Athens, we have a problem.

I missed seeing Paul Krugman on Fareed Zakaria’s show on CNN on July 19. The transcript is worth looking at, not because it’s that informative about Greece but because it’s informative about how–and how carefully–Krugman thinks about Greece.

On austerity:

I mean, really nothing has changed in the strategy, which is still cut, cut, and, you know, austerity your way to back to solvency,

Krugman has been completely obstinate about distinguishing between austerity in the form of budget cuts and austerity in the form of tax increases. Notice that, in describing austerity, he says “cut, cut.” Yet the new austerity plans involve huge tax increases; those are not cuts–they’re increases. Here’s CNBC:

The sales tax that Greeks have to pay on a range of goods and services–from every products [sic] to taxis and restaurants, rose on Monday [July 20] from 13 percent to 23 percent as the Greek government implements reforms in return for a third bailout package.

It is estimated that the new hikes will cost Greeks 1,500 euros ($1,625) per year on average in an effort to generate 5 billion euros in revenue for the government, according to Greek newspaper Proto Thema.

On the referendum:

ZAKARIA: Ken Rogoff on last week’s show actually said that you bared [sic] some responsibility here, because you advocated that the Prime Minister of Greece voted no, supported the no proposition, the referendum he took, in a sense defying the European creditors. The result of that was that he got worse terms. Do you think that’s fair?
KRUGMAN: Well, it’s certainly true that – I assumed – it didn’t even occur to me that they would be prepared to make a stand without having done any contingency planning. I…

Get it? Krugman advocated a No vote because he just assumed that they had a Plan B.

ZAKARIA: You assume that Greece had an exit plan from the Euro?
KRUGMAN: Yes, that they – not that – at least something they could hold up, “this is what we will do if we can’t get any new cash.” And, amazingly, they were – everything hinged on them – they thought they could simply demand better terms without having any backup plan. So certainly this is a shock. But, you know, in some sense, it’s hopeless in any case. They – with – they – it’s not as if the terms that they were being offered before were feasible. I mean, the new terms are even worse, but the terms they were being offered before were still not going to work. So I, you know, I may have overestimated the competence of the Greek government.

Yes, Krugman does tend to overestimate the competence of governments.

On regulation:

ZAKARIA: Steve Rattner and several others – I mean, this is the general view in the business community – feel, look, the truth of the matter is, the fundamental problem is Greece is massively uncompetitive – is a highly overregulated economy. Its retirement – you know, if you look at its retirement age, if you look at areas like pharmacy, you look at, you know, vast swaths of the Greek economy, there’s too many regulations, very business unfriendly, and a Swiss cheese-like model of tax collection, and that if you don’t reform that – and that’s what really the Germans are asking for, more than austerity.
KRUGMAN: Well, let me say on – the one about tax collection, while it’s true that there are a lot of holes and a lot of evasion, Greece, nonetheless, does manage to collect a lot of taxes. People, you know, look at it and say, well, they must be, you know, they can’t be collecting any money. In fact, they’re collecting, you know, a higher share of GDP in taxes than the United States is, one way or another. So it’s not as if they don’t manage to raise revenues. Maybe they should do it better. They should, obviously. As for all the other stuff, yes, Greece is an over-regulated, problematic economy – not as much as it was. It’s done much more reform than people think. But also it – all of these structural issues –
ZAKARIA: Structural reform, not just cutting budgets?
KRUGMAN: They’ve done a lot of structural reform. You look at the World Bank survey of doing business, and Greece is not a great place, but it’s not as bad a place as it was. So – but the main point is, all of these things were true of Greece 10 years ago, 15 years ago, but Greece was not in the midst of an incredible Great Depression-level slump back then. What – so these are part of the background noise, if you like. It is, in fact, the Euro – the trap that the Euro has turned into and the austerity policies imposed in an attempt to keep Greece in the Euro that are responsible for the disaster that’s taking place now. It’s like looking at – you know, they’re – every country has problems – Greece maybe more than some, less than others. But it’s the Euro that is responsible for this disaster.

Good for Zakaria for pointing this out. Krugman does make a good point that those regulations were bad 10 years ago but the Greek economy was not doing as badly 10 years ago. But they had the Euro ten years ago too. I agree with Krugman that the Euro is a huge culprit, but Krugman minimizes the problem of regulation. Transparency International ranks Greece, by the Corruption Perceptions Index, at 69th out of 175 countries rated. Germany’s? 12th. Canada? 10th. (Low numbers are good.) Economic Freedom of the World puts Greece at 84th. Germany? 28th. Canada? 7th. (Again, low numbers are good.) Narrowing it down to regulation, Economic Freedom of the World puts Greece at 144th, Germany at 31st, and Canada at 10th. Athens, we have a problem.

HT to Francois Melese.