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(53,061 posts)
Thu Aug 16, 2012, 01:34 PM Aug 2012

Why the Romney/Ryan ticket will bring a Greek style collapse to the American economy.

It should be clear to all reasonable people that we operate in a public/private partnership. The basic understanding of that relationship was formed under the Roosevelt administration and bonded during World War II. Initially rejecting the modern understanding of the modern state the Republican Party eventually turned to Eisenhower to bring them back from political oblivion. Since that time there has been a back and forth between the two parties about how much should be private and how much should be public.

Under Bush II one element of that general broad consensus was breached. We openly attacked a country that had not attacked us. Using deception and manipulation they were able (with a cowered Democratic Party) to break away from the general working consensus that starting an all out war on a country should only happen when they actually attack us.

Now Romney/Ryan plan to conduct and even more brazen attack on the fundamental consensus of what the modern state should look like.


Yesterday, we touched on why Paul Ryan's budget will inevitably lead to skyrocketing deficits. But one part of that in particular deserves unpacking: Ryan wants to cut almost all of the discretionary federal budget down to just 0.75 per cent of GDP. That is, bluntly, impossible.

The (simplified) argument against Ryan's "fiscal credibility" is that he wants to cut taxes and spending. But while no-one ever argues with tax cuts, the spending cuts he has laid out are implausible. As a result, his plan would result in lower taxes but the same spending, creating a budgetary black hole which will rapidly increase the deficit.

. . . .

But all of this assumes that Paul Ryan will be able to get defense spending down to its historic minimum of 3 per cent of GDP. Right now, the National Security budget is $754bn, and the Department of Defense alone commands $671bn. That is 5.0 per cent, and 4.4 per cent, of GDP, which Ryan would need to slash.

The spending cuts he desires are impossible. They will not materialize, and never could be expected to. And so Ryan will either have to abandon his plan entirely, or pass unfunded tax cuts. If he really is a deficit hawk, that has got to qualify him as one of the most incompetent ever.

So they can't do it but in trying to do it they can lay the foundation for the same type of collapse that we are witnessing in Greece, drastic radical declines in public consumption leads to further collapse of the private sector leading to a dramatic drop off on tax revenue in an atmosphere of chaos that causes the soverign funds to stop purchasing US debt and forcing us to pay rapidly increasing interest rates in a spiral that will accelerate as it becomes clear that there is no more to cut and there are increasingly fewer revenues to service the debt, especially as the interest rate will continue to grow until a tipping point is reached and complete insolvency is reached because there will be no way to pay off the debt.

Beyond these conditions, and people should be absolutely terrified that these radicals will attempt it is one other element of the Greek collapse that the Romney/Ryan ticket will bring.

At the foundation of the Greek crises is not the unions, or the civil service abuse (and frankly some things you hear from Greece are pretty disturbing) but in the Greek constitution;

The Greek Constitution institutionalizes broad areas where no taxes are gathered, starting with revenues from shipping. Billionaire Greek Shipping magnates never have to pay one penny in taxes. They have expanded it to include capital gains and dividend income, yep they have the Romney/Ryan budget for years on the income side.


There are several cases of Tax exemptions under the Greek taxation system, these are as follows:
Proceeds from the sale of shares that are traded on the Athens Stock Exchange.
Income from ships and shipping.
A dividend received from a Greek company.
Capital gain from sale of a business between family members, as defined by law.

What is the result of such a policy?

Beyond the obvious lack of revenue from capital has been a collapse of tax revenues from the professional class and small businesses.


Map showing tax evasion in Greece by area

The euro crisis first started roaring in late 2009, when auditors inside the newly elected Greek government discovered that the country had a much—much—bigger deficit than anyone realized. That, in turn, inflamed fears that Greece couldn’t wiggle its way out of its debt trap so long as it was tethered to the euro. It also exposed structural problems within Europe’s currency union. Worries soon spread to Ireland, Portugal, and eventually Italy and Spain. Now the entire global economy is on edge.

But why did Greece have such a massive budget deficit in the first place? One factor (among many) was rampant tax evasion, which had starved the Greek government of funds. As it turns out, this was a very big deal indeed. The Wall Street Journal’s Justin Lahart points to a new paper (pdf) by three economists who estimate that the size of Greek tax evasion accounted for roughly half the country’s budget shortfall in 2008 and one-third in 2009.

How is it even possible to estimate taxes that aren’t ever paid? The economists, Nikolaos Artavanis, Adair Morse and Margarita Tsoutsoura, cleverly exploit a discrepancy. Few people in Greece want to report their real income to the government, since that would mean paying more taxes. But Greek banks have very solid estimates for how much income people are actually raking in — the banks need this info to make loans or to issue mortgages.

. . . .

In any case, this is hardly the only reason that the euro is now stuck in a crisis. As Paul Krugman explains in this lecture, the euro zone has long had all sorts of deep structural flaws that were bound to combust sooner or later. It just so happened that the spark, in this case, appears to have been Greek tax evasion.

It turns out when you exempt the very very very rich from paying their fair share of the tax burden then the dentist, optician, drug store owner, car mechanic, and all of the other professional and small business guys think "If they aren't going to pay their fair share then why should we pay ours?".

This is why it is so important that Romney release his tax records (and why his much more ethical father released 12 years when he ran for President). If he is elected and it is commonly believed that he paid only nominal taxes then there are tens of millions of small and medium businesses and professionals who will follow their Greek brothers and sisters and saying "its not fair for me to pay more than a rich shipping magnate" or in our case Mitt Romney.

The IRS actually checks only a very small percentage of the returns and if the tax system is perceived to be a cynical dodge for the rich then the vast number of self employed and small business owners will turn on it, just like they did for Greece.

Greece still hasn't amended its constitution. The plutocracy continues to live tax free so I am not too sympathetic to them, they asked for what they got. I understand why the workers in France and Germany are not happy to have to give up some of their money to pay for a country that doesn't tax its rich and where there is vast tax evasion by the upper middle class, but in their self interest and because they share the same currency they have come several times to bail them out.

So it is with astonishment that we watch an uninformed Republican Party follow the Greeks down the sinkhole.

There is one main difference between Greece and the US. The Greeks can get together and form a consensus and throw out the government and put in another one at any time. They could do it tomorrow.

In the US when you vote in an idiotic government you cannot get them out for stupidity. They get 4 years and if people weren't aware of this fact and how disastrous it can be then George Bush showed it in painful detail.

So if Romney is President and he lead us down the path to an Athens style collapse who does he think will be there to bail US out? No economy in the world could help and we would bring the world economy down and start another long depression. After you destroy the revenue base of the US government where do you go for help?

The planet Kolob? Maybe there is some intergalactic FDIC plan that Romney hasn't told us about.

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(17,064 posts)
3. Yes, and gives the GOP the pretext they want
Thu Aug 16, 2012, 01:51 PM
Aug 2012

to impose austerity measures on middle class while transfering greater wealth to the wealthy. The right has been waging class warfare for 32 years now.


(15,330 posts)
4. Mitt and Ryan need to start wearing toga's no disrespect to the Greeks who almost invented Western..
Thu Aug 16, 2012, 01:55 PM
Aug 2012


Yes Mitt those Greek columns are also part of your heritage as well as the Anglo Saxons, Egyptians, Celts, Picts, Romans, Germanic Tribes, Franks, etc. etc. and all our ancestors came from Africa.

Poor Republicans do not realize their insistence for austerity is the current European style government.

Lucy Goosey

(2,940 posts)
7. ...exactly. Economic collapse is an intended consequence of austerity.
Thu Aug 16, 2012, 02:22 PM
Aug 2012

It's disaster capitalism - create an economic crisis, then convince the public that the only way to fix the crisis is to hand public assets to the 1%.



(653 posts)
9. Simply stated, in my opinion, countries get rich two ways:
Thu Aug 16, 2012, 04:22 PM
Aug 2012

1. Dig it out of the ground
2. Add value to products/services

And sell more of those things to other countries than the goods you buy from other countries.

To me, in a nutshell, this is a big bunch of the problem that doesn't get nearly enough attention:

It started to go south under Carter-Reagan. Clinton had a comeback with free trade - which was a short term gain - long term pain approach in how it was implemented. Bush and Obama have been effectively screwed since - exhausting the Fed with common economic temporary approaches like interest rates, currency rate, cash available (gov't borrowing/deficit), etc.

Yes, the Bush wars, the Bush unpaid drug plan and the Bush tax cuts hurt the US bottom line but that's far from the entire problem. The housing bubble and stock scams hurt as well but to some extent they were related to the overall problem. The trade deficit has sucked massive amounts of cash out of the US. Something had to give.

The big, big thing that needs to take place for the turn around is getting America back to being a nation that produces more than they consume = a nation that creates wealth.

Some of this came about because of labor rates and was accelerated with free trade. As underdeveloped countries started to develop and produce their own goods and services, the US labor rate was noncompetitive. When the US went for free trade (removing protective trade barriers) without preparing the US for it, it rapidly exposed a lot of US jobs to cheaper foreign labor. For example, the Chinese workers were paid $1 per day plus a bowl of rice in 1999. I know that for a fact because I did manufacturing analysis for companies outsourcing to the Chinese in 1999. And the companies had no choice because the competition was doing it and killing them with cheaper prices.

The US was also forced to consider doing something for national security reasons. The US had the lions share of the world's wealth. If they didn't let some out, they risked a major world war or more serious terrorism by all the have-not nations.

The timing of the decision to proceed with free trade/removal of the protective barriers when Clinton did was also brought about to provide rapid relief to the US economy that was already suffering the first symptoms of trade deficit problems during the Carter-Reagan-Bush years - when the band aids like interest rates, currency rates and borrowing, etc weren't enough.

Under GHW Bush, the plan for free trade was to implement a transition - to prepare the work force and businesses so it didn't get hammered as badly. That transition was to begin long before they opened the free trade flood gates while the US had the wealth and could hammer out the best deal. When Clinton came in, he tried to fast track free trade to fix the economy and did. But the transition to retrain the work force and adjust before free trade was attempted to be done in parallel (too late but better than never). Gingrich came along with his "Contract for America" and nuked the transition investments out of the budget. As a result, the middle class, who were already going to take a hit, got smoked while the owners scooped some of the bigger profits from cheaper labor and stocks rose steeply

Today, the GOP seem to want to continue to hammer the middle class into being a cheaper labor force. Obama wants to lessen the hurt to the middle class with training/education and investment doing the economic transition work that was supposed to have been done two decades ago. Either way, it's probably going to take a generation for this to all shake out. The difference is that Obama's approach provides some relief to the middle class much sooner and he seems to have understood the issue back in 2007 when he was running his first campaign.


(53,061 posts)
10. I appreciate your interest but this particular formulation of trade has long ceased to be relevent
Thu Aug 16, 2012, 04:54 PM
Aug 2012

and has zero crebility outside of the US it is a particularly anglo/american centric way of formulating trade that doesn't respond to modern realities.

For example when a Malaysian goes to a KFC restaurant and buys chicken grown in Malaysia, made by Malaysian labor and consumed 100% of Malaysia it does not show up in your chart but it has a significant profit/branding repatriation.

Japanese have a more inclusive model that includes repatriated profits and other economic activity that shows the US with a trade surplus that is much closer to reality than the purely industrial model of the 1960s that you are showing.

Another example. IPhone. Made in Malysia for $ 25 in product costs and then sent to the US where $ 100 software costs are added and then $ 25 distribution and $ 150 retail. So it is shown as an imported product.

Now the same IPhone is made in Malaysia and shipped to India. $150 export value is shown in Malaysia because that is where the product was made. Only $ 25 of that stays in Malaysia and $ 125 goes back to the US but since it isn't a product moving across a border doesn't show up in balance of trade. Now it goes to India where there is going to be distribution and retail and some or most of that is again going to go back to Apple. So phones made in Malaysia and shipped to India are going to show up in your chart but most of the value is going back to the US and doesn't fit the trade definitions used in 'trade balance' calculations because no product actually physically moved.

The United States remains, by far, the greatest manufacturing power on earth, but you have to understand what is being manufactured has changed.

Would you rather manufacture the TV that the family buys every 10 years or manufacture the content that is on the TV every night for 10 years.

The fact is that movies, software, games, and so on represent the US's largest export and is not included in trade statistics because it doesn't represent a physical product.

Now if you don't believe that then answer this. A couple of years ago there were about 2 dollars for 1 Euro. it is now approaching parity. How could it be that any economy could suffer mass trade deficits and maintain a strong currency.

Its that what is manufactured and where it is being manufactured has shifted. It used to be in the rust belt. Now it is in Seattle (software), Los Angeles (Movies and Entertainment), San Francisco (Software and Games) and San Diego (Games). In terms of exports electronic games is as large as the movie industry. Those games are largely produced by companies in the US even if they are sold to be used on japanese game systems.



(653 posts)
13. I don't completely agree
Thu Aug 16, 2012, 06:46 PM
Aug 2012

A very simple example:

Product cost breakdown of how it roughly used to be: "old" way:
US Assembly Labor $ 5.00
US Component Labor $ 15.00
Overhead usually as a function of Labor $ 20.00
US Material Costs $ 30.00
Foreign Material Costs $ 30.00
Total Product Cost $100.00

Product cost breakdown of how it roughly is "now":
US Assembly Labor $ 5.00
Foreign Component Labor $ 5.00
US Overhead $ 5.00
Foreign Overhead $ 5.00
US Material Costs $ 10.00
Foreign Material Costs $ 40.00
Total Product Cost $ 70.00

Let's say for simplicity that the US company netted 10% profit after general sales & admin, etc expenses. And that the US company netted $15 profit after selling the cheaper product now. So the US company profited more from outsourcing to get the cheaper product made.

But let's focus on what happened with those costs. In the "old" example, $70 of that cost stayed in the US being paid to US people and vendors. In the "now" example, $20 of that cost stayed in the US being paid to US people and vendors. Foreign companies and their workers gross an extra $50 per unit cost than they used to and when that product is bought in America - America is sending an extra $50 of it's money overseas.

"most of the value" in your Apple example doesn't come back to the US
a) because most of the product is made elsewhere, that value ultimately goes to those providing that value add in the other countries - like Malaysia. Apple gets their profits - that's it.

b) Apple US might see some money but if they consulted Bain, they're keeping a bunch of the international profits in companies located in countries with lower taxes. If their software is involved, they can license Apple Malaysia or whoever to resell the software with Apple Malaysia paying Apple US a token licensing fee to avoid big US taxes - for example.

Software and movies are not exonerated from inclusion in trade deficit statistics though I would agree they may not catch all of it. I didn't look closely at the chart I originally linked to. It just roughly communicates the growth of the problem.

Buffett Sounds Warning On U.S. Trade Deficit--Again, January 2006

Buffett reiterated Tuesday. The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to "political turmoil", the decorated investor warned. Buffett's bearishness is understandable: Fixing the trade deficit--which soared to a record $665.9 billion in 2004, and is expected to top $700 billion this year--is becoming rather like turning around an ocean liner by dipping a teaspoon in the water.

Echoing comments he made at around this time last year, Buffett told business students at the University of Nevada that the globe owned $3 trillion more of the U.S. than it owned of them. "In my view, it will create political turmoil at some point...Pretty soon, I think there will be a big adjustment," he said without elaborating.

And we saw a pretty big adjustment in 2008. If we don't heed Buffet's words, we're going to see another "big adjustment".

girl gone mad

(20,634 posts)
12. Uhh... NO.
Thu Aug 16, 2012, 06:00 PM
Aug 2012
So they can't do it but in trying to do it they can lay the foundation for the same type of collapse that we are witnessing in Greece, drastic radical declines in public consumption leads to further collapse of the private sector leading to a dramatic drop off on tax revenue in an atmosphere of chaos that causes the soverign funds to stop purchasing US debt and forcing us to pay rapidly increasing interest rates in a spiral that will accelerate as it becomes clear that there is no more to cut and there are increasingly fewer revenues to service the debt, especially as the interest rate will continue to grow until a tipping point is reached and complete insolvency is reached because there will be no way to pay off the debt.

Unlike Greece, the US is sovereign in its currency. We can always pay off our same-currency debts (and all of our national debt is dollar denominated). We are in no danger from bond vigilantes and there is absolutely no risk of insolvency.

Please, please, please learn some economics instead of parroting this type of extremely misguided debt hysteria.
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