Renegade Economists 206

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Broadcast Oct, 26th, 2011

K.F: Let’s have a chat with Yanis Tziligakis. He’s a New York based academic – he’s got a bachelors, a masters, and a phd in the field of physics – he’s now realized he’s got to get his head around economics and he’s headstrong into it, in the last 3 years doing some really good stuff on creative commons. We started off talking about Jeffrey Sachs’ new book. He was off to see his speech earlier today. Sachs’ new book is called the Price of Civilization. Anyway let’s get into this right now.

Can you give us a broad brush overview of the Greek economy? How much money do they owe? What’s the next tranche of debt they’re struggling to gain finance for at present? Set the scene for us.

Y.T: the level of the Greek debt is about €350 billion but of course that’s sensitive to the interest rates. Now Greece got about €110 billion bailout from the European Union and this is channeled- it’s been given to Greece in installments so this is exactly what the current problem was because Greece is supposed to be fulfilling certain obligations for each installment to be handed to it. Now as you can understand the problem lies in that those expectations that the Greek economy has to be fulfilling every time the new installment comes due to be paid out is that they are unrealistic. Or let me put it they are overly optimistic.

The Greek government thinks that they can target their deficit by austerity but at the same time losing track of their income – the tax revenues keep shrinking because of the austerity. It seems to me that the battle of tax evasion which is the main affliction of the Greek economy, if not of most of the economies around the world, that’s the battle that is impossible to win without international cooperation and that’s what Greece is lacking right now.

K.F: How do people evade their taxes in Greece? We hear a lot of stories of corruption going on there but tell us some of the stories you’ve heard of how the social contract in Greece is somewhat different to most countries, where only fools pay their taxes.

Y.T: I think the problem of tax evasion is not a moral problem. I’m against this corruption nuance that’s been passed around and I don’t think tax evasion is a corrupt act. I think it’s an act that makes economic sense. It basically shows that the citizens do not trust to give their money to the state. So, actually the Greek citizens have withdrawn their trust from the Greek government way before the markets sniffed something iffy in the Greek economy. Now it’s sort of a vicious circle of merry-go-round.

Greeks are very entrepreneurial people. 80% of the work force are entrepreneurs and only 20% are public servants so that’s another defamation that Greece has been afflicted with that it’s a country of an overgrown public sector – overgrown, overpaid and basically an inefficient public sector . That’s not actually true.

Greece is actually on the bottom tier of the European Union as far as size of public sector workforce and the size of its salaries that are devoted to the public sector. So the tax evasion has a very interesting nuance that actually nobody has picked up yet. The nuance is this – if the Greeks were simply tax evading, Greece wouldn’t have a problem because Greece would have been shrinking its economy and the cost of living in Greece would be going down if the Greeks were simply exporting their money overseas but that’s not really what is happening in Greece.

The money gets evaded to offshore tax havens and mattressed to places like Switzerland, the Caymans – Greeks are champions in offshoring – and the money comes back to the country untaxed – inflating real estate prices – which affects the overall cost of living and the cost of doing business. So that’s how Greece gets doubly hurt by tax evasion.

K.F: Tell us about the size of the Greek property bubble through the 2000s – how high did it grow?

Y.T: Greece’s real estate index inflated from the years 1993 to about 2008 – it inflated about 225%. So Greece has wealth – but it is under the mattress we call “slow turnover yielding capital”. That is called, in common parlance, real estate. Now the tragic-comic aspect to this is that offshore companies hold the bulk of this real estate and they artificially make Greece expensive for its own citizens.

K.F: Phenomenal – and then the property tax system in Greece has the curse of taxing the improvements like it does in so many other countries, so I hear there are lots of unfinished houses with steel turrets poking out of the roof as if the house isn’t really finished (only finished houses pay property taxes on the improvements). Is that one of the common sights around Athens and so forth?

Y.T: The common sight in Athens – but I haven’t visited for a few years – but a number I’m going to give you, Karl, is that a few months ago they had about 200,000 vacant properties – lets say available for sale or rent – I mean that’s an amazing supply of housing, however, the ratio of wages and pensions to rent has been constantly decreasing. In other words it becomes more and more unbearable to come up with the everyday living expenses especially for people who are getting unemployed and especially for pensioners.

Everybody’s talking about unemployment relief and extra relief to the pensioners but nobody can see that an immediate relief, which would be of no cost to the budget of the government, is by taxing rents and thus forcing them (house prices) down.

Another impact of the high rents is also on Greek businesses. About 1000 Greek businesses outsourced themselves – like they leave the country to go across the border – it’s a similar situation between the United States and Mexico. Its almost like it reaches the realm of the tragic-comic in Greece because it looks like Greeks keep shooting their own feet but they don’t seem to realize they are doing that. And it’s tragic for all these Greek companies that Greece is too expensive for them but Bulgaria isn’t. That’s the effect of high rents of an inflated real estate market which affects both workers and businessmen – it affects both labor and capital.

K.F: What taxation – what capturing of economic rents is there in Greece?

Y.T: Right now even though I had predicted and I had been fighting with my fellow Greeks because Greece is a country where 80% of the people have land. It’s not a country where the people are renters. I mean it’s not like the United States where the land belongs to a few people – a few moguls. In Greece almost everybody has some kind of property. So people know the value of their land and it’s hard for them to realize that this economic factor of production needs to be targeted. They don’t understand that land is a passive factor so if you invest in it you hurt the productive aspects of the economy. Greeks don’t seem to realize that.

However, the government realized it recently so they have actually tried to impose a real estate tax which they’re going to collect through the utility bill because that way they hope that they will be able to pinch everybody and nobody can avoid paying their utility bill so that’s the way they think that this tax is going to be imposed. Now as you said before this real estate tax is faulty, economically, in the sense that it punishes improvements on the land but it doesn’t punish speculation on the land values.

K.F: we’ve certainly got some topsy-turvy economic policies filtering around the world and no doubt the Jeffrey Sachs of the world will be continuing on this misinformation that we should be taxing our food and we should be cutting the public service and cutting the wages rather than ensuring that the precious resources we own are used efficiently and the naturally rising value of this earth is recycled back to the people, through the government, rather than all these taxes that just go mad.

So lots of rioting – there’s obviously some passion on the streets as we love Greek people for but what are the N.G.O’s, the resistance – are they actually looking at serious economic policy or is there still too much pain and hurt on the streets for people to be looking at alternative policies?
Y.T: I’m not sure – besides the Communist Party who has a very clear and ironclad ideology – which still doesn’t sound to me very clear on how it can be implemented. It’s one thing to say “support the workers” and another thing how are you going to provide the funds to support the workers in a climate where the businesses that employ the workers leave the country. So besides that I don’t see a very clear and well thought out plan on how to tackle the economic inconsistencies in Greece.

As soon as the government announced this extra real estate tax everybody attacked it. They think that boosting the real estate market is the way that the Greek economy should be going. However, they fail to see that that is actually what doomed the Greek economy. We had a 225% rise in the real estate and yet we are down in the dumps. So I don’t think there’s a clear understanding, even among Greek politicians. Even though I’m not a fan of the PASOK party, or George Papandreou, it sounds to me that he is the more likely to come up with the right economic solution.

As far as the conservative party, it sounds to me like its going to be a Greek version of the American Republican- the American G.O.P. party. So I’m not really hopeful if the conservative party takes the lead of the country – I’m not very hopeful about that.

But the people need to be on the street. The people need to protest not only about the economic demise of the country which is the result of an elite proportion of the population and that is something that the media don’t pay their due justice – their fair justice. They engage in a carpet criticism of the entire Greek people which almost borderlines racial slurring instead of targeting the true culprits which is an economic elite of 5 or 10% of the population.

An indicator that this is the case is that nobody, even from the Europeans, bother about the € 80 billion outflux of Greek savings to Swiss and other European banks last year. They almost put the country to the brink of revolution just for almost a billion dollars discrepancy in the reduction of the deficit this past October. However they don’t seem to bother about the €80 billion of savings that fled from the Greek banks to other European banks. It looks like some people do benefit from the panic by instilling panic into the minds and the psyche of the Greek people. So the Greek people need to think better of who their allies are and who aren’t.

Karl, the last point I want to make is that Andrea Merkel spoke yesterday in a very different and clear tone. She said very clearly that she wants to get her hands on the Greek real estate – on the Greek land, on the Greek natural resources; and solar power- that’s the key for the future. Greece has 50% more sunshine than Germany and yet is 80% behind Germany in taking advantage of that. The Germans want to take a piece of the Greek sun and that’s what this debt crisis is all about.

K.F: Whoa, that is a mad point to finish off with Yanis – thank you very much for joining us here on the Renegade Economists.

Thanks to Paolo Rosa for the pic

photo credit: bayerberg

Last Thursday’s G20 meet saw little new initiative. The $1.1 trillion stimulus package was largely from already announced packages. This totals up to US$5 trillion in bailout economics worldwide, appx 7% of the planet’s GDP of US70 trillion (purchasing power parity exchange rates).

The ‘name and shame’ tax haven policy development will dwindle once Gordon Brown’s poll bounce is over. Hopefully the policy focus doesn’t dwindle, but the writing is on the wall with the ignorance of ‘automatic information exchanges’ between tax jurisdictions.

The hype over the Financial Stability Board, set up to monitor CEO largesse and hedge fund trickery will be another talkfest with false teeth. They have no policy parameters. George Monbiot will be more likely to keep them honest.

As usual, the press uses the diversionary headlines of the above to channel attention away from the tragedy of these talks – the expansion of the IMF’s powers. It’s budget tripled. The bermuda triangle of economic policy was enhanced, with the bailout economics playbook now extending to one of the world’s most controversial institutions. The expansion of the IMF’s Special Drawing Rights means it can expand it’s quantitative easing – AKA printing money AKA Mugabe economics AKA hyperinflation.

But what about the policy reform no one dared mention? The one that would address both asset price bubbles and environmental devastation?

This expansion in Special Drawing Rights gave a nod towards the Chinese and Russians who are lobbying for a new world currency. This G20 meet paved the way for SDR’s to become their desired ‘globo’ world currency.

Based on a weighted index of the US dollar, the British pound, the Japanese yen and the Euro, SDR’s are distributed to countries according to their IMF contributions ie the SDR currency is backed up by the various countries percentage contribution to the IMF.

Read this excellent bloomberg article to understand the weighting of this currency basket and whether the US dollar is under threat.

From tax havens to credit squeezes to climate disasters, the playing field could be leveled with the big picture reform we remind you of:

The great tax shift, off our wages and onto natural resources (and licensed monopolies). We hope someone mentioned the UK’s great People’s Budget debate of exactly 100 years ago. Did these principles get mentioned anywhere?

Nobody can hide land, rendering tax havens irrelevant. Asset bubbles are only caused because speculative impulses push the ponzi scheme higher and higher until the inevitable 18 year land cycle explodes like a teenager’s hormones. By keeping a lid on land prices we have a more stable asset base from which credit can be based on.

Climate disasters have been sped up by the easy profits one can make raping the planet as a miner or land banking so that families have to live on the outskirts, not next to the train station in town. Land banking leads to doughnut development. A Resource Rental system backed up by environmental bonds re-iterates what we all invariably feel – that the planet is valuable and that we must look after it.

We must halt the speculation upon natural resources if we are serious about providing a sense of hope for working people. How ironic that the forgotten war, no not Afghanistan Mark2, but the unending suburban war zone in America saw 2 tragic mass murders over the weekend. The G20 policies will only prolong this depression.

The overwriting aim is to lock renters into paying 40 – 40% of their income to the lazy, planet flipping speculators that caused this GFC. Global financial crisis or Good for Corporates?

We dare you to get involved by studying the 3 dimensional financial literacy so desperately needed. With the groundswell building, we aim to reform economics such that people and planet matter.

Watch Michael Hudson blister Obama and his economic advisors on Democracy Now.

Digest the hard hitting statements then read Hudson’s Counterpunch piece:

Trying to Revive the Bubble Economy:
Obama’s Awful Financial Recovery Plan

By Michael Hudson

Martin Wolf started off his Financial Times column for February 11 with the bold question: “Has Barack Obama’s presidency already failed?” The stock market had a similar opinion, plunging 382 points. Having promised “change,” Mr. Obama is giving us more Clinton-Bush via Robert Rubin’s protégé, Tim Geithner. Tuesday’s $2.5 trillion Financial Stabilization Plan to re-inflate the Bubble Economy is basically an extension of the Bush-Paulson giveaway – yet more Rubinomics for financial insiders in the emerging Wall Street trusts.

The financial system is to be concentrated into a cartel of just a few giant conglomerates to act as the economy’s central planners and resource allocators. This makes banks the big winners in the game of “chicken” they’ve been playing with Washington, a shakedown holding the economy hostage. “Give us what we want or we’ll plunge the economy into financial crisis.” Washington has given them $9 trillion so far, with promises now of another $2 trillion– and still counting.

A true reform – one designed to undo the systemic market distortions that led to the real estate bubble – would have set out to reverse the Clinton-Rubin repeal of the Glass-Steagall Act so as to prevent the corrupting conflicts of interest that have resulted in vertical trusts such as Citibank and Bank of America/Countrywide/Merrill Lynch. By unleashing these conglomerate grupos (to use the term popularized under Pinochet with Chicago Boy direction – a dress rehearsal of the mass financial bankruptcies they caused in Chile by the end of the 1970s) the Clinton administration enabled banks to merge with junk mortgage companies, junk-money managers, fictitious property appraisal companies, and law-evasion firms all designed to package debts to investors who trusted them enough to let them rake off enough commissions and capital gains to make their managers the world’s highest-paid economic planners.

As sharemarkets crash around the world, the wrong people are being bailed out. Lower interest rates, infrastructure projects and money for the AIG’s of the world will only prop up land prices. Infact, policy makers couldn’t do any worse if they tried.

We actually need land prices to fall back to long term averages. About half what they are in Australia today. However, as Fred Harrison explains above, the wealth gap will only expand under the present policies.