The Greek simple

The Eurozone does not seem to grasp the messages being sent from Greece's last election results and Syriza's prominence to government.

1- There is no doubt the previous Greek government implemented disastrous policies impoverishing Greeks without embarking in any meaningful reforms in an attempt to protect their own hard won privileges and playing good cop to the Eurozone, this way they could on the one hand keep the Europeans happy and on the other tell the Greeks it is all the Troika's fault. A game of compromise whose ultimate victim was Greece's unsuspecting citizen.

2- However, what they missed is that all this austerity brought Greeks to a dead end. They could no longer live a respectable life continuing to observe a misstructured program serving the Greek nomenclatura. Greeks had reached their limits of austerity.They no longer have anything to give under the terms of the previous governments self serving program.

3- In such circumstances, it is not a question of the Dutch or German tax payers, for that matter, paying more to finance Greece’s pensioners. Its very simply that if push comes to shove Greeks will not be able to coexist with the current program and opt to exit the Eurozone and regain their dignity.What the EZ should then ask is how much will the German or Dutch tax payers pay when Greece defaults and what will the ultimate repercussions of such an outcome be? This is not black mail it is the common responsibility bestowed upon a Eurozone for the erroneous policies which have been in effect in Greece in total Unison.

 4- Isnt it then clearly in the interests of the whole of Europe to allow some slack and common sense to prevail and come to an agreement? It is not beyond them to accept, that what may have partly worked in Portugal has been disastrously administered by the previous government and should now be reconstituted to allow the possibility* of real reform efforts to take effect.

The Greek tourist product in reply to a blogger

Greece has undoubtedly one of the best tourist products available worldwide.

1- Fantastic weather

2-Fantastic beaches

3-Fantastic crystal clear temperate waters

4-One of the richest cultures

5-One of the richest of histories

6-The birth of civilization

7-The birth of education, 

............and so on and so forth. 

Now if you are able to combine these privileges uniquely available to Greece with the local traditions of each periphery one can add unequalled genuine value to the tourist product which then can sell at a premium to the all inclusive product. A product which is identical whether you find it in Greece , Turkey, Croatia ,Spain or wherever its available. So maintaining the all inclusive is not a long term strategy for a country empowered with such abundant riches. It degrades its inherited wealth to the lowest common denominator and transforms what can become a unique experience into a mere cheap commodity. 

If we want to differentiate our product  based on our comparative advantages this, I believe, is the road to our future in Hellenic Tourism. 

Redistributing the socially financed financial gains . A question of equality.

Just a reminder of what I was saying back in June of 2012. Inevitably we are where we are.

This was in response to a Paul Krugman article "Catastrophic Credibility"

QUOTE

Authorities have three choices:

1- Go through many years of austerity and or growth enhancing policies to reduce both deficits and debt to sustainable levels a very long process of perseverance.

2-Central banks abandon their narrow mindedness and allow inflationary EXPECTATIONS (it is this variable expectations, that is important to trigger demand side incentives)

3-Even more importantly design a process to redistribute wealth to households by increasing mortgage debt forgiveness and thus wealth, allowing for increased final demand as net worth and prosperity values rise. 

In summary, it is a function of transferring wealth from creditors to debtors. If this process is not accelerated then it will be imposed by market forces and or political and ultimately social repercussions. This effectively, is what is currently happening in Greece. 

It goes without saying that a combination of all is also another desirable mix.

UNQUOTE
I speak of mortgage debt forgiveness as my answer was directed to the US economy where the biggest part of household debt were mortgages. It may or may not apply to Greece I do not have the statistics handy. 

And for good order's sake the socially financed gains to save the World  financial system have created the current inequality in the developed economies with the QE programs and excessive liquidity directing investment to stock and bond markets. Isn't it high time for a more equitable distribution? 

Response to Krugman on Inequality

This is Paul Krugman's post in the New York times

 http://www.nytimes.com/2014/08/08/opinion/paul-krugman-inequality-is-a-drag.html?smid=tw-share.


This is my comment on his post. 


I wholeheartedly agree with the premise after all Ford himself saw logic to paying higher wages to his workers to generate new buyers for the cars they were producing. The same principle if extended to a macro level should increase the propensity to consume, to educate, to invest at a local national level thereby adding to Gross Domestic Product.

However it is one thing to agree to redistribute it is very much another how.

I claim that taxing wealth is the wrong approach as it disrupts the markets. The right approach would be to tax what generates revenue this way there are no liquidity issues and its non disruptive.For example imagine taxing bank savings or security investments or real estate all on an annual basis. Automatically, there will be a flight of capital, the securities market would collapse and the real estate market would freeze. The alternative if INCOME would be taxed at progressively higher levels or CAPITAL GAINS from the sale of all assets this would neither produce any disruptions in any market and there will be ample ability to collect.

Alternatively a worldwide policy of a minimum respectable wage disincentivising companies from relocating production on basis of wages alone, would induce companies to home grown production and a higher GDP. Equally incentives for companies to provide shareholders rights to workers with various schemes,thereby sharing company profits increasing worker participation and productivity and thus profits and equality.

An equitable GREEK property tax

The debate is ongoing about what would constitute a fair property tax in Greece given its current Macro and Microeconomic reality so it would be useful to add my own suggestions to the debate in the hope that some may be discussed.

Firstly the government has clearly got its causality wrong. Its starts with the premise that it needs to fund a certain gap in its budget, then works a tax policy around this number to ensure that it is reached without regard and analysis on the long term consequences of its tax policy actions. This method can be characterised by short sightedness and has devastating consequences on valuations as has recently been witnessed by the government's insane proposals.

The right approach would be, we need to fund this deficit so lets tackle each potential source of tax revenue and see what tax can be imposed based on the evaluation of the prospects for the long term growth of this revenue source. In this case property.

So lets focus on two important choices. 1- We need to raise money from the property market to fund the governments deficit and 2-We need to do it without major disruptions to the market, to be effective, raise as much money as possible and structured in such a way as to allow for the continued long term growth of the market. Sounds like an impossible task but it isnt.  

Taxing property on artificial valuations set by the government to trap tax evasion when the property market was booming is out of whack with current reality. It is unconstitutional as owners are taxed on unrealistic valuations, on some occasions two to three times higher than their market value, principles which are not commensurate with the basic workings of a free democratic society. A second problem is that this tax is imposed on ownership without regard on the asset holder's ability to pay. A household's property investment may represent a very high proportion of its savings which is the current reality and is thus forced to sell it to meet these enormous tax obligations in a collapsing market, the result of this heavy taxation which leads to confiscation individual bankruptcy and a dead end. This is self defeating and it only serves the appetite of the lurking vulture funds.

The first and foremost consideration and should be a basic principle of taxation is to tax what generates revenue this way you ensure:

1- Collection. The owner has the ability to pay the tax because he has received revenue from it .This includes rental income as well as revenue from the sale of the property. There are two types of taxes here, tax on rental income and tax on capital gains from the sale of the property.

2- Valuations are not affected. Since ownership is not taxed there is no pressure to sell the asset to generate revenue and values remain to a large part unaffected which means property owners have then the choice to sell, hold or buy in a healthy market. In fact if capital gains tax is imposed on short term ownership progressively more so that property buyers who buy to live are subject to much lower capital gains than a short term speculators, only in it for short term gains, the tax is fair and clearly non disruptive.

There is this theory in Greece that since a large proportion of black money has gone to buy property we must tax ownership and especially the expensive properties at high rates on an annual basis to catch this laundered money.

The problem with this proposal is that its flawed with devastating consequences on valuations and highly  disruptive for all households as Greeks have one of the highest proportion of home ownership already discussed in my previous blog http://www.rgdanon.blogspot.gr/2013/11/mr-stournaras-and-bad-economics.html . One of the big negatives from this tax is its recurrence. Property valuations are based on Net Present Value considerations (for those familiar) which implies that values are adversely affected. from its continuity.

May I remind readers that the PASOK government had originally  introduced this tax with the premise that it would be temporary, a one off occurrence. The result, an enforcement of a backlog of four annual property taxes during this summer period and the reintroduction of the tax on an annual basis from 2014 onwards.

What is even more suicidal is that this unbearable tax raid on Greek households is forced upon them during a fourth year of collapsing GDP and catastrophic unemployment. It is no surprise therefore that this policy leads with mathematical precision to depression.

Whats more this tax veil is not conducive to international investment in the property market an important consideration as the government looks to international investors for its growth agenda. The government may structure favourable tax treatment on a case by case basis with investors but investors will ultimately want to sell units from their investment to generate their profit which will be subject to these punitive government imposed taxes.

To summarise a revenue based tax together with a finite one off property holding tax would be a desirable mix for revenue generation. The effect?  the property market will return to normalcy, transactions will explode as the purchase tax is also reduced to 3% as suggested.  International property investment will surge and the government will increase its tax earnings from the increased transaction volumes well beyond its expectations bridging its deficit gap.

Oh and one more point in case it is not obvious from above. Objective values must be returned to current market values and all taxes must be based on these new government set objective values.

Mr Stournaras and bad economics revisited

In an article in the newspaper Sunday Vima today Stournaras tries to justify his property tax saying there is a lot of negative reaction by the wealthy to the tax and it is time for them to pay. It states the government is explicitly targeting the rich and this is why they have called it a left tax. He furthermore states that  he will fight to impose it.

In my previous article I contend that Stournaras is dangerous for Greece's health because he adamantly believes in bad REVENGEFULL economics which he has erroneously been taught but which sells to his populist political audience without recourse to the real economics see my 2nd blogspot below.

But what he fails to say is that he is trying to protect big government and his own privileged position see my blog below without any remorse about the crumbling personal finances of Greek households and the destruction of wealth around him. It appears that for him his job protection  as well as those of his colleagues is more important than the well being of his country.

As far as his contention that it is the rich which are being hit by his property tax, it is propaganda that sells well to the public, however he seems to be living in fantasy land and has not realised that many flats in most underprivileged neighbourhoods are selling below distressed prices in some cases for less than 5000 euros to pay for his property taxes. Look around you Mr Stournaras is this the rich class you are destroying?

In my book an Economics Minister has the power to destroy or rebuild a country this Economics Minister  remains dangerous for Greeks's well being see my two blogs below.

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.