Program Notes for the Greek Endgame: Austerity, Cyprus, and How to Exit a Currency Area

The Greek government has rejected the latest austerity and reform proposals from the EU, the ECB, and the IMF.  It has declared a national referendum, scheduled for Sunday, and urges a "No" vote. "We ask you to reject it with all the might of your soul, with the greatest margin possible," says Prime Minister Alexis Tsipras. Greek banks, which have been hit by an accelerating run, are to remain closed until after the vote. Yet rumors swirl of behind-the-scenes talk and a last minute deal.

We don’t yet know what lies ahead—default? Exit from the euro? Exit from the EU? Some kind of muddling through with a parallel currency and a declaration that any default is “only technical”? Answers to those questions will come only after Greek voters make a choice.

Meanwhile, here are some program notes and links to background material that should help place the Greek crisis in the context of similar episodes elsewhere.

How Tough has Greek Austerity Really Been?

To hear Greeks tell it, their country has undergone a deeper slump and tougher austerity measures than any other European country. Some of their EU partners, on the other hand, portray the Greek government as unwilling to take moderate, common-sense measures that everyone else has already successfully implemented. What do the numbers say?

This post, published at the time of the elections that brought the radical left Syriza party to power, shows that the Greek perception is largely correct. The slump in Greece, as measured by the gap between current and full-employment levels of GDP, has been catastrophic, a plunge of more than 20 percentage points. At the same time, budget cuts and tax increases have moved the best indicator of austerity—the underlying primary budget balance—nearly 20 percentage points toward surplus. Those movements far exceed what has happened in the United States or in any other European country. Read more

A Critique of the ShadowStats Alternate Unemployment Rate

A few weeks ago, I posted a critique of the alternate inflation measure devised by John Williams for his popular website ShadowStats.com. Several responders asked if I could also comment on Williams’ alternate unemployment rate.

Here, reproduced with permission is the latest unemployment chart from ShadowStats. Like William’s inflation rate, his unemployment numbers run far higher than the official data from the Bureau of Labor Statistics (BLS). This post addresses two questions: First, what is the intended purpose of the ShadowStats alternate unemployment indicator? Second, given what it tries to do, is it calculated in a reasonable way?

 In search of the employment gap
The standard unemployment rate from the BLS, known as U-3, focuses on a very narrow segment of the labor market. It tells us how many people are not working but who have actively looked for work in the past four weeks, expressed as a percentage of the civilian labor force. (The civilian labor force includes all people 16 years and older who are not in prison or the armed services.)The ratio of active job seekers to the labor force is highly sensitive to ups and downs in the business cycle. For that reason, monetary and fiscal policymakers watch it closely in deciding whether the economy needs stimulus or restraint. It is not perfect, but if what we want is a short-term business cycle indicator, it is probably good enough.

Williams, however, is looking for something different. His alternate unemployment rate should be understood as a broad measure of the employment gap—the difference between the amount of work that people would like to do and the amount they actually do. >>>Read more

Spillover from Russian Crisis Hits Latvian Economy, but So Far the Damage is Limited

From the beginning, it was clear that the economic crisis in Russia would pose multiple problems for Latvia and its Baltic neighbors. Until recently, many businesspeople in Latvia had seen close trade, transportation, and financial linkages as strengths that allowed their country to serve as Russia’s economic portal to the EU. Since the middle of last year, a collapse in oil prices, compounded by sanctions and countersanctions arising from the Ukraine conflict, have sent the Russian economy into a tailspin. Latvian ties to Russia have become liabilities rather than assets.

As the chart shows, growth of the Latvian economy has slowed since the Ukraine conflict began in the spring of 2014, but not come to a halt. According to preliminary data for the first quarter of this year, growth remains equal to the Eurozone average, which itself is improving. In that regard, Latvia has done better than neighboring Estonia and Lithuania, which have also felt the impact of conditions in Russia. >>>Read more