France is Raising Taxes on Wealthy Individuals and Businesses to Stimulate Economic Activity

Posted by PITHOCRATES - September 30th, 2012

Week in Review

When a store wants to increase sales what do they do?  Raise prices?  Or lower prices?  Well, based on those sales papers, one has to say they lower prices to increase sales.  Because if someone stops buying from a store raising prices just isn’t going to bring them back to that store.  For how many people ever say they would shop more at a store if only they would raise their prices?  Zero people.  For no one ever shops where their money will buy less.

The higher the price of something the less we buy.  Something few people will dispute.  Unless, of course, it’s rich people investing in job-creating businesses.  As government people believe that rich investors will spend more money the less they can make from their investments.  Especially in France (see Hollande opts to punish French rich with €20bn of new taxes by John Lichfield posted 9/29/2012 on The Independent).

France’s Socialist government insisted yesterday that it could solve the conundrum of simultaneous deficit-cutting and growth which has eluded every other European country from Greece to Britain.

As new clouds gathered over the eurozone, President François Hollande pushed ahead with the country’s toughest budget for three decades, taking €20bn (£16bn) of new taxes from big businesses and the wealthy but imposing relatively moderate €10bn cuts on state spending.

With growth stagnant and unemployment rising sharply, the success or failure of the 2013 budget could decide whether Europe’s second-largest economy becomes part of solution to the eurozone crisis or a new, and devastating, part of the problem.

If we can learn anything from history it’s this.  Tax cuts stimulate economic activity.  Tax hikes don’t.  So growth will remain stagnant in France.  And unemployment will rise even further.  Especially when they will tax very successful business people at 75% on earnings and eliminate business tax breaks.

Among other things, the budget introduces Mr Hollande’s “temporary” 75 per cent tax on personal earnings over €1m and abolishes the tax breaks on large firms introduced by his predecessor, Nicolas Sarkozy.

The Prime Minister, Jean-Marc Ayrault, spoke of a “fighting budget” which would help to get France “back on track” after 38 years of successive state deficits. He insisted the target of 0.8 per cent growth next year was realistic and would be achieved.

But opposition politicians said the budget had been “muddled together”, and was more concerned with preserving Mr Hollande’s campaign promises than addressing France’s – and Europe’s – deepening economic crisis. They pointed out that, while almost all European countries were cutting back spending, the French budget for 2013 preserved the 56 per cent of GDP spent by the state and marginally increased the number of state employees, by 6,000…

Critics complained, however, that the budget did nothing to tackle the erosion of France’s international competitiveness, which has been blamed for large-scale redundancies in the car industry and other sectors. The cost of employing a worker in France has increase by 28 per cent in the past decade, compared with an 8 per cent increase in Germany.

A growth rate of 0.8%?  They’ll be able to achieve what many call a recessionary level of growth?  Not much of a goal.  No wonder France has one of the most uncompetitive workforces.  That massive welfare state costs money.  And there’s only one way to get the money to pay for that massive welfare state.  Taxes.  Even if a government runs a deficit they finance with borrowing.  Because they have to pay the interest on that debt with taxes.

Everything comes back to jobs.  The more jobs there are the more tax revenue the government can collect.  But to create more jobs businesses have to grow larger.  But when governments tax businesses (and business investors) so excessively there is little incentive to grow these businesses larger.  So France’s actions are not likely to have any of the intended results.  In fact they will probably only make a bad situation worse.  And may make them part of the problem in the Eurozone crisis.

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The Greek Crisis is Now Threatening the Credit Rating of the Stronger Eurozone Members

Posted by PITHOCRATES - July 29th, 2012

Week in Review

Since 2009 we’ve been hearing about the European sovereign debt crisis.  Also known as the Eurozone crisis.  And here we are in 2012.  Despite numerous rescue packages and recovery plans the crisis continues on.  Greece can’t borrow money in the credit markets because no one believes Greece will ever be able to pay them back.  For Greece has been running some pretty big deficits.  Which has accumulated an enormous pile of debt.  Resulting from their large spending obligations for public sector wages and pensions.  They don’t have the money.  They can’t borrow the money.  So a massive Greek default is likely.  Which because of the common currency will be felt throughout the Eurozone (see Germany’s AAA rating under threat after Moody’s cuts outlook by Jamie Dunkley posted 7/24/2012 on The Telegraph).

Moody’s warned the outlook for the ratings of Germany, Luxembourg and the Netherlands is negative because the threat of a Greek exit from the eurozone and the need for greater financial support for struggling eurozone countries from the strongest members of the bloc.

In a statement, issued after the close of the US markets, it added: “The level of uncertainty about the outlook for the area and the potential impact of plausible scenarios on member states, are no longer consistent with stable outlooks.”

Not some pleasant choices.  Have a Greek default damage your credit rating.  Or make your taxpayers pay for another nation’s debt.  Which begs the obvious question.  Or should.  How is having other people pay for spending you can’t afford going to solve your problem of spending more than you have?  If Greece doesn’t cut their spending nothing will change in the long run.  They will need another emergency bailout following this emergency bailout.  Because this emergency bailout doesn’t address the source of their trouble.  Excessive government spending.

Keynesians encourage excessive government spending because they think it’s stimulative.  That it creates economic activity.  In fact the Keynesian solution to the Greek crisis is more government spending to stimulate the economy.  Which begs the obvious question.  Or should.  If government spending does all of this why after all of their government spending is Greece on the precipice of bankruptcy?  Huh?  Answer that one smart Keynesian person.

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The Ruins of Past Greek Overspending join the Ruins of their Glorious Past

Posted by PITHOCRATES - July 22nd, 2012

Week in Review

Greece is at the heart of the Eurozone crisis.  Or, as some would say, the cause of the Eurozone crisis.  Their deficit spending threatens to bring an end to the Euro itself.  For the only way to save the Euro appears for other Eurozone members to assume Greece’s debt.  And make their taxpayers pay for it.  Something their taxpayers understandably don’t want to do.  But the Keynesians urge such a plan.  Along with some debt forgiveness.  So the Greeks can start spending some more.  To stimulate their economy to recovery.  As if their overspending ways of the past had never happened (see Greek athletes strive for London as Athens legacy fades by Mark Lowen posted 7/22/2012 on BBC News Europe).

Outside lie many of the venues from the Athens games, others dotted around the city. Most are idle, locked up and empty, simply rusting under a baking summer sun.

They mirror the decay now felt across the country – but also stand as monuments to Greece’s mistakes: the massive overspend of the past, without any plan for later use.

They’re seen as representative of the short-term vision that got Greece into its financial mess in the first place. The hoped-for privatisation of many of the sites has been thwarted by a mix of bureaucracy and mismanagement…

They came at the height of Greece’s borrowing boom: three years after the country joined the Euro, Athens was investing in grand infrastructure projects that it simply couldn’t afford: among them, the Olympics.

What the Keynesians fail to explain (at least with a straight face) is how more such spending will not saddle Greece with more debt that they will also not be able to service.  Putting them back exactly where they are now.  Or even in a worse financial position.

During the 20th century the European countries became social democracies.  Promising a cradle to the grave welfare state.  And large public sectors.  With large public spending.  All paid for by large tax rates on the taxpayers.  Only one problem.  All of Europe’s population is aging.  People are having fewer children.  Meaning there are fewer people entering the workforce to become new taxpayers.  While a greater number of people are leaving the workforce to go into retirement.  While enjoying their pensions and health care.  Paid for by a shrinking workforce.  Add that to grand infrastructure spending and you get unsustainable government spending obligations.  Ever more government borrowing.  And a Eurozone debt crisis.  Or in other words, Greece.

The Greek government did a great disservice to their people.  They spent so much that cutting back will be incredibly painful for their people.  But it’s the spending that’s the problem.  They have to cut it.  And if they don’t do it now it will only become more painful in the future.

Greece.  Home of Athens.  The cradle of Western Civilization.  Once the greatest place in the civilized world.  The nation that pushed back the mighty Persian Empire.  Now adds new ruins to their landscape among those of their glorious past.  But they can once again restore their glory.  If they just abandon Keynesian economics.

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Spain is Taking Center Stage in the Eurozone Crisis

Posted by PITHOCRATES - May 5th, 2012

Week in Review

To be a generous welfare state requires one of two things.  Either a population making babies like bunnies.  To keep the base of the pyramid of the welfare state expanding greater than the top.  Or a booming economy that showers money onto the treasury.  If you have neither than you better have good credit (see Spanish borrowing costs to jump at auction, bank buying eyed by Paul Day posted 5/3/2012 on Reuters).

Spain has jumped to the forefront of the euro zone debt crisis due to concern over its public deficit and shrinking economy and pressure is growing for a plan to recapitalize its banks, which are burdened with bad debts from a property market crash…

Spanish banks, virtually cut out of wholesale debt markets after losing billions since a decade-long property bubble burst in 2008, snapped up cash the European Central Bank pumped into the euro zone banking system in December and February, in operations totaling more than a trillion euros.

Recent data from the Bank of Spain suggests that they used a portion of the ECB’s ultra-cheap three-year money to buy up high-yielding sovereign debt.

According to the central bank, Spanish lenders held just over 13 percent of domestic debt in November 2011, but that total soared to almost 30 percent by March. Non-residents held almost 56 percent of all Spanish debt in November, but by March, that proportion had fallen to 38.8 percent.

Spain has neither a population boom nor an economic boom.  Nor is her credit looking all that good.  Which does not bode well for the Eurozone. 

Too many countries look to the housing market as the panacea for all that ills an economy.  Keep money cheap to borrow.  To encourage people to borrow.  So they can borrow.  And buy overvalued houses.  This is the kind of government Keynesian tinkering that never ends well.  And there are so many examples in history you’d think we’d have learned this lesson by now.  Japan, Ireland, Spain and the United States.  And now even China is growing a little housing bubble of their own.  Bubbles are not good.  They are artificial economic growth.  And they always pop.  Just ask our good friends in Japan, Ireland, Spain and the United States.

And when those bubbles pop recessions set in.  To correct all of those overvalued prices.  There’s deflation.  Old debt that becomes impossible to repay.  So banks fail.  Just because government Keynesians had to tinker.  Playing with interest rates.  To keep them below what the market would have them.  It was good on the upside.  Great new government spending and benefits.  Which have to go away on the downside.  Because there isn’t the robust economic activity to pay for it.  Even the interest on the debt becomes difficult to pay.  And because all of this is in play no one wants to buy their sovereign debt anymore.  Which raises the interest they must pay on new debt to retire old debt.  And the vicious cycle just continues.

Trying to fix the debt problem is looking at a system and not the disease.  The disease is the welfare state.  And until they cut that spending the debt problem will never go away.

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Bloated Public Sectors Responsible for the Eurozone Crisis

Posted by PITHOCRATES - January 1st, 2012

Week in Review

The Eurozone was Europe’s answer to the United States of America.  One large, single-currency, free-trade zone.  And it worked.  For awhile.  During good economic times.  Like most things work during economic times.  Like it does in business.  A business could have a lot of cost problems and inefficiencies.  But if sales are good people don’t tend to see them.  Because healthy sales revenue can fix any problem.  It’s when you don’t have healthy sales revenue that high costs and inefficiencies hurt a business.  And the cost cutting, nay, the cost slashing begins.  Which is what has happened in the Eurozone.  Only they haven’t started the cost slashing yet (see The Eurozone Crisis For Dummies by Simone Foxman posted 12/30/2011 on Business Insider).

Since joining the euro back in 1999, the governments of Greece and Portugal (among other offenders) have gotten used to spending a LOT of money. When times were good, it wasn’t a problem — banks and other investors were willing to lend them money on the cheap and their public sectors became bloated.

When the financial crisis hit, however, problems came to a head. Debt levels in Portugal, Italy, and Greece became unsustainable, and taxes in a contracting economy are no longer enough to pay the bills.

Greece, Portugal, and Ireland are still struggling to bring their public debt under control, after receiving billions of euros in bailout aid from the European Commission, the International Monetary Fund, and the European Central Bank (the so-called troika). Some of this aid was provided through a temporary Special Purpose Vehicle called the European Financial Stability Facility (EFSF).

For a complete summary of the Eurozone crisis follow the above link to the full article.

Some say Europe’s spending is the problem.  Others say it’s the austerity they’re pushing onto the high-debt states that has taken a non-problem and created a crisis.  Some blame outside economic factors such as the American subprime mortgage crisis that ruined a good thing.  To point the finger of blame you need to look at when the crisis became a crisis.  And when was that?  When these countries could no longer pay the bills for their bloated public sectors.  Regardless of what caused it.  It happened.  And when it did they showed us that they could only support their government spending during exceptional economic times.  Which can mean but one thing.  They were spending too much.

When a business finds itself in this predicament the long knives come out and they start slashing costs.  And the businesses that weren’t spending too irresponsibly usually survive.  Those who spent too much or don’t slash enough don’t.  And that’s where the Eurozone is right now.  But they have a peculiar problem.  They may have a currency union but they are still independent nations.  Rich with history and tradition.  And set in their welfare-state ways.  These great social democracies of Europe.  The Eurozone as a whole can only hope the problem states do the right thing and cut back their spending.  Which they haven’t yet.  And appear to be doing only with the utmost reluctance.  Which explains the ongoing crisis.

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