Looks like the trillion didn’t even buy the EU the day and a half I suggested.

While not much has actually changed some cross currents can start to surface.

Decent US economic news, especially the through the rear view mirror, should continue to be reported.

The euro austerity measures are deflationary, and they are being attempted, so they can firm up the currency once the portfolio shifts have run their course, though that can be a ways off.

China’s policies could prove deflationary as well.

In fact, it looks like the entire world is going the route of ‘fiscal responsibility’ at the same time.

Euro Erases Gains as Bailout Optimism Ebbs; Chinese Stocks Fall

By Justin Carrigan

May 11 (Bloomberg) — The euro lost all of yesterday’s gains on concern the $1 trillion bailout will hurt European economic growth. Stocks fell, paring the MSCI World Index’s biggest advance in a year. Chinese shares entered a bear market.

17 Responses

  1. In fact, it looks like the entire world is going the route of ‘fiscal responsibility’ at the same time.

    Start of the double-dip aka continuation of the GFC?

    1. Exactly, while discretionary fiscal is not strong enough to make up for the huge losses in employment, the stabilizers are doing the job of getting GDP going + credit expansion is going in the right direction.

  2. WARREN:

    I have question about this. I ask Greek friend about situation, and he describe Greek economy in general as having fairly high unemployment, especially among young. He say kids just want work at Government as it is high prestige, secure, well paying. Private sector jobs do not pay well. Also, he say that families are very fiscally conservative because they need to pass on house to children — children cannot afford own home (as is typical in US).

    My points is this — tough employment situation, sluggish private sector, very conservative/low leverage real estate market — this is not sounding like a MMT economy with too large deficit. Given taxes are so low in Greece (more through evasion than anything else) and public sector is huge, then why is it not MMT worker paradise? AD should be very strong, but it is not enough to let a kid buy his own appartment.

  3. first, if voters want more public sector jobs that option is always open

    it just means potential private sector output falls as there are fewer private sector jobs

    second, europe in general is subject to massive shortfalls of agg demand as evidenced by the high unemployment and the public sector paying more than the private sector. the right levels of demand change that around.

    there is always a level of taxation that will equate to full employment of whatever is left of the private sector regardless of govt size.

    1. Warren,

      Not sure if you fully answered Zanon’s question which I’m curious about too. If tax non-compliance is endemic in Greece it would seem as if tax rates are already ultra-low (i.e. official rates may be high, but if business doesn’t pay, effective tax rate is close to zero already. Despite this, it sounds as if Greece is far from “full employment”.

      1. Two comments:

        First, tax revenues are actually not that low, at least compared to the US. According to the CIA world factbook, tax revenues are approximately 32% of GDP (although, there is probably a very significant unreported GDP). US tax revenues are generally between 18% and 20% of GDP.

        Second (and I know you know this), they’re not in an MMT situation, as the value of the Euro has been maintained by too little AD in the rest of Europe. AD is not specifically the problem in Greece, it’s competitiveness. The average Greek worker cannot produce enough to justify paying him the average Greek wage in Euros, so there is high unemployment, and AD is satisfied by net imports. The CIA World Factbook data shows a trade deficit of 12.5% of GDP, which strikes me as quite a large AD sink.

        If Greece still had the drachma, it would have adjusted a long time ago to make Greece more competitive. Unemployment would be lower, and employed Greeks would earn less in real terms.

        I still think this has to happen some day. Germans aren’t going to be willing to subsidize the Greeks forever.

      2. That is larger than I thought. Even with 25% expected underground economy, it puts taxes around 25% of GDP (actual).

        OK, maybe with even lousy compliance greeks are overtaxed. And I was talking about pre-euro days, where govt sector was big, and tax evasion as as popular as ever.

        Italy is similar. It has gone through big inflatinos, has high tax avoidance, conservative approach to family and the houses, but is notorious for high unemployment among young. And this is also long before they join the euro as well.

        the profligate “southern” europe has been profligate for long time, but has never been MMT paradise for the worker

      3. U.S. *Federal* Tax revenues are about 20% of GDP. State and local taxes are about 10%-15% of GDP as well.

        Greece, given it’s social spending, needs tax revenues of about 40% of GDP, or it needs to perform massive cuts in spending to make it closer to U.S. benefits, if it is to have U.S. tax burdens.

      4. RSJ:

        Given its current monetary arrangement you are correct.

        My question though is that even BEFORE Euro, Greece had similar spending/tax habits, and yet it was not the worker paradise MMT says it should be. Why?

      5. Hmm, who says is it wasn’t?

        Reminds of the joke about the american businessman who is visiting a small island in Greece, and sees a fisherman sleeping in a hammock on the beach. And he starts berating the fisherman, telling him that what he *should* do is to work very hard and save his money. Then, he could buy two boats, and then three boats, and eventually a fleet of boats! Then, he could sell his fleet, be filthy rich, and lounge around all day in the sun. And the Greek says “what do you think I am doing now?”

  4. Michael Hudson blames it Greece’s regressive tax system:

    Iceland, Latvia and now Greece are the opening shots in the resulting global campaign to roll back the great democratic reform program of the 19th century and the Progressive Era: taxation of land and the “unearned increment” of price gains for real estate, stocks and bonds, and subordination of the financial sector to the needs of economic growth under democratic direction…

    Houses, office buildings and entire companies are worth whatever banks will lend. So populations (and corporate raiders) have responded to the pro-financial tax shift by borrowing to buy houses (and companies) before prices recede even further out of reach. And taxes on labor now are about to be jacked up to pay off the public debts resulting from the asset-price inflation and financial wreckage that property tax cuts have helped cause. This is the cause of national debts. Governments have run into debt as a result of un-taxing the wealthy in general, not just real estate…

    Following Western governments in shifting the fiscal burden off property and finance onto labor over the past few decades, Greece’s government is politically unable or unwilling to tax the wealthy, or even well-to-do professionals.

  5. Well isn’t Greece like Japan then? Japan has the highest debt to GDP ratio in the industrialized world, and it’s overall tax burden is among the lowest. It should be an MMT heaven, but it’s been wallowing in stagnation for twenty years. I thought the reason was that Japanese people are ridiculously frugal. No matter how high a deficit the government runs, it can’t get people to consume, they just save more. Perhaps the Greek people are also not big consumers.

  6. think of the US, where some states have higher unemployment than others. all the fed gov can do is implement a job guarantee which would address the unemployment in the laggard states without removing too much drag in the rest of the states that are at full employment with a general tax cut.

    however the US has sufficient mobility or presumed mobility where people are expected to move to where the jobs are so we don’t consider the regional differences nearly as critical as they do in the euro zone.

    also, in the us, state tax policy does matter.

  7. Some facts. The unreported GDP generated in the informal sector in greece is close to 40% of GDP. So tax evasion is substantial and mainly among professionals and businesses. Furthermore, there is substantial transfer pricing that with the euro regime and no currency risk it favored imports at the expense of domestic production and not because of high wages/productivity. Market power mantains prices much higher than in other Euro economies. The unit prime cost ratio is about the average of the EMU countries. The private sector is a net saver with much lower debt to GDP ratio than most developed economies. We have a situation of high public to private debt composition but the total is less than most other developed economies. Furthermore, Public sector employment is a high percent but this reflects the absence of jobs in the private sector as production is replaced by imports to exploit transfer pricing that avoid taxes and also because of entrepreneurial capacity and market power that keeps high prices. There is corruption and waste in public spending of approximately 20% of the total. The debt problem is that 82% of it is foreign owned which means that there is aconsiderable inerest income drain and tax revenue loss as interest income is taxed abroad. There is more…….

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