More Greek barter evidence for monetary disequilibrium

Just one small snippet of news from Greece (HT MacroDigest), but to my mind a very important extra bit of evidence that confirms the monetary disequilibrium approach to understanding recessions:

"All employees of the super market chain, which counts some 150 stores country-wide, get paid irregularily, she explains.

"Things took a turn for the worse about a year ago. At first we were paid with a month's delay, we didn't complain much. Then the (unpaid) sums accumulated."

In May, already three months in arrears, the company asked employees to accept half their salaries in 20-euro vouchers to be used in the super market.

"They think I will pay my taxes with flour and sugar,» Zarkamela said." (bold added).

You don't get barter because real wages are too high, or because real interest rates are too high, or because real exchange rates are too high, or because there's been a negative productivity shock. You get barter because the quantity of medium of exchange is too low. You get barter because there's an excess demand for the medium of exchange, so the deal is: "I will only buy from you if you buy from me, so we don't need to use a medium of exchange to trade with each other".

I have blogged about this before. And again. This post is simply to add one more bit of empirical evidence.

(I have stopped blogging about the Eurozone, because I don't have anything to say that others aren't saying better than I could. But I am still watching it, and still pessimistic, even though my earlier pessimism was premature.)

Comments

[Ralph Musgrave]

I agree with Nick’s basic point. But just to be strictly accurate, a fair amount of barter takes place even where the “quantity of medium of exchange” is adequate. E.g. marriage involves a lot of barter: perhaps husband does the gardening and wife does the cooking or the other way round. Plus much of the trade between communist counties in Eastern Europe before the collapse of communism was on a barter basis. Plus even some deals between multinationals in recent years have been on a barter basis.

I.e. Nick’s point needs re-phrasing to something like: “there is a significant increase in the amount of barter where there is a shortage of the medium of exchange”.

[Nick Rowe]

Ralph: true. Sometimes, there is a simple coincidence of wants, so barter works fine, and monetary exchange isn't necessary even in normal times.

[jt26]

Thinking about Nelson Mandela, I'm wondering if there is an alternative theory, let's call it boycott theory, which is where South Africa comes in. Let's say employers have a desire to only hire the "top 10%" and refuse to hire anyone less talented. They would rather pay 1.5X the salary then hire someone less talented. (This sounds like a fable and parable, but is in fact quite prevalent at many companies.) They do this, not because of a lack of MOE, but because their experience has shown that below a certain marginal productivity, the total company productivity decreases. So, the D accounting student can't work at Deloitte Touche, but instead becomes a bookkeeper at a local hardware store. The problem with long-term unemployed is they are being boycotted due to age or just being unemployed. The solution is a segmentation of their skill (the bookkeeper) or economy (a local economy of businesses staffed by formerly unemployed people. The latter is quite difficult, but sometimes does happen, e.g. immigrant/minority businesses, ex-prison, ex-military.

[Nick Rowe]

jt26: but that wouldn't explain why we see more barter in recessions.

[jt26]

Wouldn't it be possible if, say in an RBC theory, debt and capacity build up, and then at some threshold businesses decided they wanted to freeze their marginal productivity by not hiring new grads or "low performers". Other businesses or their competitors would see this as a signal to do the same, since lowering their marginal productivity would hurt relative profits?

[Nick Edmonds]

It's probably also reasonable to assume that the supermarket does not have large holdings of short term non-checkable bank deposits, so is it obvious that it is medium of exchange that is lacking rather than liquid financial assets generally?

[Nick Rowe]

jt26: suppose it is possible. But it still wouldn't explain why we see barter.

Nick Edmonds: the supermarket may lack many things. And the workers at the supermarket may lack many things. But barter only solves a lack of medium of exchange (though, by solving that lack of medium of exchange, it indirectly may solve some of those other lacks too).

[genauer]

I find it actually pretty cynical to use this story for waxing about "Barter".

It is not paying salaries, plain and simple.

[Mark A. Sadowski]

"You don't get barter because real wages are too high, or because real interest rates are too high, or because real exchange rates are too high, or because there's been a negative productivity shock. You get barter because the quantity of medium of exchange is too low."

Yep. According to the Bank of Greece, the M3 measure of broad money was €189,816 million in October down 27.3% from its peak of €261,090 million in December 2009:

http://www.bankofgreece.gr/Pages/en/Statistics/monetary/monetary.aspx

[Miami Vice]

Its not barter its store credit. There was no direct exchange of goods and services for goods and services they even say so. What do you think a voucher is? Jesus. In fact I would argue its evidence for the contrary. They created credit no one resorted to barter

[Miami Vice]

They created MOE. I bet their MOE trades at a discount to Euros.

[Odie]

Thinking about it those employees should actually be glad about that deal. If the store owner would have followed standard theory, they should have just lost their job and would need to reduce their desired wages to find employment again.

Germany is really out there to destroy the southern economies just that they can preserve their precious savings. The reelection of Merkel is the worst thing that could have happened to Greece although I am not sure that the social democrats would have changed policies much. Surprisingly, the left and green parties seemed to best understand what was going on based on their party program.

Isn't the question now on how to get the MOE back into the Greece economy to get it functioning again? I doubt that barter system will be working for an extended time. The store owner should have a hard time to "barter" with his suppliers. Next step will probably be some kind of "shadowbanking" where companies make "loans" directly to their customers by supplying their products.

[Squeeky Wheel]

If the market is paying more in vouchers than the minimum store expenditure by any employee, then they are not just bartering, they are also reducing the liquidity value of pay. (I hope that sentence made sense). This is supported by the employee's comment - he wants the e20 to pay tax, not buy food, so the voucher is less valuable than the cash. As Miami suggests, they've converted a higher value currency into a lower value currency. So it can be interpreted as a pay cut - a way of getting around nominal wage rigidity (though the employees seem to have noticed).

[Kevin Donoghue]

It's a stretch to say that this is "evidence that confirms the monetary disequilibrium approach to understanding recessions", when what appears to be happening is simply that employers are defaulting on their contractual obligations (maybe because their only alternative is to sack people).

I'm all for reading Clower, Malinvaud etc. But this story doesn't strengthen the case for doing so. It does strengthen the case for not reading freshwater macro of course.

[Nick Rowe]

Kevin: I can't understand why you say that doesn't strengthen the case? When firms are sales constrained, so we are on the constrained labour demand curve, there are (potentially) gains from trade if the firm can pay the workers in its own output. Barro Grossman point B(?).

Sqeeky: it's not really a currency, since it can only be spent buying goods from the employer. Yes, it's worth less than currency. But, why did they do barter rather than cutting wages instead? Monetary disequilibrium explains why.

[Kevin Donoghue]

Nick, I'd say you had a point if the supermarket was offering to pay for current period labour input with vouchers in lieu of cash. In fact, however, it is offering to pay for past services in a currency other than the one it had contracted to pay. I once had a tenant who said I could keep the TV aerial he had installed on my roof (without permission) in lieu of the rent he owed me. You'd hardly call that barter. This is no different really.

[Nick Rowe]

Kevin: OK. I understand you now. So you see it like a default, in which the bondholders (the workers in this case) were paid 50% in the creditor's assets. I was interpreting it differently. The workers have seen this happen once, and will expect it to happen again. It's implicitly a new wage contract, where they expect to get paid 50% in kind in future. They would prefer to keep working for 100% cash, but 50% cash and 50% goods is better than any pure cash alternative they could actually get.

[Kevin Donoghue]

Nick, schemes like this Irish "favour exchange" seem to me a better illustration of your point, in that there's no default involved. I'm not sure whether the problem is best seen as shortage of money, shortage of credit, or a defective price mechanism. It's a bit of all three I suppose.

[Kevin Donoghue]

Incidentally we're told the system described on that site "began in 1979 on Vancouver Island, Canada during a severe economic depression and has flourished best at times of economic hardship."

[Nick Rowe]

Kevin: I see that "favour exchange" as being a medium of exchange. It also illustrates my point. If I had clear evidence that schemes like that were countercyclical, I would count that as evidence for the monetary disequilibrium theory of recessions.

But outright barter can be seen as even better evidence, simply because barter is so inconvenient. They wouldn't do barter unless it overcame some really big problem.

[Nick Rowe]

Kevin (our comments crossed): "Incidentally we're told the system described on that site "began in 1979 on Vancouver Island, Canada during a severe economic depression and has flourished best at times of economic hardship.""

AHA!! Bingo! They say it is countercyclical! Well-spotted!

[genauer]

"Arvanitidis super market in Katerini" is a classical case of "when Walmart comes to town"

A small, inefficient, local northern Greek retail chain, gets competition of Carrefour and "Lidl - International Chain (German owned hard discounter)" (wiki/List_of_Greek_supermarkets) and others, with prices about 30% cheaper

Getting desparate, "bringing the retail chain to sell products that were produced in its storehouses under the name of famous brands." (wiki/Arvanitidis)

Not paying salaries anymore, desperately trying to force at least the own employees to buy in the own stores with those vouchers, absolutely no voluntary barter in that. Before the inevitable bankruptcy.

But to see the reality, one needs to know a little bit of the subject at hand

[Min]

"In May, already three months in arrears, the company asked employees to accept half their salaries in 20-euro vouchers to be used in the super market."

Hmmm. If the nominal value of the vouchers was equal to their whole salaries, while they still got half their salaries in actual Euros, might that be an acceptable deal?