Greece Could Rise To Greatness, Or Become The Next Venezuela
March 19, 2015
(This item originally appeared at Forbes.com on March 19, 2015.)
I like to boil down economic concepts into very small and simple forms. They are like life preservers that one can cling to in an emergency, when cabinet meetings become a whirlwind of bad economic advice. One such concept is: the health of the government and the health of the private economy are linked together. A healthy private economy will produce a healthy government. When the private economy is weak, the government’s revenues will be poor, the need for money will be unrelenting, and corruption will be eroding the state everywhere.
The philosopher Confucius was not a holy man in the model of the great prophets. He was mostly interested in good public administration, and had a brilliant early career as a high minister in the state of Lu before resigning in 497 BC.
In the Analects, we find:
Duke Ai asked Yu Zo: “It has been a year of famine and there are not enough revenues to run the state. What should I do?”
Zo said: “Why can’t you use a 10% tax?”
The Duke answered: “I can’t even get by on a 20% tax, how am I going to do it on 10%?”
Zo said: “If the people have enough, what prince can be in want? If the people are in want, how can the prince be satisfied?”
This is why I recommend another small concept, the Magic Formula. It is: Low Taxes and Stable Money. When taxes are low and money is stable, most of the other hundreds of issues of statecraft you could name become easier to manage, and usually right themselves with time and attention. When taxes are high or money is unstable, the foundation of the economy crumbles, and all of the other edifices of the state crumble as well, despite all attempts to repair them.
When we look at Greece today, it is very clear that we have a rough approximation of Stable Money (thus far), but we certainly do not have Low Taxes. The lowest-earning people in Greece face a VAT of 23% and a combined payroll tax of 44%. If you manage to somehow make 26,000 euros in the course of twelve months of labor, you then get to pay another 32% income tax rate on top of all that. No private economy can function properly under these conditions, so we find that it either functions improperly, via tax evasion and avoidance, or not at all.
Thousands of Greek businesses have relocated to low-tax Bulgaria, while others, such as the famous Greek shipping industry, have special deals that allow them to operate nearly tax-free. This does not include the many thousands of Greek businesses which simply don’t exist at all, because this hideous environment prevented them from taking form.
Businesses that don’t exist, or have fled for friendlier jurisdictions, don’t pay taxes, and don’t hire local employees. Thus, unemployment is high, and those that are employed earn pitiful incomes. Of what little they do receive, the government attempts to take from them the largest portion. Thus, people are in want; pressure comes from all sides for the government to sustain them in some way.
In the first instance, this takes the form of various kinds of welfare programs. The government senses that to cut off their support of millions of genuinely needy families would cause their instant downfall. These programs become untouchable. However, it soon goes far beyond that. Before long, people notice that government employees are far better off than employees in the private sector. Their link to the only remaining source of sustenance, the government, is more direct. Thus, everyone wants to become a government employee, and headcount blooms far beyond necessity. Along the way, it becomes understood that a government job is a sort of welfare; the government employee supports their immediate and often extended family. Excessively generous compensation, in the form of wages and also benefits such as early retirement on a guaranteed pension, gains a sort of moral imperative. Reform is impossible. It is the last remaining strategy by which the middle class can continue to exist.
The more ambitious in society soon discover that it is far easier to make a profit when the government is involved, rather than trying to exist in the private economy. Various government contractors, such as public works construction companies or the defense industry, bleed the state with bloated crony contracts. They soon find that this process is easier when the government administrators are playing on the same team. The “revolving door” between business and government is established, and before long 50%, 80% or more of all expenditure is basically being lost through various subtle means of theft, which over time becomes less and less subtle. Honest private business becomes laughable; repugnant. All the smart people know the way to make a pile of dough is to steal it from the government, a process which has become easy and well-understood.
Those that remain in the private sector, but are unable to flee for better jurisdictions or get special deals, often go underground to avoid taxes. The problem here is that an underground business must typically be very small. These are local businesses like a bar or small restaurant, a small contractor, or any other business that can be done mostly on a cash basis. A healthy economy cannot consist of this alone.
Thus all the forces of society, from the most cunning and ambitious to the gentlest, bewildered Subaverage Joe, and often the highest ministers themselves, come together with the single purpose of bleeding revenue from the state. Not surprisingly, they succeed, as there is no actual resistance, just perhaps a bit of jostling as to who gets what. The political Left wants to preserve its welfare programs and bloated government employment; the Right wants to preserve its crony corporate theft, and regular payments on the swelling mountain of government bonds. This revenue must come from somewhere, and it is bled out of the private sector with ever-higher taxes (and ever-higher borrowing), which intensifies all of the above processes still further. Later, in the case of Greece, the revenue came from foreign buyers of Greek government bonds; and when even that came to its natural conclusion, German taxpayers were rounded up to serve as the new suckers.
If Greece’s government defaults and restructures its debt, such that the present value falls to perhaps 50% of GDP, it would not stop any of these processes. As long as the private sector is crushed out of existence by impossible taxes, people will look to the state for their prosperity; but the state is in turn dependent on the private sector, from which everyone is fleeing. After a default, the process would become a lot more local, no longer enabled by foreign financing. Greece might then become a pariah state, somewhat like Venezuela and Argentina, as capital controls, price controls, and other such fumbling further cripples whatever productive endeavor remains in the country.
Thus, the proper strategy is to create a friendly environment for business. Not just a little less-horrible, but an arrangement that is genuinely as good as you can make it. I suggest something like a 15% flat income tax on individuals and businesses, the elimination of all payroll taxes (perhaps over a phase-in period), and the elimination of all other junk taxes, which may number in the hundreds.
A wealthy private economy will produce a wealthy state; a decrepit private economy will produce a decrepit state. How could it be any other way.
In the 1870s, Japan was in the process of completing its transition from a medieval, feudal society to a modern industrial state. The Tokugawa Shogunate was replaced in 1868. The Satsuma Rebellion of 1877 was a sort of civil war that eliminated the last remnants of the old order. In 1875, Japan’s government undertook a tax reform, in which over 1,600 official taxes were reduced to 74. Eighty percent of the government’s revenue came from a single property tax; most of the remainder came from taxes on alcohol.
Mirroring the principles of Confucius, and the priorities of the time, Japanese leaders had the motto: “a wealthy economy; a strong military”
While the rest of Asia, including China, was falling into European hands, Japan set about building its own modern empire. The Ryukyus (Okinawa) were annexed in 1879. In the Sino-Japanese War of 1894-1895, Japan gained increasing control of Korea and Formosa (Taiwan). Defeat of Russia in 1905 gained Japan holdings in Manchuria and the southern Sakhalin. Japan was the only non-ethnically European state to enter the small club of world powers.
At the beginning of the 1940s, a German writer said of Japan:
The rise of Japan to a world power during the past 80 years is the greatest miracle in world history. The mighty empires of antiquity, the major political institutions of the Middle Ages and the early modern era, the Spanish Empire, the British Empire, all needed centuries to achieve their full strength. Japan’s rise has been meteoric. After only 80 years, it is one of the few great powers that determine the fate of the world.
Greece could begin its own path to greatness, right here and now. Or, it can become the next Venezuela. I know which I would choose.