Death to structural reform: Why the latest demands on Greece are bogus

Paul Krugman, recently in Greece, reports that the talks between the government, led by the anti-austerity party Syriza, and Greece's eurozone overlords are on the brink of collapse, once again casting into doubt Greece's continued membership in the eurozone. One point of disagreement is a classic one: structural reform. In this case, that phrase means additional large public sector cuts, which Syriza would very much like to avoid.

"Structural reform" is an interesting phrase. Any reform deemed "structural" would seem to imply a general focus, but in practice its scope is highly limited. By examining areas that are mysteriously overlooked by the reformers — like highways — we can see how overstated the case for such reform is.

The whole ideology of structural reform is supposed to be about laying the foundations for economic growth. By getting rid of "rigidities" that foul up the workings of The Holy Market, nations can get the fast growth that leads to riches and well-being, as all right-thinking readers of The Economist instinctively understand.

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Therefore, your average structural reform package privatizes state-owned businesses, deregulates the economy, gets rid of price supports and trade barriers, reforms taxation towards broad bases and low rates, and imposes austerity to balance the budget. This last one typically means sharp cuts to social insurance to pay international creditors — which is precisely at stake in the Greece negotiations, with the IMF demanding more cuts to pensions and so forth before it will release the next batch of aid money.

Let's set aside for the moment the fact that the IMF's record in promoting growth with structural adjustment loans is "not good," as well as the fact that just about all money given to Greece will be immediately turned into debt payments as part of a sneaky, ongoing bailout of French and German banks. Let's look deeper.

Structural reform, at root, is supposed to be about efficiency. On its face, this doesn't seem too implausible. Performing operations faster and with less work surely creates economic growth, and it's not ridiculous to think that reducing discrepancies in taxation, for example, might do that to some degree.

But consider a few items that are virtually never on the list of structural rigidities. Car and highway systems, for instance. In America, as of 2012, almost 94 percent of commuters drove to work alone — which leads directly to colossal inefficiency in the form of traffic jams. A 2011-12 study found that the average commuter spends 38 hours stuck in traffic, costing $121 billion overall in the form of lost time and wasted fuel.

Highways don't usually operate under free-market principles, either. When chronic traffic jams happen, the response is not to introduce congestion pricing, but to blindly keep expanding capacity, which just makes the jams bigger due to induced demand. Parking is arguably worse: Most American cities have enormous overcapacity due to mandated parking in the building code, even while people circle the block endlessly in downtown areas due to underpriced street spaces. Meanwhile, neighborhood spots are allocated by Soviet-style rationing.

These problems can be resolved, but just on the straight engineering merits, cars are a poor choice for transporting large numbers of people in a confined space (e.g., a city). On generous assumptions, one lane of freeway can transport about 2,900 people per hour, while in a similarly sized space a heavy rail system can move upwards of 55,000 per hour.

One can make similar points about the whole suburban system, supported as it is by enormous distorting subsidies for the rich, which are enforced by draconian and inefficient building codes and are utterly reliant on the janky highway system.

My point is not that pro-suburb policy is bad (though it is), but that it receives no attention from the structural reformers. There are some free-market types who agitate against the problems I've described, to be sure, but they are a tiny minority next to those working against labor unions, public pensions, and price controls. More to the point, they do not command anything close to the massive coercive apparatus that has been bludgeoning Greece and Spain for the last five years.

It simply beggars belief that the structural rigidities encumbering Greece's economic prospects are so bad that it's worth crushing the size of its economy by a quarter right now. Remember that most Greek debt is now owned by institutions like the European Central Bank, which has no inherent need for repayment. If growth in itself were the real motivation for austerity, then the first item on the agenda wouldn't be "create world-historical amounts of anti-growth."

But on the other hand, the lack of attention to highways also calls into question the whole idea of economic efficiency in the first place. America's huge highway and suburb binge also happened immediately after World War II — which coincided with the country's greatest-ever economic boom. Efficiency isn't a bad idea, but structural reformers greatly underrate the idea of simply muddling through. Sometimes attempting to wrench a society in line with the frictionless economic models is less important than keeping a nation on its feet.