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Thursday, January 31, 2019

Minimum Wage vs. Minimum Income

PM Tsipras' intention to increase the monthly minimum wage to 650 Euro has triggered debate. I think the debate is about the wrong issue.

As someone who is often blamed by readers for being a neo-liberal, I propose the following: anyone who champions a market economy as the best system for generating wealth must recognize that there will always be people who don't succeed, for one reason or another, in such a market economy. Perhaps temporarily, perhaps permanently. Given that, it is mandatory for a society of the First World to make sure that there is a sufficient safety net for those who cannot succeed, temporarily or permanently. No one in a First World country should fear potentially being totally left out in the cold. I emphasize the term First World country because such countries definitely have the resources to provide for a safety net. Obviously, a safety net should be in place everywhere but where there are no resources, there cannot be benefits.

Examples of such a safety net would be Hartz IV in Germany or Sozialhilfe in Austria. These systems must not be confused with the concept of Basic Income. The latter proposes unconditional basic income for everyone. Hartz IV or Sozialhilfe, on the other hand, assure that those who require protection are protected but not the others.

Society, through the democratic process, needs to determine the extent of the safety net, i. e. the minimum amount of income those who do not succeed in a market economy should receive to maintain a satisfactory existence. Sozialhilfe, I believe, sets that amount at 850 Euro per month, Hartz IV, I believe, is lower than that.

And now to the connection between the safety net and a minimum wage. If Sozialhilfe stands at 850 Euro, it is clear that market forces will automatically set the working wages above that level. There has to be an incentive for working in order to avoid incentives for not working.

As I said, whether or not a minimum wage of 650 Euro is adequate for Greece is a matter for the democratic process to determine. However, to have a minimum wage in any amount for people who work without having, at the same time, a safety net for people who cannot work is not defensible.

Tuesday, January 15, 2019

Interest Expense In the Drachma Age vs. Interest Expense In The Euro Age

With all the challenges/problems which the Euro brought for Greece, there were also benefits which are often overlooked. One of the principal benefits was the significant reduction in interest expense. One way to measure the burden of interest expense is to put the latter in relation to the financial resources available to pay interest, i. e. tax and other government revenue. In theory, one could argue that every billion which is saved on interest expense would enable the government to make a billion of investments elsewhere. In reality, this is not the case because the government could do both at the same time when financing the 'other' billion with new debt.

Greece's debt increased dramatically from 2000 (the last year of the Drachma) to 2017, from 141,0 BEUR to 317,4 BEUR (this after a haircut of approximately 100 BEUR). A layman might assume that Greece's interest expense would have increased dramatically, too.

In fact, Greece's interest expense declined from10,2 BEUR in 2000 to 5,6 BEUR in 2017.

In 2000, the last year of the Drachma, interest expense absorbed 32% of tax revenue whereas in 2017, interest expense absorbed only 11% of tax revenue. This was due to a combination of higher tax revenue and lower interest expense.

In 2000, the last year of the Drachma, interest expense absorbed 17% of total government revenue whereas in 2017, interest expense absorbed only 6% of total government revenue. This was due to a combination of higher government revenue and lower interest expense. The statistics are below (in BEUR).

Interest Expense vs. Government Revenue
2000 2017
Taxes on income, property, etc. 13,2 18,1
Taxes on production, imports, etc. 18,5 30,8
-------- --------
Total revenue from taxes 31,7 48,9
Social contributions 17,0 26,0
Capital transfers, etc. 9,9 11,8
-------- --------
Total non-tax revenue 26,9 37,8
Total government revenue 58,6 86,7
Total debt 141,0 317,4
Interest expense 10,2 5,6
Interest expense as % of tax revenue 32% 11%
Interest expense as % of total revenue 17% 6%

What conclusions can be drawn from the above?

First, had Greece stayed with the Drachma, the interest expense would have remained high because Greece could not have taken advantage of lower Euro interest rates. Secondly, the interest expense would in all likelihood have increased because it is safe to assume that Greece's debt would have also increased. Whether government revenue would have increased substantially under a Drachma regime is anybody's guess. Probably not by much (this statement had to be revised. See the below addendum).

Put differently, interest expense as % of tax revenue, already a staggering 32% in 2000, would in all likelihood have increased. Markets might not have been concerned as long as that percentage increased to 35% or a even a bit more but once that percentage would have hit or crossed the 50% level, there would have been panic in markets. Could interest expense have hit or even exceeded 50% of tax revenue? If debt had continued on a rapid growth path and if tax revenue had remained flat, that could definitely have happened.

My conclusion is that, had Greece stayed with the Drachma, it could not have accumulated as much debt as it did with the Euro. This for the simple reason that markets would have determined long before 2010 that Greece had hit or exceeded its borrowing capacity.

Secondly, the Euro not only brought Greece lower market rates but also two additional advantages: Greece could avoid a sovereign default and, following the implementation of the programs, Greece was offered extremely below-market interest rates on the loans from its Euro partners. With a debt load of about 180% of GDP, it is miraculous that the government would only have to allocate 11% of its tax revenue and 6% of its total revenue to interest expense. Those are percentages which one finds in the strongest Euro countries. Countries like Portugal, Spain, Italy or Ireland have to allocate much more of the revenue to interest expense.


I have added the years 2008 and 2009 to the chart. The interesting point is that until 2008/09, i. e. as long as the economy was booming, tax revenue and government revenue in general had increased substantially. For example: revenue from taxes increased from 31,7 BEUR in 2000 to 50,1 BEUR in 2008, and total government revenue increased from 58,6 BEUR in 2000 to 98,4 BEUR in 2008. That seems to be a nice proof that a booming economy increases government revenue (even if it is all financed with debt).

 Interest Expense vs. Government Revenue
2000 2008 2009 2017
Taxes on income, property, etc. 13,2 19,7 20,3 18,1
Taxes on production, imports, etc. 18,5 30,4 27,8 30,8
-------- -------- -------- --------
Total revenue from taxes 31,7 50,1 48,1 48,9
Social contributions 17,0 30,6 29,3 26,0
Capital transfers, etc. 9,9 17,7 15,1 11,8
-------- -------- -------- --------
Total non-tax revenue 26,9 48,3 44,4 37,8
Total government revenue 58,6 98,4 92,5 86,7
Total debt 141,0 264,8 301,0 317,4
Interest expense 10,2 11,7 12,0 5,6
Interest expense as % of tax revenue 32% 23% 25% 11%
Interest expense as % of total revenue 17% 12% 13% 6%

Tuesday, January 8, 2019

New Goals For The Future

For Ekathimerini, the New Year has begun with exhortations regarding the future.

In an op-ed by Yiannis Manuelides, the author argues: "Years of proud Greek exceptionalism, followed by years of passive-aggressive acceptance of memoranda, need to be followed by something radically different. The world today is interconnected in complex ways. It will continue to evolve in challenging ways. For Greece to break free of its current isolation, it needs to engage with the world. The means of this engagement is a better and marketable Greek product. The actors who can bring this about are the residents of Greece working better together and becoming bona fide members of the global community. Rising to this challenge will see the return of lasting prosperity and legitimate national pride."

Alexis Papachelas argues that "it is high time for Greece to set new goals for the future, to make a plan: "Today we are looking at the future divided and with a clear leadership deficit. The asymmetry with Turkey, notwithstanding its internal problems, is a cause for concern. It’s time we hammered out a plan that will help the country restore its strengths and play a leading role in the region, taking advantage of untapped potential. Looking back at the big picture, it may not appear that bad, but if we want to halt the decline we need to set goals for Greece and the diaspora, which has also played a key part."

And then there is an obituary about Nikos Mouyiaris who is quoted: “I’ve been in America for over 50 years. I saw many of us succeed in what we chose to do. Professionals, academics, scientists, businessmen. Some also excelled in politics. As persons we succeed. Regretfully, however, I see that organized Hellenism is declining. Associations and federations are in danger of extinction. They are not capable of attracting our youngsters, our many incredible young professionals."

One of the wonderful traits of Greeks which I have learned to admire is their competency in making diagnoses. I have been with taxi drivers who would explain to me, during a 1/2 ride from the airport, everything that is wrong in Greece and why. It makes for wonderful conversation. What is lacking across the board, however, are specific proposals and action plans. Not sophisticated macro-economic dissertations but, instead, pragmatic goals and measures which the population at large can absorb and identify with (if they only hear them often enough).

Suppose a Prime Minister made the following speech on prime time TV: "We - the government - propose a New Deal to the Greek people: going forward, we will, unequivocally and irrevocably, pursue 4 obsessions in our daily lives: we will be obsessed with export promotion, thereby creating growth in the economy; we will be obsessed with substituting imports through local production wherever we can, also adding to economic growth; we will be obsessed with attracting foreign investment as a source of foreign capital, provided that such investment adds value to our economy and society; and - we, the government - will seek to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos."

If nothing else happens, that speech will go down into the history of beautiful soundbites. What else must happen? Each of these soundbites must be supported by specific action plans with milestones. During the last 10 years of crisis, there has been a multitude of proposed plans for the turn-around of the Greek economy. To only name my favorite: the Greece Ten Years Ahead Report submitted by the Athens office of McKinsey in 2011. And regarding the building of a modern and prosperous Greece, I refer to the former EU Task Force for Greece.

It really would not take all that much but what it will definitely take is Greek leaders who step forward and display civil courage and disinterested conduct. Does Greece have such leaders? A plenty, in my judgment. The eternal question I have about Greek society is why such leaders do not step forward and display civil courage and disinterested conduct.