Size matters

[don]

Baltic Riots Spread to Lithuania in the Face of Deteriorating Economic Conditions



Riots broke out once again in the Baltic states on Friday, this time in the Lithuanian capital, Vilnius, where a group of 7,000 gathered to protest planned economic austerity measures. A smaller group began throwing eggs and stones through the windows of government buildings until the police moved in, using tear gas and rubber bullets to disperse the crowd.

In all three countries, years of steady economic growth have come to a jarring halt, and citizens are facing layoffs and cuts in wages. In each case, the authorities were left wondering whether they were facing organized activism or just the anger of people whose expectations have been disappointed. “I think this is just the beginning,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington. “We should expect this to happen in many places.”

Like its neighbor, Latvia, Lithuania has enjoyed a reputation as a “Baltic Tiger,” buoyed by foreign investment, a housing boom and annual growth rates of around 8 percent. Although Lithuania is not facing as dire an outlook as Latvia, economists predict a 5 percent drop in gross domestic product there next year, and the newly elected Parliament has announced tough austerity measures: workers in the public sector will see pay cuts of up to 15 percent, pensions will fall and an array of taxes will rise.

http://www.nytimes.com/2009/01/17/wo...html?ref=world

Did anybody believe these three tiny states were viable in a world on FIRE? Would it surprise anyone that there was a separatist movement inside any one of them. Bigger= Better

[metalman]

Re: Size matters

Baltic Riots Spread to Lithuania in the Face of Deteriorating Economic Conditions



Riots broke out once again in the Baltic states on Friday, this time in the Lithuanian capital, Vilnius, where a group of 7,000 gathered to protest planned economic austerity measures. A smaller group began throwing eggs and stones through the windows of government buildings until the police moved in, using tear gas and rubber bullets to disperse the crowd.

In all three countries, years of steady economic growth have come to a jarring halt, and citizens are facing layoffs and cuts in wages. In each case, the authorities were left wondering whether they were facing organized activism or just the anger of people whose expectations have been disappointed. “I think this is just the beginning,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington. “We should expect this to happen in many places.”

Like its neighbor, Latvia, Lithuania has enjoyed a reputation as a “Baltic Tiger,” buoyed by foreign investment, a housing boom and annual growth rates of around 8 percent. Although Lithuania is not facing as dire an outlook as Latvia, economists predict a 5 percent drop in gross domestic product there next year, and the newly elected Parliament has announced tough austerity measures: workers in the public sector will see pay cuts of up to 15 percent, pensions will fall and an array of taxes will rise.

http://www.nytimes.com/2009/01/17/wo...html?ref=world

Did anybody believe these three tiny states were viable in a world on FIRE? Would it surprise anyone that there was a separatist movement inside any one of them. Bigger= Better

worth a re-read...the hudson interview by the major latvian newspaper... Housing Bubbles and Trade Deficits: The Latvian Extreme

This means that homeowners – and companies buying their own commercial space – end up paying the banks what the wealthiest owners paid the government in taxes in previous times. Banks end up with this revenue. Back in 1930, U.S. states and cities raised two-thirds of their tax revenues from the real estate tax. Today, that proportion has fallen to only about one-sixth of their revenue as cities rely more on sales taxes and income taxes. This makes them more expensive to live in, creating a “rust belt” when people abandon them for jobs where housing costs less and the economy is more balanced. Even so, the property tax pays for the cost of local education and other basic municipal spending in American cities.

If governments don’t tax property, they have to tax labor. So labor not only has to pay more to the banks as mortgage interest, industrial employers also have to pay high enough wages to enable their employees to break even on their basic living costs, after taxes.

This stifles industrial investment, because employers need to pay a living wage that includes a heavy tax burden. At the same time, this tax policy encourages a real estate bubble. The result is to leave more and more Latvians without jobs. This pushes young workers in their twenties into a state of dependency. At the wages they earn, after paying taxes, they can’t afford to buy homes at today’s prices. For many Latvians, the only alternative is to emigrate abroad.

The way the West traditionally has increased the value of property and capital was to provide state-financed infrastructure and expand the domestic market. If the Baltic States do not go this route, if they avoid taxing land values and other wealth, they will concentrate wealth in the hands of a few people, headed by real estate speculators and political insiders. Their economies will polarize even more – and get poorer in the process. European studies report that Latvia and Estonia already are the most unequal economies in Europe.

Finally, the EU itself has a shrinking work force. It has done nothing to help the Latvian economy keep its labor at home by helping it create the small manufacturing or supplies that even the old Soviet Union set up.

For good reason, Latvians are very resentful towards Stalin for deporting 50 thousand members of the middle class. It is ironic that today, European neoliberals are promoting a policy that is pushing 100 thousand Latvians out of their country every year by the fiscal class war being waged by property (but not industrial capital!) against labor to an extent never seen in Europe. Europe’s great political fight of the 19th century was by industrial capital against the landlord class. Today, Latvia is fought over by landowners – largely absentee foreigners, and largely financed by foreign mortgage credit – against prospective industrial capital and employment in Latvia. In this respect, once again, neoliberal ideology is precisely the opposite of the classical liberalism of Smith, Ricardo and Mill.

It is this ideology, promoted in Latvia by the EU as well as by US ideologues, that is responsible for Latvia’s inflation. The fact that its inflation rates are higher than those in Estonia and Lithuania reflect two facts: First, its flat tax is higher and imposed in a more onerous way; second, the lack of a land tax means that its property prices are higher (partly because of the long delay in giving Latvian families a chance to buy their homes in co-ops and other state-owned housing).

There is a basic economic principle at work here. Taxes on labor and industrial income (profit) raise its supply price. This includes flat taxes on the income of construction workers, because building is an industry. But taxes on land LOWER its price, by reducing the after-tax land rent available to be pledged to banks as interest on loans to new buyers. Latvia follows a policy that maximizes its commercial and industrial costs, and also its real estate prices. Land and financial costs are now dominant in determining the cost of capital in most of the world, so this puts Latvia at a competitive disadvantage internationally.

I should add that a third and rising factor is the supply of foreign credit by EU banks. While taxes and land prices enter into costs, credit increases demand. A fourth factor is the privatization of former state-owned utilities, such as the telephone system. Privatization increases costs even if customers pay less, because of the combination of monopoly profits, higher pay to management, interest and dividends while these enterprises take on (foreign) debt for “investment.”

Imagine what Europe would be like if the fight by Adam Smith, Ricardo, Mill and others had not succeeded in stripping away the remains of feudalism in England, France, Germany and other countries. The continent still would be run by a small coterie of landowners and bankers. Today, these interests are sponsoring a Counter-Reformation which they call by the misleading term “neoliberalism,” as if their policies open the way for more individual freedom and prosperity rather than debt-serfdom. But the only countries in which they really have had a free hand to press their radical reforms to the limit is in the Baltic States and other post-Soviet states.

The result is balance-of-payments dependency, financed by debt dependency as Latvia refrains from making use of its labor force to create basic industry and develop export markets. Neoliberalism is a doctrine for living in the short run. It is impossible to persist for long, except by shrinking the economy. Its logical conclusion would be for Latvia to turn itself into a kind of tourist attraction, like a Caribbean Island – Jamaica on the Baltic. It needs land and tourist housing facilities, and global-type shopping malls for the usual brand names. But it doesn’t need people. Its labor is emigrating to countries that have not followed neoliberal policies.

What amazes me is that these dynamics are not being explained to voters or even to university students in the Baltic States. Many students to whom I lecture are surprised to learn that every industrial economy in the West taxes real estate and natural resources as a major source of government funding, even though they now are having to fight hard against neoliberal ideology. It is mainly the post-Soviet states that are rolling back the clock to a Counter-Reformation, subsidized by large landowners and financial interests. This is euphemistically called a step forward from Communism. But it really is a step back from Industrial Capitalism. That’s quite a rhetorical trick to pull off.

it goes on...