Greece’s biggest employers group on Thursday said that rising costs, poor infrastructure, higher borrowing costs and red tape were among the main reasons that the cost of goods in the country has not dropped despite the ongoing crisis.
In a memo sent to the Development Ministry on Thursday, the Hellenic Federation of Enterprises (SEV) set out six reasons for the stubborn prices. These were:

1. Soaring energy costs as a result of higher energy rates, including a special tax tagged on electricity and gas bills.

2. The escalating cost of mostly-imported raw materials.

3. Poor infrastructure services. The report cited the substandard cargo loading and unloading facilities at the port of Volos, in central Greece, as an example.

4. The high transport costs which undermine competition.

5. The extra financial strain caused by the doubling of borrowing costs over the past year, the deterioration of payment terms for imported materials (e.g. packaging materials), the significant increase in taxes, and the long delay in VAT reimbursement.

6. Red tape and a complex administrative structure.

“Compressing labor costs is not fundamental in reducing prices,” SEV said in the memo. “A good example is energy intensive industries where energy costs make up for 40-50 percent of production costs. To offset the recently-imposed 20 percent rise in energy bills you would have to reduce labor costs by 80percent,» it said.

The federation said that the key steps for reducing the prices of manufactured products were lowering taxes, removing regulatory and administrative barriers, and improving the efficiency of the notoriously dysfunctional state apparatus.

Greece’s international lenders, the International Monetary Fund and the European Union, have demanded a reduction in labor costs to make the country more competitive.

But many Greeks, who have seen their disposable income plummet over the last few years, are frustrated that the cost of living has not fallen as well.

Tens of thousands of demonstrators took to the streets of Athens on Wednesday in protest at the anticipated cuts.

46 Responses

  1. The Greece story confirms that inflation is largely a function of international commodity prices, not domestic demand-pull. Similar to our 70’s stagflation.

    Inflation caused by rising wages is the kind of inflation wage earners should support.

    1. @Dan Lynch,

      Except that inflation makes them poorer, devaluing value of their money. Yes debts come down too but they have more assets than liabilities making them poorer overall.

      Inflation is not good.

  2. Warren – I think your Mandatory Readings section could use an all-encompassing piece on inflation. Would you consider doing something new, or elevating something you have already written to go in there?

    You obviously cover inflation in many places – including in “Soft Currency Economics”. But these are generally passing references, and to my mind the distinction between benign vs malign price rises isn’t always clear. And when, in Soft Currency Economics, you refer to 5% CPI over a period of years as not the same thing as inflation, I worry that you are using the term ‘inflation’ to refer specifically to malign inflation, rather than the broader sense of a “generally rising price level”.

    I think this is important to address an exchange along the following lines, which is where I’m getting bogged down:

    1. MMTer: if you look at sector financial balances, it’s obvious that sovereign states should not fear large budget deficits.
    2. Non-MMTer: OK, but what about bond vigilantes.
    3. MMTer: bond vigilantes are powerless in the face of explicit yield ceilings by the CB.
    4. Non-MMTer: large-scale monetisation could be seriously inflationary as the injection of liquidity into private sector non-banks could prompt such non-banks to increase their spending sharply, even at the cost of depleting their NFA.
    5. MMTer: but such injection of liquidity hasn’t proven inflationary so far in Japan, Switzerland, the US or the UK yet.
    6. Non-MMTer: OK, but these may be special cases; inflation may take off following a yield ceiling in future. What is worrying is that if we are running a yield ceiling, we by definition cannot rely on monetary policy to beat inflation if it were to take off.
    7. MMTer: but interest rates don’t have a track record of managing down inflation anyway – the Volker ‘success’ in 1982 should be attributed to nat gas deregulation, for example. Fiscal policy is a better tool to manage inflation.
    8. Non-MMTer: but other examples of inflation defeats – eg the UK’s ‘success’ in the early 1990s – are in fact attributable to the 10%+ interest rates at the time. And there is no track record of fiscal policy defeating inflation.

    I know that the Bank of England, in particular, believes as an article of faith in the ‘hot potato’ theory: it maintains that the private non-bank sector will increase its spending (depleting its NFA) following an unplanned liquidity injection from the central bank, until prices have risen to restore pre-injection norms of liquidity vs prices. So they insist that per se QE is (and yield ceilings would be) inflationary. The BoE is also adamant that it is monetary policy, and primarily overnight rates, which control inflation.

    1. @Anders,

      “it maintains that the private non-bank sector will increase its spending (depleting its NFA) following an unplanned liquidity injection from the central bank,”

      And yet, despite being sat on mountains of cash, they aren’t doing that at the moment. It strikes me that private sector actors are quite happy to hold private sector financial instruments rather than public sector ones.

      At what point does the evidence render the theory incorrect?

      Liquidity can’t go anywhere – it just ends up being ‘saved’ by the banks at the central bank. non-bank actors are forced to take a private sector savings instrument rather than the public sector one – or spend the money on something.

      The ‘Hot Potato Theory’ boils down to people are likely to save less and spend more when interest rates are zero (unless they’re really frightened).

      And that’s kind of the plan.

      1. @Neil Wilson,

        I’m not sure evidence alone is going to be acceptable to mainstream/monetarists. The analogy they would presumably reach for is a engineered system – such as a bridge: just because it hasn’t failed so far doesn’t mean that putting a bit more weight on it wouldn’t be dangerous.

        Specifically, whilst your hot potato gloss is surely correct, M/M would reply that we need to conceive of policy that is robust for a situation where people stop – quite suddenly – being really frightened. MMT’s tack seems to be to argue: look, people just aren’t going to suddenly stop being really frightened. That’s like saying – M/M would respond – that a bridge isn’t going to have to carry any more weight.

        I think another tack is to argue that there is nil evidence of any wealth effect outside the housing market, and that the impact of large-scale liquidity injections (a) are therefore not of any near-term concern as long as housing confidence remains broken, and (b) can be managed in future by regulating mortgage products.

        But fiscal management – ie well designed automatic stabilisers – is something I’d like to see fleshed out in more detail.

      2. Montarist case is build on false premise that agg. demand is function of money stock, when in fact it is more function of net wealth position, ie. assets – liabilities.

        More sophisticated monetarists (fraudsters) claim that there is complicated money multiplier process going on when in fact there is no such thing. Their faulty understanding of the monetary system leads them astray. Or it is intentional and they lead us astray. Damn charlatans!

      3. @Heplon,

        To be fair to monetarists, the smart ones (at least in the UK-based broad monetarist school) don’t maintain that money multiplier from narrow to broad money exists. They do claim that deposit balances affect agg demand, but they also state that wealth has an effect: both deposit balances and wealth enter their agg demand functions based on ostensibly sophisticated vector auto-regression analysis over long periods which seems to show that both deposits and wealth are important to spending.

        Their analysis (eg “Money and Asset Prices”, Congdon 2005) does seem to demonstrate the importance of each quite well on their own terms.

        My concern with monetarist analysis is that their data usually encompasses periods where households experienced what were perceived at the time to be irreversible increases in net worth, so wealth effects for the household (and corporate, via sale-and-leasebacks) would have been far more robust than they seem today. A QE-induced equity, bond or commodities bubble today is just not likely to induce households to reduce their planned surpluses or spend out of wealth.

      4. @Anders,

        Clad to hear they are not simplistic as I have heard.

        This “hot potato effect” mistakes the nature of savings. Savings are, by definition, stored purchasing power that is not meant to be consumed now. It does not matter what form these savings take whether it is government bonds or plain money. QE is just an asset swap that changes the form of savings in the private sector, but they are still savings.

        As QE strips interest income from savers it is likely to cause them save more, not less, because they want to achieve their desired savings position. Think about pension savers who previously could count on interest income to supplement their initial “nest egg”. Then QE takes interest income away and they have to build up even bigger initial pot of money from which to draw down in retirement to achieve same standard of living.

      5. @Neil Wilson,

        Liquidity can’t go anywhere – it just ends up being ‘saved’ by the banks at the central bank. non-bank actors are forced to take a private sector savings instrument rather than the public sector one – or spend the money on something.

        which means looking at aggregate liquidity is totally irrelevant.

        what matters is how liquidity flows between individual owners, not the aggregate.

        and remember no government can impose the currency in which the private sector attempts to net save, unless it imposes very strict capital controls and manages to enforce them.

      6. @MamMoTh why do you think that looking at adequate liquidity is irrelevant, if you concede that one of the things excess liquidity may do is to increase spending?

        Also – not sure of your intended significance of “…no government can impose the currency in which the private sector attempts to net save…” It seems to me that the private sector in aggregate is actually forced to net save (ie accumulate NFA) in local currency; if it prefers to hold a foreign currency, it needs to persuade a foreigner to accept its NFA in return for some foreign currency assets.

    2. @Warren Mosler,

      I do appreciate my responses weren’t your responses; I’d be delighted if you could set me straight on any of those individual points which seemed very wide of the mark…

      I’m amazed you found yourself agreeing with Tim Congdon – he believes in a Patinkin-esque hot potato effect – ie that liquidity always matters!

      1. @WARREN MOSLER, OK – that’s intriguing of Congdon.

        What is the right response to a mainstreamer who says:

        “Yield ceilings (and therefore an MMT approach in general) are unworkable because we need to be able to deploy base rate rises in case inflation starts to accelerate. Sure, oil price falls may have been more important than Paul Volker in beating inflation in the 1980s, but we can’t rely on commodity price falls in the future; and there is no track record of fiscal policy successfully defeating inflation.”


      2. “there is no track record of fiscal policy successfully defeating inflation”

        There’s no track record of monetary policy successfully defeating unemployment.

        Use the car analogy.

        A car with square wheels is a bad design for a car, but it is not an argument against cars.

        Consider this thought experiment. Parliament gives the central bank the ability to move a Land Value Tax through a range of, say, 0% to 10% payable by the entity holding a charge over a property, or the freeholder if there is no such charge. The tax is used to extinguish central bank liabilities and reduce the size of its balance sheet.

        That is the fiscal tool by which inflation is controlled. It’s a more powerful control mechanism than interest rates as you are literally destroying spending power rather than just moving it from borrower to saver. So why wouldn’t it work?

      3. @WARREN MOSLER,

        “there is no track record of fiscal policy successfully defeating inflation”

        ECB, one of the most crazy about inflation central banks around, has just admitted that its new headquarters will cost about 300mn more which is roughly one third above the original price. Can we take this as a claim that there is also very little track record of monetary policy “successfully defeating inflation”?

        What is “successfully”? And why should we be fighting it?

      4. @Neil,

        I like very much the idea of a dynamic land value tax, although I struggle slightly to reconcile fiscal policy with conflict theories of inflation (if inflation results from workers and firms in aggregate having too much pricing power, then higher tax doesn’t really address this). But ever since Lloyd George choked in 1911, a land value tax has been firmly off the agenda: it feels much further away from being accepted than other MMT policies.


        Unfortunately your reference to the ECB HQ just picks up mainstream concern about trusting the authorities to deliver on any planned fiscal policies.

        When trying to spread the word on MMT, I don’t think it’s realistic to expect mainstreamers to jettison altogether their concern for managing inflation. It’s an interesting question to discuss, but I’m looking for a set of arguments that have a chance of being accepted.

      5. Anders,

        I wasn’t using the Land Value Tax as a policy proposal. I was giving you a thought experiment using fiscal policy to replicate what monetary policy is supposed to do – move the cost of mortgage repayments up and down and therefore withdraw spending power.

      6. @WARREN MOSLER,

        Anders: Unfortunately your reference to the ECB HQ just picks up mainstream concern

        Anders, I think mainstream has to present a convincing argument that monetary authorities can control inflation. Who should have the burden of proof here? I think once we had a discussion on this. My opinion is that noone can really control inflation though fiscal policy definitely has a stronger lever. Inflation is rather a feature of any capitalist economy while the rate of inflation is defined by the intrinsic structure of that economy. We basically have two conflicting forces: price margins and competition. The more developed the economy is the lower the capacity to increases prices due to competition is and the lower the required return on capital due to institutional risks is.

        The question of defeating is kind of stupid and sounds very much like the typical gold bug hyperinflation sweat dream. The question of controlling is however much more important and interesting. And here it is far from clear that monetary authorities have any control, something that the case of ECB clearly indicates if not proves. And if ECB is allowed to be 30% off in just a couple of years then forget controlling. We do not even have a case for “defeating inflation”.

      7. I think mainstream has to present a convincing argument that monetary policy can do anything *outside of a system where the private debt to gdp ratio is constantly increasing*.

        All their data is from a period that has a clearly unsustainable dynamic.

        To me it seems that monetary policy can only do anything if it is pushing private debt like some insane drug dealer.

        ZIRP seems to me as a way of stopping that dash to debt.

      8. @WARREN MOSLER,

        “rate hikes, if anything, cause ‘inflation’ to get worse”

        The argument in “the natural rate of interest is zero” appears to be just that (a) Japan hasn’t seen inflation despite ZIRP, and (b) the interest income channel. I don’t disagree with either of these points, but the entire central banking community seems to subscribe to the view that rate hikes lower inflation (eg

        This is my point: if a fundamental building block in getting MMT accepted by mainstreamers is persuading people that central banks have a diametrically incorrect understanding of the relationship between rate hikes and inflation, then we have a mountain to climb.

        My other pragmatic concern with adopting ZIRP permanently is that it challenges the maths of private pensions, since without any return on capital, the required private capital accumulation for an individual by retirement is much larger, and will be less ‘helped’ by compound interest.

      9. @Neil,

        I’m no fan on monetary policy – and I’m much more inclined to explore automatic stabilisers and MAP to *try to* control inflation rather than rely on base rates.

        Nonetheless, if base rates were hiked by 5% points overnight, this would presumably (despite having a quasi-fiscal effect of increasing interest income injected into the private sector) put a brake on demand overall, resulting in slowing inflation and GDP growth.

        This fact – assuming you agree with it – is pretty powerful, because it underpins the fact that economies around the world have put their trust in central banks and monetary policy ensure that the currency survives. This is what one is up against, in trying to push MMT upon the mainstream.

      10. @Sergei,

        I am sympathetic to any heterodox perspectives on inflation – including a greater tolerance for faster price growth, and a focus on the second derivative rather than the first.

        But my approach is, again, to try and build a case to take to the mainstream. The burden of proof falls on Post-Keynesian approaches to demonstrate that there are more effective ways to control inflation than monetary policy. Why? Because the whole international system of central banks is set up with monetary policy as the centrepiece of currency stability.

        Arguing against relying on monetary policy on the grounds that it doesn’t really control inflation, is a bit like arguing that barriers on the side of a bridge can be removed on the grounds that they wouldn’t really stop a car that smashed into them ending up in the river. The obvious mainstream reply is: well at least we have the existing form of protection, even if we aren’t sure that it works, so we shouldn’t tear it down without putting in place some alternative that is at least as likely to protect against the relevant tail risk.

        You can legitimately point to monetary authorities’ mixed success at controlling inflation, but it is epistemologically difficult to say the authorities don’t have _any_ control. In any event, the question is what approaches are likely to be more effective than monetary policy.

      11. “Nonetheless, if base rates were hiked by 5% points overnight, this would presumably (despite having a quasi-fiscal effect of increasing interest income injected into the private sector) put a brake on demand overall, resulting in slowing inflation and GDP growth.”

        I don’t think anybody is denying that monetary policy does something. The problem is that you don’t know quite what it does, when it is going to do it and to whom, and you certainly don’t know to what extent things happen now that we don’t have an environment of persistently growing debt ratios.

        Destroying investment reduces the productive capacity of the system and will lead to inflation eventually. Moving the price of money around constantly makes it very difficult to plan long term investments.

        AIUI the MMT approach is from functional finance. The base price of money should be set to encourage the appropriate amount of investment in an economy and it should largely stay there. Counter-cyclical management should use another more appropriate tool.

      12. @WARREN MOSLER,

        Anders: You can legitimately point to monetary authorities’ mixed success at controlling inflation, but it is epistemologically difficult to say the authorities don’t have _any_ control.

        Well, we have enough cases already which clearly show how difficult it is to inflate a developed economy. What if, as I say above, inflation is just here and is not dependent on whatever monetary authority pretends to do as long as long as it does not do outrageously stupid things like hike o/n rates by 5%? What if monetary policy is like a kid with a steering wheel in the backsit as Warren says? Why is that link between inflation rates and interest rates? And finally what comes first: intertemporal preferences or interest rates? Maybe be by having interest rates we ourselves induce intertemporal preferences which are simply NOT there.

      13. @Sergei,

        I’m very open to the idea of monetary policy being the proverbial kid with a steeering wheel. But to persuade people of that, you can’t just use agnoticism and argument from first principles. You need a fleshed-out theory of inflation which explains, among other things, how base rate movements have an impact.

        Didn’t follow your point on Japan? I struggle to believe private sector spending would increase if rates went up by 5% points, but perhaps inflation wouldn’t fall any lower than where it is at present.

      14. @WARREN MOSLER,

        Anders: But to persuade people of that,

        What is we stop publishing budget deficits? We can not persuade people of anything because they are constantly brainwashed. We need to limit to room for brainwashing either by better and broader education or by limiting the flow of garbage. The latter assumes that we either cut it off at the point of output or we cut off the supply of input. I am generally in favour of forbidding publishing the budget deficits. We all know those figures are rather useless.

      15. @Neil, I’m not only arguing that “monetary policy does something”. I’m arguing that it appears to have a track record of effectively reducing inflation, if rates are high enough.

        In other words, when inflation has approached a level which the authorities have deemed to be excessive (putting aside the question of whether this was the right conclusion for them to have drawn), monetary policy appears to have been effective at reducing inflation.

        So in future, the mainstream can say, we may again find inflation reaching excessive levels, defined as 10%, or 100%, or as sufficiently-accelerating. We can’t simply jettison monetary policy, with all its flaws, without having other tools which are likely to be as or more effective as monetary policy at stabilising inflation.

        I suppose I’m saying that we need a more comprehensive account of these other counter-cyclical tools than I have yet seen.

      16. @Anders,

        Putting taxes up has exactly the same effect. That is very effective at managing inflation – up until the point where the politicians didn’t feel that they could put taxes up any more without getting laughed at.

        Once again that is why I gave you the model I did. That uses taxation and channels it via precisely the same ones as monetary policy – the cost of a mortgage. However it is *more* effective because it doesn’t then channel anything back to savers or banks.

        Present the model and ask the monetarists why putting mortgages up in that way won’t control inflation. Because if it doesn’t then neither does their model.

      17. @Anders,

        Anders, that is very weak argument. We have cases when apparently big rate hikes calmed down inflation. But we do not have big tax hikes for the same purpose. So what do we prove here?

      18. @Neil, you’ve hit on the biggest reservation with fiscal policy as an anti-inflation tool: politicians do get laughed at when they put taxes up.

        Unfortunately it seems that a case for MMT policies is intrinsically bound up with a case to reform our institutions quite fundamentally to establish a ‘counter-cyclical fiscal authority’, or your central bank land value tax idea.

      19. @Sergei,

        I think it’s a non-starter to stop publishing budget deficits, at least as long as government debt is outstanding, as bondholders would insist on it. Besides, the whole developed world is now signed up to sector financial account disclosure (System of National Accounts 2008). The trend is towards more data provision, not less.

        “what do we prove here”

        I’m just stating the mainstream objection that jettisoning monetary policy as the main anti-inflation tool would be a leap into the unknown. They would also likely point to the US which saw inflation rise from c. 1.5% in 1998 to c. 3.5% in 2000 despite Clinton’s withdrawal of NFA from the private sector.

        That said, I do find Neil’s proposals compelling. It’s just that they don’t seem acceptable to the mainstream any time soon.

      20. @Anders,

        Almost there.

        But I do find the ‘safeguarding against folly’ annoying. The safeguard is the democratic result of the ballot box every five years and the operations of the democratic institutions within that period.

        Suggesting that there should be some overlord function based on the output of technocrats is to suggest that there should be some form of dictatorship over the economy. And it is that dictatorship that is allowing the disasters in Europe to unfold.

        If a government is considered competent to take a country to war, then it is competent to make *all* the economic decisions.

  3. The sole act of printing money will drive up prices of inelastic goods, like oil, but the MMT religion does not see this.

    1. @JBH,
      Prices for inelastic goods like land, airwaves and IPv4 adresses don’t show up in CPI and “don’t count”. That’s why you see the FED buying up mortgage paper and cheering about house prices go up whilst looking proud about low inflation figures.

    2. by printing i presume you mean spending?
      if the fed prints a zillion dollars and leaves them on the table by the press nothing happens, right?
      they need to spend it to alter anything

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