great-great-grandchildren are still too rare to bother with for politicians.

This does not mean there is a lack of bright ideas. The engineers looking into this really are a very creative bunch, talking about whitening clouds, aerosol sprays, reflective shields, and artificial trees. One new idea that I hadn’t heard before is to genetically alter our crops so that they reflect sunlight better than the current crops. I don’t know whether this has any chance of getting serious traction, but one has to admire the ingenuity of the idea. Still, ominously, almost no field tests or large scale long-term testing is underway as scientists are waiting for societal approval to go ahead.

A good example of the ‘adverse climate for studies into geo-engineering’ is the reaction to the experiment with iron fertilisation off the coast of Canada in 2012: two businessmen/scientists dumped 100 tonnes of iron into the oceans in the hope of stimulating huge algae blooms that would capture a lot of carbon. The algae blooms failed to materialise, showing that iron fertilisation on its own was not as effective as once hoped for. Yet, these scientists were denounced as ‘rogue’ and there were widespread calls for legal action. This reaction was absurd once you think of the puny scale of the experiment: they only dumped 100 tonnes of iron ore into the oceans. Given a yearly world iron ore production by humans of around 3 billion tons per year, the experiment was insignificant compared to the amount of human-processed iron that flows to the oceans on a daily basis in terms of rust! You don’t hear equal amounts of complaints whenever an old ship is deliberately sunk to form an artificial reef, even though that is a similar amount of iron being ‘dumped’! The reactions hence were silly, vindictive, and essentially irresponsible. No wonder that the scientists looking at geo-engineering are waiting for official societal permission in the form of regulation that could sanctify their experiments and thus insulate them from the moral crusaders.

So at the moment, the scientific debates about feasibility and costs are mainly fought by means of computer simulation studies, with the usual claims and counter-claims that one gets when there is no real data. Typically, published reviews of this literature are critical of any form of geo-engineering that would have the potential to have immediate effects, usually saying the unknown risks are unacceptable. A good example is a recent paper by Cussack and others in 2014 that grudgingly admitted that Solar Radiation Management is indeed likely to be cost-effective at cooling the planet down quickly for relatively little money, but nevertheless says would entail unacceptable (but unknown) high risks, leading the authors to advocate broad-scale application of carbon-sequestration.

Carbon-sequestration is an oft-quoted darling in the literature critical of Solar Radiation Management, but is really a pretty hopeless technology as soon as you realise that coal is a beautifully compact form of sequestered carbon. To go from digging it up and burning it, which is what we do now in greater amounts than ever before, to re-creating it and then burying it seems rather costly, doesn’t it?

Re-sequestration would thus need to be done on a huge scale to have any effect, essentially undoing 2 centuries of digging up coal, oil, and gas, by putting similar substances back into the ground, preferably just as deep. The volumes involved would be such that we’d be talking decades of enormous industrial efforts to do it, which raises the question who would pay for it. Apart from the cost question though, the time-frame is off as it would not reduce the temperatures quickly but, once again, would only see its ‘benefits’ felt decades later. You might hence say that the world is still ‘unsequestering’ as fast as it can and ‘resequestering’ would only seem likely to happen if current populations were willing to expend huge efforts to aid their great-great-great-great-grandchildren. Not very likely, is it? This is typical of the studies critical of geo-engineering: they have little appreciation for the role of impatience and opportunism that are pervasive aspects of voters and their politicians.

We are thus a bit in scientific limbo-land at the moment, with moral crusaders preventing real progress: on the basis that the planet is hurtling towards disaster, we are asked to change our way life dramatically now, yet we should also accept that the damage takes centuries to undo and that we should just live with the climate change caused by our past sins. Solutions with immediate effect are seen as a form of cheating on our just deserts, and are said to involve unacceptable risks, with research designed to find out about those risks seen as unethical and already too risky. Why it is apparently more ethical to rejoice in the US-China announcement that they will keep increasing emissions for decades to come, is somewhat of a mystery: how can anyone truly fearing irreversible climate disaster see such non-binding agreements of sustained high emissions as real hope? It’s bizarre.

The stalemate that we see now in the science of geo-engineering would not seem sustainable though. Research funds keep being poured into this and the scientists involved will find ways to have real experiments in order to give the funders a real return. Also, at some point large groups of concerned voters will wake up to the absurd level of patience and altruism that the IPCC is currently asking of them, at which point they are going to force their politicians to cut through the fog of political correctness and experiment on a wide scale, moralising crusaders be damned. How far are we away from this? Hard to know, but I would be surprised if we need to wait more than 5 years for big experiments to see the light of day.


[1] Justin McClellan, David W Keith, and Jay Apt, “Cost Analysis of Stratospheric Albedo Modification Delivery Systems,” Environmental Research Letters 7 (2012).