One of the advantages of an American high school education is learning English literature from teachers who are usually highly dedicated to their profession*. One such work of literature is Nathaniel Hawthorne’s Scarlet Letter, which takes place in a Puritan village near Boston in 1642, and deals with the travails and eventual transformation of Hester Prynne, a woman condemned for adultery who is forced to wear the letter “A” on her clothing. Although this “A” initially stands for “adultery”, Hester’s persistence in the face of ostracism and suffering, and her turn towards charitable work, mean that by the time of her old age and death, the “A” is transformed into something else entirely. Some interpretations leads us to believe it is “Able”; I always preferred the interpretation of “Angel”.
The contradictions of personal liberty and public ideals expressed in the Scarlet Letter were brought to my mind by the latest antics of Mr. Antony Samaras, the leader of New Democracy. Followers of Greece’s public events will know that Mr. Samaras finds himself in a highly contradictory position:
· He has pledged to support the new government, led by Dr. Lucas Papademos, but has announced he will not support any new taxes or austerity measures;
· He has refined this position, stating that he will support government cutbacks, but not new taxes or any measures which constrain growth. In other words, he supports the October 26th agreement, but not its measures (or conditionality);
· He has recently said that the only reason he agreed to support the government was for Greece to receive the sixth instalment of the first bail-out agreement.
This contradiction has not gone unnoticed by the European Union or the Greek population. The European Commission has asked that the main political parties supporting the government, the Governor of the Central Bank, and the Prime Minister sign an official letter supporting the October 26th agreement. Mr. Samaras has refused to sign such a letter, saying that “his word of honour” was enough.
I’m particularly intrigued by the “pro-growth” position that while cutting back government expenditure is acceptable, further taxes are not. This reveals a deep misunderstanding of the nature of gross domestic product (GDP) and how it is measured.
GDP is a simple measure of the value of all goods and services produced within a country in one calendar year. GDP can be measured using three standard methodologies, which I summarise in non-economic terms here:
a. The Production (Output) Approach
This method measures (or estimates) the gross value of domestic output of all registered enterprises, individuals and public organisations in the country. The accepted method for doing so is Gross Value Added = [Output Value] – [Intermediate Consumption Value].
b. The Income Approach
This method measures the income declared by all economic actors in the country which declare one. Income includes salaries and wages, pensions, corporate profits, financial and investment interest income, and taxes. The accepted method is GDP = [Employee Compensation] + [Operating Income] + [Gross Mixed Income] + [Taxes] – [Subsidies].
c. The Expenditure Approach
This method measures all declared financial expenditure in a country, including personal and corproate income and investment, government spending, and net exports. The accepted method is GDP = [Consumption] + [Investment] + [Government Spending] + [Net Exports].
Anyone familiar with the Greek economy can therefore understand why it is difficult to measure GDP in Greece. If you visit a dentist and don’t receive a receipt, the value of this transaction doesn’t appear in GDP. If your uncle in the village gives you 5 litres of olive oil from your family’ trees, this doesn’t appear in GDP, even through it is an economic activity.
But the point of this post isn’t to expound on the morality of GDP, but on what government expenditure means in measuring GDP. In each of the three definitions, it’s established that government expenditure counts in measuring GDP.
Thus, if the government reduces its salaries in the public sector, or eliminates public sector jobs, its expenditure will theoretically fall: that’s the point of the cutbacks. Alternatively, if we measure using the income approach, public sector wages will fall. Therefore, so will GDP.
So in economic terms, it is a logical fallacy to claim that someone can be in favour of government cutbacks, but against further taxes, because the former is “good” and the latter is “pro growth.” It depends on what kind of growth one is referring to, its relative magnitude, and how quickly the transfer of economic activity between one sector and the other sector occurs.
But even if we look at private sector growth, the contradictions are all too apparent. When you cut government expenditure on payroll, this has a direct impact on consumer spending by former or current government employees. Since most consumer spending is on items such as groceries or services which are provided by the private sector, it is logical to assume that private sector expenditure will also fall.
The result? Lower public sector staff expenditure = lower private sector income = lower private sector growth = lower GDP growth.
Over the longer term, and in an economy which is well-regulated and tax evasion is minimal, we could indeed hope that certain public sector activities will be eliminated or replaced by more productive activities, and that private sector activity would replace them and lead to higher productivity and innovation. Yet this is far from assured in the Greek context given the operations of the private sector, and it is also almost certainly impossible in a recession of the kind Greece finds itself.
So I have to wonder if Mr. Samaras realises that he is not only contradicting himself in political terms, but in economic terms. Yet it is precisely this economic competence that he trumpets at every opportunity as the basis for his readiness to lead Greece.
Watching this eminently dishonourable process, I have to ask myself just which letter I would assign to Mr. Samaras at the present time, and how future generations will interpret it.
© Philip Ammerman, 2011
* I had three phenomenal English teachers at the American Community Schools of Athens: Steven Medeiros, Marca Daley and Maria Priles. Steve and Marca are still at ACS, educating generations of students in the best way possible. Maria, whose value as an English teacher I only realised years afterwards, regretfully passed on some years ago.