The case for less Government (in Greece)

Its standard textbook stuff that during a recession it is inconceivable to reduce the government deficit as this withdraws government stimulus from the economy and leads to a deeper recession. So many countries tend to increase government spending and thus expand an existing deficit during recessionary times and it is hoped this will be reversed during the boom cycle as tax receipts increase and the deficit is automatically reduced eliminating any increase that was thereby created.

Now lets take by way of an example the US and its reaction to the great recession. The government deficit ballooned as the government decided to bailout its banking system which incidentally was to a large extent responsible for the great recession. To avoid world Armageddon the government together with the Fed embarked in an infinite addition of liquidity by stepping in and buying all distressed assets. This the US could do whilst running an existing large deficit and debt because of two reasons.1-The technical reason- It had its own currency and the Fed could expand its money supply theoretically without limit and the government could issue as much debt as it wished as long as the market had the appetite for it and it did 2- The practical reason- The market was not adversely affected by its actions namely a-A potential rise in interest rates if the market perceived an irresponsible Fed and government driving inflation and inflationary expectations to the roof  b- A collapsing dollar as the market lost confidence in the stability of the US economy and c- The ability by the US government to finance its expanded deficit, in other words will there be the required demand to absorb this new issuance without adverse consequences? The answer to all these questions was a resounding yes. The Government and Fed successfully financed their increased balance sheets without driving rates higher, on the contrary rates fell as the economy experienced a liquidity trap, the financial system was saved, the economy stabilised and it is currently on a slow growth tragectory, restructuring but on a much healthier footing.

Time to visit Greece. Like the rest of the world Greece experienced the great recession but during an inevitable hangover following the more than 7 years of partying. The result an overhang which amounted to a deficit of 15% and a debt of  150% of GDP. To make matters worse it had lost its independence in terms of having its own currency for it chose to embrace the euro stability and the government was soon faced with the inability to borrow in international markets to finace its unsustainable deficit. Greece had then two options either default and exit the euro very much along the route taken by Iceland or resort to a rescue engineered by the Troika and it chose the latter. It was then forced to shrink its deficit to a euro wide acceptable level and reduce its debt by a combination of haircuts, privatisations and restructuring. The problem with this recipe is that it goes contrary to economic dogma as outlined above. This shrinkage in the deficit would throw Greece into a worse recessionary trend with adverse effects on both the deficit itself but also steepen its negative growth trajectory and it did. Clearly there was no alternative Greece had outstretched its finances and had to realign itself with the rules like other more prudent members of the economic club it had chosen to be a party of. But did it at least follow the right recipe? This is where, I believe, the mix of policy ingredients was mistakenly chosen. The government decided to cut government spending to some degree, reducing wages and salaries in the public sector but not enough, embarking in a tax raid out of all proportions particularly with respect to the sensitive property sector to fill the void. But since the government had its hands tied and it had to shrink the deficit why did it decide to tax as opposed to cut government spending? It was clearly a political decision unable or unwilling to confront the government employee rage and the self inflicting wounds that would have resulted from the redundancies created in the public sector. Purely put the civil servants were opposed to the loss of their own privileges associated with their positions so they chose the road of least resistance with the help of their well entrenched propaganda. The problem with taxation as a tool to reduce the deficit is that 1- It is deeply recessionary whichever part of the economy it is imposed upon whether capital, income or profits 2- It is a major disincentive for new investment whether local or international and thus future growth is impaired in an already highly recessionary environment.The importance of investment cannot be overemphasized for it is this that is the driving engine for long term growth and finally  3- It increases tax evasion as already outstretched businesses and households try to make ends meet. So in part it is self defeating.

So what is the alternative? A policy aimed at reducing more aggressively government spending and laying off public sector employees and the redundant institutions established by the ruling paties to earn them votes but which serve no productive purpose may seem a difficult approach but it has enormous benefits. Instead of increasing taxes the government, because of a decline in spending,  is now in a position to start reducing taxes particularly if focused in areas where Greece has its comparative advantages, tourism, agriculture, shipping, etc thus providing incentives for PRIVATE capital to replace the shrinking government sector. The magnitude of this private investment can be extraordinary and can exceed in many multiples any loss in deficit spending with highly expansionary effects for the Economy. Thus private investment is mobilised from 1- domestic sources being money transfered abroad in search of security from taxes and bankruptcy and 2- international sources as Greece becomes an investment destination for international investors. It also allocates factors of production, in this case public employees much more efficiently. They leave their generally acknowledged unproductive public jobs and train to become semi skilled or skilled workers and be absorbed by the expanding private sector. This way they now serve a productive private enterprise and thus allocate their labour much more efficiently. It also improves individual freedom as power is decentralised and the freedom to create is enhanced.

Clearly therefore if Greek Politicians want their country to prosper they should stop serving their narrow minded self interests and look at the country's long term prospects.   


Mr Stournaras and bad Economics.

I have been compelled to write this blog having watched a couple of days ago an interview by Stournaras Greece's economics minister on television and his attempts at explaining his economic policies to the Greeks.

In particular, a number of his comments such as " The property tax is the fairest tax on the Greeks" and comparisons with the UK to the tune of " The property tax is much higher in the UK than Greece".

I will attempt at explaining how wrong he is on both counts. I will confine myself to his comments on the  property tax only because I believe it has in itself been responsible for much of the current destruction of wealth in the Greek economy and the annihilation of the middle class in total contrast to his assertion and hopefully prove that Mr Stournaras is single handedly responsible for Greece's current malaise. In short Stournaras is bad for Greece's health particularly because he fervently believes in his own fallacy.

We all know by now that Greece had been partying in the new millennium with borrowed money and anyone with the absolute minimum knowledge of basic economics understands that such profligate behaviour can quickly become unsustainable and it did creating a gigantic debt and as a consequence an inability to service it in a great recessionary environment. The net result insolvency and ultimately bankruptcy. To the rescue the EU and the Troika with their well known recipes.

Now Greeks had always been prudent savers and a substantial part of their life time savings had manifested themselves into property. In fact Greeks have one of the largest percentage of property ownership amongst OECD countries vis a vis its total population. This number is close to 80%. By way of contrast in the UK where house ownership is also popular owner occupancy is 65%. It was estimated and this is very rough that perhaps more than  25% of Greece's GDP is its black economy and that if the government were to crack down on tax evasion it would have solved  a considerable part of its budget gap. Unquestionably with such high percentages of owner occupancy and the black economy it follows that a measurable amount of this money must have gone to buy property in Greece. Now one of the basic pillars of Stournaras tax on property is this, that since a substantial part of the black money must have been invested in property we must tax property ownership to catch this laundered money. When first confronted with this purportedly equitable proposition my reaction was there is some merit behind it, however it has MAJOR disruptive and destructive flaws. First it unjustly taxes the owner who has been a responsible and tax paying citizen,who has bought his property on taxed income and has paid a hefty more than 10% to the government by buying it . Second it has a recurrent element which is highly destructive. The government should be taxing this shadow untaxed money once not annually ad infinitum for then it shrinks the Net Present Value of these assets and thus destroys THE MOST IMPORTANT STOCK OF CAPITAL IN GREECE with its banking and other repercussions.Third, it is  highly unjust as it is a tax on a non income generating asset, in most cases, which maybe the largest if not the total saving of many households. Its effect is the wiping out in property values as potential buyers differ purchases owing to the punitive nature of such a tax and  more importantly driving frugal households to annihilation as they become unable to sell their liability generating asset in a collapsing market to pay their taxes  leading to a dead end and confiscation. In other words Mr Stournaras has created a monster with devastating vicious circle consequences for Greeks's wealth and their well being.  

Returning to the proposition and Mr Stournaras's assertion that the UK's property tax rate is higher than that which may be applicable in Greece here Mr Stournaras is totally misinformed to say the least. There is no tax for owning a property paid to the UK government and there is only a UK council tax paid to the municipalities of each property. This council tax very much depends on the location of the property but is nowhere close to the level of tax proposed by Mr Stournaras not even 1/10 of that level and of course is payable to the council not the central government.

It is about time Mr Stournaras wakes up to the follies of his property tax and revisits his Economic textbooks.