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A lesson from Greece: you can’t run a government without taxes


9:36 am - June 28th 2011

by Richard Murphy    


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I’ve been reflecting on the situation in Greece and have pointed out that much of what is happening is the inevitable consequence of neoliberal thinking.

So too is the fact that Greece suffers endemic tax evasion. It is thought that 30% of revenues are lost to evasion in Greece, with the rich being especially prone to non-payment.

There is a reason for this: neoliberal thinking reinforces the often held view that the payment of taxes is detrimental to a person’s well-being.

The evidence is obviously to the contrary in this case: Greece would clearly be in a better position, and its population would also very clearly be in a better position if these taxes have been collected and the country was able to pay its debts .

You can’t even argue that many of those who should have paid would have been materially worse off as a result of their paying this tax. As Veblen would have argued, much of this money will have been used on conspicuous consumption.

Adherents of Neo-liberalism do however ignore this point. They argue that any interference in a person’s ability to choose the way in which they spend their gross, pre-tax, income diminishes their well-being because only they can no their preferred consumption preferences. This, however, is wrong.

There is now a vast body of research showing that people are very poor at decision-making, particularly when it comes to their long-term well-being, and anyway, as I have frequently argued, a person’s entitlement is not to their gross income, but to their net income after tax is paid.

It is very clear that people wish that democratically elected governments provide service on their behalf that they cannot provide themselves, and which in many cases they cannot anticipate requiring. Use of the word ‘cannot’ in that sentence is quite deliberate: many people cannot anticipate unemployment, ill-health, or even the fact that they will need considerable help in most cases in the period of terminal care prior to their deaths, for example.

Put simply, you can’t run a government, a country, an economy or a society without a solid, progressive, effective and confident tax system that collects the money that is due.

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About the author
Richard is an occasional contributor. He is a chartered accountant and founder of the Tax Justice Network. He blogs at Tax Research UK
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Reader comments


FWIW my reading of Greece’s predicament is that that its economy is basically uncompetitive against competition in international markets. This means that it really needs to depreciate the exchange rate of its currency but is unable to do that because Greece is in the Eurozone and therefore no longer has a national currency.

The truth of the matter is that additional loan facilities do not address these competitiveness issues. Greece shouldn’t be in the Eurozone.

Competition and markets: there’s your problems.

What a load of straw man argumentation.

I can’t think of anyone who would think that a government can be run without taxes. But Greece’s problem isn’t about running the country without taxes; it is about having an overly complex tax code combined with lots of government regulation of private enterprise, which fosters corruption, and a large public sector with extraordinary benefits to officials.

What Greece needs is simpler tax laws, less regulation and better policing of those taxes. And a lot of less protection for privileged professions and austerity for government employees.

“Competition and markets: there’s your problems”

Greece could, of course, avoid those awkward problems if it withdrew not only from the Eurozone but from the European Union as well and all those international agreements which constrain its option to unilaterally hike trade barriers. Mind you, Greece will need to be wary about the prospect of retaliatory actions by other countries if it does choose to hike trade barriers.

I am not a neo-liberal and I agree with your arguement. However one must also take onboard the small state arguement that since you can’t run a government without taxes one must then decide just how much government you can actually afford.

Given that most socially aware lobbying is now focused on demanding state aid, maybe the centre and left should take on board some of the anarchist ideas and look for non statist solutions to provide social provision in a way that is wholly protected from the problems of representative democracy.

While I’m sure Richard’s nemesis, Tim, will be along in a minute to make this point, you’d be hard-pressed to find a liberal who’d endorse tax evasion, which is problem you’re talking about. That is a real problem in Greece.

The way that incompetents and some lefties have reduced the situation in Greece to “it is due to tax evasion / teh evil bankers / neoliberal thinking” is extraordinarily simplistic, although I suppose I shouldn’t be surprised.

Try this for a rather deeper look at Greece:

http://www.economist.com/blogs/charlemagne/2010/03/empathy_short_supply

There’s a cracker of an article for Vanity Fair by Michael Lewis on Greece that sets out just how and why Greece is so utterly doomed. And it’s not terrible supportive of the idea that if only the Government’s tax revenues were higher, there’d be no problem.
http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010?currentPage=all

The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece’s rail passengers into taxicabs: it’s still true. “We have a railroad company which is bankrupt beyond comprehension,” Manos put it to me. “And yet there isn’t a single private company in Greece with that kind of average pay.”

And the problem with schools is always a lack of money isn’t it?

The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland’s. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something.

And as for Richard’s usual scapegoats?

Oddly enough, the financiers in Greece remain more or less beyond reproach. They never ceased to be anything but sleepy old commercial bankers. Virtually alone among Europe’s bankers, they did not buy U.S. subprime-backed bonds, or leverage themselves to the hilt, or pay themselves huge sums of money. The biggest problem the banks had was that they had lent roughly 30 billion euros to the Greek government—where it was stolen or squandered. In Greece the banks didn’t sink the country. The country sank the banks.

As for Richard’s comment that:

There is now a vast body of research showing that people are very poor at decision-making, particularly when it comes to their long-term well-being

It is really quite abundantly clear that the people in Greece who were worst at decision-making, particularly when it comes to their long-term well-being, were the Government. I’m not at all sure that simply making sure they had more money would be a proper solution.

@3 pjt

The idea that reducing regulation will result in less corruption is pure madness.

Regulation seeks to prevent undesireable behaviour from private industries, it’s mere presence and the threat it poses to profits will ensure that at least some of that undesireable behaviour stops.

If 20% of an industry offered to bribe government officials, a lot of those offers would be rejected and firms prosecuted. Even if some bribes were accepted, it seems fairly clear to me that the fall in undesirable behaviour, combined with the prosecution of some corrupt industrialists would far outweigh the increase in corruption.

Abolishing regulation would just result in all the undesirable behaviour the regulation was trying to prevent happening again.

Para 6 also has a type – it says ‘no’ not ‘know’.

@7

A deeper look at something in the Economist? You’ll be lucky.

12. Charles Wheeler

“non statist solutions to provide social provision in a way that is wholly protected from the problems of representative democracy.”

They don’t, have never, and can’t exist.

Without intervention markets concentrate wealth and power. Those at the bottom don’t have the resources to fend for themselves. Only the state has the coercive power to redistribute in transfer payments or services.

As long as the ideology that holds that ‘taxation is theft’ dominates – even among those who benefit from redistribution inequality will continue to increase. We have plenty of examples of small state, low tax economies – it’s called the Third World.

A comprehensive and effective tax base coincided with the ‘golden age’ of capitalism. The destruction of this through tax cuts on the rich and the explosion of ‘offshore’ avoidance and evasion is directly responsible for our current malaise as those on lower incomes have been forced to overborrow from the rich and repay with interest – effectively reversing the flow, redistributing from poorer to richer, inflating asset prices and creating a feedback loop until debts simply become unserviceable.

Greece just happens to be the canary in the mine – the sovereign equivalent of sub-prime borrowers. But the problems arise (as in the US and the rest of Europe) from excessive PRIVATE debt transferred to the public accounts – private debt being the corollary of escalating inequality and an ideologically fixated approach to government action from the disciples of Ayn Rand.

The idea that individual self-help can ameliorate the forces of an unrestrained market went out with the Dodo.

The idea that reducing regulation will result in less corruption is pure madness.

Not really. If the purpose of the regulation is to require that, eg contracts, need approval from civil servants, then the likeliness that those civil servants are bribed increases massively. Once the expectation is there that public officials can be bought, the level of corruption increases dramatically, again from Michael Lewis:

Where waste ends and theft begins almost doesn’t matter; the one masks and thus enables the other. It’s simply assumed, for instance, that anyone who is working for the government is meant to be bribed. People who go to public health clinics assume they will need to bribe doctors to actually take care of them. Government ministers who have spent their lives in public service emerge from office able to afford multi-million-dollar mansions and two or three country homes.

Or as PJ O’Rourke said “when legislators determine what can be bought and sold, the first things to be bought and sold will be the legislators”.

Ciaran: the reason for corruption in Greece is that there is more regulation – and cost and taxes related to regulation – than people have historically been willing to accept, and no means of enforcing this amount and detail of regulation. There is a widespread practise of corruption due to this. Naming “industrialists” as the problem is a simplification, probably in an attempt to not face the actual issues which covers much of the country, not just a few evil capitalists.

This is not just about the industries. It’s about everything in the performance of the public sector, and industries as well as small enterprises, where everything is bogged down by regulation and corruption. Things like doctors – where you may not get an appointment without a bribe – and pharmacists, hairdressers, etc. A hairdresser is considered a hazardous job where you are entitled to retire at the age of 50. It’s no wonder that the country is not competitive.

http://www.businessinsider.com/in-greece-you-can-retire-at-50-with-full-benefits-2010-3
http://www.nytimes.com/2010/10/15/world/europe/15greece.html
http://news.bbc.co.uk/2/hi/business/8701127.stm
“Every Greek is familiar with the idea of paying what’s called the faculackie, a little bribe to a doctor or a consultant, sometimes in appreciation but more often than not to try to speed up the process of healthcare”

Tim J: A brilliant quote from Rourke. Exactly the problem in Greece.

16. littlekeithy

Can the critics agree on their arguments?

Economist article (from no 7) “many Greek civil servants are paid pitiful wages—partly because there are so many of them”

Vanity Fair (no 8) “The average government job pays almost three times the average private-sector job.”

Of course it could be that the private sector jobs in Greece pay a third of a pittance or it is more likely a lot of hearsay and opinion is being dressed up analysis.

There is a detailed study here http://www.eurofound.europa.eu/eiro/studies/tn0808019s/gr0808019q.htm of wage rates in Greece, shows that the statrutory minimum wage is nearly half that of the Eu average, there doesn’t appear to be a 3x times public/private ratio and makes the interesting point that low wages are a problem for industry (can’t attract the right people).

To misquote no 7 above: “The way that incompetents and some neo-liberals have reduced the situation in Greece (or UK or country of choice) to ‘it is due to overpaid public sector workers and generous benefits/pensions’ is extraordinarily simplistic.”

Reminds me of the spoof headline in The Onion’s 100 years of headlines: October 1929 edition, “Plutocrats blame everyone except plutocrats for crash”.

The above point my littlekeithy is worth reading.

Also, commenter above says: Greece just happens to be the canary in the mine – the sovereign equivalent of sub-prime borrowers

Hmmm… could someone please name the bank that told them this was all ok and above par? How are they doing right now?

18. George Hallam

Pit said : A brilliant quote from Rourke.

As Dennis Healy said: it’s no trick to be brilliant as long as you don’t mind being wrong all the time.

“when legislators determine what can be bought and sold..”

When have states not determined what can be bought and sold? It’s entirely routine, so the ‘when’ is misleading. This makes a nonsense of the proposition that “the first things to be bought and sold will be the legislators.”

Of course, political power is important and people and will fight over it, but that doesn’t mean that legislators can be bought and sold. It can happen but it’s not inevitable and certainly not routine.

Economist article (from no 7) “many Greek civil servants are paid pitiful wages—partly because there are so many of them”

Vanity Fair (no “The average government job pays almost three times the average private-sector job.”

The two quotations above aren’t actually incompatible.

There is a detailed study here http://www.eurofound.europa.eu/eiro/studies/tn0808019s/gr0808019q.htm of wage rates in Greece

That’s not a study about wage rates at all, it’s a study about wage formation. Which is rather different. It’s not exactly my area of expertise, but Reuters seem to agree:

Greek civil servants receive on average higher salaries, work fewer hours and retire earlier than their private sector peers. About half a million are on the government payroll, and another 300,000 work in the wider public sector.

http://www.reuters.com/article/2010/03/09/us-greece-economy-people-idUSTRE6283PU20100309?feedType=RSS&feedName=worldNews

Surely the bizarrest point in all this is that public sector workers in Greece receive 14 monthly salary payments per year.

html fail, sorry mods.

When have states not determined what can be bought and sold? It’s entirely routine, so the ‘when’ is misleading. This makes a nonsense of the proposition that “the first things to be bought and sold will be the legislators.”

PJ was mainly talking about the growth of the lobbying industry in the US I believe. And it’s hard to disagree with the thrust of that argument.

Tim J: A brilliant quote from Rourke. Exactly the problem in Greece.

For prudential reasons, most countries regulate to restrict the medicines which can be sold over the counters in pharmacies without the prescriptions of registered medical practitioners. Other regulations restrict the food which can be sold as fit for human consumption. I don’t detect a groundswell of public opinion calling for the abolition of those regulations.

Sadly, Greece’s problems extend well beyond gathering more tax revenues to balance the government’s budget. Greece’s inflation rate is too high above that of the Eurozone average, its industrial production is falling and its balance of payments is in chronic deficit.

Those problems won’t be resolved by deregulation and sacking swathes of public sector employees. Greece shouldn’t be in the Euzone – it didn’t meet the Maastricht eligibility criteria but was enrolled anyway in the usual fit of political Europhoria which enveloped the project at the start when those running the EU and their supporters didn’t want to recognise the economic fundamentals of monetary unions. Their minds were befuddled by the intoxicating aspirations of European integration.

“Competition and markets: there’s your problems”

lack of competition and malfunctioning markets? a workers paradise, obviously.

25. manoamano

“I’ve been reflecting on the situation in Greece and have pointed out that much of what is happening is the inevitable consequence of neoliberal thinking”

Erm, because Greece hasn’t been done under by its socialist party government then?

Erm, because Greece hasn’t been done under by its socialist party government then?

Taking advice from Goldman Sachs? On what planet is that socialist politics?

27. Maltese Cross

Tim J rules this thread. Just read his comments.

26 – I just remembered the great Lobachevsky.

There is now a vast body of research showing that people are very poor at decision-making …

Trust us: we’re not people, we’re politicians.

I really wonder if those who so readily bandy around the term “neo-liberalism” have ever read a mainstream economic textbook or academic paper in their life.

My insights into the potential failings of the Euro project derive from reading this prescient article by the late Rudi Dornbusch (MIT) in the Foreign Affairs periodical, issue for September 1996: Euro Fantasies:
http://www.foreignaffairs.com/articles/52431/rudiger-dornbusch/euro-fantasies-common-currency-as-panacea

Try this assessment of the Euro and its prospects in 2009 by Martin Feldstein (Harvard)
http://www.nber.org/feldstein/ReflectionsonAmericansViewsoftheEuroExAnte.pdf

This was Feldstein’s earlier assessment in 1998 of prospects for a single European currency:
http://www.nber.org/feldstein/ny050798.pdf

The classic British presentation of the case for and against joining the Eurozone was this P/B book by James Forder and Christopher Huhne: Both Sides of the Coin (Profile Books 2001)
http://www.amazon.co.uk/Both-Sides-Coin-Arguments-European/dp/1861973217/ref=sr_1_1?ie=UTF8&qid=1309265820&sr=8-1

31. George Hallam

22. PJ was mainly talking about the growth of the lobbying industry in the US I believe.

Exactly. A comment about a highly specific situation has been expressed as if it was a general law. Brilliant but wrong.

Sunny, when did Greece start taking advice from Goldman Sachs?

Taking advice from Goldman Sachs? On what planet is that socialist politics?

Greece asked a bank for advice on how they could borrow lots more money without contravening EU rules on borrowing. Since, as we are constantly told, inordinate borrowing is the key to future economic growth and prosperity, Goldmans were doing the right thing?

31:
>Exactly. A comment about a highly specific situation has been expressed
>as if it was a general law. Brilliant but wrong.

Wrong as a generalisation for all situations on Earth, but quite fitting also for the current situation in Greece. When a whole country provides utterly falsified economic statistics and bookkeeping, it’s not of course a fault of only the politicians or only the industrialists, it’s a collective failure. And of course not even a collective failure of just Greece, but also the rest of eurozone that just wanted to believe that the euro project will make things good.

Still, stronger “resistance to cuts” or whatever will not be a cure. The countries will have to learn to spend not more than they earn.

32 – 2002 I believe. Greece wanted to raise more money (to invest in public services! To prime the economic engine for future growth!) but were up against Eurozone borrowing limits. So they asked GS to structure a complex derivatives currency swap deal.

I might even have understood this at one point, but it’s been 5 years since I did worked on derivative transactions. Essentially it’s off-balancesheet borrowing, where liabilities are pushed into the future. It’s not uncommon in the, eh, fiscally looser countries of the Southern Mediterranean.

@19. Tim

“Surely the bizarrest point in all this is that public sector workers in Greece receive 14 monthly salary payments per year.”

Why? It is common in Southern Europe for public (and private) sector workers to have your salary divided into 14 rather than 12. It’s like a state sponsered saving scheme.

Quick quiz – who earns more?

Person A – €20,000/12 = €1,666.67
Person B – €20,000/14 = €1,428.57

Try Mervyn King’s take on Greece’s problems:

“King’s remarks to a British parliamentary committee follow worries he expressed at a news conference on Friday, when he warned that Greece’s problem was solvency, not liquidity, and that temporary cash injections would not fix it.”
http://www.reuters.com/article/2011/06/28/us-britain-boe-greece-idUSTRE75R1NY20110628

38. Northern Worker

Whatever happens in Greece, the government will still have to cut back expenditure. Austerity will be needed whether they are bailed out or default. I wonder if the demonstrators appreciate this?

@ 25

“Erm, because Greece hasn’t been done under by its socialist party government then?”

Since the establishment of the Third Republic in Greece after the fall of the military junta in 1974, PASOK the Greek Socialist party has been in power for around XX years (Oct. 1981 – Jul. 1989, Oct. 1993 – Mar. 2004 and Oct. 2009 to present).

It’s hardly likely that all of their problems can be laid at the feet of PASOK, and none attributed to the conservative New Democracy party.

The GS/Greece deal was an off-market FX swap designed to hide the extent of their current debt to comply with Maastricht EZ entry criteria. I had just joined GS after the trade happened.

The problems is Greece are numerous;

As Ritchie points out, tax evasion was endemic across the economy. Try paying a bill by credit card there, or getting proper treatment from a Doctor without paying the bulk in cash.

Corruption is rife in both public and private sectors.

Public sector careers were too short – just over 25 years on average, with retirement longer than that. People weren’t saving enough for retirement.

Public sector was too bloated and too well paid in comparison to the tax paying private sector base.

Public sector pensions were too generous for the amount saved and productivity of those workers.

The SOCIALIST (neo-liberal? really?) governments were too in hock to their voting constituencies to admit that their spending was unsustainable – and they regularly falsified budget deficit data.

Where Ritchie gets it worng though, is that even if Greece had almost no tax evasion problem they would still have been spending and borrowing too much, and would still be just as bankrupt, just not on such a biblical scale.

It’s not noe-liberal thinking that has caused this – it’s entitlement based socialism. Everyone thinking they deserve a certain treatment from the state without questioning how it will be paid for other than a general “other rich people will” philosophpy.

41. Richard W

Even for Mr Murphy this article is a shocker. The idea that Greece is in trouble through neoliberalism is jaw dropping. They are one of the least neoliberal nations in the advanced world and are regularly at the bottom of everyone’s competitive index. Who has ever said ” that the payment of taxes is detrimental to a person’s well-being. ” The government tax take is hardly ever the problem. Within reason what will help to determine prosperity is how the government taxes not how much they tax. Denmark and Sweden are high tax take nations with comprehensive welfare states. Even with right wing think tanks like Cato and Heritage they score highly as free market neoliberal states because the tax system does not discourage enterprise. High tax Scandinavia are considered more neoliberal than the UK, and miles in front of Greece.

There is a very simple way for Greece to collect taxes form their rich millionaires and billionaires who all claim to earn less than 90 K per annum. A LVT will do the job.

Greece is a middle income country masquerading as a high-income country and getting others to finance the difference. Tax is not the fundamental problem. An uncompetitive economy with a public sector almost like a feudal aristocracy in relation to everyone else in the economy is the problem.

42. Paul Newman

Interesting thread the original post is really quite chilling but the strength and reasonableness of the counter arguments are hugely impressive.

Bob B – I have filed and kept many of your references and your efforts are appreciated

Tim J – Brill

43. littlekeithy

no 19

“The two quotations above aren’t actually incompatible.”

I admitted that very possibility in the next sentence but it would mean the private sector is paid a third of a public sector pittance. But I very much doubt they are compatible unless you have some good stats that show that and not opinion pieces.

“That’s not a study about wage rates at all, it’s a study about wage formation. Which is rather different:”

It gives loads of examples of wages, minimums and averages in different sectors ie wage rates, which afterall is the result of wage formation. Tallies with a number of other statistical sources. Again if you have better data not churnalism please provide.

Regarding the bloated public sector

“In 2005, government employment in Greece amounted to 14% of the
total labour force, very close to the OECD average.” Source: OECD Comparison of Employment in the Public Domain Survey and Labour Force Survey

Mmm food for thought.

14 month pays in 12 months. Does anyone know why this is rather than just using it as a stick. I pay 12 months council tax averaged over 10 months, I don’t get 2 months free. It could just an accountancy method.

BTW the greek health service is actually rated 14th in the world by the WHO, above UK, Germany and US (France no 1) and is a mixed system of social insurance and an NHS (about half each). So not quite the evil state.

I would be interested in actual independent studies of corruption in Greece rather than hearsay and dodgy journalist pieces. The only source I could find was from the Cato Institute, who I regard as having “an agenda” on the question regarding health.

Greece’s profile appears to be the same as many other developing countries, weak economy, low wages, dominated by finance (Greek banks account for five out of the top 10 home companies so they didn’t slumber that much, plus the domination of the EU ones).

Frankly, it’s more villein than villain.

When the baron doth fail to give the king his due, the ceorls shall suffer mightily.

I guess the real reason for the overpaid, overbenefited, overfat argument is that the population has taken to the streets and doesn’t want to take the medicine.

There were similar sorts of arguments in the 1930s, whole populations/countries were damned by the Gold Standard kings because of the global recession. Ended nastily IIRC.

Greece’s profile appears to be the same as many other developing countries, weak economy, low wages, dominated by finance (Greek banks account for five out of the top 10 home companies so they didn’t slumber that much, plus the domination of the EU ones).

Probably true, although the fact it was spending like a rich European social democracy whilst having that profile might indicate the source of the problems. You can’t deny that the key problem Greece has is too much debt with no chance of paying it back.

Such a load of drivel has been peddled about Greece’s ‘bloated public sector’. It’s total nonsense, as former Citibank economist, Michael Burke, explains:

http://www.guardian.co.uk/commentisfree/2011/jun/20/greek-mythology-boris-johnson-debt-crisis

Public spending in Greece is about 46% of GDP: exactly the same as the average for the euro area. Greeks also work longer hours than almost any other people in the EU. Austerity measures have made the deficit worse by deepening the recession and hitting tax revenues. (Wow, what a surprise!)

Greece’s root problem is not the public sector, or even tax evasion – although the latter does make things worse – but membership of the Eurozone. The euro has encouraged cheap credit and over-consumption (mainly by the rich, of course) of imports (especially from Germany). This also affects Spain, Italy, Portugal and Ireland and is a common factor in their problems.

The flip-side of over-consumption is lack of investment, both public and private. This has led to stagnating productivity and the hollowing out of the whole Greek economy. The solution is:

1) Default on debts (preferably a ‘restructuring’ in which public sector creditors are favoured).

2) Nationalise Greek banks (this will become necessary after 1) and create a National Investment bank out of them, for the purpose of supporting local enterprise (esp. small business, manufacturing industry and co-operatives).

3) Leave the euro, in order to become internationally competitive again.

4) Public investment in education / training, health care, infrastructure, housing, etc. These are never a ‘waste of money’ and the private sector will not provide them efficiently. Of course, this will also require progress on tax collection.

Only a new currency and public investment can reverse the Greek economy’s nosedive – a New Deal for Greece. The private sector is in no fit state to invest, which only highlights the utter folly of the privatisations (actually asset-stripping) demanded by the IMF and EU.

In fact, this prescription is also what is needed by our own economy, except we don’t have to worry about no. 3 or no.1 and we’ve half completed no. 2. Unfortunately, we’re doing the exact opposite of no. 4, which is likely to plunge us back into recession shortly.

The longer version of Burke’s analysis is also well worth reading:

http://socialisteconomicbulletin.blogspot.com/2011/06/greek-crisis.html

Chris,

How has overconsumption by the rich somehow equated to a government deficit of over one and a half times GDP, which is the issue here (the state’s insolvency is the problem)? If private individuals overextend, they, not the country, go bankrupt. I suppose if enough did, then the government would collapse through lack of finance (see Albania for an example of this?), but this would be marked by a collapse (not simply a fall) in tax revenues, which wierdly hasn’t been the problem initially (although could be now…). Your model seems to be that overconsumption has led to less money to invest for anyone, but whilst overconsumption would lead to less money to invest from the private sector, the public sector spends from taxation, which is taken from individuals’ wages (unless Greece’s government was entirely dependent on sales taxes (hint: they weren’t)), and therefore would be removed from individuals before they could address their own debts/spending issues.

I’m not saying your model doesn’t work, but it is a death-spiral model, whereby taxation dips and then falls more and more rapidly as there is less private activity and the economy suffers, leading to a huge government deficit. In such a hypothetical case, the debt:GDP ratio would rise rapidly after the outset of the problem. In Greece however, this ratio was high before the financial crisis – indeed, at the height of the bubble it was already high, which should not be the case if it was only a result of the problem.

Also, if overextending credit was the problem, could I point out that it was not the rich in the UK and the US that were the problem, but those who probably were not capable of repaying their borrowings, some of whom may have been rich, but generally across the board. Have you got evidence that Greece was not the same? Otherwise, it looks like you are viewing this through the lenses of socialistic envy rather than reason.

47. Luis enrique

I imagine most of those who like to use the term would regard the IMF as neoliberal, but the IMF also advises countries to raise enough tax to cover their expenditure ( the IMF has a large Fiscal Affairs dept, and does a lot on domestic resource mobilisation – google it). So why does Richard think he is in opposition to the neoliberal position? He is right Greece does indeed have a major problem with tax evasion. Whether the expenditure side was “bloated”‘, well you have to augment the proportion of GDP accounted for by govt by some measure of productivity. I don’t have info on that.

Btw, parallels should not be drawn between the wisdom of deficit spending in midst of a recession, and long run deficit spending a la Greece.

49. Richard W

@ 45. Chris Whitrow

I agree with you that defaulting and getting out of the euro is probably now their best option. You don’t say how they would prevent capital flight before nationalising the banking sector. How could they remain members of the EU if they institute capital controls? Moreover, who is going to fund them in the interim period while they follow your program of reforms? The EU/ECB will not provide any more funding if they default.

I admitted that very possibility in the next sentence but it would mean the private sector is paid a third of a public sector pittance.

No it wouldn’t. Greece employs hundreds of thousands of public sector workers. “Many” of them might indeed be paid very little, but that would not mean that the *average* public sector income (especially if all benefits are included) is not much higher than the *average* private sector employee.

It gives loads of examples of wages, minimums and averages in different sectors ie wage rates, which afterall is the result of wage formation. Tallies with a number of other statistical sources.

We’re clearly not looking at the same page. It talks about the structure of wage negotiations/incomes policy, then describes the minimum wage structure. It’s an analysis of how wage levels are reached in Greece, not an analysis of what those levels are – let alone a comparitor across public/private sectors.

Again if you have better data not churnalism please provide

Proper data is hard to come by – apart from anything else the Greek Govt apparently do not keep records as to precisely how many people are employed in the public sector. There’s this, from a few years ago, but only the abstract is publicly accessible.
http://pfr.sagepub.com/content/34/4/450.abstract

The results suggest that average earnings are higher in the public sector than in the private sector for both genders but earnings in the public sector show a smaller dispersion with respect to the private sector. The findings indicate that employees in the public sector at the lower end of the earnings distribution earn a higher wage gap compared with their counterparts in the private sector but this gap decreases at higher quantiles.

The problem (see above) with this sort of figure (note how the OECD also say that the Greek deficit in 2008 was somewhere between 3 and 5% – probably an underestimate by 50%) is that Greece hasn’t been keeping its books in order:

“Nobody, not even the prime minister, can say how many civil servants there are,” says Constantinos Michalos, head of the Athens Chamber of Commerce and Industry, one of Greece’s main business lobby groups.

“We calculate 1.2 million people including contract workers. The civil servants’ union says 700,000. The finance ministry says 800,000,” he said.

http://www.france24.com/en/20100321-greek-debt-throws-spotlight-civil-service-excess#

The problem (see above) with this sort of figure (note how the OECD also say that the Greek deficit in 2008 was somewhere between 3 and 5% – probably an underestimate by 50%) is that Greece hasn’t been keeping its books in order:

I wondered if the OECD figures were corrected for ‘discrepancies’.

Eurostat Government Finance Statistics – Summary page – Greece.

In 2010, as % of GDP, total revenue 39.1, total expenditure 49.5, government deficit -10.5, government debt 142.8.

53. Richard W

@ 46. Watchman

” How has overconsumption by the rich somehow equated to a government deficit of over one and a half times GDP, which is the issue here (the state’s insolvency is the problem)? If private individuals overextend, they, not the country, go bankrupt. I suppose if enough did, then the government would collapse through lack of finance (see Albania for an example of this?), but this would be marked by a collapse (not simply a fall) in tax revenues, which wierdly hasn’t been the problem initially (although could be now…). Your model seems to be that overconsumption has led to less money to invest for anyone, but whilst overconsumption would lead to less money to invest from the private sector, the public sector spends from taxation, which is taken from individuals’ wages (unless Greece’s government was entirely dependent on sales taxes (hint: they weren’t)), and therefore would be removed from individuals before they could address their own debts/spending issues. ”

You are confusing their outstanding sovereign debt with their deficit. What you need to understand is why Greece are in a mess and why the euro traps them and the government in a decline. In countries like Greece running an ongoing trade and current account deficit means that their rise in living standards has been coming comes from imports. An excess of imports over exports is known as an output negative. The counter party to that trade deficit is the inflow of capital i.e. money borrowed external to Greece, which is financing the government. The capacity to spend is being diverted away from national activity to external activity. So while you pay for the products consumed (through debt) others get the long term benefit of your spending.

When those capital flows slow or stop because your solvency is in doubt that forces a large deficit on the government. The government deficit is always the flip side of a financial surplus in the private sector. For example, if the government are generating a surplus the private sector will have a deficit through accumulating debt or the external trade will be in surplus. If the private sector will not finance the government they need agencies like the EU/ECB and IMF to fund the government. The only way for the public sector deficit to be reduced is to export more otherwise unemployment will rise. Greece is uncompetitive so exports are a small share of GDP and can’t rise to a significant share without a devaluation. Therefore, when the current account is forced to close without an increase in exports imports will fall and unemployment will rise.

Although the public sector spending was not a hugely disproportionate share of GDP. The GDP and as a consequence the government finances were based on flows from other parts of the eurozone and they have stopped. Greece basically does not generate internally the economic activity to finance the state that they have built.

54. James Alexander

@8Tim J

Thanks for the link to a brilliant article on the Greek crisis, Tim J. You say yourself:
“it’s not terrible supportive of the idea that if only the Government’s tax revenues were higher, there’d be no problem.”, and strictly you could defend that. But if we read the article with the OP in mind, and keep on topic, the article says, and explores at great length, this:

“The costs of running the Greek government are only half the failed equation: there’s also the matter of government revenues.” My italics. Half the problem – really more supportive of the OP’s general proposal than not, wouldn’t you say?

Richard W,

I wasn’t confusing the two (at least in my head) – just being confusing in my choice of language, so your clarification was useful thanks.

My point was that the large government deficit predates the problems identified here, and those problems would not be so accute without that existing large deficit. Which is getting worryingly close to Mr Murphy’s position that this was a problem with flows of taxation (albeit I see the problem as being spending more than the actual tax revenues).

James Alexander,

It’s only supportive of the original post if you assume that “the matter of government revenues” is simply the fact that the government would have been fine if those pesky neo-liberals had not evaded taxes. If there is any other considerations in the “matter” you might find problems…

57. Richard W

55. Watchman

Yes, the deficit predates the eurozone crisis. So you had in Greece a government deficit, private sector deficit through borrowing and a trade deficit (so did we) the flip side to that deficit was the trade surplus in the euro-core nations. I know it sounds a bit weird but spending is not really their problem. A country can have as big a public sector as they want if they are competitive enough to generate the economic activity to fund it. If you are not competitive you will be relying on others to finance the government and the blowout in periphery yields was those flows coming to an end. Clearly, they were spending too much, but the real problem is a sclerotic economy and with fertility rate of 1.3 there is not much prospect of improvement without devaluation.

58. James Alexander

Watchman@56

I’m not positing absolutes, or taking sides in a single exclusive explanation debate, or using Greece as a fugleman. Just looking at the OP and saying that Tim J was gilding his lily a bit by selectively quoting from what turns out to be a balanced and riveting article that has a lot to say about the contribution of tax evasion to the Greek disaster. There’s a lot of things contributing to this mess, and tax evasion (not a strong enough term, it turns out – national tax refusal?) is a biggie. Not everything, agreed, but certainly a biggie.

@57 Richard W: “Clearly, they were spending too much, but the real problem is a sclerotic economy and with fertility rate of 1.3 there is not much prospect of improvement without devaluation.”

Absolutely. There’s an evident convergence among economists here and elswewhere on both the diagnosis and the treatment. But devaluation means Greece dropping out of the Eurozone at least for a while.

By reports: “European leaders have admitted they are preparing for a Greek default as the eurozone debt crisis enters a pivotal week”
http://www.telegraph.co.uk/finance/financialcrisis/8600016/European-leaders-prepare-for-a-Greek-default.html

We need to worry about the knock-on effects on business in Britain and the British economy:

“The SME sector in the UK is particularly vulnerable to a banking crisis.

“If there were to be a financial problem in the euro area or in the U.S. banks, that would probably reduce liquidity for SMEs in this country and that is serious about employment, investment, inflation. It’s difficult to imagine, all else being equal, inflation going up in that environment.”
http://uk.reuters.com/article/2011/06/28/uk-britain-bank-idUKTRE75R1AT20110628

The reason why that is especially worrying is because SMEs in Britain provide more than half the employment in the private sector.

It’s all very well making wax images of Neoliberalism to stick pins in but it’s none too clear what we need to do after that.

60. Charlieman

@58. James Alexander: “There’s a lot of things contributing to this mess, and tax evasion (not a strong enough term, it turns out – national tax refusal?) is a biggie.”

With hind sight, the level of tax evasion should have been reason for Greece to decline to enter the Eurozone and for others to oppose Greece’s membership. If a country has its own currency, it is more transparent when off-book money moves around; observers may not know the owners of the off-book money but the quantity may be guessed. While Greece is in the Eurozone, off-book money cannot be measured (it is up to the Greeks to manage opportunities for money to go off-book).

@57. Richard W: “Clearly, they were spending too much, but the real problem is a sclerotic economy and with fertility rate of 1.3 there is not much prospect of improvement without devaluation.”

An unfortunate conclusion may be drawn from Richard W’s comment: that Greeks can generate future economic output by bonking. I suspect that today’s protestors have expended their energy in other ways, at the same time I would also be unsurprised if there was no hiccough in Greek birth statistics in nine months. But I don’t consider fertility to be an economic concern. Number of workers?

“Bonk for economic recovery and sustenance” used to be a French political message until racists noticed the colour of newly borns.

In order to get out of this pickle (however it is managed), Greeks have to make more stuff or create investments or just do what happens more efficiently. They can’t bonk and breed a solution, and migrant labour will throw up social problems that nobody has thought about.

[Sclerotic = strong walled. Greece?]

36. Adam:
>Why? It is common in Southern Europe for public (and private) sector workers to
>have your salary divided into 14 rather than 12. It’s like a state sponsered saving
>scheme.

Yep – the only problem here is that afaik a typical way to arrive to this arrangement is when implementing a workaround to avoid reasonable budget austerity. I.e. we know that it is not possible to give a 8.3 % payrise to everyone this year, but we need to give it to some people. And if we give such a high percentage to one group, others will want it too. So we give a small payrise (say, 1 %) to everyone and for one group, give give 0 % payrise to monthly salary, but add a 13th monthly salary to the 12. And, a few years later, a 14th monthly salary. Perhaps only as a temporary arrangement to avoid strikes, and then the temporary arrangement becomes permanent.

Thus, the 14 monthly salaries a year is a method for making pay information less transparent, i.e. making it more difficult and less obvious to see the trends and make comparisons.

Of course, it is possible to have such arrangements and still keep budgets in balance. Where I live, most people get a holiday bonus which is around half the monthly salary, so the annual salary is 12.5 times the monthly salary. We now have a serious deficit problem as well, although not at all as serious as Greece.

The Greeks should tell the IMF and the EU and all the banks to go F themselves.

What is being proposed will not pay back the debt, it will just make paupers of the people.

Mobile Guillotines is what is required.

Charlieman: yes indeed. Sclerotic – strong-walled, or having a disorder of hardened tissue. Richard W found a very nice concise term describing the problem in Greece. It’s the exact antithesis of liberalism, whether neo- or classical.

pjt, having looked into it, AIUI we have misunderstood the so-called 14 monthly salary.

Suppose your gross salary is €N a year. This is divided into 14. Your normal monthly gross is therefore €N/14. At Christmas you get your monthly gross plus the Christmas doro, which is equivalent to one month’s gross. At Easter you get half a month’s gross in addition to one month’s salary – the same goes for a Summer payment.

Plug in some numbers: €14k annual gross is comprised of 12* €1k monthly, €1k Christmas doro, €500 Easter and €500 Summer.

As someone said earlier in the thread, it is like an enforced savings scheme.

As someone said earlier in the thread, it is like an enforced savings scheme.

Yes, that is entirely correct. Now ask yourself why so many Greeks need an enforced savings scheme so they have something left over for Christmas, and you’ve pretty much explained what’s gone wrong there, haven’t you, and why throwing good money after bad isn’t the answer?

66. Charlieman

@64. ukliberty: “Suppose your gross salary is €N a year. This is divided into 14.”

At the end of the day, did you get paid. Work backwards to determine whether you were paid fairly.

67. littlekeithy

I see this one is going to run and run…

Tim J 50

I asked you for data to back up your points that public sector workers in Greece earn three times the amount on average than in the private sector, you said that it is hard to find, unreliable, not to be trusted, which seems to be a cop out especially as you have given opinions on the matter, based on what?

The only data you provided was an abstract that said there was a bias of higher wages in the public sector over the private sector, there is nothing about a three times multiplier which is what you originally stated (along with several other commentators, here or elsewhere). That and the “bloated public sector” argument.

I don’t disagree with the abstract given the information I have (which I quote later). It appears to be simialr to other developing countries (which I said earlier) but lets look at some of your other points.

“No it wouldn’t. Greece employs hundreds of thousands of public sector workers. “Many” of them might indeed be paid very little.”

First, you recognise the possibility that “many” public sector workers are paid very little, which contradicts your original prejudice.

“But that would not mean that the *average* public sector income (especially if all benefits are included) is not much higher than the *average* private sector employee.”

but it does not equal three times higher.

Plus you included the benefits of public sector workers but not the benefits of private sector workers. Why?

Also, if you, or anyone else, is going to use the argument about false data and “we don’t know but I guess” then I can use it aswell, The private sector high earners hide and lie about their remuneration in equal part or, if I had a prejudice, more so than public sector workers. Afterall people have posted about bribes, which i am sure don’t only operate in the public sector. That I believe was the point of the article regarding incomes and taxation in the first place.

In the spirit of Hegel, who said you must always put your opponents argument in the best possible light, here is the best I can find saying average wage levels in the Greek public sector are higher than the average in the private sector.

“INCOME LEVELS
Overall, 55% of employees have a net monthly income of €501–€1,000; 22.3% earn a net monthly amount of €1,001–€1,250; 11.6% are paid €1,251–€1,500 a month; and 5.2% of employees have a net monthly income of €1,501 or higher. A similar proportion of employees (5.1%) receive a net monthly income of €251–€500. In all, 0.8% of workers earn a net amount of less than €250 each month (see table).

(break in quote)

PUBLIC VERSUS PRIVATE SECTOR
In the private sector, 69.4% of employees receive a net monthly income of €501–€1,000. Overall, the majority of people earning such incomes – eight out of 10 workers – work in the private sector. In the broader public sector, only 29.5% of workers earn a net amount of €501–€1,000, while the majority of workers (67.4%) earn €1,001 or more. One in three women in the broader public sector earn more than €1,250 a month, whereas the corresponding ratio in the private sector is one in five women.

source http://www.eurofound.europa.eu/ewco/2007/09/GR0709029I.htm
It’s out of date, but as you said your abstract is, which only said that wages are higher but not three times higher.

So there is a bias towards higher public sector wages, but overall within a context of the majority of workers being very low paid against EU averages. But nowhere a 3X multiplier.

The article posted at 45 included a url http://socialisteconomicbulletin.blogspot.com/2011/06/greek-crisis.html which had stats saying that workers remuneration was about 35% of gross operating surplus, one of the worst ratios in the EU. Again indicative of the low level of private and public wages.

You said the OECD deficit figure was most probably wrong for 2008.

It appears to me quite logical: there was a highpoint in 2003-4 with the Olympics, and I can remember turmoil in Greece at the time about the government attacking workers in order to deal with the deficit. Then there is a decline until 2008-9 when it increases again with the effects of the global recession, which rose in most countries.

BTW I would genuinely appreciate information showing economies whose deficits remained stable or fell during the 2008 and post recession, it appears to me a global occurrence rather than specific to countries’ policies.

Furthermore, can you give data for why the OECD figure is an under-representation rather than your hunch or a quote? I presume, from what have you posted, that you are an economist so could obtain the data to support your opinions?

We are debating the future of 11 million people, I think it needs to be based on reality not prejudices about “it’s all the public sector workers’ fault”.

PS the Irish deficit is nearly three times Greece. AI Bank defaulted recently, saved by a legal change. Hardly an advert for austerity.

@ Richard W / 49:

Fair questions. Yes, capital flight will be a big problem if Greece leaves the euro. So exchange controls would be needed until currency stability could be achieved. This wouldn’t necessarily mean leaving the EU entirely: EU rules are very much a moveable feast.

Funding investment is not a problem for a government with fiscal autonomy. The private banking system creates money every day; so can governments, especially if the banks are nationalised. Inflation is not a problem as long as the economy is below full employment. Taxation can also play a part in helping to shift from consumption to investment.

69. littlekeithy

By the way

83.5 % per cent of Greek private sector workers bunch around 500 euros to 1,250 euros mark
80.6% per cent of Greek public sector workers bunch around the 751 euros to 1,501 euros mark

according to http://www.eurofound.europa.eu/ewco/2007/09/GR0709029I.htm

out of date but at least its a statistic rather than a hunch. Not really three times is it? And in total still well below EU averages…

70. Richard W

60. Charlieman

” But I don’t consider fertility to be an economic concern. Number of workers? ”

Demographics is the big driver for an economy. The fertility replacement rate is 2.1, Greece is 1.3. When the fertility rate drops a number of things happen.

The pool of young workers is smaller and the new business start-up rate falls and GDP growth slows down.

The brightest and best find that there are less opportunities for their skills. If they have mobile skills they will tend to move away in search of opportunities. The economy suffers a brain drain and the lack of growth becomes even more of a self-fulfilling prophecy. More low skilled workers means less tax revenue. The old do not move away.

The ratio of the retired to workers rises placing more demands on the government budget at the same time as the tax pool is smaller.

Other stuff with the national savings rate and credit expansion happens that is not that important in understanding the negative effect on an economy with poor demographics.

What to do about it? Reform your economy to make it more dynamic and generate economic activity. ( Scandinavia)

Have a large energy or mineral extraction sector.( Russia and Norway)

Import migrants to fill the missing gap in the middle of the population pyramid. ( UK )

Have companies who are internationally competitive and can generate a large export trade surplus. ( Germany and euro-core nations, Japan )

Note how even though Japan can generate from their multinational firms a large export surplus, they still have massive public sector debts because the demographics are so poor and migration is almost nonexistent. Therefore, internally generated growth is low or falling and the demands on the government are rising. Germany and the euro-core are a mix of immigration and export earnings and that stops their public sector debts rising like Japan. They are still increasingly spending on their public sectors. However, their debt and deficit ratios are contained because they are increasing the numerator in the ratio.

The fertility rate not just the current one is what drives all this. Increasing debts can disguise the problems until the debts stop and force a large deficit on the government.

Now look at Greece. No large oil mineral extraction sector to generate a surplus. No firms who are not competitive internationally to generate a trade surplus. So capital will be draining from the economy. Uncompetitive through the euro so are now less attractive as a tourist destination. No reforms to the economy and resistance to proposed reforms to generate internally more economic activity. Everything is nearly always so much easier if the country maintains its replacement rate. Without some of the aforementioned factors poor demographics will manifest itself in chronic government deficits.

@ 68. Chris Whitrow

They could theoretically apply capital controls. However, such controls would breach a whole bunch of directives and quite clearly the Single European Act. That has been binding law for member states since 1992. Even when Iceland imposed capital controls, they breached the EEA Agreement on the free movement of payments and capital among the European Free Trade Association (EFTA) States and between those States and the European Union. However, the agreement is not binding law. The Greek government would be in breach of their own law. There is no single market if one member is effectively not in the single market. I know the EU often makes it up as they go along, but I don’t see how they would get round suspending the SEA for one area. It would be like suspending Cornwall from the single UK market and preventing the free movement of capital from Cornwall to Birmingham.

Core inflation is not usually a problem if a country is below full employment with an output gap. However, imported headline inflation would be huge problem for anything that they did not internally produce and needed to import. The headline inflation would unanchor inflationary expectations so core inflation would also rise. They would need FX reserves and they do not have any. The IMF would be required to provide FX and the population apparently believe that they do not need the IMF. The IMF consists of its members and some key members would be a bit pissed with Greece to say the least. Either way in this sorry state of affairs is going to be messy.

72. So Much For Subtlety

I’ve been reflecting on the situation in Greece and have pointed out that much of what is happening is the inevitable consequence of neoliberal thinking.

Interesting. So the EU – a massive experiment in fighting neo-liberalism – and Greece – run by one of the more left wing socialist governments in Europe – is all down to the one ideology that has no place in either country? Interesting.

So too is the fact that Greece suffers endemic tax evasion. It is thought that 30% of revenues are lost to evasion in Greece, with the rich being especially prone to non-payment.

Thought by who precisely? If 30% of revenues are lost to evasion then it is clear that it involves a lot more people than the rich. Basically everyone. Because the rich alone don’t pay that much tax. There are not enough of them.

There is a reason for this: neoliberal thinking reinforces the often held view that the payment of taxes is detrimental to a person’s well-being.

Except that is it obvious to everyone that not paying taxes is detrimental to one’s well being. You don’t have to be a neo-liberal to have a firm grasp of reality. If I pay taxes, I have less money to spend on myself. I am worse off. You can argue we should pay taxes – and all neo-liberals do (otherwise they would be libertarians) – but it is impossible to deny the reality.

The evidence is obviously to the contrary in this case: Greece would clearly be in a better position, and its population would also very clearly be in a better position if these taxes have been collected and the country was able to pay its debts .

Yes, Greece would be better off. But individual Greeks would not. The people as a whole would be better off. But the person evading would not. This is one of those situations where we are all well off if we do something, but we are even better off if everyone else does and we do not. Like vaccinations.

However Richard Murphy misses the bigger point. Greece’s problem is not about revenue, it is not about spending. It is about the mismatch between what they raise and what they spend. Greece would be fine as is, if the State only spent whatever sum of money it raised. You cannot have a deficit of 15% of your GDP even if you are Germany with German levels of taxation. You cannot have it if you’re Greece. Or Mali. If you go on spending more than you take, you will go bust. Regardless of what people pay in taxes.

You can’t even argue that many of those who should have paid would have been materially worse off as a result of their paying this tax. As Veblen would have argued, much of this money will have been used on conspicuous consumption.

How do you know? What is more conspicuous consumption brings its own rewards and benefits. What Mr Murphy means is that he does not approve of it. Not that the people spending wouldn’t have been better off. But of course he does not know what they would have done with it. They don’t talk to him. Some of it was probably invested. And hence did more for the world than being pissed away on Greece boondoggles.

Adherents of Neo-liberalism do however ignore this point. They argue that any interference in a person’s ability to choose the way in which they spend their gross, pre-tax, income diminishes their well-being because only they can no their preferred consumption preferences. This, however, is wrong.

Name three people in the entire world outside the libertarian movement who believe this. I hate to say this, but is Mr Murphy just making stuff up?

There is now a vast body of research showing that people are very poor at decision-making, particularly when it comes to their long-term well-being

So this whole democracy thing is a bad idea? I agree. The world would be a much better place if I was the Lord High Ultimate Pooh Bah. I expect total power to everyone any time now.

and anyway, as I have frequently argued, a person’s entitlement is not to their gross income, but to their net income after tax is paid.

Good for you. Why does your opinion matter?

It is very clear that people wish that democratically elected governments provide service on their behalf that they cannot provide themselves, and which in many cases they cannot anticipate requiring. Use of the word ‘cannot’ in that sentence is quite deliberate: many people cannot anticipate unemployment, ill-health, or even the fact that they will need considerable help in most cases in the period of terminal care prior to their deaths, for example.

Many people can anticipate unemployment and that is why they used to have unemployment insurance. They can and do anticipate ill health. Insurance again.

Put simply, you can’t run a government, a country, an economy or a society without a solid, progressive, effective and confident tax system that collects the money that is due.

That might be true. But you cannot run a country if you continue to spend vastly more than you produce. Which is what Greece has been doing. To lift some other poster’s figures:

“In 2010, as % of GDP, total revenue 39.1, total expenditure 49.5, government deficit -10.5, government debt 142.8.”

Even if the Greeks closed that gap between revenue and expenditure, they would only raise another 10.4% of GDP – less than their proclaimed deficit. In other words, they would still be sinking, only slower. There is no alternative to cuts. Even if Greece defaults, it will simply continue to spend its way back down the same hole. They need to spend less.

This is not a problem of neo-liberalism. It is a problem that the doyenne of neo-liberalism Margaret Thatcher pointed out – the problem with socialism is that eventually you run out of other people’s money. By now the other people (mainly in Germany) are tired of paying out for the Greeks to live the good life.

73. So Much For Subtlety

68. Chris Whitrow

Inflation is not a problem as long as the economy is below full employment.

Really? So you’re saying that if the British government printed another thousand pounds for every pound floating around in the economy, there would be no inflation as long as unemployment remained where it was?

What do you think the effects of run-away inflation is on employment? Remember Weimar – high inflation with high unemployment. Why might that be?

Scooby,

As someone said earlier in the thread, it is like an enforced savings scheme.

Yes, that is entirely correct. Now ask yourself why so many Greeks need an enforced savings scheme so they have something left over for Christmas, and you’ve pretty much explained what’s gone wrong there, haven’t you, and why throwing good money after bad isn’t the answer?

Has it been established that they “need” it?

littlekeithy,

Furthermore, can you give data for why the OECD figure is an under-representation rather than your hunch or a quote? I presume, from what have you posted, that you are an economist so could obtain the data to support your opinions?

If I may, there appears to be a discrepancy between the OECD figures via Guardian / IFS and the Eurostat figures, certainly for Greece.

debt as % of GDP
year | 1996 | 2008 | 2009 | 2010
Eurostat | 99.4 | 110.7 | 127.1 | 142.8
OECD | 81.4 | 73.9 | 86.1 | 94.6

deficit as % of GDP
year | 1996 | 2008 | 2009 | 2010
Eurostat | -6.6 | -9.8 | -15.6 | -10.4
OECD | -6.6 | -7.8 | -12.7 | -9.8

A few points (lifted straight from an article on Bloomberg this morning);

– Greek tax free threshold is currently 12,000 EUR.
– Railway workers earned four times more in salaries than total ticket sales
– Greek pensioners on average lived on 96 percent of the salary they had when they worked, more than twice the proportion of earnings as Germans, according to the Organization for Economic Cooperation and Development last year.

And a point of my own;

Greece was running a massive structural deficit. Even if they stopped paying all interest payments on their debt, they would still be running a primary deficit – without additional debt funding or revenue they are insolvent, and that’s before taking into account their 160% debt/GDP ratio and the costs of funding that.

They have been living way beyond their means, and have reached the event horizon of too low revenue combined with too high debt and no-one willing to fund them.

And Ed Ball’s and co. think sending the UK down this path is a *good* idea?

I asked you for data to back up your points that public sector workers in Greece earn three times the amount on average than in the private sector, you said that it is hard to find, unreliable, not to be trusted, which seems to be a cop out especially as you have given opinions on the matter, based on what?

Um, an article in Vanity Fair magazine, which I quoted and linked to. Vanity Fair’s not like the Independent you know, it has actual fact checkers working for it.

First, you recognise the possibility that “many” public sector workers are paid very little, which contradicts your original prejudice.

FFS. Wind your neck in chief. Try reading what I’ve actually written in this thread – I’ve linked to a fascinating article by Michael Lewis, who’s a cracking journalist. I’ve then linked to news reports covering such things as the Government’s inability to say precisely how many people work in the public sector and mentioned Greece’s serial fiddling of the figures. If you want to read into that a blanket condemnation of public sector workers then you’re going altogether too far.

Furthermore, can you give data for why the OECD figure is an under-representation rather than your hunch or a quote?

I’m not blaming OECD – they can only work with the data they’re given. And Greece has traded in junk data for years. But can I give data for the fact that the reported 5% 2008 budget deficit was an under-estimation? Yes. Yes I can.

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=SPLIT_COM:2010:0001(01):FIN:EN:PDF

That’s the Eurostat report from January 2010. Some key quotes – demonstrating why quoting official figures about the Greek economy is (or at least was) pretty much a waste of time.

In the 21 October notification, the Greek government deficit for 2008 was revised from 5.0% of GDP (the ratio reported by Greece, and published and validated by Eurostat in April 2009) to 7.7% of GDP…

Revisions of this magnitude in the estimated past government deficit ratios have been extremely rare in other EU Member States, but have taken place for Greece on several occasions. These most recent revisions are an illustration of the lack of quality of the Greek fiscal statistics (and of macroeconomic statistics in general) and show that the progress in the compilation of fiscal statistics in Greece, and the intense scrutiny of the Greek fiscal data by Eurostat since 2004 (including 10 EDP visits and 5 reservations on the notified data), have not sufficed to bring the quality of Greek fiscal data to the level reached by other EU Member States.

The first set of problems concerns methodological weaknesses and unsatisfactory technical procedures in the Greek statistical institute (NSSG) and in the several other services that provide data and information to the NSSG, in particular the General Accounting Office (GAO) and the Ministry of Finance (MOF).

The second set of problems results from inappropriate governance, with poor cooperation and lack of clear responsibilities between several Greek institutions and services responsible for the EDP notifications, diffuse personal responsibilities, ambiguous empowerment of officials, absence of written instruction and documentation, which leave the quality of fiscal statistics subject to political pressures and electoral cycles.

So the reported 5% 2008 deficit becomes 7.7% when Greece resubmits the historic data. Not quite the 50% underestimate I guessed, but there we are. But wait a minute… Eurostat wasn’t quite finished. They reported again in April this year:

Eurostat also revised Greece’s 2008 budget deficit to 9.8% of GDP from 9.4% and edged the 2009 deficit up to 15.4% from 15.3%. Greece’s total government debt was 142.8% of GDP at the end of 2010, the highest level in the EU, Eurostat said.

http://online.wsj.com/article/SB10001424052748703778104576286441287643636.html

So. The initial reported 2008 deficit was 5%. Actual 2008 deficit was 9.8%. Eyethangyew.

I presume, from what have you posted, that you are an economist so could obtain the data to support your opinions?

As should be quite obvious from more or less everything I write, I’m not an economist. a historian by background and preference; a lawyer by grim necessity.

littlekeithy,

BTW I would genuinely appreciate information showing economies whose deficits remained stable or fell during the 2008 and post recession, it appears to me a global occurrence rather than specific to countries’ policies.

According to the OECD figures compiled by the Guardian and IFS that I linked to earlier, no country’s deficit was reduced in 2008. However, 11 countries had equal or reduced deficits in 2009 compared to 2008 (and 21 in 2010 compared to 2009).

62. sally
>The Greeks should tell the IMF and the EU and all the banks to go F themselves.

Apparently, that is what the demonstrators are doing. And I am so glad. Because this makes it absolutely clear for everyone that the Greeks are not even trying to take care of their debt, and therefore there is no point in pouring in money to fund the Greek state. They will stop spending when they don’t get more loans. And that will be very very soon. There will be a lesson to learn – by the Greeks, by the banks, by the eurozone members, by other states. But especially the Greeks and their “go F yourself” attitude.

What a crappy attempt to use Greek tax-dodging for an attack on (neo-)liberalism.

I don’t think the Greek taxi driver, fisherman or farmer who pockets money under the table has a neo-liberal ideology.

I am a liberal. I have no idea what a neo-liberal is, but I might also be one. I am also a democrat and I would think that most liberals are, too. If the majority in parliament decides on a tax policy, then I pay the respective taxes on my income, whether I like it or not. After all, I also use the services that are financed by these taxes.

Liberals might argue for lower taxes, but that doesn’t mean they advocate illegal tax fraud. Just like not every environmentalist blows up power plants.

82. Charlieman

@70. Richard W

Thanks, Richard.

“The pool of young workers is smaller and the new business start-up rate falls and GDP growth slows down.”

Is that based on historical or recent evidence? In the UK, the average 2.4 children family ceased to exist around about the time that it became an established “fact”. UK fertility rates have been less than 2.1 for more than one generation, I presume.

So my question is whether the age of people who initiate startups has increased? And do people who failed try again (UK law does not encourage repeated startups)? Are grey enterprises established by the prematurely retired accurately counted in the number of startups?

“The brightest and best find that there are less opportunities for their skills.” I agree that this is the case if young workers are dependent on other young people to initiate startups. But older people setting up business (using the founders’ credentials) is a very good model for creating opportunities for young workers.

@63. pjt: Respectfully noted, but sclerotic, beyond this instance, will not be entering my vocabulary. I’ll mentally file the word alongside “outwith”.

Here is a good paper covering most of the issues. What you need to remember Charlieman is it is the age structure that determines how things will affect the economy. Too many children or too many retired raises the dependency ratio and is bearish for growth. You really do not want the population pyramid to start to invert with a large pool of retired at the top and a smaller pool in the middle. We alleviated our falling fertility rate by importing migrants to fill the gap in the middle.
http://www.oeaw.ac.at/vid/download/FB32.pdf

If you have less in the middle then human capital will inevitably fall. Grey entrepreneurs is a bit of a myth. If they were not entrepreneurial when they were younger generally speaking it is unlikely that they will become entrepreneurs in their fifties and sixties. Moreover, if you have a population pyramid with the age structure like Germany you have to structure the whole economy towards generating export growth. The domestic economy simply can’t generate the growth through consumption as credit expansion will decline. Everyone can’t have an export surplus.

Debunking the debunkers and how the population age structure affects asset prices and investments.
http://www.citizeneconomists.com/blogs/2011/04/18/debunking-the-demographics-irrelevance-proposition/

A progressive tax scheme is not what is needed. The tax code should be as simple as possible with no loopholes or deductions. Either a flat (non progressive) sales tax or a flat income tax established at a rate that will cover the “basic” needs of the government. Government must become much smaller, with an elimination of congressional bills that have add-ons or additonal revenue for pork projects. The president needs line item veto authority (as many Governors have now), and the IRS should be dismantled. Federal, state, and local governments have become bloated and unsustainable, and they must become much smaller and more effecient. Otherwise the USA goes steadily the way of Greece, and will become insolvent. It is the private sector that drives growth, not government.

Interestingly Greek employment is down 6% from it’s 2008 high, yet public sector employment is marginally up despite all the austerity measures.

Makes me wonder who exactly is suffering and who is protesting.

How long before opposition to ‘globalisation’ starts being used as a pretext to attack the human rights of minorities as scapegoats for some kind of worldwide conspiracy while these ‘leftists’ advocate retreat from the international institutions imposing rules they signed up to?

Those bankers, they’re all Jews, aren’t they?

socialism –> fascism? discuss.

Richard, your argument is a creative construal of the facts, but doesn’t stand up to a more nuanced analysis of the Greek tax system. Without disputing your data on Greek tax evasion, the question still needs to be asked: why is this the case? Upon asking that question the most obvious answer is that it is precisely because of Greece’s high tax rates that people choose to engage in tax evasion (45% top income, +20% top VAT, 16% SS, and cap gain at same income tax rate). Undoubtedly, taxes are needed to run a government, and I know few who would contend the contrary. Placing too many tax demands, however, on the citizenry of a country can discourage and disincetivize. The effect is low productivity, which has been cited by most mainstream economists as the root cause of Greece’s economic woes. Indeed, the high level of government ownership and involvement in business, along with low labor output (which is a factor of private enterprise), have created an economic system that is unsustainable, exacerbated by Greece’s tax system. One lesson from Greece is that, as you say, you can’t run a government without taxes. Another, however, is that to collect those taxes you have to have a broad tax base, productivity that creates wealth to tax, and you can disincentivize paying taxes by having an oppressive tax system.

87. dionissis mitropoulos

Neoliberal thinking does NOT advocate that no taxes are paid at all. And it is a matter of fact that in Greece no one pays taxs if they can avoid it, notable among them the doctors, the lawyers, the plumbers, the professions in general. So, as you may deduce, the problem of Greeks is not that they are neoliberals, but that they are morally corrupted. This corruption dates back to the 400 years that we Greeks have been enslaved by the Turkish: slaves tend to develop this sort of negative attitude towards taxation that is imposed by their master. Well, we have been stuck with this attitude even after we were liberarated – habit makes the world go round, as you know.

NOT SO, NOT SO, NOT SO.

Taxation is totally unnecessary.
Taxation is criminal.
Taxation is armed robbery.
Ezra 7:24.

HOW TO RUN A COUNTRY WITHOUT DEBT AND TAXES
Read my book by the same title over at amazon.com
http://www.notaxesnow.org
Interest on mortgages should pay for the government
instead of taxes being used to pay interest to the international bankers.
gene karl


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    The key lesson from Greece: you can't run a government without taxes http://bit.ly/iQavBd

  2. Alexander Wallace

    RT @libcon: The key lesson from Greece: you can't run a government without taxes http://t.co/jz8FJVD

  3. Matthew Sinclair

    .@RichardJMurphy on @libcon says it's our fault Greeks evade taxes, that hotbed of econ liberalism http://t.co/xyIzYdj

  4. Gabriel Milland

    @ukuncut fave Richard Murphy unveils himself as someone who thinks ordinary people are just too stupid to make choices http://t.co/ncXhTIM

  5. Murph of the day

    […] it’s a glorious one: I’ve been reflecting on the situation in Greece and have pointed out that much of what is […]

  6. copperbird

    A lesson from Greece: you can’t run a government without taxes | Liberal Conspiracy http://t.co/kaLZlaq via @libcon

  7. Ben Stroud

    Liberal Conspiracy – A lesson from Greece: you can’t run a government without taxes http://bit.ly/k2Ed5u

  8. john patrick horrock

    Liberal Conspiracy – A lesson from Greece: you can’t run a government without taxes http://bit.ly/k2Ed5u

  9. Robert Ferguson

    Need to stop getting distracted from work trying to figure out the cause of macro economic problems in #Greece… http://bit.ly/kL9nfp

  10. Link Loving 05.07.11 « Casper ter Kuile

    […] A lesson from Greece: you can’t run a government without taxes. Richard Murphy. […]

  11. Geof Nightingale

    This bloke makes a good point on Greece and tax http://t.co/ucyMmMak ….as long as the elected reps don't waste it….

  12. marilyn ray

    A lesson from Greece: you can’t run a government without taxes | Liberal Conspiracy http://t.co/K0fH5OTC via @libcon





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