Feeds:
Posts
Comments

Posts Tagged ‘Greece’

I detest writing about Greece. I suggested back in 2010 that the best outcome was default, which would have been the most likely outcome of a no-bailouts approach.

And for the past five years, events have confirmed – over and over again – that this was the right approach.

So you can understand how frustrating it is to comment again on this issue.

But sometimes the policy proposals from national governments and international bureaucracies are so blindly insane that I feel compelled to restate obvious points.

Consider what is happening now. The various members of the Troika (the International Monetary Fund, the European Commission, and the European Central Bank) are pressuring Greece to make reforms in exchange for additional subsidies, handouts, and bailouts.

But since the Greek government is run by lunatics, the net result of “reforms” is more and more bad policy. To be blunt, the Troika crowd is subsidizing and encouraging a process that is resulting in suicidal tax hikes in Greece.

Here are some excerpts from a story in the EU Observer.

Greece edged closer to a last-ditch agreement with her eurozone creditors on Monday (22 June), after Alexis Tsipras’ government promised to raise an extra €8 billion over the next two years. Under the proposal submitted to eurozone ministers, the Greek government would raise just under €2.7 billion in extra revenue this year, followed by a further €5.2 billion in 2016. …Tsipras’ government has proposed to raise €645 million over the next two years by increasing health contributions to 5 percent. …As expected, the remaining proposals are almost exclusively based around new tax increases, the most significant of which is a new 12 percent levy on all corporate profits over €500,000, which the Greek government expects to bring in €1.35 billion in extra revenue. …together with €100 million per year from a new TV advertisements tax. It also wants to widen the scope of a so-called ‘luxury’ tax to cover private swimming pools, planes and boats.

Here’s a look at the breakdown of the new deal, which I got off Twitter from a pro-liberty Greek citizen (i.e., an endangered species).

So the latest deal is 93 percent tax hikes and 7 percent spending cuts. And I’m sure those so-called spending cuts are probably make-believe reductions in previously planned increases instead of genuine reductions.

That’s so imbalanced that it makes President George H.W. Bush’s disastrous 1990 tax-hike deal seem good by comparison.

And just in case you wonder whether there’s no fat in the Greek budget, consider this shocking sentence from the EU Observer story.

Public spending on pensions currently amounts to 16 percent of Greece’s GDP.

To give you an idea of how crazy that number is, Social Security outlays in the United States consume “only” 4.9 percent of GDP.

And don’t forget the Greeks also squander money on a bloated bureaucracy and a preposterous regulatory regime (click here and here to see I’m actually understating the problem).

Yet rather than change any of these anti-growth policies, the government wants more and more revenue to prop up a bloated government.

The bottom line is that Greek politicians and interest groups are trying to impose an upside-down version of my Golden Rule.

But while my Rule says that the private sector should grow faster than the government, their version is that the tax burden should grow faster than the private sector.

Needless to say, that’s an approach that is guaranteed to produce economic ruin.

Productive people leave the country or operate in the underground economy. And many others decide that it’s far more comfortable to climb into the wagon of government dependency.

The situation is utterly ludicrous, as explained by George Will.

…a nation that chooses governments committed to Rumpelstiltskin economics, the belief that the straw of government largesse can be spun into the gold of national wealth? Tsipras…thinks Greek voters, by making delusional promises to themselves, obligate other European taxpayers to fund them.

But George sees a silver lining to the dark cloud of Greece’s economic illiteracy.

Greeks bearing the gift of confirmation that Margaret Thatcher was right about socialist governments: “They always run out of other people’s money.” …This protracted dispute will result in desirable carnage if Greece defaults, thereby becoming a constructively frightening example to all democracies doling out unsustainable, growth-suppressing entitlements.  …It cannot be said too often: There cannot be too many socialist smashups. The best of these punish reckless creditors whose lending enables socialists to live, for a while, off of other people’s money.

I fully agree with this final point. Just like it’s good to have positive examples (think Hong Kong, Switzerland, Texas, or Singapore), it’s also good to have bad examples (such as France, Italy, California, and Illinois).

Though it’s unclear whether politicians even care about learning any lessons.

P.S. Don’t forget that some American politicians want America to be more like Greece, as illustrated by this Henry Payne cartoon.

P.P.S. Also keep in mind that Greece is just the tip of the iceberg. Other European welfare states are making the same mistakes and will soon suffer similar fates.

Read Full Post »

I wrote in May 2011 that the situation in Greece was hopeless because nobody with power and/or influence wanted the right policy.

So I wasn’t bashful about patting myself on the back later that year when it quickly became obvious that bailouts weren’t working.

Ever since then, I’ve tried to ignore the debacle, though I periodically succumb to temptation and highlight the wasteful stupidity of the Greek government.

Having shared all sorts of bad news, I now feel obliged to point out that the situation isn’t hopeless.

Just last year, I explained that the right reforms could rescue Greece. And just in case you think I’m laughably naive, others have the same view.

Writing for the U.K.-based Telegraph, Ivan Mikloš, and Dalibor Roháč explain how Greece can enjoy and economic renaissance.

Greeks have to stop seeing themselves as victims… True, Greece’s international partners need to bear their share of responsibility for the economic catastrophe that has been unfolding in the country. However, it is not its creditors that are holding Greece back – rather, it is the lack of domestic leadership and ownership of economic reforms.

And what gives Mikloš and Roháč the credibility to make this assertion?

Simple, they’re from Slovakia and that nation faced a bigger mess after the collapse of the Soviet Empire and the peaceful breakup of Czechoslovakia.

As Slovaks, we have learned a fair bit about these matters. Once home to much of Czechoslovakia’s heavy industry – exporting arms and heavy machinery to the former Soviet bloc – Slovakia bore a disproportionate share of the costs incurred by the transition from communism in the early 1990s. …At the time of the country’s break-up, in 1992, the per capita income in Slovakia, expressed in purchasing power parity, was merely 62 per cent of that in the Czech Republic.The years that followed were not happy. The lingering sense of victimhood fostered nationalism and authoritarianism, as well as cronyism and corruption… By the time of the parliamentary election of 1998, Slovakia was on the brink of a financial meltdown.

But the election didn’t result in victory of crazed leftists, as we see with Syriza’s takeover in Greece.

Instead, the Slovak people elected reformers who decided to reduce the size and scope of the public sector.

The new government, formed by a coalition of pro-Western parties, restructured the banking sector, brought the public deficit under control… The parliamentary election of 2002 opened a unique window of opportunity. Slovakia’s novel tax reforms, spearheaded by domestic reformers under the auspices of Prime Minister Mikuláš Dzurinda, were seen by the IMF at the time as far too radical. However, the new, simpler, and leaner tax system, alongside other structural reforms, incentivized investment and turned Slovakia, nicknamed the “Tatra Tiger”, into the fastest-growing economy in the EU.

And a handful of other EU nations have followed the right path.

In 2008, instead of devaluing its currency – as recommended by the IMF – Latvia slashed public spending, cutting the salaries of civil servants by 26 per cent. The economy rebounded quickly to a growth rate of 5 per cent in 2011.

Here’s the bottom line.

Today, Slovakia’s per capita income rivals that of the Czech Republic. Together with Poland and the Baltic states, these countries have been catching up with their advanced Western European counterparts.

And the lesson for Greece should be clear, both politically and economically.

The purpose of economic reforms should not be to please the Troika, but to restore durable, shared prosperity. Deep, domestically led reforms need not be a form of political suicide, either. In 2006, after eight years of deep – and sometimes painful – reforms, Slovakia’s leading reformist party recorded its best electoral result in history. Similarly, many of the radical reformers in the Baltic states did well in subsequent elections. And a Greek leader who turns his country into a “Mediterranean Tiger” will most certainly not go down in infamy.

Unfortunately, the slim odds of good policy being adopted in Greece are partly the fault of the United States.

Or, to be more accurate, the Obama Administration is being very unhelpful by urging bailouts instead of reform.

Here’s some of what is being reported by the U.K.-based Guardian.

The Greek television channel, citing a senior German official, described the US treasury secretary, Jack Lew, imploring his German counterpart Wolfgang Schäuble to “support Greece” only to be told: “Give €50bn euro yourself to save Greece.” Mega’s Berlin-based correspondent told the station that the US official then said nothing “because, as is always the case according to German officials when it comes to the issue of money, the Americans never say anything”.

I’m not a big fan of Wolfgang Schäuble. The German Finance Minister is a strident opponent of tax competition, and some of his bad ideas are cited in the CF&P study that I wrote about yesterday.

But I greatly appreciate the fact that he basically told Obama’s corrupt Treasury Secretary to go jump in a lake.

And I’m also happy that Congress has done the right thing so that Obama and his team don’t have leeway to bail out Greece either directly or indirectly.

P.S. Since we ended on some good news, 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.

Read Full Post »

Over the years, I’ve had many arguments about economic policy with my statist friends. I put them into three categories.

  • The completely unreasonable statists blindly assert, notwithstanding all the evidence around the world, that bigger government and more intervention are actually good for growth.
  • The somewhat unreasonable statists acknowledge that bigger government and more intervention might have some minor “efficiency” costs, but those costs are acceptable and affordable in the pursuit of more “equity.”
  • The semi-reasonable statists admit that bigger government and more intervention hurt growth, but they argue that “libertarian types” must somehow be wrong because our predictions of economic chaos never materialize.

The folks in the last category have a point. For decades, advocates of limited government and free markets have warned about the economic cost of bad policy, yet where’s the collapse?

Why hasn’t Atlas shrugged, as libertarians have warned? Why have predictions of economic dystopia (examples here and here) been wrong?

I have two responses to these questions.

First, the economic damage caused by an expanding welfare state has been offset by improvements in other types of economic policy.

Second, maybe dour libertarians have been right, but got the timing wrong because it takes a long time and a lot of bad policy to destroy an economy.

And that’s today’s topic, because it certainly looks like both Greece and Venezuela have finally reached the end of the road. Let’s call it the Thatcher Inflection Point.

Here are some excerpts from a very grim New York Times story about the economic misery in Greece

Bulldozers lie abandoned on city streets. Exhausted surgeons operate through the night. And the wealthy bail out broke police departments. A nearly bankrupt Greece is taking desperate measures to preserve cash. …In a society that has lived off the generosity of the government for decades, the cash crisis has already had a shattering impact. Universities, hospitals and municipalities are struggling to provide basic services… Greece is already operating as a bankrupt state. …For a generation of Greek politicians who saw government spending (and borrowing) as a national birthright, the idea of deploying only the money at hand has been jarring.

Egads, imagine the horror of only being able to consume what you’re able to produce. Obviously a violation of human rights!

Though some people apparently are learning the right lesson.

…for other Greeks who are eager to break from the country’s tradition of dispensing political favors to the well-connected, these years of imposed restraint have also provided a valuable lesson. “There are no free rides in this country anymore,” said Kostas Bakoyannis, 37, the governor of the Central Greece administrative region. “…Now we have to live on what we can make and produce.”

By the way, don’t cry too many tears for the Greeks. Yes, they’ve had to make genuine budget cuts since outlays peaked near the end of last decade. But government spending in Greece, after adjusting for inflation, is about the same level it was in 2000.

And that wasn’t an era of “harsh austerity.”

In other words, Greece wouldn’t be in trouble today had politicians simply obeyed my Golden Rule.

Besides, how can you feel sorry for a nation that subsidizes pedophiles and requires…um…stool samples to set up online companies.

When it comes to bizarre government policy, Greece truly is special.

Now let’s look at Venezuela, where economic buffoonery is an art form. My Cato colleague Steve Hanke has a new column about that nation’s grotesquely reckless monetary policy.

I estimate Venezuela’s annual inflation rate at 335%. That’s the highest rate in the world. For those holding bolivars, it amounts to: “no rule of law, bad money.” …Facing this inflationary theft, Venezuelan’s have voted with their wallets. Indeed, they have unofficially begun to dollarize the economy.

Here’s John Hinderaker’s summary of the overall situation.

When a country can neither produce nor buy toilet paper, you know the end is approaching. …Venezuela’s regime is long past eating its seed corn; now it’s selling the furniture. Will Maduro’s government default on the country’s debt, some of which carries 30% interest? …The IMF is helping to keep Venezuela’s economy afloat, and if oil prices rise, the Maduro regime might be able to buy a little more time. But the end game is obvious: economic collapse.

I’ll add one modification (and I’m sure John would agree), which is that economic collapse is obvious if policy stays on the current path.

Venezuela (or Greece, or any other nation) could save itself by shifting to a policy of free markets and small government. But I’m not holding my breath.

By the way, I suppose we could also use the example of the Soviet Union. That was a collapse of turbo-charged big government.

But let’s close instead with a point about richer nations in the western world because some readers understandably are thinking that countries such as Germany, Japan, and the United States will never suffer the fate of nations such as Greece, Venezuela, and the Soviet Union.

That’s probably true, but keep in mind that demographic changes are a wild card. Simply stated, aging populations and poorly designed entitlement programs are a very unpalatable combination.

And if governments wait too long to implement reforms, the political obstacles may be too great. Restoring good policy is a lot harder once the people in the wagon outnumber the folks pulling the wagon (as illustrated by these cartoons).

Read Full Post »

I don’t know which group is more despicable, Greek politicians or the voters who elected them. In both cases, they think they’re entitled to other people’s money.

But since the “other people” in this case happen to live in nations such as Germany and Finland, and those folks don’t want to write blank checks to a bunch of moochers and looters, Greece faces a difficult choice.

Either the Greeks behave like adults and rein in their bloated public sector. Or they throw a tantrum, which presumably means both a default on payments to bondholders and a return to the unstable drachma currency.

My guess is they’ll eventually go with the latter option.

But maybe there’s hope for Greece. One of the Prime Minister’s chief economic advisers, an out-of-the-closet communist, has announced his resignation. Here are a few of the details from a story in the EU Observer.

Giannis Milios, a member of Syriza’s central committee and long time economic advisor to Greek prime minister Alexis Tsipras, resigned Wednesday… A professor of economic policy who defines himself as a Marxist, Milios is considered one of the most loyal members of the left-wing party.

So does this signal a shift to more mature and sensible policy?

Perhaps not. According to an article in the Wall Street Journal, the problem in Greece isn’t really the communists. It’s the American leftists like Paul Krugman!

Germany, many other governments and senior policy makers in Brussels believe…that recklessness has been encouraged by misguided political and economic philosophies and bad advice from abroad. It isn’t so much that many in Mr. Tsipras’s Syriza party are Marxists—the eurozone can handle followers of the bearded 19th-century German philosopher. It is more that they are seen to be excessively influenced by a 20th-century British economist—John Maynard Keynes—and his living Anglo-Saxon disciples. At finance ministers’ meetings in Brussels, Mr. Varoufakis has been accompanied by American economists James Galbraith and Jeffrey Sachs. From across the Atlantic, the new government gets strong rhetorical backing from Paul Krugman, Joseph Stiglitz and others.

Wow, this is remarkable. Who would have guessed that run-of-the-mill American leftists are more damaging to economic policy than communists!

I guess this is because the Marxists are probably harmless crazies who hang out in coffee houses and gripe about the capitalist class.

The American leftists like Krugman, by contrast, do real damage because they use discredited Keynesian theory to argue that politicians should be spending even more money to “stimulate” an economy that’s in a crisis because of previous bouts of government spending.

Sort of like trying to get out of a hole by digging even deeper.

What’s amazing is that Krugman and other American statists are pushing bad policy when there are successful examples of nations escaping fiscal crisis with genuine spending cuts.

John Dizard wrote an interesting article about Greece for the Financial Times. He began his article by quoting Krugman, who wrote that the plans of the crazy Greek government are “not radical enough.” Dizard also shared another quote from Krugman, which criticized proponents of lower spending because “the best the defenders of orthodoxy can do is point to a couple of small Baltic nations.”

So Dizard decided to compare Greece with those Baltic nations of Estonia, Latvia, and Lithuania.

There are…some practical lessons to learn from…the contrasting ways that Greece has dealt with the world after the global financial crisis compared with the relatively poor Baltic states. Greece took a path of gradual fiscal adjustments weighted towards tax increases, accompanied by a partial debt default. The Baltic states adopted rapid and deep cuts in their state expenditure and current account deficits.

And here’s a shocking bit of news, though it won’t be surprise to folks in the real world. The Baltics have done far better.

The big issue in the Baltic states is upward wage pressure from tight labour markets. That is what we call a high-class problem. This understates the Baltic countries’ achievements. …They also did this without much benefit from concessionary multilateral finance or international debt haircuts.

Dizard looks at some of the differences between the Baltic nations and Greece.

There were virtually no dismissals from the Greek civil service over this period. Salaries were cut, but public sector staffing was reduced with lay-offs of temporary contract workers and early retirements. This had the effect of reducing already low service levels and transferring costs from payrolls to pension obligations. Latvia fired one-third of its civil servants. …The tax burden [in Greece] on salaried workers, compliant domestic businesses and property owners was substantially increased. In contrast, the Baltic states have fairly flat and relatively low tax rates.

All this is music to my ears since I’ve already written about the successful spending cuts in the Baltic countries.

And I particularly enjoyed having the opportunity, back in 2012, to correct the record when Krugman tried to blame Estonia’s 2008 recession on spending cuts that occurred in 2009.

P.S. Since today’s column focused on the statist ideas of Paul Krugman and because he’s a leading voice for the notion that more government spending somehow “stimulates” growth, I can’t resist sharing an explanation of Keynesian economics I gave back in 2009 as part of some remarks to Colorado’s Steamboat Institute.

Feel free to watch the whole video, but fast forward to 3:30 if you’re pressed for time. I’m being snarky, of course, but I also think my debunking of so-called stimulus is spot on.

P.P.S. By the way, the above video is from the Q&A portion of my remarks. If you watch my my actual speech, and if you pay attention about the 1:35 mark, you’ll see I was talking about the importance of having government grow slower than the economy’s productive sector back in 2009 even though I didn’t unveil Mitchell’s Golden Rule until two years later.

P.P.P.S. Since we’re picking on Krugman, here’s something that’s making the rounds on Twitter.

Good ol’ Professor Krugman praised the European approach of bigger government back in 2010, and everything that’s happened since that point has made his assessment look foolish.

Sort of reminds me of the time he attacked me for my gloomy assessment of California and claimed that the Golden State’s job market was strong. But it turns out that California had the 5th-highest unemployment rate in the nation.

P.P.P.P.S. Let’s close with the observation that the mess in Greece shouldn’t be blamed on Krugman. Sure, he’s giving bad advice, but Greek politicians deserve the lion’s share of the blame. Moreover, to the extent that outside advisers get blamed, we should remember that economists like Joseph Stiglitz and Jeffrey Sachs also are involved, and in some cases exercising more influence than Krugman.

Read Full Post »

I periodically share this poster, in part because it’s funny, but mostly because it’s true.

After all, can you think of many “success stories” involving government?

When I pose this question to my statist friends, I usually get a blank stare in response. Though some of them will offer answers such as the GI Bill, interstate highways, and landing on the moon.

But even if you accept that those policies were successful, it’s rather revealing that folks on the left have a very hard time identifying any success stories from recent decades.

On the other hand, we have a never-ending and ever-growing list of government failures, boondoggles, and screw-ups.

And that’s our focus today. We’re going to look at all levels of government for new examples that confirm Bastiat was right.

Let’s start with Montgomery County in Maryland, where bureaucrats are waging a legal battle against parents who – gasp! – allow unsupervised play for their children.

Here are some troubling passages from a Washington Post report.

The Maryland parents investigated for letting their young children walk home by themselves from a park were found responsible for “unsubstantiated” child neglect…the finding of unsubstantiated child neglect means CPS will keep a file on the family for at least five years and leaves open the question of what would happen if the Meitiv children get reported again for walking without adult supervision. The parents say they will continue to allow their son, Rafi, 10, and daughter Dvora, 6, to play or walk together, and won’t be swayed by the CPS finding. …The case dates to Dec. 20, when police picked up the two Meitiv children walking in Silver Spring on a Saturday afternoon after someone reported them. …The Meitivs said they would not have allowed the one-mile outing from Woodside Park to their home if they did not feel their children were up to it. …The Meitivs, both scientists by training, embrace a “free-range” philosophy of parenting, believing that children learn self-reliance by being allowed to make choices, build independence and progressively experience the world on their own. …Danielle Meitiv said when she first read the decision, she felt numb. As she reread it, she recalled turning to her husband and saying: “Oh my God, they really believe we did something wrong.” …Danielle Meitiv said that in spite of the decision, her children played at a nearby park by themselves Monday, when schools were closed for the snow day.

I confess that I was more paranoid than the Meitivs when my kids were young, so I can’t claim to have followed the same “free-range” approach.

But I also tried to avoid being a “helicopter” parent.

Not that my decisions on child rearing matter. What’s important from the perspective of public policy is that the Montgomery County bureaucracy is trying to dictate how to raise kids. And there’s a very clear implicit threat that it will arrest the parents and/or confiscate the children if the Meitivs don’t acquiesce.

And if you think I’m exaggerating and governments don’t behave this way, check out the story of the mom who was jailed overnight because her kids played outside – while she was watching them!

All of us should be outraged, regardless of our parenting approach.

Now let’s look at an example of a state government in action.

As reported by the Washington Post, the Georgia State Patrol enjoyed a Keystone Cops moment when it raided an old man because…drum roll, please…he was growing okra.

Georgia police raided a retired Atlanta man’s garden last Wednesday after a helicopter crew with the Governor’s Task Force for Drug Suppression spotted suspicious-looking plants on the man’s property. A heavily-armed K9 unit arrived and discovered that the plants were, in fact, okra bushes. …Okra busts like these are good reason for taxpayers to be skeptical about the wisdom of sending guys up in helicopters to fly around aimlessly, looking for drugs in suburban gardens. And that’s not to mention the issue of whether we want a society where heavily-armed cops can burst into your property, with no grounds for suspicion beyond what somebody thought he saw from several hundred yards up in a helicopter.

In some sense, this is an amusing story of government incompetence.

But military-type raids, when the supposed offense involves a possible “crime” with no victims, are a recipe for disaster. Let’s be glad that the cops didn’t accidentally kill anybody in this raid.

By the way, this isn’t the first time cops have seized okra bushes. Or looked foolish because of an inability to identify marijuana leaves.

At the point, I don’t want to miss an opportunity to say that it’s time to end the foolish Drug War. People who abuse drugs may be stupid, but they’re not infringing on the rights of others. The War on Drugs, by contrast, has led to all sorts of policies that do infringe on our rights, from disgusting asset forfeiture policies to pointless snooping on our bank accounts. Or, as we just read, raids on okra growers.

Time now for a look at an example of federal government fecklessness.

But this story from the Washington Times won’t surprise anybody. Because anybody with a pulse already knows that there is a lot of waste in Washington.

Federal agencies across the board are continuing to waste tens of billions of taxpayer dollars on duplicative spending efforts, even after Congress‘ official watchdog has made hundreds of recommendations for cutting back. The spending issues, ranging from Medicare and Medicaid mismanagement to transportation programs to weapon systems acquisitions, cost taxpayers $125 billion in improper payments in 2014 alone, as highlighted in a new report from the Government Accountability Office. …GAO investigators noted in the report that the government can’t continue to sustain its wasteful spending habits… “The federal government faces an unsustainable long-term fiscal path. Changing this path will require difficult fiscal policy decisions to alter both long-term federal spending and revenue,” the GAO analysts concluded. …The GAO report targeted both the Internal Revenue Service and the Department of Health and Human Services for mismanaging programs that saw rampant wasteful spending. …“These programs combined account for over 76 percent of the government-wide estimate. We have made numerous recommendations that if effectively implemented, could help improve program management, reduce improper payments in these programs, and achieve cost savings.”

Notice that HHS and the IRS win the prize for wasteful incompetence.

But don’t laugh. After all, those are the two bureaucracies that got lots of new power and authority as a result of the costly Obamacare boondoggle. So the joke’s on us.

By the way, the GAO’s definition of waste is very narrow. It merely applies to funds that are improperly disbursed.

If you also include monies that are squandered, then the amount of waste includes every penny at the Department of Agriculture, Department of Education, Department of Housing and Urban Development, Department of Transportation, etc.

Last but not least, let’s look at a great moment in foreign government.

I’ve written about the crazy Greek government on many occasions. And given that this collection of misfits does utterly bizarre things (such as giving handouts to pedophiles and requiring stool samples when setting up online companies), I’m never surprised to learn when they adopt foolish policies.

But even I was taken aback to learn about the latest gimmick they concocted to “solve” the nation’s fiscal crisis. Here are some excerpts from a report in the U.K.-based Guardian.

The Greek government has told its eurozone creditors it has a novel way of tackling the country’s chronic tax evasion culture – wiring students, tourists, and housewives for sound and video to spy on tax dodgers while posing as shoppers and customers. …Varoufakis’s plans for a new government-sponsored amateur snoopers’ charter…attracted most attention. …He said the prospects of successfully countering tax dodging were dismal because of the demoralised and understaffed state of the tax inspection service. Instead, he proposed recruiting large numbers of “non-professional inspectors” on short-term casual contracts of no longer than two months who would be paid by the hour. They would be “wired for sound and video”, trained to pose as “customers” and “will be hard to detect by offending tax dodgers.” …Varoufakis said the launch of the amateur snoopers would act as a deterrent, “engendering a new tax compliance culture” in Greece. He added that Athens would need to ask eurozone partners for help with the equipment and the training. Germany has previously offered to send 500 tax inspectors to Athens. …In Athens, news of the undercover tax agents was quick to spark ridicule and widespread disbelief.

Hmmm….so the Germans offered to send 500 tax inspectors? Sounds like a perfect job for ex-Stasi officials.

And there are some bureaucrats in Chicago who almost surely would want to help implement this snitch-on-your-neighbor scheme. And the governor of New York has related experience, though his police-state policy focused on guns rather than tax revenue. Let’s also not overlook the U.K. politicians who have a tax-enforcement-über-alles mentality.

Never mind that all the research shows that low rates are honest government are the best ways of getting high compliance.

So I’m not holding my breath expecting success from this latest Greek scheme.

But I can say it’s a perfect example of how governments operate. Screw up, grab for more money, screw up some more. Lather, rinse, repeat.

It’s almost a shame that there’s no life on Mars. We could make today’s list even longer if there was another layer of government.

Now you know why it’s almost always the right time to mock politicians.

Read Full Post »

There’s a big fiscal battle happening in Europe. The relatively new Greek government is demanding continued handouts from the rest of Europe, but it wants to renege on at least some of the country’s prior commitments to improve economic performance by reducing the preposterous burden of spending, regulation, and intervention.

That seems like a rather strange negotiating position. Sort of like a bank robber holding a gun to his own head and saying he’ll shoot himself if the teller doesn’t hand over money.

At first glance, it seems the Greeks are bluffing. Or being suicidally self-destructive.

And maybe they are posturing and/or being deluded, but there are two reasons why the Greeks are not totally insane.

1. The rest of Europe does not want a Greek default.

There’s a famous saying, attributed to J. Paul Getty, that applies to the Greek fiscal fight. Simply stated, there are lots of people and institutions that own Greek government bonds and they are afraid that their investments will lose value if Greece decides to fully or partially renege on its debts (which is an implicit part of Greece’s negotiating position).

So while Greece would suffer if it defaulted, there would be collateral damage for the rest of Europe. In other words, the hypothetical bank robber has a grenade rather than a gun. And while the robber won’t fare well if he pulls the pin, lots of other people may get injured by shrapnel.

And to make matters more interesting, previous bailouts of Greece have created a rather novel situation in that taxpayers are now the indirect owners of a lot of Greek government debt. As you can see from the pie chart, European taxpayers have the most exposure, but American taxpayers also are on the hook because the IMF has participated in the bailouts.

The situation is Greece is akin to a bankruptcy negotiation. The folks holding Greek government debt are trying to figure out the best strategy for minimizing their losses, much as the creditors of a faltering business will calculate the best way of extracting their funds. If they press too hard, the business may go bust and they get very little (analogous to a Greek default). But if they are too gentle, they miss out on a chance of getting a greater share of the money they’re owed.

2. Centralization is the secular religion of the European elite and they want Greece in the euro.

The bureaucrats at the European Commission and the leaders of many European nations are emotionally and ideologically invested in the notion of “ever closer union” for Europe. Their ultimate goal is for the European Union to be a single nation, like the United States. In this analogy, the euro currency is akin to the American dollar.

There’s a general perception that a default would force the Greek government to pull out of the euro and re-create its own currency. And for the European elite who are committed to “ever closer union,” this would be perceived as a major setback. As such, they are willing to bend over backwards to accommodate Greece’s new government.

Given the somewhat blurry battle lines between Greece and its creditors, what’s the best outcome for advocates of limited government and individual liberty?

That’s a frustrating question to answer, particularly since the right approach would have been to reject any bailouts back when the crisis first started.

Without access to other people’s money, the Greek government would have been forced to rein in the nation’s bloated public sector. To be sure, the Greek government may also have defaulted, but that would have taught investors a valuable lesson about lending money to profligate governments.

And it would have been better if Greece defaulted five years ago, back when its debt was much smaller than it is today.

But there’s no point in crying about spilt milk. We can’t erase the mistakes of the past, so what’s the best approach today?

Actually, the right answer hasn’t changed.

And just as there are two reasons why the Greek government is being at least somewhat clever in playing hardball, there are two reasons why the rest of the world should tell them no more bailouts.

1. Don’t throw good money after bad.

To follow up on the wisdom of J. Paul Getty, let’s now share a statement commonly attributed to either Will Rogers or Warren Buffett. I don’t know which one (if either) deserves credit, but there’s a lot of wisdom in the advice to stop digging if you find yourself in a hole. And Greece, like many other nations, has spent its way into a deep fiscal hole.

There is a solution for the Greek mess. Politicians need to cut spending over a sustained period of time while also liberalizing the economy to create growth. And, to be fair, some of that has been happening over the past five years. But the pace has been too slow, particularly for pro-growth reforms.

But this also explains why bailouts are so misguided. Politicians generally don’t do the right thing until and unless they’ve exhausted all other options. So if the Greek government thinks it has additional access to money from other nations, that will give the politicians an excuse to postpone and/or weaken necessary reforms.

2. Saying “No” to Greece will send a powerful message to other failing European welfare states.

Now let’s get to the real issue. What happens to Greece will have a big impact on the behavior of other European governments that also are drifting toward bankruptcy.

Here’s a chart showing the European nations with debt burdens in excess of 100 percent of economic output based on OECD data. Because of bad demographics and poor decisions by their politicians, every one of these nations is likely to endure a Greek-style fiscal crisis in the near future.

And keep in mind that these figures understate the magnitude of the problem. If you include unfunded liabilities, the debt levels are far higher.

So the obvious concern is how do you convince the politicians and voters in these nations that they better reform to avoid future fiscal chaos? How do you help them understand, as Mark Steyn sagely observed way back in 2010, that “The 20th-century Bismarckian welfare state has run out of people to stick it to.

Well, if you give additional bailouts to Greece, you send precisely the wrong message to the Italians, French, etc. In effect, you’re telling them that there’s a new group of taxpayers from other nations who will pick up the tab.

That means more debt, bigger government, and a deeper crisis when the house of cards collapses.

P.S. Five years ago, I created a somewhat-tongue-in-cheek 10-step prediction for the Greek crisis and stated at the time that we were at Step 5. Well, it appears my satire is slowly becoming reality. We’re now at Step 7.

P.P.S. Four years ago, I put together a bunch of predictions about Greece. You can judge for yourself, but I think I was quite accurate.

P.P.P.S. A big problem in Greece is the erosion of social capital, as personified by Olga the Moocher. At some point, as I bluntly warned in an interview, the Greeks need to learn there’s no Santa Claus.

P.P.P.P.S. The regulatory burden in Greece is a nightmare, but some examples of red tape are almost beyond belief.

P.P.P.P.P.S. The fiscal burden in Greece is a nightmare, but some examples pf wasteful spending are almost beyond belief.

P.P.P.P.P.P.S. Since we once again have examined a very depressing topic, let’s continue with our tradition of ending with a bit of humor. Click here and here for some very funny (or sad) cartoons about Obama and Greece. And here’s another cartoon about Greece that’s worth sharing. If you like funny videos, click here and here. Last but not least, here’s some very un-PC humor about Greece and the rest of Europe.

Read Full Post »

I’m a pessimist about public policy for two simple reasons:

1) Seeking power and votes, elected officials generally can’t resist making short-sighted and politically motivated choices that expand the burden of government.

2) Voters are susceptible to bribery, particularly over time as social capital (the work ethic, spirit of self reliance, etc) erodes and the entitlement mentality takes hold.

Actually, let me add a third reason.

The first two reasons explain why countries get into trouble. Our last reason explains why it’s oftentimes so hard to then fix the mess created by statism.

3) Once a nation adopts big government, reform is difficult because too many voters are riding in the wagon of dependency and they reflexively oppose good policy.

Or they’re riding in the party boat, but you get the idea.

Now that I’ve explained why I’m a Cassandra, let me try to be a Pollyanna.

And I’m going to be Super Pollyanna, because my task is to explain how Greece can be saved.

I’ll start by pointing out that government spending has actually been cut in recent years. And we’re talking about genuine spending cuts, not the make-believe cuts you find in Washington, which occur when spending doesn’t grow as fast as previously planned.

This chart, based on IMF data, shows that the budget increased dramatically in Greece from 1980-2009. But once the fiscal crisis started and Greek politicians no longer had the ability to finance spending with borrowed money, they had no choice but to reduce the burden of government spending.

This seems like great news, but there’s one minor problem and one major problem.

The minor problem is that there hasn’t been nearly enough structural reform of the welfare state in Greece. For long-run fiscal recovery, it’s very important to save money by reducing handouts that create dependency, while also shrinking the country’s bloated bureaucracy. By comparison, it’s less important (or perhaps even harmful) to save money by letting physical infrastructure deteriorate.

The major problem is that controlling government spending is just one piece of the puzzle. There are five major factors that determine economic performance, with experts assigning equal importance to fiscal policy, trade policy, regulatory policy, monetary policy, and rule of law.

Moreover, not only is fiscal policy just 20 percent of the puzzle, it’s also important to understand that spending is just part of that 20 percent. You also have to consider the tax burden.

And the progress Greece has made on the spending side of the budget has been offset by a bunch of destructive tax increases.

But there is a glimmer of hope because Greek politicians apparently realize that this is a problem.

Here are some excerpts from the Wall Street Journal’s coverage.

Greek Prime Minister Antonis Samaras promised tax-relief measures to help jump-start the country’s economy and boost the government’s popularity as it faces a series of political challenges in the months ahead. “The overtaxation has to end,” Mr. Samaras said Saturday during a speech.

It’s easy to see why there’s a desire to boost economic performance.

Since entering recession in 2008, Greece’s economy has shrunk by more than a quarter… This year, however, the country is expected to emerge from recession and post growth of 0.6%. But the recovery has yet to trickle down to ordinary Greeks who continue to face a jobless rate of more than 27% and higher taxes imposed during the past few years.

However, don’t get too excited. The Premier isn’t talking about sweeping reforms.

Instead, it appears that the proposed changes will be very minor.

In his remarks, the Greek premier announced a number of tax changes, including a 30% reduction in the levy on home heating oil and amendments to a new unified property tax that has been so far marred by errors and miscalculations in implementation.

Geesh, talk about rearranging the deck chairs on the Titanic.

Indeed, at least one of the tax cuts may be designed to bring in more money for the government. The New York Times, for instance, reports that the energy tax didn’t generate any extra tax revenue.

That levy, which was introduced in 2012, raised the tax on heating oil 450 percent. But it has failed to bring in additional revenue and has led to environmental damage as Greeks turned to burning wood for heat.

I guess it’s progress that both the Greek government and the New York Times are acknowledging the Laffer Curve, but this is a perfect example of why it’s important to be on the growth-maximizing point of the curve rather than the revenue-maximizing point.

So why am I expressing a tiny sliver of optimism when the Greek government’s tax agenda is so timid?

Well, there’s at least some hope of bigger and more pro-growth reforms.

He also announced a reduction to a so-called solidarity tax on income, the size of which is to be determined when the state budget for 2015 is drafted in October. The changes would be part of a “road map” for lowering taxation with cuts to the property tax, income tax and corporate tax to come later, he said. “Overtaxation may have been necessary, but now it must stop,” he said.

And the Greek press is reporting further details indicating that the government wants to reduce marginal tax rates

Samaras said that it his ultimate aim to reduce the top income tax rate to 32 percent and for business to pay no more than 15 percent.

If these policies actually took place, then I suspect Greece’s economy would enjoy robust growth.

Particularly if policy makers also dealt with the major problem of excessive regulation (see here and here to get a flavor of the awful nature of red tape in Greece).

In other words, any nation can prosper if good policy is adopted.

Including Greece, though I must admit in closing that I suspect that there’s a less-than-15-percent chance that my optimistic scenario will materialize. And if you read this Mark Steyn column, you’ll understand why the pessimistic scenario is much more likely.

P.S. Click here and here for two very funny (or sad) cartoons about Obama and Greece. And here’s another cartoon about Greece that’s worth sharing.

P.P.S. Click here and here for some amusing Greek policy humor.

P.P.P.S. The IMF also has admitted that Greece is on the wrong side of the Laffer Curve.

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 2,812 other followers

%d bloggers like this: