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Archive for the ‘Greece’ Category

In 2008, government spending consumed 50.9 percent of economic output in Greece according to OECD fiscal data. That same year, Greece’s score from Economic Freedom of the World was 7.12 (on a 0-10 scale), which was rather poor for a supposedly developed country and only #60 for all nations.

Then the fiscal crisis hit and Greece supposedly has atoned for its profligacy and gone through a tough period of “austerity” to reduce the burden of government spending and cut back on onerous levels of bureaucracy and red tape.

How much progress has occurred? Have Greek politicians, with the help of the European Commission, International Monetary Fund, and European Central Bank (the infamous “troika”), scaled back government and freed up the private sector?

Nope.

The OECD data shows that the burden of government spending is now 53.1 percent of economic output. And the latest data from Economic Freedom of the World shows that Greece’s score has dropped to 6.93 (dropping the country to #86 in the rankings).

In other words, Greece suffered a crisis caused by too much government and too much statism and the politicians (along with outside “experts”) decided that the solution was to….drum roll, please…increase the relative size and scope of government.

As one Greek observer noted in a column for CapX, this has not been a very successful recipe.

…how has the Troika been performing? 3 adjustment programs, 12 reviews, 220 billion Euros and 7 years down the road, the results are abysmal: 179% debt, 0% growth, 25.1% unemployment.

To be fair, there has been some spending restraint since the crisis began. In some years, the budget even shrank. The problem, though, is that the private sector has been battered by huge tax increases, thus crippling incentive to create jobs and growth.

If you want to get a sense of what’s happening, this New York Times story is a very sobering example. Apparently the tax burden is so oppressive that people don’t want to inherit property.

At law courts throughout Greece, people are lining up to file papers renouncing their inheritance. …they are turning their backs on what used to be a pillar of Greece’s economy and society: real estate. …In 2013, two years after a property tax was introduced (previously, real estate tax revenue came mainly from transfers or conveyance taxes), 29,200 people declined to accept their inheritance, according to the Justice Ministry. In 2015, the number had climbed to 45,627, an increase of 56 percent in two years. Reports from across the country suggest that this year, too, large numbers of people are refusing to inherit. …People once hoped that if they came into property they could sell it and live easier; now they fear that they will be unable to sell it and the taxes will drag them down. …After many years in which only very valuable properties were taxed, many Greeks went from paying almost no taxes on real estate to not having enough money to pay. In 2010, property taxes accounted for 0.26 percent of gross domestic product, while this year they are around 2 percent, according to state budget figures. …Arrears in tax payments at the end of September were at 92.8 billion euros and keep increasing by about 1 billion each month.

But give Greek politicians credit for a perverse form of perseverance. They’re doing everything they can to squeeze even more money from oppressed taxpayers. Indeed, the U.K.-based Times reports that they’re even spying on social media to see if people have lifestyles that seem extravagant compared to the income they report to tax police.

Finance ministry officials said that an operation named “24 hours” will monitor about 1.8 million Greeks believed to be declaring an income inconsistent with their lavish lifestyles they enjoy and display on websites. Trifon Alexiades, the deputy finance minister, said: “It may sound ludicrous, but this is a serious effort to crosscheck information about those suspected of concealing wealth.” Tax authorities will begin operating software in September for a month-long trial. “Under this new scheme, auditors will be able to access taxpayers’ Facebook, Twitter and Instagram accounts to extract information and details of assets that may not have declared,” a Greek news site reported.

Ugh, I guess this is the kind of policy you get with you mix French-style economic advice and German-style tax enforcement. Geesh, maybe the IRS isn’t so bad after all.

And it doesn’t seem the current left-wing government is learning from all these mistakes. The EU Observer reports that it wants to make the nation’s infamous bureaucracy even bigger.

Alexis Tsipras’ Greek government plans to hire 20,000 civil servants over the next year to help Greece’s austerity hit education and health services. Government officials believe that the hiring will not run into objections from representatives of Greece’s international creditors, Kathimerini newspaper reports.

By the way, Greek politicians think more spending is the right recipe, even if it means more spending in other nations. Here’s some of what was reported back in June by Bloomberg.

Greek Finance Minister Euclid Tsakalotos urged Germany to take advantage of record-low borrowing costs and invest more to spur the economy, saying Europe should seize the chance to modernize its infrastructure. …Failure to provide the euro area with a Keynesian-type stimulus would risk leaving the region with insufficient infrastructure, said Tsakalotos, whose country has the biggest ratio of debt to gross domestic product in Europe. European Union budget rules should be changed so that investment spending is excluded when calculating whether countries have met deficit targets, he said.

I guess this could be called an example of misery-loves-company economic advice. Germany has actually been complying with Mitchell’s Golden Rule in recent years (and part of last decade also) and its economy is in decent shape.

But Greek politicians are basically saying, “Hey, you should be more like us.”

Heck, the Prime Minister of Greece already is trying to create a coalition of fiscally mismanaged nations.

Greek prime minister Alexis Tsipras on Thursday invited leaders of six southern EU states to meet…in a bid to form a strong southern alliance and counter the stance of countries in Northern Europe. Athens News Agency reports the states invited will include France, Italy, Spain, Portugal, Cyprus and Malta.

The article doesn’t say what this alliance would accomplish, though presumably Tsipras hopes it will be a unified voice for more handouts. Maybe it can agitate for something really crazy such as eurobonds.

I’m also amused that Greek officials think businesses will invest in a highly-taxed economy merely if politicians promise not to raise taxes even further. I’m not joking. Here are some excerpts from a Reuters report.

Greece is offering big investors more than a decade of no increases in their taxes, in an effort to promote entrepreneurship in a country struggling to return to growth after almost seven years of recession. …Under the law, investment plans exceeding 20 million euros and creating at least 40 new jobs could choose a stable tax regime with no tax increases for 12 years once the investment is concluded.

By the way, just in case you think promising not to go even further in the wrong direction is akin to a step in the right direction, you need to keep reading the article because you’ll discover the plan is based on cronyism.

Alternatively, they can apply for a subsidy, amounting to 10 percent of the plan and up to 5 million euros.

And if you want to understand why Greece is hopeless, check out what the Economy Minister said about how any new investments will get “quick” approval.

Stathakis said that Athens will seek to shorten approval time for investment plans to three months instead of the two to three years it takes now.

Needless to say, the approval time in a market economy is zero because people don’t have to get permission from bureaucrats before creating jobs and investing money.

But in Greece, if you curry favor with the mandarins, you’ll “only” have to wait three months. I guess that’s to be expected in a nation where bureaucrats demand stool samples before you can set up an online company.

And since we’re on the topic of regulation and red tape, this is a good time to point out that the Greek government apparently is good at passing laws to liberalize the economy but not very good at implementing them.

Guy Verhofstadt, leader of the European Liberals and Democrats, is very critical… “Greece is passing a lot of legislation, but is not implementing it. It is shocking to see that 74% of the legislation that has been adopted since the first bailout package has never been implemented.”

But let’s look at the bright side. This means 26 percent has been implemented. Of course, that 26 percent presumably includes all the tax increases.

In any event, Greece has a miserable track record when it comes to following through on commitments to reduce state intervention. The government was supposed to engage in sweeping privatizations, but the gap between projections and performance is enormous.

Last but not least, I’ve always thought the ultimate sign of incompetence is when a government can’t even waste money effectively. I’ve already noted that Japan and the U.K. have met this test, and now I can add Greece to the list.

Hundreds of millions of available EU funds have yet to be used by the Greek state to help migrants and refugees. Administrative bottlenecks on the Greek side mean that…The European Commission…will soon be sending someone to Athens to help the government resolve its issues in an effort to better spend the money.

You may be wondering what’s the purpose of today’s attack on Greece. Is it because I think poorly of Greeks? Well, I despise Greek moochers, but I have the same view of French moochers and American moochers, so that’s not the answer.

You also may be thinking this is just another excuse for me to say “I told you so” about the failure of bailouts. Sure, I’m happy to pat myself on the back, even though any non-comatose person should have known bad things were going to happen.

My real goal is to warn that the miserable results in Greece will be replicated if we try the same policy in America. There are several states that are on a very bad trajectory, such as California and Illinois. I don’t know if things will blow up during the next recession or afterwards, but if there’s any hope of forcing politicians to make sensible choices in Sacramento and Springfield, it will be very important for Washington to reject all pleas for handouts.

Likewise, pension funds for state and local government bureaucrats are ticking time bombs. Once again, prudent reforms will only be possible if politicians conclude that there’s no hope for bailouts from Uncle Sam.

The bottom line is that politicians will continue to make mistakes if they can make other people pay the price. That’s today lesson.

P.S. Even though Greece’s debt is sustainable, I would prefer a default if it meant no more bailouts. Yes, Greek politicians would be reneging on their past obligations, but the good news is that they wouldn’t be able to borrow any more money and (hopefully) would have no choice but to copy Latvia and adopt good policy.

P.P.S. Though it’s an open question whether Greece can be saved. Many productive people already have escaped the nation and most of the ones who have stayed are part of the problem.

P.P.P.S. To offset the grim message of today’s column, let’s close with some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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In my presentations about how to deal with budgetary deterioration and fiscal crisis, I often share with audiences a list of nations that have achieved very positive results with spending restraint.

The middle column shows how these countries limited the growth of government spending for multi-year periods.

The next column of numbers reveals how multi-year spending restraint leads to significant reductions in the amount of economic output that is diverted to the government.

And when you address the underlying problem of excessive government spending, you automatically ameliorate the symptom of red ink, as shown in the final column of numbers.

At this point, I usually ask the audience whether they’ve ever seen a similar table that purports to show nations that have obtained similarly good results with tax increases.

The answer is no, of course, though it’s not really a fair question to people who don’t study fiscal policy.

More important, I ask the same question when I have debates with my statist friends from left-wing organizations. They generally try to change the subject. Some of them bluster about “fairness.” And a few of them think Sweden is an acceptable answer until I point out that it became rich when government was small but began to lose ground once a large welfare state was imposed beginning in the 1960s (as explained in this video).

But Sweden wouldn’t be a good answer even if its economy hadn’t slowed down. That’s because the question is how to climb out of a fiscal hole. In which case Sweden actually provides evidence for my position!

To understand why tax increases aren’t the right way to deal with a fiscal mess, let’s look at Greece. From the moment the crisis began, Greek politicians started raising taxes. And they haven’t stopped, with many of the tax hikes being cheered by international bureaucracies.

This is a never-ending story.

With new chapters being written all the time. Here’s a report from Reuters on the latest “reform” package from Greece. As you might suspect, it’s basically a bunch of tax hikes. Here’s what the politicians approved on social insurance taxes.

Sets social security contributions at 20 percent of employees’ net monthly income – with 13.3 percent burdening employers and 6.7 percent employees. Reforms the social security contribution base from notional to actual incomes for the self-employed, including farmers and lawyers, forcing them to make a contribution to pension funds which is phased in over a five-year period to 20 percent of their income.

There are also income tax increases.

Lowers the income tax-free threshold, or personal allowance, to an average of around 8,800 euros a year from around 9,500; makes income bands narrower, increases tax coefficients. Lowest tax band is now 22 percent on a gross income of 20,000 a year compared to 22 percent for 25,000 euros which existed previously. The upper tax band, of 45 percent, is now imposed on gross incomes exceeding 40,000 as opposed to 42 percent on income above 42,000 under the previous arrangement. Includes EU farming subsidies on taxable income.

And there are further income tax hikes as part of the “solidarity” levy, which is basically another income tax.

Solidarity Levy…on net incomes ranges from the lowest 2.2 percent on incomes from 12,000 to 20,000 a year, to 5.0 percent up to 30,000, and 6.5 percent up to 40,000. The highest band is 10 percent on incomes above 220,000. By comparison, the highest band in that category was 8.0 percent before the new reform was pushed through, on earnings exceeding half a million euros.

And there also will be more double taxation.

Dividends Tax: Increases to 15 percent from 10 percent.

You would think this big package of tax hikes might satisfy the crowd in Athens for a year or two.

But that would be a very bad assumption. Amazingly, the politicians in Greece already are looking for additional victims, as reported by ABC News.

Already, a new bill is being prepared, calling for higher taxes on a range of products, from tobacco to beer to broadband Internet connections. This bill is expected to pass later in the month.

And they’re not exactly apologetic about their tax-aholic actions.

Prime Minister Alexis Tsipras and his ministers defended their plans, saying…that taxes were better than spending cuts. …Labor Minister George Katrougalos, who introduced the bill, said that…the bill’s provisions showed the way forward for social policy in a Europe dominated by pro-market “neoliberals.”

Sadly, Mr. Katrougalos may be correct. I won’t be surprised if the rest of Europe follows Greece off the cliff.

Though he’s smoking crack if he thinks the rest of the continent is dominated by neoliberals (i.e., classical liberals or libertarians).

Not that we’ve established that Greece has been trying to solve its fiscal mess with tax hikes, let’s look at the results.

Has debt been reduced? Hardly, though to be fair it seems to have stabilized.

In any event, we haven’t seen the big reductions in debt that are associated with spending restraint

And what about the economy? Here, the news is uniformly grim, doubtlessly in large part because of all the tax hikes.

It’s rather ironic this chart is based on periodic IMF forecasts since that bureaucracy is infamous for advocating endless tax hikes.

One wonders if the IMF bureaucrats will eventually learn some lessons?

I’m not holding my breath, just like I’m not optimistic that Greek politicians will address the real problem in their country of excessive dependency caused by a bloated public sector.

But maybe the rest of us (other than Hillary and Bernie) can learn what not to do.

P.S. For more information, here’s my five-picture explanation of the Greek mess.

P.P.S. And if you want to know why I’m so dour about Greece’s future, how can you expect good policy from a nation that subsidizes pedophiles and requires stool samples to set up online companies?

P.P.P.S. To offset the grim message of today’s column, let’s close with my collection of Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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Greece is special, though not in a good way.

The nation has such a pro-welfare mentality that pedophiles get disability benefits. And the regulatory mindset is so nutty that you need to submit a stool sample if you want to create an online company.

2300-greece0708-a1While those are bizarre examples of foolish government, Greece is probably best known for bailouts. Lots of them.

The politicians spent too much money and drove the economy into a ditch. And ever since, they’ve been trying to tax their way back to solvency, apparently oblivious to the fact that the private sector can’t rescue the economy if it’s being taxed into oblivion.

And that’s not idle rhetoric. A new report from The Economist gives us a very good warning of what happens when politicians get too greedy.

The story starts with an anecdote about a Greek entrepreneur who failed. But he didn’t fail because of a bad idea or a poor work ethic. Instead, the government got too greedy and taxed him into exile.

Panagiotis Korfoksyliotis set up a business in Athens in 2011, ferrying tourists around by car…he paid his staff a decent wage and declared all his earnings. Unfortunately, the taxman did not repay the kindness. Sharp increases in business taxes have prompted Mr Korfoksyliotis to pack his bags and move his company and his life to Bulgaria. Now he employs drivers to take foreign visitors around that country’s tourist spots instead.

And it turns out that Mr. Korfoksyliotis has lots of company.

He is part of a growing trend. …Greek governments desperate for cash have sought to squeeze it from companies, despite evidence that this is driving them away to places like Bulgaria, Cyprus and Albania. …by some estimates more than 200,000 businesses have closed or in some cases left Greece since then. ……accountants, lawyers and businesspeople reckon that perhaps as many as 10,000 Greek-owned firms have moved abroad. In a recent survey of 300 firms, Endeavor Greece, a non-profit organisation that helps entrepreneurs, found that more than a third had either left or were thinking about going.

And guess what? When a whole bunch of entrepreneurs and businesses decide that it’s no fun to work hard when the government is the main beneficiary, they leave. And all of sudden the politicians no longer have as much income to tax.

Between 2009 and 2014 the taxable profits declared by the country’s businesses fell by more than €5 billion ($5.6 billion) to €10 billion.

Wow, that’s a big Laffer Curve effect, even when including all the other factors that would have caused taxable income to decline over the past few years.

We also see the impact of tax competition in this story. The nations that are being sensible are attracting jobs and investment. Greece, of course, isn’t in that category.

Other euro-crisis countries, such as Portugal and Ireland, cut business taxes or kept them low, to encourage investment and growth. …But Greece has raised its corporation-tax rate from 20% in 2012 to 29% in 2015… Greece’s tax rise makes Bulgaria’s rate of just 10% even more alluring; likewise Cyprus’s 12.5% rate and Albania’s 15%.

But what’s really amazing is that Greece will probably go from bad to worse.

…the left-wing ruling coalition is not listening. It is now proposing a 20% rise in a levy on companies’ profits that goes toward pensions. Carry on in this vein, and there will not be many businesses, or much profit, left to tax.

Let that final sentence sink in. Our friends at The Economist are very much part of the left-leaning establishment. Yet they ended the story with about as powerful of an endorsement of the Laffer Curve as one could imagine.

In the meantime, I’ll end my column with an utterly depressing assessment of Greece’s future.

The country is basically doomed. In part, this is because government is too big. But it’s even more because the social capital of the Greek people has been eroded by decades of handouts and subsidies.

Social-Collapse-TheoremAnd when people think that it’s morally acceptable to use the coercive power of government to take money from their neighbors, it’s just a matter of time before than society collapses.

Why? Because people like Mr. Korfoksyliotis eventually decide that it’s no fun being enslaved by a bunch of looters and moochers.

The Economist slowly but surely seems to be waking up to this reality.

But I have very little hope for Bernie Sanders. Like the Syriza government, he would double down on higher taxes even as more and more taxpayers decided to “go Galt.” And just like Greece, there will be no turning back when we reach that dependency tipping point.

P.S. While part of me wants Greece to suffer because of bad politicians and scrounging voters, even I don’t want to subject the Greeks to this much torture.

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This isn’t intentional, but there’s been a European theme to this week’s posts. I wrote yesterday about economic chaos in France, and the previous day I wrote about the grim consequences of Italian statism.

Today, we’re going to look at Greece. In the past, I’ve explained that Greece is special, albeit in a bad way. But I’ve also asserted that Greece could be rejuvenated and could deal with its debt with the right reforms.

Heck, Greece could even renege on its debt and still enjoy an economic renaissance if it adopted the right policies. That’s the message of this short video narrated by Garett Jones of George Mason University

So the $64 question (actually, the $231,199,453,552 question according to the latest projection of Greek debt) is whether Greece will do the right kind of reform.

Unfortunately, it appears that all the bailouts have subsidized bad policy. Writing for National review, a journalist from Greece explains that his government is adding more and more taxes onto an overburdened private sector.

…the new austerity measures, which are often amusingly termed reforms, are for the most part tax increases — which may not be popular, but which conform to SYRIZA’s ideological creed. The new package agreed to by SYRIZA and Greece’s creditors is about 90 percent new taxes or tax increases and 10 percent reforms. The tax increases have the benefit of protecting SYRIZA’s core constituency, which is the public-sector employees. Despite the collapse of public revenue and the overall dismal economic outlook, the SYRIZA government plans to increase the salaries of public-sector employees (by as much as 8 percent) and carry on with 45,000 new hires in 2016. Meanwhile, in the private sector, SYRIZA has increased taxes on all sorts of things and is planning to double the taxation of farmers. It has increased business taxes and also demanded the pre-payment of business taxes. It has increased the VAT on almost all goods, and it is defining affluence down so as to increase income taxes for a greater number of taxpayers. And although Greece has probably the highest social-security contributions in Europe, SYRIZA is planning to increase these contributions even more, despite the fact that pensioners now outnumber those who are still employed in the private sector.

More pensioners that private-sector employees?!?

Wow, even I’m shocked by that factoid. There definitely are far more people riding in the wagon than pulling the wagon when you add up pensioners, bureaucrats, and welfare recipients.

So you can understand why Greece is almost surely doomed.

Especially when you consider that many of the people leaving Greece are the productive ones (i.e., those who normally would be pulling the wagon). Here are some passages from a story in the New York Times from last year.

From 2010 to 2013, about 218,000 Greeks emigrated, according to an estimate from the Greek statistics agency. Nearly half of them went to Germany. …Resentments against Germany — Greece’s most powerful creditor — quickly fade when it comes to the prospect of a regular paycheck. Many of those leaving Greece are highly educated professionals and scientists seeking greater opportunity and better pay. An estimated 135,000 Greeks with post-secondary degrees have left since 2010 and are working abroad, according to Lois Labrianidis, an economic geographer and official in Greece’s Economy Ministry. “We think this is human capital that is crucial for the development of the country,” Mr. Labrianidis told me recently, calling the departures a “major blow.” …While much of the attention on recent Greek emigration has focused on the highly educated, I’ve been surprised by the number of working-class Greeks I’ve met who left due to financial desperation.

But there’s one group of people who aren’t leaving.

You probably won’t be surprised to learn that they are the bureaucrats. As noted in this report from the U.K.-based Telegraph, their privileged position is zealously protected by vote-buying politicians.

The other thing most people in the area seem to agree on is that the biggest impediment to progress is the size of Greece’s public sector. The country has a population of 10 million, of which 2.5 million are pensioners, one million are government employees and two million work in the private sector. A further 1.7 million are unemployed. The rest are children or students. “So you can see why the current situation is unsustainable,” says Tryfon. “The only solution is for the public sector to be cut back. But every government since the crisis has chosen to raise taxes, while doing little to stimulate the private sector because they only want to protect votes.” “…Public sector employees and pensioners are the first to get paid and the only ones to get paid on time. We need investment into the private sector, but there is no motivation for companies to come to Greece…” a company would be nuts to invest in a politically unstable country, creaking under debt and crippled by an incredibly punitive tax regime. “What business will invest in a Greece when it takes six months to set up a company compared to Cyprus where it takes 15 minutes?” asks Dimitris Karkavitsas, an investment banker-turned-strawberry farmer. …the young engineer, says everyone who tries to make it in the private sector gets strangled. “The tax is killing us,” he says. …In the meantime, the public sector remains a massive beast.

Moreover, when you set up a company in Cyprus, there’s never a risk that you’ll be required to provide disgusting forms of DNA  as part of bureaucratic requirements.

Yet rather than be outraged by overpaid and meddlesome bureaucrats, I suspect most Greeks probably think how they can get on that gravy train. Which explains why, in an interview, I said the Greeks shouldn’t be allowed to “loot and mooch their way through life.”

Until and unless they learn that lesson, the nation is doomed to societal collapse.

P.S. Another sign of Greece’s moral and fiscal bankruptcy is that pedophiles can get disability payments.

P.P.S. To offset the grim message of today’s column, let’s also enjoy some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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For both policy reasons and narcissism, I wish the most popular item ever posted on International Liberty was Mitchell’s Golden Rule.

But that guide to sensible fiscal policy isn’t even in the top 70.

Welfare State Wagon CartoonsInstead, my most-read post is a set of cartoons showing how the welfare state inevitably metastasizes as more and more people are lured into the wagon of government dependency.

I suspect these cartoons are popular because they succinctly capture and express a concern that is instinctively felt by many people.

But instinct isn’t the same as evidence.

So I’ve shared various estimates of America’s growing dependency problem, though I’ve also warned that these numbers don’t necessarily tell the full story.

Given my dissatisfaction with the current estimates, I was very interested to see a new attempt to measure the degree to which nations are undermined by ever-expanding redistribution. Writing for the Mises Institute and using Greece as an example, Justin Murray analyzes the dependency problem.

…without understanding how Greece got into this problem in the first place and identifying the root cause of an over-indebted society, any plan or solution has a high probability of failure. …Greece, being a nation with a high tax rate on production and a high subsidy rate on public assistance, will generate a population that finds greater preference toward public assistance and away from productive labor.

Mr. Murray puts together a new statistic called “implied public reliance,” which is designed to measure how many strangers each worker is supporting.

…we must identify a nation’s currently employed population. Next, all public sector employees are removed to obtain an adjusted productive workforce. …this productive population is divided into the nation’s total population to identify the total number of individuals a worker is expected to support in his country. …the average household size is subtracted from this result to get the final number of individuals that an individual must support that are not part of their own voluntary household. In other words, how many total strangers is this individual providing for? …Greece…is currently expecting each employed person to support 6.1 other people above and beyond their own families.

And here’s a chart from his article, showing the IPR measures for 18 countries.

I’m not surprised that Greece has the worst IPR number, and it’s also no surprise that nations such as Italy and France do poorly.

Though I am surprised that Canada scores so highly. And Denmark’s decent performance doesn’t make sense considering the data I shared a few months ago.

Mr. Murray then looks at this data from a different perspective.

To demonstrate how difficult it is to change these systems within a democratic society, we just have to look at the percentage of the population that is reliant on public subsidy.

And here are those numbers.

Wow. It’s hard to be optimistic after looking at these shocking numbers.

Moreover, I suspect we’ll remain pessimistic even if Mr. Murray’s initial numbers are revised as he refines his methodology.

And here’s the most depressing part of the analysis.

The numbers imply that 67 percent of the population of Greece is wholly reliant on the Greek government to provide their incomes. With such a commanding supermajority, changing this system with the democratic process is impossible as the 67 percent have strong incentives to continue to vote for the other 33 percent — and also foreign entities — to cover their living expenses.

From a public policy perspective, here’s the real challenge: How do you convince voters to back away from the public trough?

In my humble opinion, the only possible solution is to reject any and all bailouts and force Greece to balance its budget overnight. With luck, that may be such a sobering experience that the Greek people might learn that a society based on mooching and looting doesn’t work.

Not that I’m optimistic. Which is why I’ve been worried for more than five years that we’ll eventually see a loss of democracy in some European nations.

P.S. The second-most viewed post of all time is a parable about buying beer, which is actually a lesson about the dangers of so-called progressive taxation. And the third-most viewed post is a parable about applying socialist principles in a classroom, which is a lesson about the dangers about the dangers of redistribution.

P.P.S. On the topic of dependency, here’s what nursery tales would look like if they were written by statists.

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I wrote last month that the debt burden in Greece doesn’t preclude economic recovery. After all, both the United States and (especially) the United Kingdom had enormous debt burdens after World War II, yet those record levels of red ink didn’t prevent growth.

Climbing out of the debt hole didn’t require anything miraculous. Neither the United States nor the United Kingdom had great economic policy during the post-war decades. They didn’t even comply with Mitchell’s Golden Rule on spending.

But both nations managed to at least shrink the relative burden of debt by having the private sector grow faster than red ink. And the recipe for that is very simple.

…all that’s needed is a semi-sincere effort to avoid big deficits, combined with a semi-decent amount of economic growth. Which is an apt description of…policy between WWII and the 1970s.

Greece could achieve that goal, particularly if politicians would allow faster growth. The government could reduce red tape, which would be a good start since the nation ranks a miserable #114 for regulation in Economic Freedom of the World.

But Greece also should try to reverse some of the economy-stifling tax increases that have been imposed in recent years.

That may seem a challenge considering the level of red ink, but good tax policy would be possible if the Greek government was more aggressive about reducing the burden of government spending.

And if that’s the goal, then the Baltic nations are a good role model, as explained by Anders Aslund in the Berlin Policy Journal. With Latvia being the star pupil.

…austerity policies have not been attempted most aggressively in Greece: all three Baltic countries pursued more aggressive fiscal adjustments, especially Latvia. The Latvian government faced the global financial crisis head-on. …The Latvian government carried out a fiscal adjustment of 8.8 percent of GDP in 2009 and 5.9 percent of GDP in 2010, amounting to a fiscal adjustment of 14.7 percent of GDP over the course of two years, totaling 17.5 percent of GDP over four years, according to IMF calculations. Greece did the opposite. According to the IMF, its fiscal adjustment in the initial crisis year of 2010 was a paltry 2.5 percent of GDP, and in 2011 only 4.1 percent, a total of only 6.6 percent of GDP over two years. Greece’s total fiscal adjustment over four years was only 11.1 percent of GDP.

In other words, Latvia (like the other Baltic nations) did more reform and did it faster.

And it’s also worth noting that the reforms were generally the right kind of austerity, meaning that expenditure commitments were reduced.

Whereas Greece has implemented some expenditure reforms, but has relied far more on tax increases.

Better policy, not surprisingly, meant better results.

In 2008-10 Latvia suffered an output decline of 24 percent, as much as Greece did in the six-year span from 2009-14. However, thanks to its front-loaded fiscal adjustment, Latvia was able to restore its public finances after two years. The country has shown solid economic growth, averaging 4.3 percent per year from 2011-14, according to Eurostat. …The consequences of tepid Greek fiscal stabilization have been a devastating six years of declining output, even as the Latvian economy has revived. In 2013 Latvia’s GDP at constant prices was 4 percent lower than in 2008, while Greece’s was 23 percent less than in 2008, according to the IMF. A cumulative difference in GDP development of 19 percentage points over six years cannot be a statistical blip – it is real.

The bottom line is that Latvia and the other Baltics were willing to endure more short-term pain in order to achieve a quicker economic rebound.

That was a wise choice, particularly since the alternative, as we see in Greece, is seemingly permanent stagnation.

Anders Paalzow of the Stockholm School of Economics in Riga also suggests, in a recent article in Foreign Affairs, that Latvia is a good role model.

Professor Paalzow starts by explaining that Latvia is now enjoying good growth after enduring a dramatic boom-bust cycle last decade.

In 2008, Europe’s most overheated economy, which had been fuelled by cheap credit and rapidly raising wages and real estate prices, collapsed. GDP dropped by 20 percent and unemployment rose to more than 20 percent. But here’s where things take an unexpected turn. By late 2010, the first glimmers of recovery became apparent. Today, the economy is among Europe’s fastest growing, and its GDP is back at pre-crisis levels. So how did Latvia, the hero of this story, do it?

The first thing to understand is that Latvia was determined to join the eurozone, so that meant it wasn’t going to devalue its currency in hopes of inflating away its problems. Which meant the only other choice was “internal devaluation.”

…the Latvian government’s only real option was fiscal policy adjustment, the details of which it unveiled in its supplementary budget for 2009 and its budget for 2010. Both of these saw substantial reductions in social benefits accompanied by long overdue cuts in public employment with close to 30 percent of civil servants laid off. Those who remained in the public sector saw their salaries cut by 25 percent, on average, whereas salaries in the private sector fell by on average ten percent. …the reductions made during the crisis years amounted to approximately 11 percent of GDP. Most of the fiscal consolidation was done on the expenditure side of the public budget… The fiscal consolidation program continued into 2011 and the years following, even though the economy started to grow again.

Not only did the economy grow, but the government was rewarded for making tough choices.

…in 2010, the government responsible for austerity was reelected.

But here’s the challenge. Professor Paalzow warns that fiscal reforms won’t mean much unless the chronic dysfunction of the Greek government is somehow addressed.

The importance of the institutional framework cannot be overestimated. …it seems like a fool’s errand to try to sell off the public assets of a country riddled with high corruption… Furthermore, with a legal system incapable of enforcing current legislation and characterized by slow judicial processes, inefficient courts, and weak investor protection, legal reform will be a necessary condition for an economic turnaround.

So he suggests that Latvian-type fiscal reforms should be accompanied by Nordic-style institutional reforms.

Greece should look further north to Finland and Sweden, which overcame their own crises in the early 1990s. …The three to four years following the initial economic disaster saw remarkable institutional reform…substantial changes in both welfare systems. …both countries pursued austerity…, a remedy that both nations had frequently tried in the 1970s and 1980s without any success. What made the difference this time was that the institutional, and hence the fundamental roots, of the problems were addressed.

While I like his prescription, I suspect Paalzow is being too optimistic.

You can’t turn the Greeks into Finns or Swedes, at least not without some sort of massive jolt.

Which is why my preferred policy is to end bailouts, even if it means that Greece repudiates its existing debt. If the Greeks no longer got any handouts, that necessarily would mean an immediate end to deficit spending (assuming the government doesn’t ditch the euro in order to finance spending by printing drachmas).

Welfare State Wagon CartoonsAnd that might be a very sobering experience that would teach the Greek people about the dangers of having too many people trying to ride in the wagon of government dependency.

That might not turn the Greeks into Nordics, but it presumably would help them understand that you can’t (at least in the long run) consume more than you produce.

That’s also a lesson that some American politicians need to learn!

P.S. I wonder if Paul Krugman will attack Latvia’s good reforms. When he went after Estonia for adopting similar policies, he wound up with egg on his face.

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The conventional wisdom, pushed by the IMF and others, is that Greece’s economy will never recover unless there is substantial debt relief.

Translated into English, that means the Greek government should be allowed to break the contracts it made with the people and institutions that lent money to Greece. That may mean a “haircut,” which would mean lenders (often called creditors) only get back some of what they’ve been promised, or a “default,” which would mean they get none of the money they were promised.

I wouldn’t be surprised if Greece has a full or partial default. And that actually might not be a bad result if it meant an end to bailouts and Greece was immediately forced to balance its budget.

But let’s set that issue aside and look at the specific issue of whether Greece’s debt is unsustainable. Here’s a look at Greek government debt, measured as a share of economic output.

As you can see, when the crisis started in Greece, government debt was about 100 percent of GDP.

Was Greece doomed at that point?

Well, if the situation was hopeless, then someone needs to explain why the United States didn’t collapse after World War II.

As you can see from this chart, debt climbed to more than 100 percent of economic output because of the heavy expense of defeating Nazi Germany and Imperial Japan. Yet the American economy rebounded after the war (notwithstanding dire predictions from Keynesians) and the debt burden shrank.

So maybe the more interesting issue is to look at how America reduced its debt burden after 1945, which may give us some insights into what should happen (or should have happened) in Greece.

Here’s one question to consider: Did the burden of the federal debt drop between the end of World War II and the 1970s because of big budget surpluses?

Nope. If you look at Table 7.1 of OMB’s Historical Tables, you’ll see that there was a steady increase in the amount of government debt in America after 1945. Yes, there were a few years with budget surpluses, but those surpluses were more than offset by years with budget deficits.

The reason that the national debt shrank as a share of economic output was completely the result of the economy growing faster than the debt.

Here’s an analogy. Imagine you graduate from college and you have $20,000 of credit card debt. That might be a very big burden relative to your income.

But in your 50s and (hopefully) earning a lot more money, you might have $40,000 of credit card debt, yet be in a much stronger financial position.

So the real issue for Greece (and Spain, and Japan, and the United States, etc) is not so much whether the amount of debt shrinks. It’s whether debt is constrained compared to private-sector growth.

That doesn’t require any sort of miracle. Yes, it would be nice if Greece and other nations decided to become like Hong Kong and Singapore, high-growth economies thanks to small government and non-interventionism.

But all that’s needed is a semi-sincere effort to avoid big deficits, combined with a semi-decent amount of economic growth. Which is an apt description of U.S. policy between WWII and the 1970s.

Is it unreasonable to ask Greece to follow that model?

Some may say Greece is now in a different situation because debt levels have climbed too high. Debt in the United States peaked a bit above 100 percent of GDP at the end of World War II, whereas government debt in Greece is now closer to 200 percent of GDP.

It’s certainly true that today’s debt burden in Greece is higher than America’s post-WWII debt burden. So let’s look at another example.

Government debt in the United Kingdom jumped to almost 250 percent of economic output by the end of the World War II.

Did that cause the U.K. economy to collapse? Did Britain have to default?

The answer to both questions is no.

The United Kingdom simply did what America did. It combined a semi-sincere effort to avoid big deficits with a semi-decent amount of economic growth.

And the result, as you can see from the above graph, is that debt fell sharply as a share of GDP.

In other words, Greece can fulfill its promises and pay its bills. And the recipe isn’t that difficult. Simply impose a modest bit of spending restraint and enact a modest amount of pro-growth reforms.

Unfortunately, prior bailouts have given Greece an excuse to avoid reforms. Though the IMF, ECB and European Commission (the so-called troika) have learned somewhat from those mistakes and are now making greater demands of the Greek government as a condition of another bailout.

The problem is the troika doesn’t seem to understand what’s really needed in Greece. They’re pushing for lots of tax increases, which will make it hard for Greece’s private sector to generate growth. The only good news (or, to be more accurate, less bad news) is that the troika doesn’t want as many tax hikes as the Greek government would like.

In other words, don’t be too optimistic about the long-run outcome. Which is basically what I said in this interview on Canadian TV.

The bottom line is that a rescue of the Greek economy is possible. But so long as nobody with any power wants to make the right kind of reforms, don’t hold your breath waiting for good results.

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