The plan of which I write is of course, Marshal Auerbach’s proposal that one trillion euro should be distributed by the ECB on a per capita basis to the Eurozone governments to reduce their debt burden. In his latest post in New Deal 2.0, he mourns Greece’s fate as the fiscal conservatives demand their pound of flesh,
Score another one, then, for the high priests of fiscal rectitude. Harsh cuts, tax increases — this is by no means a recovery policy. The capital markets have got their pound of flesh. But Greece is no more able to reduce its deficit under these circumstances than it is possible to get blood out of a stone. Politically, it means ceding control of EU macro policy to an external consortium dominated by France and Germany. Greece becomes a colony.
Nor will the policies work, as the ’strict enough conditions’ imposed will further weaken demand in Greece and, consequently, the rest of the European Union. Furthermore, the rapidly expanding deficit of Greece has benefited the entire EU because it supported aggregated demand at the margin, and the sudden reversal contemplated by this package will reverse those forces. (link to article)
Check out the discussion following the post by ‘Art’ and ‘Reality’ and Marshal Auerbach himself for a succinct overview of Neo Keynesian v Neo Liberal viewpoints.
Here is a snippit
Reality, you should only retract government spending when it becomes inflationary, not because of some arbitrary idea that it somehow “distorts” the free market. The point I was making in the previous article on Greece was that the choice of these voluntary “funding” arrangements for governments that are not intrinsically revenue-constrained is always political and never financial. I argued that if citizens realised these were political choices only (reflecting ideology) then they would be better able to compare them with other political decisions such as the austerity measures. In making this point, I argued that once citizens had a better comparison and were not forced into thinking that the financial constraints were real then governments might be more carefully scrutinised and forced into making better decisions with advance public purpose rather than simply fall prey to the notion that the “markets are always right” and “always determine interest rates”.the notion of a “government budget constraint” only applies ex post, as a statement of an accounting identity that has no significance as an economic constraint. In an accounting sense, it is certainly true that any increase of government spending will be matched by an increase of taxes, an increase of high powered money (reserves and cash) and/or an increase of sovereign debt held. But this does not mean that taxes or bonds actually “finance” the government spending. They do not!See this if you want an explanation. Then you’ll be approaching your ‘nom de plume’ , “Reality”:
NB: By all accounts, Greece has an uneven taxation collection system and a crazy pensions policy both of which need reform. But the case for not using savings from cuts in these areas to make productive public investments or for the pre-distribution of an emergency per capita payments has not been made by any commentator. Borrowing to spend on such a fair stimulatory package – following public sector and payments reform – could be justified and might even be supported by the bond market.
The very same critique could be made of the current discourse re Irish government policy. Why are the options only A) maintaining excessive public and semi-state salaries, pensions and consultants fees (promoted by the Unions) versus B) cuts to the above (promoted by the employers and government). Smart Taxes want to explore C) which is B) plus major public investment programme and an emergency citizen dividend.
Having said that, Marshal’s plan should be also be considered under whatever scenario A, B, and C.
The key task is to ensure there is spending power with a stable money system. A Citizens’ Dividend is a powerful tool to help achieve this. But it should be understood as an ongoing right, not a temporary emergency measure.
A major public investment programme makes sense only so far as genuine investment opportunities are available. Only in the Keynesian model is public investment advocated regardless of real return – mainly as a means of distributing spending power. A regular Citizens’ Dividend removes the need for artificially boosting public investment – the money is likely to be much more effective in the private sector.
Another key step is to cut (or eliminate) taxes on production. Production taxes stymie the economy, create compliance cost, deadweight costs, avoidance and evasion. Greece needs this urgently. Over 25% of GDP is in the black economy, mainly to evade the cost of taxes. Average household bribery bills are put at 1700 Euros/annum, further undermining the productive economy.
The final challenge is to ensure a stable money system (in Greece’s case by eliminating deficit spending). With the Citizens’ Dividend and the elimination of Dumb Taxes, major new sources of government revenue are essential. Land Value Taxation, Carbon Taxation are the Smart Tax alternatives. Achieving stable money will not be possible without monetary reform, and this requires reform of the ECB. Paper currency, coins and bank deposits should all be exclusively issued by the public part of the banking system.
So the key elements of a New Marshall Plan for Europe must include drastic reductions in Dumb Taxes, a regular Citizens Dividend, Land Value Tax and Monetary Reform.
The smartest way of proceeding is to combine these steps is to do a tax-for-debt swap, swapping mortgage debt and payments across the Euro zone for land-value indexed tax payment to government, replacing lost bank equity with debt-free, interest-free ECB paper. This is the basis for the exciting new Land Value Covenants (LVCs) we’ve all been hearing so much about lately – Smart Taxation without the pain!