Gillian Tett on the euro

Gillian Tett’s Friday FT columns are always worth reading.  This week she worries, and reports official US government worries, that European ministers and officials are understating the severity of the risks if Greece were to leave the euro.  Earlier in the week, I argued that Greek exit may well set off a chain of events that, in time, leads to the complete dissolution of the euro, and threaten the EU itself.

Tett’s perspective on the markets risk is plausible.  The honest assessment has to be “who knows”, and she herself makes that point.    Against the list of points she highlights, many of which would have been compelling in 2010, one could highlight that, unlike the Lehmans failure, the risk of Grexit has now been a long time coming.  About the only upside of the protracted Argentine journey to failure and default 15 years ago, for example, was that it was so long coming that in the end contagion was pretty limited.

But even if she is right about market risks, or I am about the political risks, not everything that is costly and potentially destructive can always be avoided.  This isn’t a cyclone or a tsunami, but perhaps it is the macroeconomic equivalent.  What is the credible effective politically-achievable way through the current storm that both avoids Grexit and puts Greece on a strong sustainable path to recovery and towards full employment?     Perhaps a divine choreographer could do it but, as I noted to a commenter the other day, God doesn’t usually seem to do macroeconomic management.  The interests are so diverse, the narratives are so diverse, and there is no choreographer.  That is democracy –  messy but better than the alternatives.  Probably such diverse democracies should never have signed up for the common currency.  But they did.  And now it seems hard to escape a conclusion that they can only drive on through the storm, hoping to limit the damage, to a new and very different future.  Perhaps no one will be better off.  Perhaps it won’t happen this quarter.   But –  other than just buying a little more time, when patience increasingly seems exhausted and the status quo doesn’t seem particularly satisfying –  what is the realistic alternative?

24 April 1915

(NB: There is almost no economics in this post.  It is for the history-minded)

Papers Past is one of New Zealand’s little-heralded resources.  The National Library has made available electronically copies of dozens of New Zealand newspaper titles dating from, in one case, as early as 1841 and often up to 1945.  It is a shame they haven’t yet attempted, or perhaps been able, to do more recent decades.

I was curious to see what Wellingtonians might have been reading on Saturday afternoon, 24 April 1915, so I downloaded the Evening Post for that day.

Older newspapers typically had their classified advertisements first.  But the first news page that day had the shipping news and the market data.  New Zealand government bonds maturing in 1929 and quoted in London were yielding about 4.15 per cent –  rather higher than today’s 3.37 per cent 10 year yield.

War news features heavily of course:

  • A fascinating story that, in the middle of a war, the Hungarian Parliament (Hungary then being part of the dual monarchy Austria-Hungary) had failed to pass the war credits sought by the government.
  • Much talk (perhaps deliberately encouraged?), of a forthcoming major naval confrontation in the North Sea.
  • Zeppelins observed over Newcastle
  • A report of the efforts of members of the Socialist Party of Germany to promote an early peace.
  • An account of two British efforts in 1807 to force the Dardanelles – they succeeded, but failed to take Constantinople.
  • Uncertainty about the adequacy of the supply of wheat in New Zealand, European agriculture having been disrupted by the war.

But it isn’t all, probably not even mostly, about the war.

  • “Owing to exceptional pressures on space, the usual sporting, football, and hockey notes have been held over”,  but space for a listing of which Wellington grounds had been allocated by the Council to various different sports codes.
  • Campaigning for local body elections was in full swing, with various accounts of the views of candidates and meetings they addressed.
  • An account of William Jennings Bryan (“cross of gold”), the US Secretary of State witnessing in his office the impact of alcohol poured over plants  (“What seemed to please Mr. Bryan most was that- when the plant was given alcohol it passed through a- brief period of obvious exhiliration, followed by a decided drooping, indicating that even plants must pay the price of “the morning after.”)
  • The progress of new consumer-oriented technology, in Germany.
  • The weekly book reviews

And a remarkably long discussion on the latest northern hemisphere spring fashions.

It is a fascinating snapshot, of the quotidian affairs amid the most awful, and escalating, war. Of course, there is no hint of the next morning’s Gallipoli landings, or of the systematic Turkish efforts to slaughter Armenian Christians just getting underway in Constantinople that very Saturday.

Boat, bach and BMW? Really….

The Dominion-Post reported yesterday on the results of the latest Westpac (in association with the Productivity Commission) Grow New Zealand survey of “nearly 1200 small and medium businesses” with turnover ranging from $250000 to $5 million.  The results were interesting –  data almost always are –  including the comparisons with the earlier 2011 report, taken when the economy was only just beginning to emerge from the recession.  But the interpretations placed on the results were what caught my eye.

In the 2015 survey many fewer respondents saw the “current state of the market” and “lack of funds” as the main obstacle to growth in their own business.     As those obstacles had been removed, more cited a desire to “maintain my work/life balance” and “want to retire/leave the business” soon.  These results shouldn’t surprise us.  After all, in 2011 the recession had only just ended –  times were tougher, on average, for businesses.  In 2015, many business owners reasonably enough feel that they have more choices.

There has been a popular line running round the New Zealand debate for some years that what ails New Zealand is lifestyle – the people who run New Zealand small and medium businesses don’t have the hunger they perhaps “should” or could have, and are instead content to get to a certain scale and then settle for a very comfortable lifestyle, characterised as “bach, boat, and BMW”.    The Dom-Post journalist uses the Westpac survey results to give this line another run.    The chair of the Productivity Commission is reporting as suggesting that “in the more competitive United States market, the concept of taking it easy for the purposes of leisure time was unheard of.”

But how seriously should we take the “bach, boat and BMW” syndrome as an obstacle to growth?  New Zealanders work longer hours per capita than their peers in most Western advanced economies, and it isn’t obvious why we should assume that our business owners are particularly different.  And are US small and medium business owners really so different?   The US is a very big and diverse country, and perhaps there is a risk of forgetting that for every Microsoft or Oracle there are thousands of small businesses in small towns and medium-sized cities, often protected by occupational licensing and entry restrictions that make New Zealand look intensely competitive.  Many owners will be keen on a round of golf on Wednesday afternoon, or just the flexibility that comes with being one’s own boss.     The range of factors that motivate people to set up a business is likely to be as diverse there as here.

In preparing its first report in 2009, the 2025 Taskforce – charged with understanding why New Zealand GDP per capita lagged so far behind Australia’s (and other advanced countries) –  went through some of the common arguments.   Here is what they said (and if the prose style feels familiar, I drafted it for the Taskforce):

Sometimes it is also claimed that successful New Zealand business people are too willing to cash up too soon, and enjoy the fruits of success (the boat, bach, and BMW) rather than continuing to build their businesses up. We have not encountered any systematic evidence to support this claim. Everywhere in the world, some people build businesses, and then cash up to enjoy the fruits – from successful merchants or industrialists retiring from Manchester to build elegant country houses in the 19th century, to businessmen selling up to go into politics. Some will be talented creators, but not natural managers of large enterprises. Some will have owed their success as much to good fortune as to innate skill: for them, selling up and crystallizing the gains is likely to be a very prudent step. Others will simply put a higher value on other things in life than making more money. In any society – especially one New Zealand’s size – there are likely to be only a relatively few highly successful highly-driven entrepreneurs.

Tastes and preferences vary, but I reckon that in a country that was once among the very richest in the world, peopled with those whose ancestors made the costly effort to come to uttermost parts of the earth to build a better life, we would be better off looking for the pitfalls in government policy for the answers than in suggesting that our business owners are somehow letting us down by through their own lifestyle preferences

Incidentally, in the same article I noticed Murray Sherwin quoted as suggesting that the survey results “reflect that New Zealand has had a very good global financial crisis compared to most”.  I was a bit puzzled, and emailed Murray, who tells me that what he had in mind was GDP per hour worked.    Growth in GDP per hour worked has slowed a lot since 2007 when compared with the previous decade, but the slowing has certainly been less marked here than in many advanced countries.

But our overall economic performance since 2007 –  just before the global crisis hit –  has been mediocre at best.  We’ve had lots of advantages – high terms of trade, no domestic financial crisis, and no major external constraints on using macro policy (not in the euro, avoided the near-zero lower bound) –  and yet in GDP per capita terms we’ve tracked very similarly to the United States, the country at the epicentre of the initial crisis.  Even that picture flatters us: US productivity has been better than New Zealand’s, but we’ve made up for it with more people working.  It could have been worse – and in most euro-area countries it has been – but the years since 2007 haven’t been good ones for New Zealand.

nz vs us