• REMEMBER THAT NUMBERS ARE PEOPLE LOOK FOR COCK-UP BEFORE CONSPIRACY • ALWAYS CITE PRIMARY SOURCES


Friday, 16 September 2016

COUNTING THE FINGERS OF THE INVISIBLE HAND

'Greece needs EUR100bn to get it out of today's recessionary spiral. We know how to release it.'

I'm wary of Big Numbers. They tend to stick regardless of their source, the methodology involved in calculating them, or any caveats well-meaning originators attach to them. Citing Big Numbers is thinking big, maybe. But it's also asking for trouble. So who came up with this one? Step forward Kyriakos Mitsotakis, the leader of Greece's opposition.

The figure, to be fair, predates Mitsotakis' ascension to the ND leadership- it was first mulled by the Hellenic Federation of Enterprises in Dec 2015, only to be resurrected by him in June 2016. And it's not hard to see where the numbers come from; here are the figures on Gross Capital Formation in Greece going all the way to 2015, and a breakdown by industry and asset is available going from 1995 to 2014. You can also look at the figures for business investment by detailed sector in tradeservices and construction and industry, although again the data only go up to 2014 (2013 if you want all of those yummy 4-digit industries!).

As far as I can tell, the HFE researchers have used the data above to compare pre- and post-crisis figures for fixed capital formation other than construction of dwellings, then calculated the shortfall between actual investment and some counterfactual extrapolated from pre-crisis numbers. This isn't a bad idea, as long as we know what we're working with. For the avoidance of doubt, this isn't 'economics' and neither is my commentary. It's playing with numbers to assist our thought process.

Extrapolating from a pre-crisis trend assumes that the level of investment by Greek businesses in the run-up to the crisis was sustainable and growth could have continued much as it had before - avoiding the excesses of 2007-8 but still on the same basic trajectory. That's unlikely. If we assume that the level of investment would remain constant at 2008 level turns out to be harsher than just mean reversion. Assuming a linear trend is more generous. Both estimates converge on a shortfall of some EUR89-EUR109bn between 2009 and 2014 (the last data available to researchers when the estimate was first produced) or EUR137bn to EUR108bn between 2009 and 2015.* That explains where the EUR100bn number came from.

An alternative might be to assume that 2008 was the peak of a credit bubble and use 'bubble free' figures that allow for a correction. I'm not going to bother with something detailed for the purposes of a thought experiment, so let's just take the 2001-08 (post-Euro) average as the benchmark for what 2008 should have looked like and assume that investment would then grow in a linear fashion based on the pre-crisis trend. This would produce a 2015 gross capital formation figure (ex dwellings) not far from the 2008 average. It would also mean a shortfall that is only about three quarters what the HFE estimated - about EUR73bn between 2009 and 2014 and EUR95bn between 2009 and 2015.

Here's what the various estimates look like when plotted against historical data:


Now if you find these counterfactuals a useful place to start, the logical next step is to apply the same kind of thinking on a sector-by-sector basis. Here a few things become glaringly obvious:
  • The big difference between my 'bubble-free' estimate and the simpler ones is precisely investment by real estate firms. By my estimate, there is no real net shortfall; the bubble has burst and that's all. By the estimates I think the HFE carried out, there is a huge shortfall. I think I'm right and they are wrong.
  • A lot of the investment shortfall is in the public sector. By my reckoning, EUR31bn of the lost EUR76bn of investment were in the broad public sector (including public administration, education and health) and about EUR21.5bn in public administration alone.
  • The other big contributors to the shortfall are shipping, sectors directly linked to domestic consumption - wholesale and retail and agriculture, and sectors linked to the real estate market. I would argue that this investment, totalling a net EUR40bn of the missing EUR76bn, cannot return while trade and the labour market remain subdued, but will likely be attracted to the sectors naturally as the former recover. 
  • This is some interesting arithmetic - the missing EUR100bn is actually EUR76bn and could in fact be mostly due to public investment cuts. I cannot be certain that all of this investment was productive or needs to be restored. It may take a much smaller, and cheaper, boost to trigger investment into much of the private sector- as long as it is allowed to reach the businesses that can put it to good use.
  • One sector's investment was, nevertheless, boosted tremendously by the crisis - "membership organisations" have been investing in commercial property and other non-housing construction in an explosion of spending that started in 2009. Since "membership organisations" or s.94 in the NACE classification include a) the church b) political parties c) professional and business lobbyists d) unions, I can come up with any combination of conspiracy theories. Unfortunately I can't get much more detail than this as Eurostat doesn't publish detailed enterprise statistics for NACE s.94.
To confirm some of this thinking I looked at the Conference Board's Total Economy Database  and its estimates of how disinvestment has contributed to the recession. Again, I have not tried to retro-engineer the Conference Board's Growth Accounting but used simple extrapolations instead. What I got what this: essentially disinvestment in capital itself accounted for just under 10 percentage points of lost growth. Most of the damage was done by a loss of multifactor productivity, which means that the Greek economy has, over the years of the crisis, become fundamentally worse at allocating resources. Surely, disinvestment has contributed to this, but it's hard to know by how much.




* I can create extrapolations up to 2015 for capital formation excluding dwellings because, even though I don't have an asset x sector matrix for 2015 I know that almost all the investment in dwellings during the crisis era has come from the real estate sector. I can therefore make a pretty accurate guess of the 2015 matrix.






Friday, 5 August 2016

STATPORN, STATPIMPS, STATWHORES: AN ABRIDGED HISTORY OF GREEK STATISTICS


The Greek debt crisis had been decades in the making when it finally came to a head in late 2009, triggered by a sensational revision of government deficits. But the events that led up to the ‘Greek Statistics’ debacle are still poorly understood both within the country and beyond. Half-truths and conspiracy theories have rushed to fill the void where evidence and reflection is lacking; and the fate of the country’s first-ever independent national statistics agency hangs in the balance.

“When a measure becomes a target, it ceases to be a good measure”

This little-known but highly quotable phrase is Dame Ann M. Strathern’s summary of Goodhart's “Law”, which stipulates that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”
 If Goodhart’s “Law” applies to anything, it must apply to government deficits: they are some of the most closely and regularly monitored statistics in the world, and the multi-trillion Euro government bond markets literally hang on every release. 

It is no surprise, then, that a wealth of empirical evidence suggests that European countries’ deficit forecasts and actual deficits are, indeed, tampered with – routinely, significantly, and predictably. A range of studies such as Koen and Van de Noord (2005)Pina & Venes (2007)Beetsma et al (2011)de Castro et al (2011), Alt et al (2014) or Gilbert & de Jong (2014) show that this tampering is the result of political incentives subject to both economic and political cycles, and is made possible by a combination of incomplete fiscal transparency and fiscal centralisation. Worse, the evidence suggests that the Stability and Growth Pact (SGP) and its 3% deficit ceiling (in effect since 1998) accentuated the political incentive to flatter the numbers. Post-SGP, forecast and early-release deficits have indeed fallen, but at the price of increasing stock-flow adjustments, and particularly the disguising of deficits as equity injections into state-controlled enterprises. Importantly, it isn’t Greece that drives these findings - the pattern holds when Greece is completely removed from the data.

So what was special about Greece?
This doesn’t mean Greece’s track record in this regard does not warrant further discussion. A full record of planned and actual deficits is available through Greece‘s Excessive Deficit Procedure (EDP) Notifications - and it raises significant questions. As Koen and Van den Noord (2005) and Beetsma et al (2011) demonstrate, Greece had been an outlier in terms of both accounting gimmickry and revisions to deficit figures since at least 1997, with ex-post revisions typically doubling our original reported figures. The effect of accounting distortions on Greek deficits was typically three times the size of the distortions of the next worst-performing country. 

As with other countries, (see 
Koen and Van de Noord (2005) Tables 4, 5, p. 15) the SGP reduced Greek governments' planned deficits – which indeed never crossed the 3% ceiling, and kept first-release deficits low as well. Only after 2009 did the real story emerge, through the ex-post reviews of our deficits during Eurostat methodological visits. These revealed a persistent, downward trajectory for the public finances.  Compliance with the SGP may not have instilled budget discipline, but it did give Greek finance ministers more power over their colleagues. As Prof. K. Featherstone, a long-time Greece-watcher, recalls, when calls for relaxing the fiscal discipline of the SGP were loudest in 2002, [t]he Simitis government [of Greece] did not call for a lessening of this external discipline: [T]he corset […] was a means of strengthening its domestic position when pressing for difficult reform.”
You might think Greece's performance with regard to fiscal targets has always been poor, but you'd be wrong. Historically, Greece is no stranger to such controls. The Greek state was dependent on foreign loans (and therefore on fiscal reporting to third parties) from day minus one; subsequently, we spent decades under fiscal monitoring and monetary straitjackets of some sort or other, of which the Euro accession criteria and the SGP were only the latest. If this is of interest, see Tuncer (2009) and Lazaretou (2004) for a review of this rich history. Ironically, it may be because of this history that the Greek people had, by 2009, ceased to be the intended users of fiscal data at all; from a citizen’s perspective, our country had one of the most centralised and opaque budgeting systems in Europe. Fiscal data were, ultimately, for foreigners.


In keeping with this institutional deficit, Greece had never, until 2010, had an independent national statistics agency or Government Audit Office. The now-defunct National Statistics Agency of Greece (ESYE) was a directorate of the Ministry of Finance until it was abolished in favour of the independent ELSTAT. This concession was only made in late 2009 by then-PM George Papandreou, in a futile attempt to stave off an imminent investor strike. 

In search of a hard constraint
With no real pressure from the SGP or the people to rein in spending, did politicians see anything as a hard constraint? An OECD review of budgeting in Greece, prepared two years ahead of the 2009 deficit revision, is very revealing. Budgeting was a line-by-line process, planning for only one year at a time, and leaving almost no role for Parliamentary scrutiny and no provision for ex post review. Accounting became increasingly poor as one moved away from central government. Audit lacked rigor and independence.
Most importantly, the country was run almost entirely on cash accounting: transactions were recorded when funds changed hands or bank balances changed; spending was attributed to the year in which the movement of funds took place.  This practice (by no means limited to Greece) clashed strongly with the accruals-based manner in which annual Greek budgets and EDP notifications were compiled. Under accrual accounting transactions are attributed to the year in which the state incurs a liability (eg. by approving a supplier’s invoice), regardless of when the cash changes hands.

This left Greece with two fiscal accounting systems – a cash-based one that was integrated, up-to-date and closely monitored, and a broadly accruals-based one that was purely for show. Ultimately, the real constraint on Greek government spending was the Government “cash plan,” which cascaded regular cash targets down to agencies on a line-by-line basis. In the post- Euro-accession era of cheap borrowing this could be stretched quite a lot – buyers could always be found for our bonds or T-bills, and suppliers could usually be convinced to wait a little longer for payment. In the most controversial case, hospital suppliers had waited for up to five years for invoices to be paid. They were eventually paid in 2010 – in bonds.

Un-gaming Europe's deficits

Critics of Eurostat’s handling of the Greek statistics crisis of 2009 often note that the Directorate had signed-off on the Greek 2004-8 deficit figures that it came back to eviscerate in 2009-10. If Greece was so far off the mark, and if it was only an extreme case of a much wider problem, it’s fair to ask why Eurostat found itself calling for changes so late, against its own earlier opinion, and in such a piecemeal manner.

The answer is that Eurostat's current auditing powers over national statistics agencies and its role as guarantor of the reliability of European statistics are themselves a product of the Greek crisis. Eurostat's September 2010 visit to Greece was the first time they were used. Eurostat only got those powers in June 2010, because, as the Commission explained, 'in 2005 [when such powers were originally considered, as a result of major revisions in Greece and Italy] several key member states were opposed.' Euractiv reports those as having been the UK, France and Germany. In the idyllic days of 2005, Eurostat helping itself to national statistical offices’ headcount on a whim and possibly imposing one-size fits all reporting standards sounded like a land grab. By 2010, however, it sounded a bit more reasonable.

Strengthened by the evidence of statistics gone wild in Greece, the European Parliament’s renewed proposals for auditing powers managed to get past the Council, though not without concessions. Commission proposals that member states punish civil servants for misreporting data were still defeated by finance ministers who saw them as an unacceptable infringement of national sovereignty.
  
The Greek debt crisis – an alternative timeline
The Greek statistics crisis began in earnest with the second EDP notification submitted by ESYE on 21 October 2009, revising Greece's 2009 deficit forecast from EUR9.3bn (3.7% of GDP) to EUR30.1bn (12.5% of GDP). Submitting two notifications for the same semester is not normal practice; however, just two days after the first notification of 2 October, George Papandreou’s PASOK won the 2009 legislative elections, and ordered a review of the public finances, and of our deficit figures.
Whatever PASOK’s motivation for revising the 2 October estimates, the rushed review was so flawed that it was rejected by Eurostat. Faced with a wide range of missing data and (as they claim) pressure from ministers, ESYE staff improvised badly. A substantial amount in hospital liabilities incurred between 2004-2008 was discovered, but lacking any means of allocating them to individual years, ESYE had chosen to lump them all into the 2008 deficit. Within a year the error had been amended, and roughly EUR800m of previous years’ spending was reattributed to the correct years. This was small fry compared to the EUR11bn by which the 2008 deficit was eventually to be revised up, but it presented a ‘smoking gun’ to conspiracy theorists, who saw evidence of a plot to inflate the Greek deficit. Check out the Oct 2009 blip in the charts below - and tell me whether you think it really makes a difference.


A string of credit downgrades followed the October 2009 revisions, with all three major credit agencies downgrading Greece by December.  Although their ratings were still investment-grade (and thus optimistic in hindsight), the timing was disastrous. Greece had lifted its head above the parapet just as Dubai's unfolding sovereign debt crisis had investors wondering who would be the next sovereign to go bust. Foreign banks pretty much ran for the exit.
The post-mortem for Greek statistics came in early January, with the Greek government’s expert report and Eurostat’s account both noting the intense interference of Greek government officials in ESYE’s work. ESYE was finally abolished on 9 March 2010, as our new statistical law came into force, and ELSTAT established as our first ever independent statistics agency. This was followed, at the end of March, by yet another Eurostat methodological visit which helped produce the April 2010 EDP Notification. Greece's 2009 deficit now rose from EUR30.1bn (12.5% of GDP) to EUR32.3bn (13.6% of GDP) and predictably launched another round of downgrades, below investment-grade this time.  What the banks had seen coming in October was now becoming obvious to all.



Ex-IMF man A. Georgiou, took over as president of ELSTAT on 2 August, and his appointment was almost immediately followed by two of Eurostat's methodological visits. It was only after their conclusion, on 15 November 2010, that Eurostat was able to publish Greek fiscal data on 2004-2009 without reservations again.

The origins of a revision target
What caused such frantic activity by the old ESYE in October 2009, and why were such significant errors made in the process? My guess is that by early October 2009, the old ESYE leadership knew that producing deficit figures below ca. EUR30bn for 2009 and EUR20bn for 2008 would cost them the new Government’s confidence and possibly the international community's remaining goodwill.
Greek governments had form in using fiscal statistics reviews to discredit their opponents, or as an excuse for reneging on campaign promises. But like previous reviews, this one too was justified, at its core. Foreign analysts could see for themselves how much debt Greece was issuing, and it was way out of line with our deficit projections. For example, by Nov 2009, net issuance (debt issued minus debt repaid) for the year was estimated at EUR35.4bn by Danske Bank. This was not tactical over-borrowing. Greece was raising funds in the teeth of literally the biggest bond sale in human history. Our finance ministers in 2008 and 2009 must have known that, and anticipated rising borrowing costs – but they had no choice.
Either way, the rush and political pressure to produce numbers in line with issuance no doubt contributed to errors. But the October 2009 notification, for all its flaws, did not overestimate the headline figures of the 2008 and 2009 deficits. We now know that it underestimated them, to the tune of 4.7bn and 6.1bn respectively.

Conspiracy theories grow
By the end of 2009, a persistent conspiracy theory was starting to grow out of the protests of Greece’s conservative ex-ministers and the car-crash manner of the October 2009 deficit revisions. Ignoring the net bond issuance figures, conspiracy theorists claimed that the 2009 deficit was in fact closer to 7.9% of GDP. However, with the active assistance of Eurostat, it had been inflated in order to cause the country to lose access to the capital markets, then pave the way for an IMF bailout and the loss of national sovereignty; and it was finely calibrated in order to scapegoat the country as the most profligate in Europe, just ahead of Ireland, thus cowing the Greek people into submission. 

ELSTAT and Georgiou have spent the last five years fighting these allegations even though neither was even around during the decisive October 2009 EDP. Three different court cases on the matter have been dismissed; two separate Parliamentary Committees have examined the case; even Georgiou’s email has been hacked in a vain effort to obtain incriminating evidence against him (more detail here).

Meanwhile, the world's statisticians have been unanimous that the case against ELSTAT is, to quote the International Statistical Institute, 'fanciful.' More than half of all ethics-related interventions by the ISI in recent years have been about Greece and in ELSTAT's favour. An international Good Practices Advisory Committee has given the agency a clean bill of health for 2013 and 2014, while deploring Greek governments’ renewed efforts to tamper with our statistics. More recently, ELSTAT passed a peer review with flying colours, and the European Statistical Governance Advisory Board heaped praise on it as an example of Greek reform done right.

Increasingly, however, ELSTAT’s independence was beginning to rankle, and conspiracy theorists were getting desperate. ELSTAT's employee Union took issue with a compulsory 
confidentiality attestation that obliged staff to not reveal survey respondents' personal information to anyone, including the courts. Taken out of context, this was dressed up as a gagging clause, meant to protect ELSTAT's President from what conspiracy theorists saw as his inevitable future prosecution. Two Greek MPs even demanded an explanation of the Justice and Finance Ministers.

Who buys this stuff?

In an excellent post on the subjectSigrún Davídsdóttir asks how come the Greek body politic has bayed for Georgiou's blood when he very likely presided over the production of the first accurate deficit figures in two decades; yet has never called to account the former ESYE heads who reported artificially low deficits. The reason is that much of the Greek public either believes the inflated deficit myth or desperately wants it to be true; and as ELSTAT, for all its independence, is institutionally weak, kicking it is a costless way of earning brownie points with that part of the Greek electorate.

Barring PASOK, which had no choice in the matter, every major Greek political party has rushed to exploit the deflated deficit myth. Ex-PM Antonis Samaras repeated it outright in 2010, 
in the first of his Zappeion speeches (in Greek here)though he cravenly dropped this line immediately upon taking power. Syriza's Alexis Tsipras called the 2009 deficit review a 'premeditated crime,' and repeated the accusations in 2014, while in January 2015, one of his MEPs demanded a written answer from the Commission on 'the ELSTAT scandal'. The populist right Independent Greeks not only accept the myth, but signed its chief advocate  up as a party member, gave her a salary as part of the un-google-able 'Independent Greeks Institute,' then fielded her as an MEP candidate in 2014. The Greek Parliament's Debt Audit report repeats the accusation unreservedly. 

Simply put, it has been impossible to come anywhere close to power in Greece since 2011 without at least paying lip service to the 'inflated deficit' myth, because a highly contested part of the Greek electorate believes in it. So entrenched is deficit denial, that safeguarding the independence of our statistics agency ended up as one of Greece's prior actions agreed with creditors in the July 2015 agreement – after which A. Georgiou finally resigned his post.

The early Greek Crisis Propaganda War

To understand 
why deficit denial runs so deep in Greece, you need to think back to Greece's last pre-bailout days. There had been, until 2009, very little public discourse on the sustainability of Greek debt, and Papandreou’s PASOK could not come to terms with what was happening, let alone explain it to voters. Instead, both pre-bailout and post-bailout, they blamed evil speculators, aided by the international financial press and by credit rating agencies, for damaging Greece’s credibility. Their narrative stuck because, to the majority of Greeks, the crisis had appeared out of nowhere and needed an external cause to explain it.

Throughout early 2010 the main villain of the Greek anti-austerity camp was neither Angela Merkel nor Wolfgang Schaeuble, but the IMF. The eventuality of IMF involvement in a Greek bailout had for months been portrayed as a defeat for Europe, both in Greece and abroad. The IMF had form in imposing harsh austerity; its presence was the hallmark of third-world dependency; and as a US-based institution it was distasteful to the left, the populist right and, to some extent, Greek Euro-federalists. So even if the bailout turned to be inevitable, the reasoning went, it was treason to invite the IMF into Europe and into our homes. So when Georgiou took over as ELSTAT president, many chose to see the presence of an IMF man at the helm of the agency as part of a master plan.

As the IMF staff made themselves at home in Athens, part of the Greek blogosphere was going into overdrive. One of the 
most viral Greek blogposts of all time denounced Papandreou as the half-Jewish son of a traitor (former PM Andreas Papandreou) who had been paid $100m by Chase Manhattan to destroy Greece. The conspiracy theorist blog, Olympia, soon followed up with an unstoppably viral hoax interview falsely attributed to Prof Mark Weisbrot, which called on the people to rise up in graphic violence and drive out both the IMF and the domestic elite.  As exotic as they sound, news sources like this wielded enormous influence. One of Olympia's most prolific writers, endorsed wholeheartedly by the blog, is Independent Greeks MP D. Kammenos, famous for a torrent of antisemitic and homophobic remarks which cost him his role as deputy minister for infrastructure in A. Tsipras’ 2015 cabinet, one day into the job.

Courting the populist right
The deficit-denier fantasy was a balm for the wounded pride of populist right-wing groups who, in the summer of 2010, coalesced into the nationalist contingent of the Greek Indignados known as the Upper Square. Shamed by suggestions of Greek insolvency, they resented the sneering tone of foreign editorials. They wanted no part of the austerity to come, and none of the blame for it.The Upper Square's traditional allegiances had been with New Democracy - the party on whose watch the deficit had got out of hand - and the National Orthodox Alert - the only right-wing party to have voted for the first memorandum. They were desperate to return to the moral high ground, and to a familiar narrative of heroism, resistance, victimhood and betrayal. An inside job orchestrated by PASOK on behalf of the dark forces supposedly in charge of the IMF fit the bill perfectly.

But Greece’s populist right has little by way of actual ideology and are 
opportunistic voters, which makes them attractive to parties across the political spectrum. These are the people Syriza officials were going for when they choose, back in 2013, to throw in their lot with the Independent Greeks. These are also the people Syriza officials had in mind whenever they have warned that Golden Dawn will sweep to power if their own coalition is weakened. With time, these electoral tactics also dovetailed neatly with Syriza's gentlemen's agreement with conservative ex-PM Karamanlis, who has taken a vow of silence since leaving office but somehow remains a power broker even in today's New Democracy.

The Greek statistics drama is a cautionary tale of how difficult it is to build, and how easy it is to damage, institutions in a democracy. Whether it’s the SGP deficit ceiling or the independence of a national statistics agency, institutions need to take root in the body politic and in the people to be of any use; and, in Greece at least, politicians often sacrifice institutions in the pursuit of votes without realising the damage they are causing. Syriza hoped that Georgiou's departure would satisfy deficit deniers while allowing the government to honour its obligations to our creditors. It did not, and ELSTAT’s fate was soon to be shared by other independent agencies, and indeed many of the remaining checks and balances in the system; including many that post-crisis governments had only recently introduced in pursuit of reform.