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Greek Debt in Historical Perspective: An Opinion Article

Anthony Rodolakis
November 22, 2017

Current fiscal proposals are projected to lead to a sizeable increase in U.S. debt and while people point to the Greek crisis to warn about high debt, a closer look at Greece’s debt history reveals few similarities. Modern Greek economic history is a history of debt. Greece is the country with more years in default to its creditors than any other European nation, being in default in 48 percent of the years since 1826.

[1] As of 2016, Greek debt stood at roughly 181 percent of GDP and more than twice the average of the Euro area (19 countries). In this post, we present a brief narrative of some selected major episodes of the buildup of debt in Greece to highlight the different sources of Greece’s debt problems over its recent history.

The 19th Century

By the late 1700s Greece’s proximity to Europe and a flourishing trade had allowed the development of a rich merchant class which was able to benefit from the European intellectual enlightenment – and to a large extent precipitate the ground for political independence from the Ottoman Turks. The vast majority of the peasantry, however, had been left in a semi-feudal status and beholden to the local oligarchies for favors.

Greece gained independence in 1830, following a turbulent revolutionary war. The debt buildup of that period was largely for loans to finance the war expenditures. The debt burdens the country had accumulated during the war lingered through the 1830s and 1840s and eventually led to a default in 1843. Fifty years were to elapse before the default was terminated.[2]

Following the final settlement of the default in 1878, Greece tapped the French capital markets for close to 500,000,000 francs. The terms, however, contained substantial “haircuts,” which was often the case. For example, an 1884 loan of 170,000,000 francs was offered at 68.5 percent, though even then it was undersubscribed with net proceeds of only 100,000,000 francs.[3] In all cases, bondholders were pledged a variety of receipts such as from the state monopolies of petroleum, matches, playing cards, tobacco consumption taxes, and port custom receipts. Nevertheless, both British and French financial experts sent to Greece around this time to examine the stability of finances and the ability to repay the contracted loans on behalf of their banking institutions concluded that bankruptcy was inevitable.[4]

The inability to maintain external debt obligations together with the expenses for the program of internal infrastructure development as well as renewed military expenditures led to the 1893 suspension of payments.

The 20th Century

During the first decade of the 20th century, Greece pursued a strict policy of monetary restraint and fiscal discipline that led to an appreciating drachma. Greece enjoyed rapid growth in certain sectors with the shipping industry exploiting the expanding trade opportunities. The fiscal and monetary self-discipline of those years paid off with net positive capital inflows from abroad. By 1920, the end of the Balkan wars and World War I saw a doubling of the territorial size and population of Greece.

Fast forwarding, the end of World War II found Greece and Europe in ruins, but Greece endured another round of fighting. Through 1949 Greece fought a bloody civil war between communists and the National Army that devastated the country, with widespread infrastructure destruction and rapid migration abroad. The Civil War retarded political and economic advances in Greece for several decades, handicapping the country’s economic growth compared to other European nations.

The 1950s and 1960s saw rapid rates of growth in the Greek economy premised on large public investments on infrastructure, foreign direct investment, residential investment and a strengthening commercial shipping sector. Despite this growth, “the development during this period is dependent on foreign funding and is asymmetric and unproductive.”[5] In 1950 a Daily Herald correspondent concluded that there are two Greek kingdoms: that of the new-rich of the center of Athens and the aristocratic suburbs and that of the rest of Greece where malnutrition and tuberculosis reigned.

With the entry into the European Economic Community in 1981, Greece was able to participate in a community of advanced and wealthy nations. However, the availability of development funds was to prove a double-edged sword. “According to OECD data, between 1981 and 1988, the number of central government public sector employees increased six times more than the active population of the country during the same time period, and public expenditures as a percent of the domestic product skyrocketed from 21 percent in 1976 to 51 percent in 1988.”[6] Overall, between “1975 and 1987, in 13 years, $18.4 billion in loans were contracted, of which $14.8 billion, or 80.6 percent, were allocated for the servicing of existing debt”[7] and not for development. At the end of the decade, the debt/GDP ratio stood at 66 percent.

The 1990s saw Greece struggling to implement the conditions required by the European Union (EU) convergence criteria on its path to full monetary union within the Eurozone. Successive Greek governments attempted to contain inflation and largely succeeded, but inflows from EU funds continued alongside the inability to balance the budget. The conservative government of the early 1990s increased debt by 295 percent, which pushed total debt as a share of GDP above 100 percent. Total debt servicing consumed 151.2 percent of regular government receipts as of the end of 1993.[8]

With the entry of Greece into the Eurozone in 2001 a new era of optimism and GDP growth had begun, unfortunately, premised on loans at deceptively low-interest rates. In the 2000s Greece was exposed to an international financial environment flooded with liquidity and without any real convergence with the “core” of the EU, continued lack of fiscal discipline, and with already high levels of debt. Greece was allowed to accumulate a debt of over 300 billion Euros that was to allocate the funds to its preferred oligarchic economic cartels that controlled construction projects and other outlets for the contracted loans, as well as allow largesse to the ever-expanding public sector.

The 2000s, much like the 1980s and the 1990s, proved a lost decade. The long-promised and much-needed deregulation of cartels across industrial sectors, labor market liberalization, privatization of publicly controlled enterprises, improvement of public administration, restructuring of public and private pension systems, and efficient absorption of EU funds for infrastructure upgrades were delayed or outright ignored by stakeholders. Political leaders avoided any and all direct conflict with their constituencies that tended to be concentrated in the public and private sector unions.

In Sum

The staggering Greek debt accumulated over the last 20 years is not a unique phenomenon for present-day Greece. Since the 1820s historical, political, demographic, and sociological circumstances have led to multiple periods of borrowing, default, and setbacks to growth as the nation struggled to repay its debts. The record-setting level of the current debt makes Greece extremely fragile and vulnerable to unforeseen circumstances.

[1] “This Time is Different: Eight Centuries of Financial Folly”, Carmen M. Reinhart and Kenneth S. Rogoff, Princeton University Press, 2011.

[2] “State Insolvency and Foreign Bondholders: Selected Case Histories of Governmental Foreign Bond Defaults and Debt Readjustments”, William H. Wynne, 1951, p. 298.

[3] Ibid. p. 298.

[4] Ibid p. 304

[5] Ibid. p. 271.

[6] “Foreign Loans at the birth and development of the New Greek State 1824-2009,” T. M. Hliadakis, 2011, Mpatsioulas Publishers, p. 364.

[7] Ibid. Page 393.

[8] Ibid. Page 419.

The views and opinions expressed in this article are those of the author and do not necessarily reflect any policy or position of the New York State Assembly.
Greek Debt in Historical Perspective: An Opinion Article2018-07-04T19:37:48+00:00

The Future of Health Care in America: A Panel Discussion at the Graduate Center

Merih Uctum
October 31, 2017

On October 2, 2017, the Graduate Center hosted a debate on healthcare policy with distinguished panelists: Jonathan Gruber, MIT, one of the main advisors on Obamacare, and the previous health reform known as Romneycare in Massachusetts; Dana Singiser, the Vice President for Public Policy and Government Affairs at the Planned Parenthood Federation of America; Avik Roy, the co-founder and President of the think tank the Foundation for Research on Equal Opportunity; and the Nobel Prize-winning economist, Paul Krugman, Distinguished Professor of Economics at the Graduate Center.  The discussion was moderated by the New York Times columnist Margot Sanger-Katz who covers health care for The Upshot and was sponsored by the Stone Center for Socioeconomic Inequality at the Graduate Center.

Where do we stand?
The discussants first summarized where we stand on this issue now and where they believe we will go. J. Gruber started by pointing out that the issues are difficult and the debate can be summarized by the 20/80 rule. First, 20% of Americans currently spend 80% of the healthcare dollars. Financing their healthcare costs is not possible for these 20%, so there has to be some risk-sharing. Second, 80% of Americans are satisfied with their health insurance. Given this, any change would require convincing them that a new program is superior to something with which they are pretty satisfied.

Singiser indicated that some issues are not being sufficiently emphasized in the dialogue about healthcare, particularly those that affect women. The efforts to repeal and replace Obamacare over the past few months have all included the defunding of Planned Parenthood. She pointed out that there are not always good options for women who utilize the services of Planned Parenthood, and states that did not allow it to operate saw a dramatic increase in unintended pregnancies, maternal mortality, and STDs. Singiser also underlined the innovative approaches that these health care centers have implemented using technology.

Roy stated that it is critical for any new approach to healthcare to focus on the needs of people with relatively low income. Single-payer systems have a role here as do more market-oriented universal healthcare approaches that stress competition, innovation, and private-sector consumer choice. The U.S. has the third highest per capita health care costs, with 18% of GDP being spent on health care compared to 9-11% in Europe. If we make health care more affordable and stop subsidizing the wealthy, we can cover more people and reduce costs.

Finally P. Krugman added his views on how we can go about covering as many people as possible. He indicated that there are two ways of doing it. First is the single payer. However, given the current US system and the difficulties of changing people’s opinion, he argued that this is not an easy option. The second way is to induce the private system to deliver the outcome of the single payer through a combination of regulation, subsidies, and mandates. The ACA attempted to combine both systems by expanding the Medicaid and creating a system of regulations, subsidies, and mandates, which had the disadvantage of being underfunded. The states that embraced this system reduced substantially the proportion of uninsured. He concluded that despite its flaws, the ACA gave the Americans the conviction that basic healthcare is something that everyone should have access to.

Why was it so hard to repeal and replace Obamacare?
Sanger-Katz said that various polls lead to somewhat conflicting results: a small majority of Americans looking favorably upon single payer yet many being happy with their existing arrangements; Republicans have many times tried and failed to muster the vote to repeal the Obamacare. She asked the panelists why was change so hard.

Roy argued that although Republicans had a unity around repealing the ACA, they did not have the same unity to replace it. Part of the difficulty is that large constituencies on the existing system were happy and not willing to see a change: those on Medicare, employer-based systems, including wealthy people who are over-subsidized, and Republican voters. But the existing system is costing the government $400-$500 billion in lost tax revenues and risks blowing up the budget.  If we don’t get health care expenditures in the form of Medicare and Medicaid under control, future cuts will ultimately hurt society’s most vulnerable people. The only way to prevent such hardship is to cut the health spending by subsidizing the poor and not the upper-income people.

Gruber reminded the audience that the Congressional Budget Office showed Americans that if you want to cover the sick, someone else has to pay; the Republicans were eager to cut funding for the ACA but not ready to replace it. The ACA brought the government, employers, and the individual mandate on healthy individuals to fund the system. They were not up to the challenge of replacing the individual mandate which maintains a common risk pool that allows insurers to price fairly. This is the most conservative way of covering as many people as possible without costing much more, and the reason why Republicans couldn’t replace Obamacare. Further, the ACA created some losers, about 3% of the population, the upper-income people who had to pay higher taxes, and some winners, about 17% who gained coverage but it didn’t affect about 80% of Americans.

Krugman brought up two facts about the Obamacare and its repercussions. The first was that since its implementation, the rate of increase in health care costs slowed down substantially with lower Medicare costs and private employer-based premiums, resulting in an improved forecast for the US budget outcome. The second was that the impact of the healthcare funding on the deficit matters for this administration.

Why does the US healthcare system have such high cost?
Sanger-Katz stated that as discussed before, the US is paying an ever-increasing share of its GDP to pay for health care expenses and asked why this is the case and what can be done about it.

Gruber confirmed that since the 1950s the health care spending in the US has quadrupled but its quality also increased compared to half a century ago. Although other countries with lower healthcare costs also saw improvements in their health care system, Gruber argued, one million visitors a year who come for a treatment here is evidence of the high quality of this system. Our excessive cost is due both to waste, in part because patients are over-treated, and simply that we pay too much for many features of our system.  .  We went from regulated hospital prices in the 1970s to a more managed competition model and this is where we are stuck.

Roy countered that the high costs are due to over-subsidizing the wrong people and he gave a historical assessment of how the American system ended up like this. In the World War II, labor shortages put an upward pressure on wages. Fearing massive inflation, the administration imposed wage controls but employers avoided them and competed for workers by offering health insurance. The administration later enacted a change in the tax system, which excluded employer-provided health benefits from an employee’s taxable wages. This led to increasingly higher prices charged by hospitals, doctors, and drug companies. Medicare in 1965 was built on this employer-based system. These policies had two implications. An entitlement system was created for the upper-middle class, creating $400 billion a year in lost revenue to the Treasury and the Medicare system that benefits many rich people. We could have the single-payer system where we regulate prices, access, limit costs and choice like in Canada. This would be fiscally more responsible than the system we have. Alternatively, we could have a market-based system where upper-middle class and rich people buy their own coverage and the government provides a safety net for the poor. This would reduce spending and control inflation.

Krugman disagreed strongly with A. Roy on two accounts. First, he maintained that the number of people who can pay for their own healthcare without government subsidy is about 2-3% of the population, which creates negligible savings for the Treasury. About 5% of patients account for about 50% of heath care expenditure but no individual knows when and if they will be in that 5%, and serious sickness can easily bankrupt even those in the upper-middle class. Private insurance markets don’t work unless they are heavily regulated with rules, subsidies, and mandates. Second, none of the other systems that are cheaper than us have a market-based structure but instead, have heavy government involvement. Our system has bad incentives for the providers and rewards doctors for expensive and unnecessary practice. This contrasts with Medicaid, which is more efficient and is more like other cheaper systems because it has more control over costs and a lot of bargaining power. Krugman finished his thought expressing optimism about achievements so far in terms of growth of costs.

Singiser observed that when women are able to control the timing and spacing of their families they are more likely to get education and be economically independent and rely less on Medicaid and other services. Although the economic advantage is undisputable, she added that what is important is that family planning allows women to have a say about their lives.

Panelist at this point started answering questions from the audience.  See the full report here

The Future of Health Care in America: A Panel Discussion at the Graduate Center2018-07-04T19:37:48+00:00

October 27: U.S. GDP Growth at Above-Forecast 3% in Q3

Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the third quarter of
2017, according to the “advance” estimate released by the Bureau of Economic Analysis. In the
second quarter, real GDP increased 3.1 percent. Read more

October 27: U.S. GDP Growth at Above-Forecast 3% in Q32017-10-29T15:11:14+00:00

Is the New York Economy Slowing Down?

James Orr
October 26, 2017

Recently-released employment figures show the number of jobs in New York State and New York City declined sharply in September: The state lost about 34,000 jobs and about two-thirds of the decline occurred in the city, suggesting a possible slowing of the robust employment picture seen downstate. This post examines these recent job numbers and to what extent there is a suggestion of a cooling off of job growth. It then looks at several services sectors that have been key drivers of job growth over the past year, including one sector–retail trade—where consumer buying trends have been linked to ongoing job losses nationally as well as in the state and city. Looking ahead, the administration’s recently released framework for federal tax reform proposes the elimination of the deductibility of state and local taxes. In light of the relatively large value of these deductions taken by New York residents, the post reviews the evidence regarding how this proposal could affect federal income taxes paid by New York residents.

Employment trends in New York City, the State and the Nation

While the expansion of employment in New York City since the recovery began seven years ago has been remarkable, the preliminary September employment figures show a loss of almost 20,000 jobs.  Although these estimates are subject to revision next month, declines of this magnitude on a monthly basis have been observed several times during the city’s employment recovery. The chart below shows the sharp and steady rise in employment in the city relative to both the state and the nation since the recovery of jobs began in 2010, and indicates the relative magnitude of the recent decline. In the city September’s losses were concentrated in the private sector and while steep, overall employment in the city in September is still up about 1.1 percent over September of last year. Comparisons of job growth with the nation this month are problematic, however, due to the hurricane-related distortions in the national payroll employment estimates.

Statewide, employment losses totaled about 34,000 though, like the city, overall employment in the state remained above its year-ago level by roughly 1.0 percent. The September declines in employment might have been hinted at in the August jobs report where the slowing pace of job growth nationally was also seen in both New York State and New York City. While the year-over-year growth rates held up, the month-over-month job growth rates in August were below the average monthly growth rates seen over the past year. In September, the decline in statewide employment was broad based across industries and, notably, declines occurred in the education and health sector which had been expanding throughout the downturn and recovery.

As discussed in a recent report, the areas outside of the city have not been showing the consistent strength in job growth that is seen in the city.  Moreover, as pointed out in an earlier post, the city’s strong job growth in this recovery has been accompanied by strong population growth and there was not the sharp decline in the city’s labor force participation rate during that period that was seen nationally. Data for upcoming months will show whether the job losses seen in September are continuing and thus providing more evidence of a possible cooling off in growth in both the state and city.

A look at the job growth rates by sector shows that over the past year, major services sectors—education and health services, professional and business services and leisure and hospitality—made strong contributions to the job growth rates in both the city and state. The relatively poorer performance of the finance and retail trade sectors is noteworthy. Employment in the finance sector has not been leading the recovery as in previous upturns and over the past year has seen only modest growth.

The decline in jobs in retail trade over the past year in the nationally and in New York State and New York City reflects, in part, the impact of the rise of online sales, or e-commerce, and the decline in sales in brick-and-mortar stores, particularly department stores, but also at stores selling electronics, sporting goods and clothing. A recent report shows that online shopping nationally now constitutes more than 10 percent of total retail sales. These shopping trends are increasingly supported by expanded personalized online marketing and rapid, often overnight, product delivery.

Department stores are especially affected by online shopping. Spending at department stores in August of this year was essentially flat from last year and down about 15 percent over the past five years. In the city and state, employment at department stores was down roughly 2 percent over last year and contributed to the decline in retail trade employment. Unlike the nation and the state, however, jobs in New York City in clothing, food and health and personal care stores increased. Finally, two recent reports suggest that the decline in jobs in brick-and-mortar retail stores are to some extent being offset by gains in the warehousing and transporting of goods. Jobs in this sector are up sharply in the nation, New York State and New York City, though these gains are not unambiguously related to the increase in online shopping.

Proposed elimination of state and local tax deductibility

The administration’s recently-released framework for federal tax reform proposes eliminating all itemized deductions for individuals other than for mortgage interest and charitable contributions. The proposed elimination of one such deduction, that for state and local tax payments, could have consequences for New Yorkers and the state’s economy. Under current law, individuals can take a deduction against their income for state and local taxes paid. These taxes consist of real estate taxes as well as either non-business income or sales taxes.

Estimating the amount of additional federal taxes that will be paid by New Yorkers as a result of eliminating the deduction is complicated because the framework proposes a number of other changes that will affect individual tax payments. These include changes to the value of the standard deduction and personal exemptions, the income limits applicable to the new tax brackets, and the elimination of the AMT, a parallel tax system for relatively high earners that does not allow these state and local tax deductions. A report from the Tax Policy Center estimates that the elimination of the state and local tax deduction alone would raise federal tax payments for individual New Yorkers who take the deduction by an average of $4000. An estimate by the New York City Comptroller’s office shows that the elimination of the tax deduction would not just affect higher income earners but affect taxpayers across a range of incomes. While there are some efforts to estimate the impact of eliminating the deduction on New Yorkers within the context of the proposed framework, the net changes in federal tax liabilities and, ultimately, the impact on economic activity will depend on what other aspects of the framework are adopted.

Is the New York Economy Slowing Down?2018-07-04T19:37:48+00:00

October 06: U.S. Lost 33,000 Jobs Amid Last Month’s Hurricanes

The unemployment rate declined to 4.2 percent in September, and total nonfarm payroll employment changed little (-33,000), the U.S. Bureau of Labor Statistics reported today. A sharp employment decline in food services and drinking places and below trend growth in some other industries likely reflected the impact of Hurricanes Irma and Harvey. Read more

October 06: U.S. Lost 33,000 Jobs Amid Last Month’s Hurricanes2017-10-06T18:37:40+00:00

Rising Interest Rates, Mortgage Interest Rates, and New York Home Prices

Richmond Kyei Fordjour
September 15, 2017

Conventional wisdom tells us that a rise in interest rates hurts the real estate sector since higher mortgage rates discourage first-time homebuyers and raises costs of existing mortgages. Surprisingly, the recent trends in mortgage rates and in housing market indices do not support this view. This article examines the facts in the New York Metropolitan area and the United States.

Interest rates—Government bond yields (10-year Treasury) and the 30-year Primary Mortgage Rate (the Freddie Mac Primary Mortgage Market Survey Rate)—have been rising since the end of the 3rd quarter of 2016, through the 1st quarter of 2017, and only briefly abated in the 2nd Quarter of 2017 (this year) and marginally came down (Figure 1).

Source: Federal Reserve H.15 and Freddie Mac.

The rise in interest rates, however, does not appear to have affected home prices in the United States in general, and the New York metropolitan area in particular (Figure 2). The Home Price Index for the New York-New Jersey Metropolitan Statistical Area has continued to rise in the same period:

Source: Federal Housing Finance Agency.

This observation may run contrary to logical expectation, since higher interest rates on mortgage loans means home buyers shall pay more in mortgage interest when they purchase their homes, and therefore the demand for housing may be reduced and dampen home price, and subsequently the Home Price Index. Putting this observation in a historical context, however, appears to provide some illumination. As Figure 3 illustrates, this is not the first time the NY-NJ Home Price Index has continued to rise in spite of rising mortgage lending rates. Positive correlations between them have been observed during other periods such as 2003 Q2-2006 Q3, 2013 Q1-2013 Q4.

Source: Federal Reserve H.15 and Freddie Mac; Federal Housing Finance Agency.

A closer inspection of the data reveals some clues as to why this pattern occurs. Consider the Mortgage – Treasury spread, calculated as the difference between the Primary 30-year Mortgage rate and the Treasury 10-year bond’s yield. The spread is a good proxy for measuring the relative cheapness of mortgage interest rates, because an investor considering making a fixed-income investment would compare yields on the government bond (the risk-free benchmark) versus that of the secondary mortgage market (the Mortgage Backed Security). Since Mortgage Backed Securities typically have average durations of less than 30 years and considering the relative flatness between the 10 and 30-year points on the Treasury yield curve, these two assets have broadly equivalent maturity. Examining the trend in the spread and the change in the home price index, which is also called home price appreciation rate, yields an interesting insight into the correlation between the two series (Figure 4). A simultaneous increase in both series indicates that a relative decline in the mortgage rates is accompanied by home price appreciation, consistent with the conventional wisdom.

The data indeed indicates that except for one subperiod, overall the home price appreciation rate moves together with the spread. During 1999 Q1-2000 Q1 the high spread indicating relatively expensive borrowing rates are likely to have come about as a consequence of high sustained demand, as home prices had also been rising rapidly in that same period. After 2003 the spread abated then reverted and stabilized until the beginning of the financial crisis. During this period, the increase in the relative cost of mortgages is also accompanied by a steep devaluation of the Home Price Index when the real estate market slumped in the New York metropolitan area.

After the brief spike in the spread in 2008 when the Fed was embarking on aggressive monetary easing in the wake of the financial crisis, the spread converged with the home price appreciation rate—from 2010 onwards—and the two have been trending together, an indication that demand for homes and mortgage interest costs were roughly in balance.

Source: Federal Reserve H.15 and Freddie Mac; Federal Housing Finance Agency and author’s calculations.

Comparing these historical occurrences by looking at the movements of spread and that of the home price appreciation rate, rather than considering only the movements in the levels of mortgage rates and the Home Price Index, we have been able to gain better insight into the dynamics underlying these observations. Accordingly, the Home Price Index has been broadly rising in the face of a rising level of the spread or a demand-driven increasing relative cost of mortgages.

Rising Interest Rates, Mortgage Interest Rates, and New York Home Prices2018-07-04T19:37:49+00:00
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