century.
A welfare state mentality emerged and a marathon of fiscal trouble began that continues to run its course today. The benevolent Greek Government introduced automatic indexed salary increases rather than base annual pay raises on market indicators such as productivity.
The resultant lack of economic growth created few opportunities and caused the large-scale emigration of Greeks to Australia and the US after World War II. With one of the highest rates of emigration in the world, remittances soon became the largest component of Greece’s GDP.
Meanwhile back in the homeland, economically incompetent Greek Governments continued to build an oversized and pointless civil service. The average government job now pays almost three times the average private-sector job. Civil servants are also protected by law from being fired and retire with bloated pensions creating the best working conditions in Europe.
The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. According to a Vanity Fair article, more than 600 Greek professions have managed to get themselves classified as arduous including hairdressers, radio announcers, waiters and musicians and all receive generous state-funded pensions.
The spendthrift attitude of successive Greek governments is one of the root causes of Greece’s current sovereign debt crisis. However, the government is not solely to blame. The Greek people themselves must also accept some responsibility for the country’s economic mess since tax evasion is rampant.
Greece’s deep rooted culture of tax evasion costs the country about 30 billion Euros annually in lost revenue. Tax dodgers can be found everywhere. Plumbers, electricians and taxi drivers are notorious for not giving receipts. Doctors grossly understate their income while wealthy home owners deliberately lie about owning a pool to avoid paying a luxury tax.
And so ends Act I of our human tragedy. With a short interlude to reflect on the fact that Greece – at both a sovereign and personal level – has been living beyond its means for decades – we move to Part II and meet the third “villain” (metaphorically speaking) in our plot – the Euro currency.
The Greek crisis became a European crisis due to the common use of the Euro. A single currency is only as strong as its weakest link, as the 16 other Euro nations have discovered. Tiny Greece has been dominating the headlines with speculation it could bring down the Euro if it defaults on its debts.
If Greece still had its own currency, it could employ the standard policy of devaluing its drachma to become more competitive and restart growth. Devaluation makes a country’s exports less expensive for foreigners and makes foreign products more expensive for domestic consumers. This helps increase exports and decrease imports, thereby reducing the current account deficit.
However, Greece’s monetary union with the Eurozone means it cannot follow the devaluation path. So just over a year ago the European Union put together a €110 billion bailout package for Greece that briefly calmed markets. The IMF recently warned that a second bailout package is necessary to prevent the world’s second global financial meltdown in three years.
The crumbling ruins of the Parthenon are testament to the fact that the Greeks have failed once before. This latest tragedy could again leave the country in ruins. How this tragedy ends is still to play out but the cradle of Western civilisation and birthplace of democracy is fighting for economic survival.
Posting Date: 4 July 2011
Government concessions for many
When it comes to decision making, politicians are pulled in multiple directions. The judgments that politicians make can affect thousands or millions of lives. An endless stream of business associations, community organisations and pressure groups lobby governments to influence outcomes.
These special interest groups play a legitimate role in all democratic systems of government. They are an important mechanism through which citizens can make their ideas and views known to elected officials. The ultimate aim of this advocacy is to shape public opinion or affect public policy.
An individual acting alone has little political clout but, as part of a special interest group, can assert considerable sway. Interest groups come in all shapes and sizes, can be transient or permanent and cover a multitude of issues e.g., anti-abortion, environmental protection or workers’ rights.
A well-known interest group in America is the National Rifle Association (NRA). This gun lobby is considered by many congressional staffers and lawmakers to be America’s most influential lobby group. The NRA has vigorously opposed many legislative proposals for the control of firearms.
In Australia, the mining sector flexed its considerable muscle in 2010 and unleashed the most ferocious lobbying campaign ever seen in this country. Mining powerhouses Rio Tinto, BHP Billiton and Xstrata joined forces to stop Prime Minister, Kevin Rudd’s proposed Resource Super Profits Tax from becoming law.
The lobbying campaign cost $22m, brought down a Prime Minister and led to accusations of “rent-seeking” by the mining industry. Rent-seeking is an economic term used to describe attempts to lobby a government for loan subsidies, funding grants, beneficial regulations or monopoly privileges.
Some believe these economic concessions fail to create benefits for the overall society since they merely redistribute resources from taxpayers to special interest groups. With regard to the changes to the originally proposed resource tax, the public coffers missed out on $60 billion in forecast revenue.
One way for governments to create “rent” is by limiting competition. For example, restricting the number of taxi cabs prevents new entrants and protects the profits of incumbents. This rent-seeking enables taxi owners to obtain a greater rent (return) than would be possible in an open market.
Rent-seeking takes many forms. Historically, farmers obtained government help through tariff protection. Similarly, local manufacturers engaged in rent-seeking by securing restrictions on imports via quotas. Brick and mortar retailers now want protection from foreign, online competitors.
A high-profile Australian retail stalwart spearheaded a campaign to have the government impose the goods and services tax (GST) on Internet retail purchases under $1,000 arguing that overseas retailers had an unfair advantage. The campaign infuriated consumers with local retailers labelled as “rent-seeking whingers”.
Bailing out banks is another example of rent-seeking as rescuing banks does not create value. Rent-seeking means “obtaining an economic gain at the expense of others without reciprocal benefit”. This definition covers any economic activity that expands one’s share of existing value rather than creating value.
As profit-seekers (wealth creators), many financial institutions recklessly expanded their lending activities. They lent money to people who they ought to have known could not pay them back. Mortgage securitizers compounded the problem and destroyed value.
This behaviour ultimately resulted in a number of institutions becoming rent-seekers as governments around the world were forced to prop-up banks with taxpayer funds as a result of the Global Financial Crisis. The auto industry in Australia and in the US also received government financial assistance.
Many saw the bailouts as taxpayer welfare for business with citizens angry that rent-seeking corporations were given fistfuls of cash. The US Government was also forced to pick winners and losers. Lehman Brothers was allowed to fail but insurance giant, AIG, was given a bailout.
