Following Greece Down the Road to Perdition — 21 May 2012

As the saying goes, if you owe your bank $10,000, he has you over a barrel; if you owe him $10,000,000, you have him over a barrel.

Add several zeroes, and that is apparently the gamble that Alex Tsipras, head of Greece’s anti-austerity coalition, is making.  From statements he has made, he thinks the rest of Europe would be so horrified at the thought of Greece’s ejection from the common currency club that he can negotiate easier terms.

Greek voters may believe him, but not too many others do.

There is really no good course for Greece – it is too deep in the financial hole.  The departure and default option will likely result in collapse of its financial system, bringing on yet more recession, not to mention a diplomatic crisis as its European Union membership and other treaties are hastily renegotiated.  On the other hand, another round of austerity will have much the same result, only exchanging international stress for riots and strikes at home.

The Greek economy contracted by 6.9% last year, and is forecast to decline by another 5% in 2012.  The brutality of that contraction is hard to relate to.  It makes the economic distress in this country – which actually has been out of recession for two years – seem like sunshine and roses.  And yet our situation is quite possibly dire enough to cost President Obama his job come November.

Voters have not been kind to the Greek leadership, either, which is why the two mainstream parties received a shellacking at last month’s election.  But in truth, the fault for this lies with the Greek voters.

It is the Achilles’ heel of democratic systems.  People will vote for those who say they can make life better, and usually that means spending others’ money.  Voters in general leave it up to the leadership to ensure that the promises made are in fact possible.  Through the magic of the capital markets, those leaders can promise more than they can afford by borrowing against the earnings of a future generation that doesn’t vote.  That ensures election after election.

Then one day the capital markets say “no more.”

By that time it is too late.  For the Keynesians are right that government spending does cause demand – if you put money in a person’s pocket, or if you update the government’s fleet of vehicles, or if you spend tax dollars doing just about anything, it benefits the recipients, and those to whom the recipients spend their money in turn.

The problem with government spending, however, is that is the worst kind of spending to foster healthy growth.  In the first place, it is inefficient – rather than go directly from the source of capital to the business that will use it, it must first go through the bureaucracy which collects it, distributes among agencies, and then disburses it.  All that siphons off economic energy so that the spending that actually reaches the economy is dimished.

In addition, the spending goes not to the most economically desirable application but rather to some objective (think Solyndra) that a bureaucrat deems is a good use for it.  Misallocation of resources is rife when the government is footing the bill.  One recent estimate held that for every 10% of GDP that is represented by government spending (ours is close to 40% if you include state and local spending), the trend growth in the economy is held back by 0.50%.  Compound that handicap and you’ve got millions of jobs that don’t happen.

But governments exist to spend taxpayers’ money.  So business plans are built up, networks of suppliers and providers form, and in general the economy conforms itself in dependence on the flow of government money.  Then, when the realization hits that the spending at such a rate cannot persist, the result is economic contraction as the spigot is shut off.

And so the argument goes that we cannot reduce spending, particularly since it is usually in hard times that the spending becomes untenable.  Cutting government spending just makes hard times worse.  In Greece it has led to economic slaughter, and there is no evident path to growth and prosperity.

In our own country, we see several state governments that are less dramatic versions of Greece.  California, Illinois, New York, New Jersey – these are all states where fiscal irresponsibility has led to deep deficits, most of which are technically against the law.  The deficits are structural, consisting of promises to retired and soon-to-be-retired workers that are unaffordable.  This makes them particularly intractable, and when the crunch happens, spending ends up being cut out of current expenditures – police, schools, and the like.  Even with that, and with tax hikes that end up driving away business and the most productive residents, the deficits grow.  Like Greece, our states find themselves in a death spiral.

And, far too often, there is a demagogue who will rise up and say, “it doesn’t have to be this difficult.”  Thus Alex Tsipras and the Syriza anti-austerity bloc promise they can not only escape the crushing austerity imposed by the German bankers, but actually hire another 150,000 government workers.  A similar thing happened in France, where  Francois Hollande has broken with EU orthodoxy and is now arguing for a “growth” agenda – meaning more government spending.

In reality, the time is long past for a growth agenda in Europe, and the hour is late here.  Because a true growth agenda depends on private markets, tax reform, and reduced spending.  This is especially difficult to achieve when government budgets are stressed.

That’s why the Tea Party is such an important phenomenon in this country.  For quite possibly the first time, there is an organized constituency for not spending.  Their activism has already changed the terms of the debate in Washington, and it has made folk heroes of leaders like Chris Christy of New Jersey and Scott Walker of Wisconsin.

For at the end of the day, we get the government we deserve.  If that government promises us the moon and sticks our grandchildren with the bill, we have nobody to blame but ourselves.

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