What it means to cut 25 billion Euros

It looks like Rajoy’s attempt to grow a spine and tell Brussels to bug off was short lived. Now the government has commit to cut 25 billion from the budget. With all the trillions of dollars and euros that have been tossed around, it may not seem such a big number anymore to the shellshocked citizen, but the implications are huge.

Almost Euro that the government spends goes to pay for someone’s job doing something at least moderately useful. As a matter of scale, 25 billion Euros would pay for about 2 million “mileurista” jobs (~1000 euros a month).

The current number of unemployed people in Spain is 5 million. I cannot imagine how cutting the budget by this amount isn’t going to add at least another million to that number.

With the government and private sector cutting back, at the same time, while at the same time foreign investment flees the country as fast as it can…

Just to wrap up the incredible stupidity of this whole thing, cutting spending from 8% of GDP to 5% of GDP basically means that the GDP will drop by 3% just due to the drop in government spending. What makes it worse is that there is usually a “multiplier” associated with government spending of between 1.4x to 2x. For each Euro the government spends, this Euro is spent again as the people who receive it use it to buy further services.

Since the public debt level of a country is usually measured by (amount of public debt)/(GDP), effectively what is happening is this:

Currently the public debt is about 600 billion and the GDP is about 1 trillion, for a public debt of 60% of GDP. So here are the three scenarios:

1. If Spain didn’t do the cuts (run a deficit of 8%), the debt would grow to 680 billion and for the sake of argument, say the economic didn’t shrink any more, so now we’d be at 68%.
2. Now we do the cuts, so now the debt grows to 650 billion, but the GDP shrinks by 3% to 970 billion. So now we’re at a debt/GDP ratio of 67%.
3. However, if we do the cuts and assume a multiplier of 2 on government spending, cutting 3% GDP of spending means a real cut to the GDP of 6%, which brings the GDP to 69%, which is worse than doing nothing.

If I had to place bets, my money would be on #3.

Artur Mas wants to be like Massachusetts

I think people in Catalunya confuse the fact that in English, a state isn’t necessarily a sovereign state, but can also mean something more akin to a province. So when Catalans hear the “United States of America”, they think it’s some kind of loose federation, like Switzerland. In reality, Spain is much more federal than the United States has been since at least the 1930s. Spain is like 17 little countries, all duplicating the same services, each with their own TV network (there was an article in the Economist a while back remarking that at a summit Zapatero had more reporters following him than Obama. Doubtlessly every one of the 17 networks sent their own TV crew.), health service, school system, etc.

Then Artur starts talking out of his ass and saying how Catalunya could be like Massachusetts in the United States of Europe. I’m sure he’d be shocked to find that according to the Tax Foundation, Massachusetts only gets back 82 cents for every dollar sent to Washington DC.

It’s nice to see how he thinks that Catalunya will be at the forefront of research and technology, but given a general unwillingness to invest in primary and secondary education, it’s hard to see where these researchers are going to come from, especially now that they have the requirement for university professors to know Catalan in order to get tenure.

Now Mas even wants to create his own IRS, which I’m sure scares the crap out of any multinational that was still thinking of setting up in Catalunya. I mean seriously, if you had a choice between Barcelona and Madrid, you almost can’t responsibly chose Barcelona anymore if there’s no long term certainty about sovereignty and taxation.

Finally, I hope Artur Mas learned about the last time a US State tried to separate. There was that little experiment called the US Civil War, and it didn’t go so well for the states that thought they could just leave.

The effects of not paying your bills on time

One of the most difficult aspects of starting a business in Spain is getting paid on time. Late bill payment is endemic, and enforcement via the courts takes long enough to make it almost not worthwhile. This is especially true of any kind of government work, where payments can take years to materialize. To add insult to injury until recently, you even had to pay VAT on payments that you hadn’t yet received.

It would be interesting to analyze how these late-payments affect the economy, since there is are large secondary effects, since a company can obviously not pay the bills of its suppliers until it has been paid itself.

What could Spain do to fix this problem?

For one, we could have a functioning court system that is fast enough to enforce payments on contracts within a timeframe that allows a business to function (you could be in court for 2-4 years). Although contracts are generally based on trust, it only works if both parties know that the hammer of the law will come down quickly on the party that breaks the contract.

Something that I haven’t seen here, but works pretty well in the US is the idea of a preliminary injunction. The concept is that a judge can quickly grant an injunction (such as freezing money in a bank account) based on the likelihood of the outcome and the potential damages to each of the parties. In order to keep corruption at bay, you obviously need a fast appeal process that can overturn biased decisions.

In the end, by having faster and more effective court enforcement, there might actually be less strain put on court resources, since most people would avoid wasting the effort of going to court if the outcome is fast and predictable.

The second part would be to legally allow companies to charge interest on overdue accounts at relatively high rate. For example, in the US in many states you can automatically charge 1.5% per month on bills more than 90 days overdue. In Spain, people seem to think that unpaid bills are some kind of free loan, and the longer you can avoid paying it, the better.