Greece's desperate new tax grab: Akin to carpetbombing the economy in order to save it

Back in the bleak days of the Vietnam war, Peter Arnett reported that some US Army officer, in a desperate bid to defend the destruction of a Vietnamese village, commented that “to save the village from the communists we had to destroy it.” While the quote has been disputed, it resonates nicely with that which the Greek government has said yesterday in defence of its new tax on property owners.

To paraphrase, Greece’s PM and his Finance Minister effectively conceded that the Greek economy, or what is left of it, must be  destroyed in order to be saved from… bankruptcy. This is a large claim, so allow me to explain: Greece’s GDP is in free fall. -7.3% and counting. Each month sees a new tax being imposed on those who cannot avoid it while the rest, who can, send their money to Swiss and German bank accounts. Thus, while public investment has followed private investment to negative territory (in the sense that not even replacement capital is on offer), the Greek macroeconomy is increasingly strangled by the cruel combination of falling demand, crumbling banks and rising public debt.

In the midst of this downward spiral, and with the debt-to-GDP ratio gaining further momentum, the EU-IMF-ECB troika’s demand that new taxes are raised to plug the emerging chasms in the government’s finances led the Papandreou-Venizelos government into the arms of sheer desperation. To placate the troika, in order to secure the next loan instalment, the government resorted to a tax on property owners.

Taxes on property have a long, progressive tradition since the days of David Ricardo railed against rentiers (like himself). The problem is that when much of economic activity has been flushed out of an economy, the market value of property has collapsed (as no one is buying), then a flat tax on property will lead many propertied Greeks into not just a liquidity crisis but, indeed, into insolvency.

Falling asset prices, the euthanasia of the rentier and a shift from property related activities to industrial production and innovation is surely a good thing for an economy that makes strides into a better future. But a property tax that falls on an impoverished middle class in the midst of a recession is the peacetime financial equivalent to carpetbombing the proverbial Vietnamese village in order to… save it.

27 Comments

  • If there was some hope that by “sacrificing the village”, some viable solution to the crisis could be found, one might say it was worth it. But it seems that all this money will go down the drain once more… I only hope the bankers choke on it.

  • The troika did not impose the tax. PASOK imposed the tax. I have often read that in general, property taxes are less regressive than income or sales taxes, but any new tax on the Greek economy at this stage is, as you say, destructive in the extreme. The same property tax culture existed in the UK after the war, when the landed gentry, rich in land but extremely poor in cash. Their response was to flock to Lloyds syndicates, where they could monetize their land by pledging it as surety for underwriting risk. But they ended up not only underwriting risk but underwriting the very comfortable lifestyles of their corrupt and/or incompetent brokers.

    PASOK could have done what the troika and everyone else would prefer: radically reduce the public sector, remove restraints on private enterprise, and encourage investments and grab hold of the privatization program in a credible way. Being trapped in a socialist mindset and captive of the unions, they are powerless to act in any other way than that which socialists know best – taxing the private sector for the benefit of (or at least not to cause pain to) the apparatchik

    • Jerry, the troika demanded new taxes and the Greek government delivered this particular one, just because it has run out of all other alternatives (with VAT at 23% for example). Yes, property taxes are more progressive and can even be a force of good if they punish rent-seeking activity and encourage productive investments (thus my reference to Ricardo). But in this case it is not even clear whether they are taxing the rentier or the… renters: Since the tax will be collected via the electricity bills, renters will be paying it as long as the bill is in their name – which is the case with electricity bills but not water charges. Lastly, your conviction that a mass firing of public sector workers would do the trick is as much ideologically driven, and thus divorced from reality, as that of the government’s approach. To begin with, a reduction in public sector employment by, say, 200 thousand people will send the already overstretched social security system over the cliff (unless of course you are also advocating the removal of unemployment benefits). Secondly, the loss of so many jobs in this climate will lead to the irreversible implosion of what is left of the private sector. To put it bluntly, a crippling recession is not the time to reduce massively the public sector – unless your aim is to liquidate the social economy.

    • Unfortunately, the “captive of the unions” condition is not a PASOK only condition. If PASOK, which fed and exploited the unions ( almost 80% of civil servants would vote for PASOK candidates in their union elections) cannot control them, any other party will not be able to.

      Only a dictatorship, and there are no candidates for a dictator post ( the last dictator died in jail) could by fiat do the reductions necessary and the cold showers necessary for people to wake up.Already I heard a unionist from DEH ( the one which should gather the money) say that they will boycott this move of becoming the cashier for the new tax.

      That is why I still wonder why we did not default in 2009: we would have owed half the money, so carry half the onus, and two or three months of economic upset would have made everybody, unions and all, grateful for any orderly solution, in my opinion.

      I disagree with prof. Varoufakis that firing 200.000 from the civil sector would add another burden to the burdened economy. The crux lies in WHICH 200.000. From the admitted 850.000 in the public sector now, I would bet that over 1/2 have a second job, possibly more lucrative, possibly tax evading moonlighting. Doctors, teachers, electricians, builders, …what have you all are moonlighting after civil service hours, often making much more undeclared income than their salary. Fire those.

      I have proposed a simple and fair way to clear the wheat from the chaff: Set the civil service time of work 9:00 to 17:00, strict, cameras watching who inserts the card. This will make life very hard for those who go home at 14:00 have lunch and a siesta and start their second working day at 18:00. If they make their main living from the moonlighting job they will resign from the civil service post. If not, they would stop moonlighting and there would be more jobs in the private sector so unemployment will be reduced.

      Instead, the government is planning a time table according to the convenience of the workers! starting from 7 in the morning to 9:00 at the convenience of the employee!!!

    • Hello Yannis,
      nice finding something to have a debate with you on …;-)

      I understand your point for not wanting to fire people in the public sector in these times. So some days ago I said that to a friend of mine, working as a freelancer in Greece and he replied: “so they don’t want to hurt the unproductive public sector, and they hurt even more the private sector”. The private sector, the small freelancers and effectively run small businesses, feel as the scapegoat of this government.

      Even from a righteousness point of view, people expect the public sector to be hurt more. Besides, just from listening to the news, I also am getting the impression that the troika and especially the Germans, seem to having got the message, that the Greeks cannot suffer more austerity and that they need more structural reforms, which this government has been avoiding.

      I think the idea of the “εργασιακή εφεδρεία”, if I understood its conception correctly, could be a good step. Moving a great deal of employees to an organization, which will just be a kind of agency, which will try to find jobs or educate those people could be an important step to structural reform. So you don’t fire them and you don’t have to mess with them, while trying to reform the organizations and install proper management. The goal should be sustainability, but unfortunately we are far from it.

    • That the public sector in Greece is oversized is a quite commonplace observation that I guess everyone would agree (I even know a lot of public sector employees that think the same). In the private sector there also were (and still are) some parts that were oversized. For example, did we need all those (expensive) car dealers that were thriving all these past years? The problem was (and is) that we misused people and money: Instead of helping the private sector shift to producing more and better quality goods, the banks lent loads of money to individuals in order to buy new expensive cars, go on expensive vacation (“διακοποδάνειο”!!), throw big and expensive wedding parties and so on. All this guided the private sector towards non-productive activities. The same applies to the public sector: Instead of helping the employees be more productive by introducing new information technologies and simplifying the legislation, the politicians kept increasing the chaos, creating more public organisations with vague responsibilities and tasks and hiring people not according to the public needs but according to the voter’s wishes.

      Having said all that, I don’t think that firing a few hundred thousand public sector employees (or putting them in reserve – “εργασιακή εφεδρεία”) will solve Greece’s problems. The argument that since people are being fired from the private sector so why not increase unemployment by firing from the public sector can only be answered by saying that we should try to reduce the number of people being fired from the private sector as well. Without being an economist I understand that to do this we should try to increase demand for goods and services and surely the unemployed cannot help do that. If we leave morality out, one could suggest that perhaps it would help a bit if they just died, since although it would not increase demand, it would eliminate the cost of sustaining them. But not by becoming poorer.

      As I understand it, at a time of crises a solution beneficial to the general good, cannot come by forcing thousands of people out of the system with no way to return. If the economy was on the rise, public sector employees that were fired, would have a chance by getting a job in the private sector, but this is not such a time. I hope that the European leaders will change their path to destruction (maybe with a little “push” by the US) and follow Yanis’s proposal. Then we could hope that the people will be wiser and vote for politicians that will help create a better world and not just follow the dictates of the bankers.

  • Let us get real here. Professor, if you don’t think radically downsizing the BFGPS (Big Fat Greek Publik Sektor) is a good idea, there is no hope that your readers will grasp the depth of self-destruction Greece has engaged in over the years. It isn’t so relevant what the readers think…I know as a former US Embassy economic officer, we carefully documented PASOK’s steady contribution to what we used to call the PSBR – Public Sector Borrowing Requirement. In the days of flexible exchange rates, informed observers watched that figure as an useful indicator of potential devaluations and other policy adjustments…..now its just a red flag wrapped up under the “PS deficit” number.

  • Suppose that you are the prime minister or financial minister of Greece under the current conditions. The European solution that you proposed (eurobond) is being rejected by troika. So ,you are in desperate need of money and you have the below short-term solutions:
    1. reduce public sector (either by firing people or by reducing considerably wages)
    2. impose further taxes
    3. declare bankruptcy and leave euro
    What would you prefer?
    If any other alternative is viable please refer it.
    It is very easy to criticize the politicians but it is useful to provide some logical solution in the current situation.

    Generally I strongly disagree with the politics implemented by IMF in other countries. However, indeed Greece has a non productive public sector which is paid well above the average private sector employer (could you please tell me if is this happening in any EE country?) and it is vital to reduce the public sector.

    • Nostradamos, it is every politician’s duty to optimize his/her politics and choices with a mind for the future.

      So, unless you are a PM or FM of Greece and got elected yesterday and Papandreou is not, then you do not have any excuse if the only solution you have is number 2.

      Papandreou is already governing the country for two years, so his current choices should be based on a mid-term and not short-term plan.

      The only problem as I see it is that there is no real plan.

  • Yannis,

    I think this is another case of Bastiat’s “seen and unseen”, and yes, both sides can claim the argument in this case. However, holding on to these workers is already a tax on the private sector (case in point!) and thus any social safety net is by definition going to alleviate costs *at a systemic level*.

    It is most certainly a continued missalocation of resources, which is what got us here in the first place (both locally and globally).

    Reducing the public sector shouldn’t just be a accounting solution to make ends meet. Rather it should aim to shift resources to voluntary institutions with organic borders and boundaries (rather than arbitrary) and adaptive decision-making.

    I don’t see much distinction between your prescription of refraining from shrinking the public sector, to say a four-year ban on any firing onthe part of private enterprises.

    Both increase the unemployment pool and both deepen the recession.

    However, both are a necessary (albeit not sufficient) condition for healing and recovering.

  • The problem , in a guerrilla warfare, is to win the “heart and minds’ of the occupied population and thus to isolate rebels, to deprive them of their logistic support and consequently to win.
    Papandreou although with his surname could rally the majority of the country behind him, and put the Greek people through the toughest sacrifices in order to restore its economics , selected to divide its people , to discourage them, to put his ministers to alienate his government from the very hearts and souls he had to win and to lead.
    Why? because to my opinion he doesn’t care , see him speaking and acting gives me the impression that he would rather prefer to be a mayor in a little American city than prime minister in Greece —its the equivalent of the American general who hated the guts of the Vietnamese thus equating destruction with salvation

    • You are being unfair to G.Papandreou the II . He is dancing as fast as he can, as the novel title said, but it is not fast enough. He is not up to the task.

      Considering that the huge civil sector is mainly a PASOK construct starting in 1981, stopping the behemoth in its tracks and turning it around is not possible. It is impossible to rally the greek population behind an austerity program. The reason they rallied around the father Papandreou was because of “Tsovola dosta ola”, and they voted PASOK in 2009 because “money exists” and they, the second PASOK generation, were expecting to get their children hired in the civil service. Nobody can rally them around.

      He seems a person who cares, but is out of his depth.

  • “It is the responsibility of intellectuals to speak the truth and to expose lies.” N. Chomsky

    Dear Yianni,

    your efforts to promote a modest proposal for the salvation of eurozone is admirable and in the highest tradition of intellectual integrity. However, you have not been as vocal with respect to the options of Greece. Indeed, you have convinced me that the eurozone can be saved, but not that Greece can.

    So, assume that tomorrow the eurozone adopts your modest proposal. What is the future of Greece going to look like? As far as I can tell, it will be as bleak as it is now. Under the best scenario, let’s assume that the overall interest rate goes to 3% for public debt, the banks are recapitalized (so they have reserves!) and a Marshall plan proportional in size to what Obama has given the US is put in place, ie. 15 bil. euros over 3 years, of which half in tax credits. Is that enough to arrest a 7% contraction and a 16% unemployment? Is this situation going to clear the balance sheets of Greek households and businesses, so that they may invest? I believe no, but my analysis may be flawed as I am not an economist.

    On the other hand, I am looking at the estimates of UBS’s latest report on the consequences of an exit from the euro. They estimate it at 50% drop in GDP, i.e., a devaluation of the new currency in that region. To me this sounds like economic haven, as competitiveness will skyrocket. Consider, that for an exporter, such a devaluation will imply
    (a) Reduction of labor and land cost, financing burdens, government administrative overheads, etc by 50%, skyrocketing profit margins
    (b) Available liquidity (assuming the newly recapitalized banks start working)
    (c) The equity of stockholders will be cut in half, but at the same time the balance sheet of the company will be tipped towards the black, inducing new investors to provide capital.

    Also, in terms of the government’s balance sheets
    (a) the debt will double as a percent of GDP, but that is not a NEW problem, as the gevrnment is already out of the money markets
    (b) all external aid (IMF loans, ESPA, bilateral loans) will effectively double!
    (c) the primary deficit (1% of gdp) will be easy to monetize
    (d) waste in health care will be cut overnight (all medical supplies will have to be replaced by cheaper alternatives)
    (e) it will be easier to adopt (AND WE MUST DO IT AGRESSIVELY) all the structural reforms of the IMF/trika, since it is one thing to lay off people into a deep recession and another to do so in a newly competitive economy!
    (f) privatizations will become MUCH more lucrative for FDI

    What about imports? Assume we have a product with a retail price of (say) 100E and an import price of 50E (e.g. electronics, foods, clothing etc). Such a product will be 50% more expensive (NOT 100% !) assuming the same profit margin, which will give a tremendous incentive to manufacture local substitutes, and yes, we can produce electronics, foods and clothing!. In the meantime, we will keep our old electronics and clothing, as well as consume local foods (stopping the import of olive oil from Germany, and lemons from Argentina!)

    The above arguments have the naivette of a sophomore in economics, and it is the duty of thuth-speaking, lie-exposing intellectuals to address these issues in a concrete manner, exposing the faulty thinking if it is faulty, or admitting the correctness of the argument. So far, the catastrophology of public discourse in these issues does not do anyone credit.

    • Vassili,

      The drop in said GDP is not nominal but real, and is largely a result of a sharp collapse in trade.

      Moreover, any scenario in which Greece leaves the eurozone and devalues will be met by corresponding tariffs and other trade barriers. Unless you think that Italy will happily accept us selling olive oil at half the price.

      Leaving the EZ would be absolutely devastating to the Greek economy, and greatly destabilizing to the rest of Europe.

    • Vasili,

      I truly agree in most of the things you say.

      Certainly some indexes will become eventually better. Particularly for some people like exporters, the situation will improve somehow, but not to the extend you imply.
      Yes, eurodrachma or how it will be called will be a tool for them, but what about the cost of the petrol? I guess it will almost double and to a big extend will negate most of the positive effects.

      Moreover we all talk about money and as you say we keep our clothing and electronics, an argument that I totally support, but what about food?
      Are we producing enough locally to sustain the population? I highly doubt it. To make things worse I do not think for some period it will be easy to import anything. You can imagine the implications of such an extreme situation

      Of course we need to change. Certainly we need to become better in most aspects of economy and society, but we need to do it in a timely manner with the less possible hardship for Hellas and ourselves.

    • Dear Manolis,
      I fully understand the possibilities that you refer to, coming right out of the UBS report, where they are spelled out clearly:
      http://s.libertaddigital.com/doc/informe-de-ubs-la-ruptura-del-euro-41912340.pdf

      This report is typical of other previous arguments, implying that the witdrawal of Greece from the eurozone has a huge transition cost attached. The legal arguments involved are convincing that this will be an ugly situation. Surprisingly, the economic arguments are much milder: a significant amount of GDP will be restored pretty quickly (after one year) according to the report.

      However high the obstacles for an exit from the euro, the converse for Greece, i.e., staying in the euro and getting eaten alive, EVEN IF the rest of the eurozone reforms, is equally if not more catastrophic. And as someone said, “when math says one thing and law says another, guess who is gonna lose”.

      In short, it will be to everyone’s advantage that, *if and when* a breakup of the eurozone is decided–unilaterally or not, that it should happen as cooperatively and collegially as possible, without entering into a full-blown economic war. Therein lies the catch, because such a negotiation cannot even be hinted to occur at the official level (as Yannis’ articles eloquently state).

      Thus, the crux of my request to Yannis is this:
      you (or someone of equally high intellectual standing) should work out a “Modest Proposal on How To Break Up The Eurozone”, that will be put into the public debate (perhaps as an alternative to the original Modest Proposal) and will create a basis on which an informal negotiation (aka discussion) can take place among economists, businesses and citizens. The alternative is real and must be discussed. At the very least such a discussion will increase the realization that the original Modest Proposal is, above anything else, Modest.

      I fear that, in the absense of that, a chaotic break-up of the eurozone will occur, with a misinformed and disgruntled European citizenry quickly moving towards a political catastrophe that will reverse the main objective of two generations ago for a united Europe: peace.

    • Vassili,

      Even though there is much I can agree on with the UBS report, the legal obstacles are the last thing on my mind.

      “Math” indeed shows Greek debt to be unsustainable but sais nothing of the sort about the EZs cohesion.

      In fact, Math is the wrong way to approach the euro issue as Europe is a political project in need of political solutions.

      As regards peaceful reconciliations…

      The system is so complex and so tightly coupled that any process like a eurozone breakup quickly becomes non-linear.

      Also, disincentives for resorting to violence do not a guarantee make. 😉

    • Dear Manolis,

      “Math is the wrong way to approach the euro issue as Europe is a political project in need of political solutions.”

      I used to believe this back in Feb. 2002, when Greece joined the EZ. In 2011, I am sticking with the math. More to the point, the markets seem to agree with me, both back then and today.

      Disillusionment aside, I am not disputing the “need for political solutions”, but I am disputing that “math is the wrong way”. Imho, a realistic political solution to the current mess will have to be one that respects the math. The latest policies for Greece (and Potugal, Italy, etc) do not satisfy this premise, and our time is running out.

  • I can not but be overwhelmed by the depth of blindness we can observe in this comment stream. Only a few commentators focus on improving Greece’s competitiveness. I am glad they did! Fewer admit the Big Fat Greek Publik Sektor (BFGPS) is and has always been a value subtractor. Commentators fear the economy will suffer if the money paid to BFGPS employees is reduced. I say remove this cash from the “value subtractors,” neutralize their ability to block economic initiatives (by holding up permits until bribed for smooth passage), and redirect some to health and education, but delivered through temporary employees and private firms so the “rake-off” in the BFGPS is reduced. But government operating expenditures must be cut radically, and Papandreou is showing almost no ability to do this, thanks to his Party’s Parliamentary group and others. We are waiting almost two years! I tend to agree with Jerry G on most points, Wish I had time to expound in detail.

    • Dear Alec,
      I am surprised that you got the impression that anyone here disputes that BFGPS is at the heart of Greece’s acute troubles (that’s a hell of an acronym btw, are you in the military by any chance? 🙂 In fact most comments seem to be in general agreement with you, and speaking for myself I definitely don’t “… fear the economy will suffer if the money paid to BFGPS employees is reduced”. It is the opposite that I fear, i.e., that this tax is mostly about the “fat” feeding on the “lean” to their death. And yet, PASOK (in obedience to the troika) is selling this tax as “necessary for the salvation of the country”.

      I fail to see how this tax (or, for that matter, the solutions you propose) will somehow improve Greece’s competitiveness in production. It could however improve Greeks’ competitiveness in individual survival, by encouraging even more tax evasion and corruption. And yet, I repeat, **the troika** (EU/ECB/IMF) is satisfied that this tax shows the resolve of the government for “implementing the tough measures” and that “the sacrifices are necessary”.

      PS. Being part of BFGPS (academia) myself, I have many stories I could trade.

  • Commenting on the comments, I make some questions:

    1. How do you know that the public sector in Hellas is large? I have read (I cannot find it at the moment) in Kathimerini that the size of the public sector when compared to the total workforce is not the highest in Europe (in fact if I remember correctly we are 4th from the bottom) – this was the result of the research conducted by a European Institute. Is this just another urban legend that we take for granted?

    2. Will firing 200.000 civil servants solve the problem? Personally, I would cast the problem not with respect to the public sector size but with respect to its PRODUCTIVITY and its IMBALANCES in the distribution of people. Bear in mind as well, that in the public sector we also count the military personnel which for reasons not needed to analyze here, is larger (percentage-wise) than most European countries.

    3. Who are we going to fire? At least 400.000 civil servants (please correct me if anyone knows the exact figures) work in Military, Public Health sector and Public Education sector. Even a relocation of people will not solve the problem since there is a need for staff with special skills. I was going over the list of 150 Institutions who are going to fire people and with great sorrow I saw that many of them are related to social welfare (children with special needs to give an example). I fear that nobody looked at whether these institutes are doing some work or not but they were chosen only on a “fiscal” and “convenience” basis.

    I am not going as well to say anything about comments like “1/2 the civil servants have a second job”, which are without basis (note that I am not saying that such statements are untrue since I really cannot tell).

    “It is the responsibility of intellectuals to speak the truth and to expose lies.” Noam Chomsky

    and its their obligation to communicate the truth to the common people as well.
    and it is their obligation to serve and guide the part of society without voice with the sole purpose of making their life better as well.

    I am paternalistic but still I feel sometimes that we take care of a particular tree while the forest is on fire.

  • Yanni nice metaphor once again, the one about the Vietnamese village. But let me propose another one, and raise a subject that few mention, being so passionately involved in the “lay off public workers” (aren’t they called civil servants?) debate.
    Can you push a man in free fall, to fall even faster?
    What will be the effect of removing 2bn, i.e. about 1 percent of GDP from private spending? We all already talk about a 7 percent recession in 2011. Will that extra 1 percent, or a multiple of it be added to the 7, for a total of 8 or 9?
    I am no economist, just a US trained architect, but I do see this extra burden to have a material effect in the near future, and a psychological effect even as we speak (expected work amounting to about 25 percent of my yearly income was canceled just this week)!

    So again, the question for Mr Feynman maybe, can you push a man in free fall to fall even faster?

  • @yannisv

    Yanni, I’m an avid reader of your blog and by and far agree with your views and assessments.

    However, I’m quoting you: “Yes, property taxes are more progressive and can even be a force of good if they punish rent-seeking activity and encourage productive investments”

    Kindly, enlighten me on this (not so) hypothetical and (not so) uncommon scenario:

    You’re a pensioner (say 65-70 yrs old). You own the apartment you live in, a small house your parents left you, and over the years you managed to put together enough money (literally by working like a dog) to built a small house in a nearby island, for your summer vacation.
    You’re not a mechanical engineer, you know nothing about computer science, you don’t have an MBA in finance. In fact, you don’t even have a university degree. You were say a seaman in the Greek merchant navy.

    Now I would like to ask, in what kind of productive investment would such a person invest in?

    – The non-existent and hugely backward Greek tech sector (those who believe that there actually exists a digital economy in Greece are living on some other planet – and I am talking out of experience here).

    – The government-fed Greek private enterprises?

    – The languishing stock market? (we all do remember the Simitis’ era, don’t we?)

    We live in Greece. Most property is not owned by corporate entities but by common, hard working people. Our fathers and mothers. I fail to see what they’ve done wrong and why we’re asking so much (the world and their money) of them.

3 Trackbacks