George Momferratos, on how best to promote the Modest Proposal

Extracts from an intervention, on the Modest Proposal and how best to avoid negative reactions to it (especially here in Greece) from George Momferratos. See also below for my response. What do readers think? Your input will be appreciated.

Dear Yanis,

I read your interview with UBS and it has made the Modest Proposal (MP) clearer to me.  I believe that it offers a wider solution, despite that the implementation details will be a nightmare – and how else could it be?

Allow me though to offer two comments/propositions of a “tactical” nature, that could widen your audience (in Greece, at least) without compromising the essence of the proposal.

(a) Shrinking of Greek Public sector.

Although it is a gigantic task which will also have some social impact, I believe that it is imperative for Greece to go forward with it.  Reducing the Public sector will also reduce bureaucracy and therefore corruption, and will allow the private sector to breath.  The Shrinking of the Public Sector is imperative irrespective of whether the MP is implemented sooner or later or not at all.  I believe that the majority of our population understands this and in a way it is the essence of what the Aganaktismenoi are asking too: they are fed up with our clientele driven political system and the only way to reduce this is by reducing the influence of the government in the economy, therefore a smaller state.

Irrespective of whether you agree with this or not, I understand it has nothing to do with the MP. Therefore it may help to take it out of your “rhetoric” as it enrages the millions, at least of the private sector, that spend hours and money to deal with the state and they want no more of it.  When these people, and believe me there are really millions of them, hear you suggesting that we can do nothing on this front, they stop listening to anything else that you say.

(b) Not taking any more debt now in order to force a solution.  Again I believe that this is the wrong way to approach the implementation of the MP.  The risks of a default and collapse should we stop taking new loans is immense.  When people hear that, again they do not want to listen to anything else you say.  And, again, I understand it is beyond the MP as it is a tactical move to energize European politicians faster.  However, things need their time – like the time the caterpillar needs to weave the koukouli.

(c) in summary, if you become less provocative (which is unnecessary to my view, as the provocative points are rather irrelevant with the essence of the MP) you may gain a wider audience that will be willing to listen.  Currently, your provocative points stop people from hearing anything else, which does not pay justice to the seriousness of the MP.  Most of the criticism I hear and read is about the two points above.  Perhaps, being provocative, has put you in the spot light, but now I believe you can down-play the above parts

Good luck and you have my sincere respect for getting exposed and putting all this energize into the cause, despite my strong disagreement with above points.

George Momferratos

YV’s reply

Dear George,

I take your main point, that alienating potential backers is a bad idea. But rest assured that my intention was never to be provocative in order to attract publicity. What I have said, right or wrong, was my considered judgment. Let me take the two good points you raised:

1. Size of the public sector

I have no quarrel with the proposition that the state sector, in relation to the private, is large. But I do think that concentrating on its size misses the main point: its gross, offensive inefficiency. Cutting it down will not, in itself, stop the Greek state from being the public’s enemy number one. While I am sure that the optimal size is lower than currently, the main issue ought to be the introduction of proper management, the eradication of the crushing bureaucracy and the petty (and not to petty corruption) etc.

Then, there is the question of timing. Canada reduced its public sector massively in the 1990s and in a very short space of time. It was painful but successful. But, it happened at a time when the economy was growing, courtesy of the fast growth in the world markets. In that environment, the reduction in public spending was replaced by private investment (and a replacement of public with private sector jobs). In contrast, in a recessionary environment, when private investment is negative, a spate of dismissals will add a massive drop in publically generated demand to a falling private sector demand. The result will be a parallel drop in investment/employment in both the private and the public sector. Once in that downward spiral, and with public debt increasing, the debt to GDP ratio will explode.

In short, this is not the time to fire hundreds of thousands of public sector workers (even if they are useless at what they do). First, we need to arrest the recession and only then to shepherd a shift from the public to the private sector. Having said that, this is precisely the moment when we must at all cost boost the efficiency of the public sector. See the attached document that was my recommendation to EBEA only a couple of months ago.

2. Loans

I never advocated a default. Which means that, like you, I recognise that in the very short run we will depend on the ‘kindness of strangers’, as T. Williams might have said. But this is not the same as to put our signatures on the dotted line of a massive loan (of tens of billions) that will, supposedly, see us through to 2014. A NO vote last week would not result in a default. The 5th instalment would be paid, the only difference is that our EU partners would be in conference all day and all night till they came up with a proper, rational solution. Now, they feel they bought time and are on way to their holidays – just as they lulled themselves in May 2010 to the false sense of  security that the crisis had been dealt with by means of the massive loan to Greece and the setting up of the EFSF. We gave them, with our YES, more rope to hang themselves (and us, of course). In short, I do not have a problem with loans in general. My position of voting against Memorandum Mk1 and Mk2 was that, unlike the dominant paradigm according to which these massive loans bought time, they deepened the crisis and gave the EU time to mess things up. If I am right, a decent solution could be found in weeks (with bridging loans averting default in the meantime). Our slavish behaviour allowed the EU to inflict permanent damage upon itself. 

10 Comments

  • Great exchange. From an American perspective, the question of private and public sectors is interesting. With the public sector there is always a question of efficiency, because we naturally assume private entities are self-sufficient. They have to be or else they go broke. That may indeed be true of small businesses, but don’t forget, when your private sector becomes large and powerful enough, it starts extracting from politics the sort of in-built advantages that the public sector has extracted in Greece. Those being, corporate welfare, insider-cronyism and conflicts of interest, a beggar-thy-neighbor approach to taxation as companies seek new states for lower taxes, legalized tax evasion even in the form of totally obnoxious business entertainment tax credits, and then the accounting tricks which, rather than invest in a company’s future, simply enrich the current executives, etc. Companies fail, executives move to board positions, new companies start, money is soaked from pension funds, rinse and repeat. There are managers in these corporations that utter business platitudes such as “Think outside the box” as they exhort their salespeople, and they do little else. Their existence is never questioned until the company gets into hot water. Have a look at the private health insurance industry in America, or the private energy sector (Enron!), and see how inefficiency seems to be endemic in most large bureaucracies, public or private. In the end, it’s just another form of rent for those sitting at the top.

    • It’s all too common to lose sight of actual facts and cling to “myths” which have no basis in reality.
      Medicare is a monster of an enterprise, run by the government and saddled with the “inefficiency” of the lazy public employees yet, it has one third of the administrative costs of any or all of the private health providers.

  • Opening the debate up like this is a very good idea and Yanis is to be congratulated for having the strength of character to permit others to make an input. The problems in Greece are a reflection of the whole, for every nation so affected.

    Your problem is a lack of private investment into new small businesses; all of the other problems will dissipate, if you can raise the level of employment, and thus prosperity, outside of government. And in which case trying to focus on what are perceived to be the immediate problems is a classic red herring. Trying to reduce government employment by cutting back will not work; the only true, long term solution is to increase the competitive pressure from the outside. Make it a much better choice to work for a private company. The only workable route to that goal is to create as many new small businesses as soon as possible and the only way to do that under the already accepted rules for a free market is to make sufficient equity capital available to create the jobs.

    Turning to the leadership in larger businesses; it is time they recognised that continuing along their chosen path is not doing themselves any favours either. The eventually increased prosperity of the whole, will then permit they receive access to a larger potential market. Yes, as the many new small businesses become established and start to compete, they will have greater competition; but the overall effect will be much greater prosperity.

    The same debate must now be presented to government; the problem is a lack of sufficient tax income, from outside of government; to pay for the government. To cover that lack they have over borrowed to the long term detriment of everyone. Their solution too, can only stem from greater prosperity in the private sector.

    So, again, my only complaint against the Moderate Proposal is to target the EIB as the solution to the creation of the revival of the private sector. As I have already set out that part of this debate, I will not hinder this thread by repeating it.

    The only way out of this mess is through the creation of millions of very small businesses using equity capital; which does not add to loan costs. All the legal and corporate structures are in place, right across Europe, to permit this to move forward. The only thing missing is the access to the equity capital. Something I have been banging on about now for decades. The solution I have proposed is to transfer the debt into an instrument I call a vanishing bond that can then be used as the missing equity capital to permit the creation of the very small businesses.

    The primary problem is the lack of private sector prosperity; concentrating upon anything else will not bring a satisfactory conclusion to this debate.

    • Greece is not missing small businesses, I think they are something like 50% of the total private sector, ( more knowledgeable people correct me) small enterprises with evident one or two employees and many non seen migrant workers etc. I think in Europe the number is 20%

      And as I say in my reply a number are set ups that the wife of a civil servant has set up for increasing the family income and in which he moonlights, so that when he retires he can keep working.

      Example: before boarding a ferry for the island we had a lunch at a port side tavern. The manager who was making sure he was getting people in his shop and not the neighbouring one recognise my sister. She did not remember him. It turns out he was in the police station of her area, and thus knew her face , recently retired, working at his wife’s tavern. What do you want to bet he was doing the same job after his regular one all through the years?

      Second example: I had to repair the roof in my summer cottage. I called one person in the village and they came after their job at the municipality where they are the repair crew ( time schedule 7 to 2:30 in the summer) and their rest, at 16:00, 3 of them and finished the job by 20:00.

      This is not the exception, it is the rule. This small extra enterprise is registered nowhere and pays no taxes.
      Did I ask for a receipt? No. They would not have come, and I wanted the roof repaired by them since they had made it ten years ago.
      When in Rome do as the Romans do.

    • Anna V,

      In one sense, your reply makes my point for me. What I am proposing is that all new job creators wishing to gain access to the equity capital, must first of all register a formal business, and then, they receive equity capital for each employee that they take on, up to a limit of eight or ten employees. That the mechanism; the trigger for access to the equity; is a “registered for taxation” employee. So where your present problem is unregistered businesses that pay no tax and have no registered employees; now you will have a very big incentive to become a part of the tax paying system.

      Yes, many will try and stay outside; but from that point onwards, they will be at a disadvantage as they will be undercapitalised and under pressure from competition from much better capitalised local businesses.

      Surely what Greece desperately needs is for the business community to become a part of the formal, tax paying community; this will provide all the incentive you need to ensure that happens, and very quickly too.

    • OK, I can see that. For Greece it is not “create new small businesses”, but give incentives to the numerous existing ones to appear for taxation purposes.

  • For the loans …. i totally disagree with you.

    I am not going to state any specific argument, since i do not see the point to dispute on something which basically arises from different tactical philosophy.

    And even if i am just 1st year Phd student and you, a very experienced professor with far more knowledge than me and maybe smarter ….. i am convinced for one thing. You are totally wrong about the bargaining tactics on loans. Given the Greek position and the EU one … you cannot do what you say. At least now.

    Anyways, MAYBE a VERSION of such tactic MIGHT have worked in the very first stage, i.e before going to mechanism … but … but …. and still MAYBE !!

    Y. V: “I never advocated a default” …..

    Please Prof, as kind of feedback for you try to make it clear as a public speaker, and try to make it clear as soon as possible. At least when you appear in the Greek press. You do not imagine my fights with others that are thinking of you as a default proponent.

    Thanks and Good luck

  • Here is a retired physicist’s view who only took economics 101 back in 1960 in the US and is struggling to understand how this multi-parameter dynamic system works.

    1) On the public sector I vote with G.Momferratos. My reasons are two fold.

    a)In your argument about retaining the public sector and raising its efficiency until better times come around you ignore that the inefficiency comes *because* there are supernumerary personnel in all civil service posts. This, together with the loss of hierarchy ( everybody is finally promoted to the level of director) creates busy making jobs of papers going around offices to gather one more signature and excuse an extra directorate, because all these directors have to direct something. We have reached a crisis because all those employed in the eighties, when the number of civil servants doubled, are now directors. This has the extra bonus of these directors not deigning to dirty their hands by sitting behind a counter and dealing with the public: “we need more people, we do not have enough people, etc”.
    My point here is that you *cannot raise efficiency* until you reintroduce hierarchy, not everybody becomes a director, and minimize the numbers.

    (I have a story here from a doctor friend with an international reputation who resigned from an ESY director post to open her own private agency, because all six other doctors would become directors in grade by december 2010, which means there would be nobody to look at the cancer biopsies in that hospital, unless they hired more and younger doctors.)
    Inflation.

    b) You ignore that maybe 80% or more of all civil servants have a moonlighting job, which is also not paying taxes. I am not talking only of teachers and doctors, who are the better known ones. If they were fired, they would have to maybe get a smaller car, or live more frugally, but they would not starve. They would work in their wives’ tavern, dress shop, taxi, pharmacy, … or cultivate their olives and oranges. And maybe the private sector would bloom with the extra effort. ( I even had colleagues who moonlighted in what should be a terribly dedicated and strict discipline. They were good, but they wanted more butter on their bread).

    In my experience the civil sector works with the 20% of people who are workaholics and ethical and cannot do a job badly out of principle.
    ****************************
    Actually I have a solution to propose that might solve this problem with less pain then firing:

    Make the civil service and all public sector connected jobs working hours from 9:30 to 5:30 ( half an hour lunch), obligatory, checked by cards and by a continuous recording TV. Technology is simple now. Make specific rules for firing, with a fair margin, but strict. After 5 non excused absences , fired, or some such.

    This will have the effect of separating the wheat from the chaff. The ones who make a lot of money on their moonlighting job and keep the civil one for the pension and the perks, would resign, because they cannot survive without the home lunch and siesta the 14 hour day ( greeks are not lazy, they are devious). The rest will become cognizant that they may be fired if not following rules and will get on the straight and narrow. Less bureaucracy with less people. This means their moonlighting work will have to be filled by somebody in the private sector, so less unemployment and more IKA.

    2) You have convinced me that the more we delay saying : “OK lets get to the bottom line and face the worst, no more digging the hole to fall in”, the worse for us Greeks.

  • I tend to agree with Yanis.

    As for the private sector ,i would like to see everything being in the hands of enterpreneurs ,but not in the way it is being done today. Too much corruption. And size does matter for corruption as Dimitri A. said.

    The big heads pf governments always try to find solutions ,creating organisations ,mechanisms etc. for their own sake only ,keeping the support for private businesses only typical. Except the businesses they can have a say in ,i suppose.

    I am of the opinion for instance ,that the debt ceiling of the U.S. matters not. And that the QE1 and QE2 could have been succesful by now ,even if they had created more money. It is always about manipulation of the money flow according to interests. Is it so hard to support the private sector more? To pass the money to the people? Maybe the way Chris Coles suggested. As always ,i say ,that things will change ,only when the behaviour of the people will change and that is really hard enough.

    I do not know if something like what i am typing now could work ,but what if we had some kind of an eco friendly business system with businesses of short life span (10 years maybe) and ready made templates for business creation ,that individuals could use to offer to society according to needs and then change gears? Maybe a first contact with the business world until people find their true interests? From that change alone ,the whole social system would change.