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Croatia just canceled the debts of its poorest citizens

washingtonpost.com

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Re: Croatia just canceled the debts of its poorest citizens

#161

Post by swatow »

JamisonM wrote: post #136
bmmayer1 wrote: post #116

Let's just look at the predictable consequences of this move: 1) Banks and other corporations will never lend money to poor people again. Full stop. If there is a chance that the government will write off that debt (effectively stealing future earnings from banks) for these loans, banks just won't issue them. Say goodbye to educational loans, healthcare loans, car loans. Say goodbye to home loans and mortgages. If yo…

Most of this is fairly incorrect. The risks involved lending money to poor people are largely unchanged by this and the bottom lines of all of the businesses involved are essentially unchanged. All of these outstanding amounts are delinquent as the people being relieved of these debts have to have been in financial trouble for at least 12 months by the conditions set out in the program. This means that all of these d…

The economic gain of writing off this kind of debt has to be balanced against the moral hazard effect on future borrowers.

Also, it's not clear that you are correct that this debt was largely written off. Certainly the banks didn't expect 100% recovery, but perhaps they expected a nontrivial amount.

I'm not an expert in these tradeoffs, but the one economist interviewed in the article said: I am not sure that this is the best way to help low-income people. If lenders think this can happen again they will charge very high interest rates to low-income borrowers

Re: Croatia just canceled the debts of its poorest citizens

#162

Post by ptaipale »

adventured wrote: post #154
ptaipale wrote: post #145

Earlier quoted context omitted.

Just nitpicking one thing: > taxes are very high Doesn't seem so: Croatia's tax to GDP ratio is 26.6 %. Compare that to 46.8 % in Belgium, 43.4 % in Austria, 40.6 % in Germany, 45.8 % in Sweden. 26.9 % in U.S. which is internationally known as a low-tax regime. Surely some taxes are high, and taxation is not necessarily fair, but I'd say that Croatia's taxes overall are not high. I would also expect that the "black m…

The US is not regarded internationally as a low tax economy, it's regarded as a medium tax economy. There are about 110 countries with lower tax takes per GDP than the US. Singapore (14% of GDP) and Hong Kong (13% of GDP) are low tax economies. Japan and Australia are similar to the US, and are not considered low tax countries. The US and Japan also share the distinction of having among the highest corporate tax rate…

You are right, but in comparison to European countries, U.S. taxes are low. There's only one European country (Lithuania) where tax per GDP is clearly lower than U.S.

E.g. in Scandinavia, the horrors of U.S. are attributed to its "extremy low" tax status. Horrors like that rich people only live in compounds surrounded by walls and armed guards, and the poor are dying because of no health care and no food, and the middle class does not exist. Yes, I know it sounds rather extreme but this is common rhetoric in countries where the tax rates are >40%.

Election time is never far away.

Re: Croatia just canceled the debts of its poorest citizens

#163

Post by JetSpiegel »

bmmayer1 wrote: post #116

Let's just look at the predictable consequences of this move: 1) Banks and other corporations will never lend money to poor people again. Full stop. If there is a chance that the government will write off that debt (effectively stealing future earnings from banks) for these loans, banks just won't issue them. Say goodbye to educational loans, healthcare loans, car loans. Say goodbye to home loans and mortgages. If yo…

$31M is such a drop in the ocean of debt, that overall the effect should be near nil. But individually, if the interest payments make up a significant part of your budget, this is a very helpful.

Re: Croatia just canceled the debts of its poorest citizens

#164

Post by karmacondon »

bmmayer1 wrote: post #116

Let's just look at the predictable consequences of this move: 1) Banks and other corporations will never lend money to poor people again. Full stop. If there is a chance that the government will write off that debt (effectively stealing future earnings from banks) for these loans, banks just won't issue them. Say goodbye to educational loans, healthcare loans, car loans. Say goodbye to home loans and mortgages. If yo…

Others have pointed out some of the flaws in this reasoning, but I want go over some of the obvious critiques again:

1 & 2) There will be no "full stop" on lending money to poor people. If you're a bank and you're managing say $1B, some percentage of that is allocated to high risk loans. Your job is to make money from lending money, and there are only so many borrowers. Banks don't lend money to poor people out of altruism, but because they have to make enough money from interest to at least beat inflation. They'll continue to make high risk loans until they have some new pool of borrowers to replace them, albeit at higher interest rates now.

Most of the people relieved by this cancellation didn't have a very good chance of being approved for a loan anyway. Now their chances will be somewhat reduced, but not completely eliminated.

3) The $31MM didn't disappear, it was effectively removed from the balance sheets of the debtors. If some of them eventually get jobs and build assets, that money will reappear in the economy but be distributed to different businesses. Instead of the banks receiving that $31MM from their paychecks, they'll spend it on food or gas or whatever. Probably still a net loss, but not of the whole $31MM and instead some fraction of it.

4) The concept of moral hazard is a real thing, but it's effects on any given economy vary wildly. In general, most people don't think "Well the government bailed us out once, so I'll borrow way more than I can afford and just hope that they do it again.". It's possible and I can understand why someone would believe it to be a problem, but it's far from being a law of physics or even economics.

In short, the Croatian government and their finance ministers/advisers probably aren't stupid. They have actual data and a knowledge of their own people and situation to go on. They aren't just playing armchair economist. And though I couldn't name one of them, I'm willing to bet that they thought this move through. Doesn't mean that there won't be any of the dire consequences that you've predicted here, but they've probably weighed the odds more carefully than you think.

Re: Croatia just canceled the debts of its poorest citizens

#165

Post by Sandman »

ptaipale wrote: post #145
popee wrote: post #45

Hi, croat here. Just one detail, this year there will be elections in Croatia and current gov didn't do anything useful for our economy, so this is kind of popular measure. Don't get me wrong, it's always nice to help, but situation is little bit complicated, taxes are very high and in some way this is not fair to people that are paying everything. Also, there are huge number of people living and exploiting social me…

Just nitpicking one thing: > taxes are very high Doesn't seem so: Croatia's tax to GDP ratio is 26.6 %. Compare that to 46.8 % in Belgium, 43.4 % in Austria, 40.6 % in Germany, 45.8 % in Sweden. 26.9 % in U.S. which is internationally known as a low-tax regime. Surely some taxes are high, and taxation is not necessarily fair, but I'd say that Croatia's taxes overall are not high. I would also expect that the "black m…

What hurts people the most is VAT (Value-added tax), and Croatia has one of the highest VATs of all the EU countries [1].

The US doesn't have a VAT, but it does have a sales tax, which is pretty low compared to VAT in most European countries[2]

[1] http://en.wikipedia.org/wiki/Value-added_tax#EU_countries

[2] http://en.wikipedia.org/wiki/Sales_taxes_in_the_United_State...

Re: Croatia just canceled the debts of its poorest citizens

#166

Post by ptaipale »

briandear wrote: post #159
ptaipale wrote: post #145

Earlier quoted context omitted.

Just nitpicking one thing: > taxes are very high Doesn't seem so: Croatia's tax to GDP ratio is 26.6 %. Compare that to 46.8 % in Belgium, 43.4 % in Austria, 40.6 % in Germany, 45.8 % in Sweden. 26.9 % in U.S. which is internationally known as a low-tax regime. Surely some taxes are high, and taxation is not necessarily fair, but I'd say that Croatia's taxes overall are not high. I would also expect that the "black m…

The U.S. is known as a low tax regime? They have among the highest corporate taxes in the world. Taxation as a percentage of GDP is not a good measure because that doesn't address the tax burden as a percentage of income, but as a percentage of GDP. That also doesn't measure the value received for the tax burden endured. As an extreme example, if you are receiving value from those taxes (perhaps education or public t…

Yes, value derived per dollar is meaningful, but it is rather difficult to measure reliably. A lot depends on how much corruption there is.

However, I'd claim taxes in proportion to GDP are a fairly good indicator of taxes in proportion to income, because income and GDP are strongly related. In fact, one way to define GDP is "the sum of primary incomes distributed by resident producer units" and the same number may be called GDI, "gross domestic income".

Re: Croatia just canceled the debts of its poorest citizens

#167

Post by WildUtah »

papaf wrote: post #130
bmmayer1 wrote: post #116

Let's just look at the predictable consequences of this move: 1) Banks and other corporations will never lend money to poor people again. Full stop. If there is a chance that the government will write off that debt (effectively stealing future earnings from banks) for these loans, banks just won't issue them. Say goodbye to educational loans, healthcare loans, car loans. Say goodbye to home loans and mortgages. If yo…

Say goodbye to educational loans, healthcare loans, car loans You make a good point and I do not want to undermine it. However, it is worth pointing out that people don't have to take out educational and healthcare loans in most of the civilised world (Croatia included).

And very, very few people in the civilized world outside the US and Canada need cars or car loans because most first world countries have efficient transit systems that work well and go everywhere.

Re: Croatia just canceled the debts of its poorest citizens

#168

Post by ZenoArrow »

_cudgel wrote: post #148
baddox wrote: post #135

Earlier quoted context omitted.

How do poor people in Europe get cars? Or are you saying they don't need them?

Cities old enough they were designed for foot-traffic, not car-traffic; modern-ish train systems and other public transit; the high price of fuel... My guess is less need.

Most people in the UK buy second hand cars, you can get them ridiculously cheap. The mandatory insurance can cost more than the car itself.

And yes, less need as well.

Re: Croatia just canceled the debts of its poorest citizens

#169

Post by AnthonyMouse »

reinhardt wrote: post #56
alextgordon wrote: post #40

Earlier quoted context omitted.

> But I wonder how this will affect the ability of non-elites to borrow in the future. Although we all like to hate our financial institutions, they really have been an incredible force against class structures over the last 100 years or so, allowing the middle class to own property, start businesses, etc, by gradually extending credit to more and more people. (I recognize it's not been perfect .) Reverting to a situ…

> Unlike the developing world, the developed world is perfectly capable of building a house for every man, woman and child. If it did, poverty would all but disappear; it's hard to be poor when you have your own house. If only that was true. The top countries by home ownership are Romania, Lithuania and Hungary, while UK and US are in the 33st/34th position and Germany/Switzerland 10 positions below: http://en.wikipe…

> The top countries by home ownership are Romania, Lithuania and Hungary, while UK and US are in the 33st/34th position and Germany/Switzerland 10 positions

That has very little to do with the question. Housing costs the same amount to construct whether it's rented as apartments or sold as condominiums and the amount people are paying in rent is generally sufficient for the owner of the apartment to turn a profit.

The problem is they can't afford to buy the housing they're living in and the mortgage interest tax deduction only makes it worse. The reason renters can't buy is that they have bad credit and no down payment. The tax deduction doesn't change that, but what it does is cause the people who can get a mortgage to bid up housing prices. Higher prices requires people at the margin to have a higher down payment, which pushes them back into renting. Meanwhile higher home prices put upward pressure on rents because renters have to pay enough to overcome the landlord's opportunity cost of converting many small apartments into fewer large condos. The higher rents make it again harder for people at the margin to save a down payment, pushing them further away from home ownership.

Then the people who have paid $250K for a house that should be worth $150K realize that the price of that asset has an unduly large consequence for their net worth, so they push to eliminate high density housing and do everything possible to increase housing prices. After that the house that should have cost $150K costs $450K and the idea of doing anything to reduce housing prices is very politically unpopular indeed.

Making housing affordable is easy: Subsidize the construction of high density housing and penalize destroying existing high density housing without replacing it. "Make housing more affordable" is literally the same thing as "lower housing prices." Increase the supply, price goes down, more people can afford it. Meanwhile middle class people invest more of their money in economically productive activities rather than housing speculation.

Re: Croatia just canceled the debts of its poorest citizens

#170

Post by sigzero »

byoogle wrote: post #106
popee wrote: post #45

Hi, croat here. Just one detail, this year there will be elections in Croatia and current gov didn't do anything useful for our economy, so this is kind of popular measure. Don't get me wrong, it's always nice to help, but situation is little bit complicated, taxes are very high and in some way this is not fair to people that are paying everything. Also, there are huge number of people living and exploiting social me…

Interesting, this quote comes to mind: “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” – Alexis de Tocqueville

I think that is actually part of the "Cycle of Democracy" by Dr. Alexander Tytler.
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