Letter to Iannis Mourmouras (Greek Economy)
17 Jan 2012
The Financial Times published an article by Iannis Mourmouras today, he
is deputy minister of finance in the Greek government and economic
adviser to Antonis Samaras, leader of the opposition. Of course the
situation for Greece is pretty desperate, a disastrous disorderly
default looms, and my advice is confiscation of foreign bank accounts
and other assets held by rich Greeks because anything is better than
disorderly default. People don't realise how difficult is for the
Germans to allow the Greeks an orderly default and continued membership
of the EU. Not only will other member of Club Med loose their incentive
to reform, German and Dutch taxpayers left with the ECB's vast bill for
Greek bonds will revolt. A good man doesn't punish a sinner for revenge,
he punishes him to help him learn from his mistake, but most of all in
order to terrify others who would do the same. Anyway, the article was
not about default, it was about austerity, and I replied with the
following letter:
Dear Iannis Mourmouras,
I think there is a good article in the WSJ today called "New Approach
for Italy's South". It describes how Mario Monte's new technocratic
government is trying to stimulate Italian growth, and I am afraid it
seems to me that your comments today about tackling Greece's structural
deficit by focusing on loss making public sector enterprise, sound less
sophisticated than the comments we are hearing from Italian technocrats.
If Greece is to have a future it must think beyond cuts, it must think
about how to build a smarter economy. As the Athenian said in the
opening of Plato's Laws, the goal of government is to aim like an archer
at wisdom, for it is from wisdom that all fruits such as heath, fitness
and wealth flow. There is more to wisdom than killing weeds, there is
also the watering of the wheat and the planting of seeds.
Most people today think improving the intelligence and effectiveness of
countries such as Greece and Italy primarily revolves
around making people harder working and more disciplined by implementing the sort of labour market reform Margaret Thatcher
once focused on, but I think the real gold is to be found in another
dimension. Experts such as Stiglitz, the Nobel Prize winning economist,
say we must stop imagining government as a simple redistributive force
which collects taxes from one set of people and hands them to another
set of people, and we must start imaging government as a sort of
European Post-War Marshall Plan / Chinese Economic Miracle force which makes
intelligent growth promoting commercial investments. Think about the
EBRD for example, it helps developing countries grow by investing in
commercial projects, and it doesn't burn money it actually makes a
profit on its investments. These projects create jobs and growth, but
just as importantly they transform working practices. Imagine the EBRD
opening a state of the art hydroelectric dam in Africa, such a project
transforms the minds of the people involved in the project, and that
professionalism gradually leeches out into society at large touching
everyone in society to a small extent.
Although European politicians are beginning to talk about infrastructure
spending, they are still very much stuck in the old fashioned concrete bridges
to nowhere pre-paradigm change concept of state spending. For example,
the homebuilding industry is notoriously unprofessional and downmarket
in Greece and Cyprus, imagine the government creating a new high tech
ultra professional home building industry which makes a tangible
return on investment. In China the private sector house builders recently blew
themselves up in an orgy of speculative excess and incompetence, so now the Chinese
government is stepping in and gobbling up private sector assets on the
cheap, building the cheap houses for which there is still a lot of
demand but no private sector resources available, leveraging economy of
scales, compulsorily purchasing land, cutting through red tape with
political muscle etc. The Chinese government won't make the sort of sky
high short term returns private sector counterparties aspire to, it
instead plays for long term gains. It's a sort of fire breathing dragon
model of government, the private sector is free to play, but when it
catches fire the government lays an egg in the wreckage from which a
golden phoenix owned by the state emerges. In Europe today clearly the
point of attack in the housing market is at the other end, in high end
housing built to mimic traditional styles but using modern technology,
and this seems like the way to both salvage long term Greece government
finances and sustain short term growth. Imagine the UK's Poundbury
project rolled out across the Greek islands.
The problem in the West, of course, is that modern democracy revolves
around popular emotional debates, not cold hard commerce. For example,
Janet Dailey, a popular journalist at the UK Telegraph is a fly by the
seat of her pants nationalist moralist who says the state should never
intervene in the economy, except perhaps to build her pet defence
projects. She is pure Dionysian, what Socrates called the “what is”
instead of the “what is not” thinker who paints pictures instead of
building models and examining them for flaws. Unfortunately she typifies
the intellectual modus operandi of politicians across Europe, and
consequently most European states are completely incapable of
intelligent real world commercial decisions.
Italy is in a different league, all senior government posts are
controlled by unelected technocrats, and although they depend on the
mindless politicians below them to pass their decisions into law, Italy
today probably has the most intelligent government in the Western World.
The key to Italy is reviving the South, so we who dream about new
economic models find ourselves wandering the streets of Pompeii and
Napes at night trying to think about what needs to be done.
The WSJ article talks about Cassa del Mezzogiorno, an Italian
state-funded bank with armies of technical experts that actually won
plaudits for its postwar work in boosting economic growth in southern
Italy, but over time devolved into a sclerotic political organization
that endlessly redistributed money from North to South by building
pointless "cathedrals in the desert". The WSJ talked to Mr Barca, a
long-time senior official at the treasury and the Bank of Italy who is
now looking at economic projects in Pompeii. He said the South don't
need more money, it simply needs to take the regional subsidies away
from the local politicians who are spending so mindlessly, and put the
funds in the hands of commercially minded professionals who can invest
them in profitable growth boosting projects.
In conclusion, the Stiglitz point is don't keep cutting back the state,
turn the state into a for profit venture capital specialist with
unlimited political muscle and the expertise of the entire state at its
disposal. Bring in the smartest Greek entrepreneurs, industrialists and
scietists, viciously cut back on social spending and government wages
and loss making state industry, and divert all the money into this new
EBRD style investment project that channels it back into the economy and
absorbs private sector enterprises and makes a profit. I think the
ultimate way to do this is to not only make the new investment unit
autonomous and untouchable by incumbent politicans, but even to totally
exempt it unit from Greek laws; like James Bond, give it a 007 licence
to do anything. Then it can not be held hostage by corrupt officials,
nor can it be trapped by the spiders web of bureaucracy, nor can it be
milked by lazy overpaid employees. Like the mind of great men such as
Socrates, set it completely free from the ghastly incompetence and
corruption of Greek democracy - what a golden phoenix that would be! I
think Socrates would say that it's obvious even to a fool that this is
way to save Greece. The real question is: do the people running Greece
really care about truth and justice and saving Greece, or is it all
about personal power?
Many Thanks, WH
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