Slavery for the young and highly educated in Croatia

 

Usually this story is reserved for the American student that has $60,000 or more in debt and no job, no experience. But this time, I would like to focus on my home country and its ridiculous new law.

The new law that came in effect gives the option to unemployed youth with a university education to enter a worker experience program and get paid 1600 HRK a month for doing so. 1600 HRK = $290. This will help, as we are told, to alleviate the grand number of students which have no work experience whatsoever. The minimum wage is 3000 HRK.

For an employer who wishes to employ such an individual doesn’t have to pay in for social security, medical or any related taxes. This one year program doesn’t count toward the years of labor service and doesn’t count as accumulated time for pension qualification. The employer gets slave labor, because its now legal for any employer to do such a scheme, void of paying any taxes. This is the way out our leaders think of the youth unemployment.

They don’t do the correct thing: letting nominal wage deflation to occur (which should have occurred in a deflationary environment during the crisis) so the price of labor sets at a more competitive level which would allow a more flexible job market and a lower barrier for entry into the workforce. It doesn’t eliminate progressive taxation and the pay-as-you-go social system of retirement which is going to be a burden on my generation as the employment level falls and more people exit the labor force. No. It doesn’t do that. It sets the price of labor at some arbitrary level and makes it law. What stops the employer from firing the individual after that year and rehiring the same person after a certain amount of time passes, paying him the same amount?

Nothing.

The bargaining game which occurs in the free market is taken out and the employer now has massive leverage to do whatever he wants. The youth can’t stand on its own with this kind of pay and a estimated inflation rate of 3,5% per annum. Indebted servitude anyone?

This is truly a lost generation.

President Kirchner of Argentina acknowledges economic slowdown (Blames external factors instead of own policies)

Well, this isn’t really news. After a decade of the so called wondrous economic miracle that is Argentina, a slowdown is imminent. The GDP growth projections are lowered to 2-3% after a constant 7% growth level in the preceding decade. The President called it that their luck has run out and she blames the global slowdown for it. She should get a mirror and start yelling at it.

Even though the President is to blame, the text on business.hr completely missed the point. Google translation goes as:

“The government has poured money into subsidies for industry, public works projects, generous welfare payments and other popular programs, incentives, known as the "Kirchner model."

Argentina possesses large reserves of oil and natural gas, but the production fails to keep pace with economic growth.”

The last statement is utter nonsense. Production can’t keep up with growth, eh? If you ask me this is a classic sign that the economy is heating up and that the miracle growth was nothing but a credit induced bubble that spilled over to the housing sector:

“Building sector is usually the main driver of the economy, and Argentina is turning to real estate as a hedge against of  inflation. However, new projects have slowed significantly this year due to falling sales of 15 percent, mainly due to currency controls introduced by the government to prevent the outflow of capital”,

and into the energy sector. This what happens when the government wants quarter over quarter real GDP growth but without any fall in consumption to accompany savings generated growth.

Also:

“The government has only recently started to remove some of the price controls, which was introduced nearly ten years ago.”

So, the government capped prices from rising when inflation was forced up into input prices? Smart move El Presidente. You not only get higher prices, but shortages. This charade played over the past decade lasted as long as it did because the government was able to subsidize the losing companies and had enough resources to squander. But when the credit crunch came, I am sure that the government wasn’t able to force feed the oil industry anymore. As consumers are demanding more energy, and the funds to replace worn out equipment in the higher end of the capital structure aren’t there, the consumers are going to get the double whammy – higher prices and shortages followed by rationing and ever greater doses of inflation.

And last but not least:

“Cheap energy has enabled the Argentine companies a huge advantage”.

Yeah, cheap energy, subsidized by the government, and capital mixed with inflation went into certain sectors of the economy creating an overproduction in some areas (an artificial boom) which will be accompanied by a bust and a huge glut in whichever sector the money flowed to. 

How a government can influence a segment of the market

 

We can start my giving an example of an individual working in a steel mill which receives a salary (wage) and is taxed by the government in a certain way. Lets suppose that his salary is $1000 dollars. This amount is gross. Governments usually like to tax individuals on their gross salary, as it provides the government with basically free money to engage in any form of expenditure it deems necessary. After taking money for social security and any other coercive form of taxation and “insurance”, it places the individual in certain tax brackets according to his/her income.

Most countries have progressive taxes and the more he makes, the more he is marginally taxed at the higher level. We can assume that this individual doesn’t save, owns no additional form of income and therefore consumes his monetary balance entirely at the end of each month. What he is left with, he uses to consume.

What happens if this individual decides to invest in a bond? Well, he is then effected by the tax code that goes with that investment. The tax code my be as follows:

1.He is taxed for the interest he receives at the annual or semiannual coupon payment dates

2. He maybe taxed for unrealized capital gains on his investments (if these bonds tend to have junk status (speculative grade) or represent cash flows that may come from the pornography industry – the government hates when people invest where they deem fit and look to punish those who do)

3. He maybe taxed by special provisions in the tax code which states that if you invest more than X amount of your funds in this asset class, you will be liable for more taxes and so on.

In each of these cases, capital won’t be allocated in an efficient manner throughout the productive structure. As he will be taxed for the cash flow he receives semiannually, he maybe even taxed due to the accrued interest, which means that before he receives a the coupon payment, he will have a  negative cash flow in the amount of the paid tax. He will certainly, to match his investment objectives of say 6% yield to maturity and a tax rate of 30% request a yield to maturity to equal 0,06/(1-0,3)= 8,57% yield to maturity. Due to the fact that he yearns for higher yield, a more unsuitable investment will be chosen.

If any capital gains will be taxed before he liquidates his holdings, he will again experience a negative cash outflow. If these taxes tend to be large at a relatively small taxable base, he will liquefy the investment. If one segment of the market is affected in this way, large amount of sell orders have the ability to suppress the present values of cash flows of these assets, leading to much higher funding costs.

And last but not not least, if the event of taxation occurs as a penalty for investment in a certain market segment, that market won’t provide the necessary goods and services, as it would because the cost of doing business is greatly overstated.

We should all thanks the government for in their unlimited wisdom. they have managed to keep some products of the market, because they deem it moral and know what’s really the best investment out there….