Early Retirement Extreme Forums

I'm not expert (in terms of percentages) on moonlighting in Scandinavia, so this is anecdotal: It's certainly not unusual to ask or be asked about the "under the table" price when it comes to professional services (electricians, masons, plumbers, ...). This conflict comes up regularly in the media---it's either that or about people abusing the welfare system.
Here's another one... this actually used to be a legal loophole until it was plugged. There are different taxes on heating fuel in Denmark and Germany. If you consider that you only have to drive for 2-3 hrs to get to Germany from large parts of Denmark, this provides an arbitrage opportunity. So this is what people used to do. A group of people would hire a truck and load it with fuel. They would then drive it to Germany [as passengers]. Unload it for five minutes (the fuel had to touch German soil) and officially purchase it _in Germany_. They would then load it back on the truck and drive it back. Instant tax savings.
This is kinda similar to what transnational US companies do in order to avoid paying US taxes. Just make sure that the transaction is recorded somewhere else.
I think the overall "fallacy" here is to assume that regulations won't have unintended side-effects. If a loophole can be arbitraged people will do so no matter how far away from the intention of the regulation it is.
Kinda like how you can't buy beer on a Sunday in Indiana ... so people just drive to Michigan to get it. Go figure.
Yesterday, we did the fun exercise of calculating how the Earned Income Credit actually acts as a very progressive tax. If you take the credit for granted(!) ... which low income people tend to do, then there's an incentive NOT to work lest you get into higher "brackets". This is the complete opposite of the intention of the EIC.
Just goes to show that people's self-interest can't be regulated with a simple math equation.
Whether rich or poor, everybody has their loopholes ... and they'll all use them.

"It's certainly not unusual to ask or be asked about the "under the table" price when it comes to professional services (electricians, masons, plumbers, ...). This conflict comes up regularly in the media---it's either that or about people abusing the welfare system."
I recently bought an antique table and chair from a shop where the guy said, "if you pay in cash I don't have to charge you tax." This happens pretty regularly in America.
When I lived in the Nordic region, I didn't have handymen and shopkeepers offer me this so much (I spoke the local language); I never asked around, so maybe my experience was unusual.
What I find more interesting is how levels of very high underground economies tend to cluster in regions with lower social welfare spending, when looking at the whole global spectrum and not an arbitrary comparison of Scandinavia vs. the U.S.

Felix: I'm looking forward to what you have to say. Extra points for pointing out IMF policies that didn't end in disaster. Surely, just by chance there must be one.
The "austerity measures" were too little, too late. Estonia and Latvia are examples where the business cycle was allowed to work thru the system and pass, rather than our current prolonged miasma. That's the way the business cycle worked, before Keysianism raised its ugly head. Short, deep recessions followed by rapid recovery.
Schumpeter was right about Keynes. He froze most aspects of the economy and modified a few factors, to demonstrate the effect of those few factors. Unfortunately, that makes a great teaching tool, but disastrous policy.

@ secretwealth. It is strange how you went thru the whole study, and concluded:
"What I find more interesting is how levels of very high underground economies tend to cluster in regions with lower social welfare spending, when looking at the whole global spectrum and not an arbitrary comparison of Scandinavia vs. the U.S. "
Looking at 7 identified factors for underground economies, and choosing the 1 that supports your soapbox to draw your conclusion.
Your conclusion is fairly directly contradicted by the study you posted, where virtually all of Europe scores higher than here (As always, Switzerland is an outlier). Where China, Chile, Mongolia, and Bahrain score similar to European counties. Is that because they have similar social nets?

Politicians can't seem to understand the idea that their laws (closed system) will always produce unintended consequences and be skirted and outsmarted by an infinitely more intelligent open system.
@sw:"It seems Scandinavia, while a hair higher than the U.S. in its informal economy, is much lower than southern Europe."
Uh, no. According to the paper you cited (which was great btw, thanks) Norway/Sweden are 219% higher than US/Switzerland. Meanwhile, avg of the P.I.G.S are only 33% higher than Norway/Sweden... Wow, I never would have guessed.
"What I find more interesting is how levels of very high underground economies tend to cluster in regions with lower social welfare spending, when looking at the whole global spectrum and not an arbitrary comparison of Scandinavia vs. the U.S."
I am not trying to start an argument, but it seems like every piece of information you run through a forge and attempt to hammer it into fitting your preconceived notions. I commend your passion, but I think you have confirmation bias.
I see no such correlation looking at the map and figures, on any scale... The most obvious I see is rich and stable, less black market. Poor and/or unstable, more black market.
But just for the EU where social spending stats are available:

social spending % : shadow economy %

Sweden 30.6 : 18.8

Germany 28.8 : 16

Belgium 28.5 : 21.9

France 28.4 : 15

Denmark 27.5 : 17.7

Finland 25.6 : 17.7

Italy 25.3 : 27

Norway 25.1 : 18.7

UK 24.6 : 12.5

Austria 24.6 : 9.8

Netherlands 24 : 13.2

Greece 21.3 : 27.5

Ireland 18.4 : 15.8
Plotting the above suggests that the opposite might be true, a correlation between social spending and shadow economy... But when you add the lower 20% social P.I.G.S. (which weren't on the OECD site that quickly vanishes.
source:

http://www.oecd.org/social/soc/socialex ... sesocx.htm

I notice you excluded Czech Republic, France, Greece, Macedonia, Malta, and a few other EU countries from your rundown.

Yes, not on purpose... I updated the post.
All post Soviet countries have high corruption, despite relatively high social spending.

Greece, France, and Malta aren't post-Soviet countries. Bulgaria is. I don't understand why you brought that up.

Okay, here we go... the chartalist model of economics. This may be quite a mindfuck for many as it starts with assumptions which are pretty much at odds with those of Austrian economics. One of the main problems of this elephant-wise-men-issue. It may well be that some of you reject this outright, but at least try to get through this as an intellectual exercise. As Aristotle said "It is the sign of an educated mind to entertain a thought without accepting it."
Also, it might be that my explanations are lacking. So here's the professionals describing it:

http://www.moslereconomics.com/wp-conte ... lwiler.pdf

http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

http://neweconomicperspectives.org/p/mo ... rimer.html
It may well be that they can describe it better than I will try to do, so there you might find the "long answers" to things I can only provide in brief.

I like Mosler's introduction the most, but I haven't read much of the MMT primer in the latest link.
With that said, let's start. I'll just go into the money creation/destruction part. I'll also provide a simplified view just talking about the government doing things when there's also the Fed involved operationally. But the basics remain. The rest basically follows once you understand that part which is completely at odds with the popular notion of the government as just another household needing to manage its limited funds.
The chartalist model is a model of how an economy works which has a government that issues a fiat currency. The current USA are one example. One main thing here is how that currency comes into being and how it vanishes again. It is fiat money, basically nothing more than a number in an account. Basically, the currency is created when it is spent by the government (which issues the currency) and then destroyed once it is taken back (through taxes) (there's also the issue of banks basically creating money by lending it through a fractional reserve system and then destroying it when the debt is paid.). This leads to the strange situation that is so very special to a money-issuing government: Not only doesn't it need tax revenue to spend money, it needs to spend first before it taxes. I know, I know, by now you probably are either laughing or screaming at the screen. This flies in the face of everything you learn about barter economies and the veil of money hiding the basic reality of trade and money basically representing just another good to trade like gold or silver etc.

This may be true in a barter economy, but it does not work that way in a modern fiat money system. In a very real sense, modern fiat money is a tax ticket. It is spent by the government and then paid back through taxation. Your taxes don't pay anything in the sense that your paycheck pays your food.

The entire notion of the government having money/not having money is nonsense in the eyes of chartalists.
"The story begins with parents creating coupons they then

use to pay their children for doing various household chores.

Additionally, to “drive the model,” the parents require the

children to pay them a tax of 10 coupons a week to avoid

punishment. This closely replicates taxation in the real

economy, where we have to pay our taxes or face penalties.

The coupons are now the new household currency. Think of

the parents as “spending” these coupons to purchase “services”

(chores) from their children. With this new household currency,

the parents, like the federal government, are now the issuer of

their own currency. And now you can see how a household

with its own currency is indeed very much like a government

with its own currency.

Let’s begin by asking some questions about how this new

household currency works. Do the parents have to somehow

get coupons from their children before they can pay their

coupons to their children to do chores? Of course not! In

fact, the parents must first spend their coupons by paying

their children to do household chores, to be able to collect the

payment of 10 coupons a week from their children. How else

can the children get the coupons they owe to their parents?

Likewise, in the real economy, the federal government, just

like this household with its own coupons, doesn’t have to get

the dollars it spends from taxing or borrowing, or anywhere

else, to be able to spend them. With modern technology, the

federal government doesn’t even have to print the dollars it

spends the way the parents print their own coupons."
I do realize that this is hard to accept, but this is how it works. The government issues the dollar. It doesn't need to tax it first (no need, it can be printed). It also doesn't need to borrow the very currency it issues itself from China. That would make very little sense. That doesn't mean that there can't be inflation if the government spends too much, but it does mean that it cannot go bankrupt.
What this implies is that the entire "How are we going to pay for it???"-problem evaporates. Especially in a recession, which we are in right now.
In the example above, the coupons the parents pass on to the kids is the "government deficit".
Let's say that kids don't have enough coupons to pay their weekly tax as not enough coupons are in circulation. The solution is to distribute more coupons and/or lower taxes. It's not raising taxes and issuing less coupons to "lower the deficit" for some strange reason.
Sure, too much government spending can be a problem. Rising inflation is a bad thing that can result from this. But in the biggest recession since 1929 with unprecedented unemployment, bankruptcies and private debt, this is hardly a reason for concern, not right now.
I hope I could convey this view in a way that makes sense. I am well aware that this can cause massive cognitive dissonance. I also worry that in my simplification I presented the model poorly, making you dismiss a good idea because I sucked at presenting it. I'd really suggest going through Mosler's short book to points you find relevant. There's a lot more to this theory than I was able to convey in my already way too long post.
Either way, I'm curious about your reactions. My view of the elephant is strikingly different from yours, it seems.

Brought it up because I saw Czech mentioned... Post Soviet are definitely their own animal when it comes to corruption.
Added France and Greece to first post. Others are small, no data.

I lived for decades in northern Europe, and I can assure you that the "under the table" offer by small businesses was a very common occurrence. Anecdotal evidence, but still... My experience in the US is the opposite: I have only been offered an under the table deal once in the last few decades: the offer came in a high tax city from a small business owner from an Asian country.
S_W you live in NYC. An area both high in taxes and with a very large number of people with various nationalities. In many countries, "under the table" is a perfectly acceptable way of doing business. You have received many such offers. Maybe there is a correlation of national origins and high taxation in NYC with the "under the table" offers? I have lived all over the US but almost exclusively in lower tax states. Never received such a offer, except the one mentioned before.
Tax evasion is rampant in Southern Europe, but is very common in Northern Europe as well. When faced with high income taxe rates and sales taxes, Europeans everywhere do what they can to avoid paying them, whether legally or illegally. Predictably, it is just a matter of incentive.

"S_W you live in NYC. An area both high in taxes and with a very large number of people with various nationalities. In many countries, "under the table" is a perfectly acceptable way of doing business. You have received many such offers. Maybe there is a correlation of national origins and high taxation in NYC with the "under the table" offers?"
I've also lived in a state with no income tax and California--in both places under-the-table work is common. In my experience. Anecdotal evidence is limited, of course.
Felix, thanks for doing a great job laying out the chartalist point of view--both thorough and easy to understand. I wish I wasn't so lazy! I also wish your post doesn't go ignored by the Austrians here.

Felix, I'm familiar with fractional reserve lending creating money supply. Your model above seems like one way to describe a fiat currency, perhaps the most dangerous way.
The dollar is what we believe it is worth. There is nothing but a collective belief that money has value that keeps the system going. So when you start talking about spending levels not mattering, you start becoming more of the problem, and no part of the solution to a recession.
Stop for a minute, and think of what a recession is. The economy overheats, business and individuals extend themselves too far, and when things shift into a slower gear, those individuals and business start to fail. This is only a natural part of the ebb and flow of capitalism.
Once things start failing apart, those in better positions start buying assets at fire sale prices. Those assets get put to more efficient purposes, and the new way of doing business requires new tooling, and employees doing things different than before. The whole creative destruction thing.
Since Keynes came in and f'd this up, this was a pretty fast turn around. 2 years before everything is back on track. Since the Great Depression, we've decided that the gov should step in and fix things when they go bad. This has caused V shaped recessions to look more like an L or god forbid, the W.
Now this is the critical part. I't not just the gov coming in with a firehose of money that delays the recovery, it's the uncertainty. The rules changing in the middle of the game. Why would i buy an asset at auction if there's no telling how much i'll be paying in healthcare costs per employee. When the Gov, trying to prop up prices leaves me in doubt as to where the bottom might be, will there be a rebound? When the government spending is so out of control, that if I actually am successful with the new business, will I actually keep any of the profits.
And here you come with your theory that spending/deficits mean nothing, you'll just debase my money to make up for it. And then, my favorite, the trillion dollar coin, to make a concrete argument that the inmates are running the asylum.
As a useful tool for understanding money creation, your chartalist model works as well as any other.
As a policy, it would be openly declaring a preference for starting fresh with post apocalyptic gold coins.
The Great Recession should have been over four years ago.
Or, I could be wrong. I'll follow your threads and see if they can change my mind.

"The Great Recession should have been over four years ago."
Perhaps it would have been with more government spending.
What do you think of the evidence that those countries who have chosen austerity have recovered more slowly (or not at all), whereas those who followed Keynesian stimulus have recovered more quickly?

On the subject of theory, here's a link to an artical I found on Kotlikoff's site, referencing the work of samuelson. breaking down intergenerational transfers into a simple story with humor is genius.
http://www.kotlikoff.net/sites/default/ ... 202006.pdf
I disagree with alot of Kotlikoff's work, but this is brilliant.

Well, secretwealth, I posted the Estonia and Latvia examples of what happens when the Keynsians are ignored. Quick bounce back.
Now, if the reluctant halfassed "reforms" in Greece are your idea of austerity, well we'll have to agree to disagree.
If you have a recovery story of a stimulus working better than my examples, I'd love to look into it. The only examples I've seen of:
"the evidence that those countries who have chosen austerity have recovered more slowly (or not at all), whereas those who followed Keynesian stimulus have recovered more quickly? "
involved comparing apples and carefully selected oranges. But I look forward to any examples you have.

Outright default is the quickest way for a small country to get on the road to recovery. Compare Iceland with Ireland. And its tried and tested -- read "This Time Is Different: Eight Centuries of Financial Folly" by Reinhart and Rogoff. You don't need to argue about what "might" happen when you can read about what actually did happen in many different places.
The experiment with expiring money conducted in Worgl in 1932 also worked remarkably well, although it was a limited application.
But the fact that both Keynsian and austerity-type approaches can "work" historically should tell you that your debate is more philosophical than practical. That's why this thread is so long with no hope of resolution.
@Felix, you might be interested to read "The Science of Money" by Alexander del Mar, which was written in 1885. Del Mar worked in the U.S. treasury department during the era around and just after the Civil War when the government had issued a currency, the Greenback, similar to the one you describe. (Also look up the Worgl currency if you haven't already.) Chapter VIII of the book describes what happens. In the end, the problem with the Chartalist model is not the model, but simply human nature -- i.e., politicians tend to want to expand the supply of money quicker than the actual growth of the economy, which works fine when the velocity of money is slowing, but results in inflation when the reverse is true.
For a completely avant garde view of money, read "Sacred Economics" by Eisenstein. Dreamy, but interesting all the same.

Dragline, I agree that for a small country in the right circumstances, default is the best solution, Iceland seems to be an ideal example.
The reason Iceland is so good an example is that the debt they were defaulting on was simply nationalized banking losses. They borrowed over $10 billion in a country with a GDP of $12 Billion. They didn't borrow it over many years to makeup for overextended spending, they borrowed it as a bank capitalization measure, trying to save their banking industry. This was a few politicians in back rooms working deals to save banks from their own decisions.
This was an EESA type fix, not an AARA stimulus fix.
It didn't work, and Iceland defaulted on the debt. This wasn't Iceland defaulting on debt that had paid for infrastructure improvements, or their social welfare policies. This was the popular rejection of backroom deals by politicians and bankers and the IMF to hang banking losses on the citizens of Iceland.
Obviously, default was the right way to go.
Yet, that in no way addresses the Keynsian vs capitalist approach to recession recovery.

"Keynesian vs capitalist"? Talk about loaded terminology...
As for Estonia and Latvia, can you respond to this without simply saying Krugman is evil/stupid/a hack/his book sucked/he should die? http://krugman.blogs.nytimes.com/2012/0 ... n-wonkish/

Most of the time I hear people draw sides and stake their claim as Keynesians (or Austrians) I wonder if they even know what Keynesian stimulus actually is.
One of the most textbook Keynesian examples of the last decade in the United States was the Bush tax cuts.
Cuts designed to increase spending with an expiration date built in so we would get back to paying the bills when the economy could afford it without austerity.
Then congress had bi-partisan support to keep extending them and now the party that most closely aligns themselves with Keynes, and rightly, if hypocritically, criticizes Pres Bush for his contribution to the defecit, has made them permanent for most taxpayers.
Lunacy.