A headfirst dive off the Fiscal Cliff

So, in my last post I complimented Croatia for its lack of crime and strong community norms (i.e. nosy neighbors). In this post I am less in awe of Croatia, in fact I’m down right disgusted in disappointed. I’m not too worried about offending my Croatian friends because I’m pretty sure most of them feel the same way. So what’s leaving me dejected and pessimistic about living in Croatia? Is it the neighbors? The dreaded propuh? Nope, its still tax policy.

At a time when most Americans feel like our political system is entirely broken, its even worse in Croatia. And here’s why. Let’s look at the Fiscal Cliff facing the United States in the coming month. Without a deal taxes will go up on everyone and automatic cuts will go into effect halting government stimulus across the board. Most, no every, economist has explained why this will have horrible consequences for the US economy. Wow, really bleak huh? And yet, still better than in the current state Croatia finds itself. Because despite all of the doomsday talk and the extreme partisanship between the two political parties the positions of the two are at least sensible. The GOP doesn’t want taxes to go up on anyone, understanding that tax increases will drain money from the hands of consumers who would otherwise spend it, which will result in a drop in demand and trigger another recession. Meanwhile the Democrats don’t want to see a cut in spending because they know that a cut in spending will result in massive layoffs, which will also result in less money being in consumers’ hands, resulting in a drop in demand, triggering another recession. So here’s where I see some good news: both GOP and Dems understand a drop in money among consumers = a drop in demand and another recession.

So while Congress and the President are scrambling to avoid falling off of the Fiscal Cliff, Croatia’s government has jumped and is diving headfirst off of their cliff. Last Thursday the teachers and nurses went on strike over the Government’s proposed pay-cuts. Other civil workers are also facing pay cuts. No lie, the Government needs to trim the number of civil servants (its estimated there are 200,000 civil servants in a country with 4.5 million people), but they are cutting wages while also raising taxes. The value added tax has gone up 2% since this Government took office and they’ve just proposed introducing a new, higher, property tax. That’s right, while Democrats and Republicans may disagree on which is worse for the economy, tax hikes or budget cuts, the Croatian Government has decided to implement both! Both!! This is in an economy with 20% (or higher) unemployment, 3 years of zero growth, and a drop in the average wages by several hundred dollars. Worse still, is that given the last Government’s unprecedented corruption (the PM is heading to jail) there is no real opposition to these incompetent rubes. So they can apparently keep designing poor policy with impunity... .

And that’s the source of our frustration. Few people here understand why the Government has chosen this course of action, and fewer still think there is much we can do about it.