How much money is the government of Greece capable of collecting?
That's the basic question behind economist Michael Rizzo's recent exploration of what he called the "Government Budget Identity" for Greece:
The "government budget identity" is simply a way to think about how a government can finance its expenditures. Suppose a government is required to help us build bridges and defend our borders – it requires funds to do this. A typical sovereign government can secure funds from three "legitimate" places. What are these sources?
- Taxes today.
- Taxes tomorrow. In other words we can borrow money today in order to build our bridge and then use future tax revenues to pay for the debt tomorrow. By the way, if the government is in the business of actually producing valuable "public goods" then you can easily think of this as value enhancing.
- Printing money. It's not generally done this way, but in effect the monetary authorities can monetize the borrowing of a sovereign entity (how they do it is beyond the scope of this post). For simplicity, imagine instead that a central bank prints new bank notes from scratch, hands them to the Treasury, and then the Treasury spends them on goods and services. This is just another form of a tax, again beyond the scope of this post.
So, this is what the government budget identity looks like for "normal" countries:
G = T + the change in debt + the change in base money
He then goes on to consider how that identity has come to only mean "G = T", where the amount of money Greece has available to spend is only what it collects in taxes today.
With that as the basic background then, Warren Meyer extended the discussion into what the math for Greece really looks like:
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.