Are We All Greeks Now?

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Hattip to Ed Morrissey at Hot AirAnother fine econ 101 video from the Center for Freedom and Prosperity.   Government debt is rapidly becoming the major issue of our time, both here and abroad.  The welfare states erected throughout the world have always had a resemblance to Ponzi schemes,  and all Ponzi schemes ultimately collapse, which is what is happening around the globe.  Robert Samuelson nailed it this week in the Washington Post:

What we’re seeing in Greece is the death spiral of the welfare state. This isn’t Greece’s problem alone, and that’s why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven’t fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.

Americans dislike the term “welfare state” and substitute the bland word “entitlements.” The vocabulary doesn’t alter the reality. Countries cannot overspend and overborrow forever. By delaying hard decisions about spending and taxes, governments maneuver themselves into a cul de sac. To be sure, Greece’s plight is usually described as a European crisis — especially for the euro, the common money used by 16 countries — and this is true. But only up to a point.

Euro coins and notes were introduced in 2002. The currency clearly hasn’t lived up to its promises. It was supposed to lubricate faster economic growth by eliminating the cost and confusion of constantly converting between national currencies. More important, it would promote political unity. With a common currency, people would feel “European.” Their identities as Germans, Italians and Spaniards would gradually blend into a continental identity.

None of this has happened. Economic growth in the “euro area” (the countries using the currency) averaged 2.1 percent from 1992 to 2001 and 1.7 percent from 2002 to 2008. Multiple currencies were never a big obstacle to growth; high taxes, pervasive regulations and generous subsidies were. As for political unity, the euro is now dividing Europeans. The Greeks are rioting. The countries making $145 billion of loans to Greece — particularly the Germans — resent the costs of the rescue. A single currency could no more subsume national identities than drinking Coke could make people American. If other euro countries (Portugal, Spain, Italy) suffer Greece’s fate — lose market confidence and can’t borrow at plausible rates — there would be a wider crisis.

But the central cause is not the euro, even if it has meant Greece can’t depreciate its own currency to ease the economic pain. Budget deficits and debt are the real problems; and these stem from all the welfare benefits (unemployment insurance, old-age assistance, health insurance) provided by modern governments.

Countries everywhere already have high budget deficits, aggravated by the recession. Greece is exceptional only by degree. In 2009, its budget deficit was 13.6 percent of its gross domestic product (a measure of its economy); its debt, the accumulation of past deficits, was 115 percent of GDP. Spain’s deficit was 11.2 percent of GDP, its debt 56.2 percent; Portugal’s figures were 9.4 percent and 76.8 percent. Comparable figures for the United States — calculated slightly differently — were 9.9 percent and 53 percent.

There are no hard rules as to what’s excessive, but financial markets — the banks and investors that buy government bonds — are obviously worried. Aging populations make the outlook worse. In Greece, the 65-and-over population is projected to go from 18 percent of the total in 2005 to 25 percent in 2030. For Spain, the increase is from 17 percent to 25 percent.

The welfare state’s death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day — no one knows when — doubt governments’ ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.

Go here to read the rest.  We have our own Greece in this country, called California

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Of course internet Hitler has an opinion on the Greek bailout:

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The sad truth is that Greece is merely a bit further down the debt disaster track than most industrialized nations.  Unless we radically change the spending of government, we are all doomed to be Greeks, without the climate, the Mediterranean and decent olives.

 

25 Responses to Are We All Greeks Now?

  • Art Deco says:

    The problem is not ‘the welfare state’, but a welfare state incorporating perverse incentives, a welfare state not subject to constraints as to its size (relative to the productive economy), public and private consumption financed through borrowing from abroad, and public sector borrowing at times and in circumstances where it is simply inappropriate. Congress and the Administration could fix these problems. They just don’t feel like it.

  • Mike Petrik says:

    I suppose the term welfare state is a big murky. I regard Greece as such a state, but not the US, though because the term is a loose one it is hard to know where to draw the line. But it is rather difficut for true welfare states (in the narrow sense of the term) to be fiscally responsible in the long run. This is precisely because cradle to grave security diminishes the otherwise organic incentives that are necessary to generate the productivity required to deliver such security. The smaller and more homogeneous the society the more likely it can work, at least for a while, but there will inevitably be serious costs in overall standard of living, very little economic or social mobility, and eventually a serious brain/brawn/character drain absent mettalic curtains.

  • Art Deco says:

    You are conflating two phenomena: 1. the inclination of the government to balance its books and 2. the effect of the relative size of the public sector and what it rewards and what it does not on the economic dynamism of the country in question.

    Bar in exceptional circumstances (and Greece is likely now in such circumstances), the government can balance its books if it so chooses. It chooses not to in part out of habit, in part in thrall to Keynesian notions of the utility of public sector borrowing which (per many economists) apply only when their is exceptional slack in the economy, and in part as a consequence of patron-client politics.

    You might say that fiscal responsibility is difficult in circumstances where so many incomes are politically determined. You might also posit that particular tax and benefit configurations induce demographic implosion. These are different arguments than one which says that annual improvements in per capita income of 1.4% as opposed to 2% render common provision unsustainable.

  • Mike Petrik says:

    I do understand the two concepts, but they are not so easily disentangled. My point is that the second phenomenon makes the first very difficult in the long run, though not necessarily impossible under certain conditions that probably cannot exist in the US.

  • Art Deco says:

    The per capita income of the United States was, in 1960, about 40% of what it is today. Prior to 1960, the U.S. Government balanced its budget bar in exceptional circumstances (which circumstances were regrettably common during the period running from 1929 to 1955, but that’s another story). Enhanced affluence has not improved the government’s ability to balance its budget, quite the contrary. The United States has also been on a lower growth trajectory than other occidental countries, as has Switzerland. Neither country is given more than its peers to state intervention, but both are on the technologial frontier, meaning improvements in output have to be driven by innovation as well as application.

    Think about applying your hypothesis on a micro scale. You have ten men selected at random from urban neighborhoods at age 23. You are going to find that at age 46 they have quite a range of incomes because of how their skill sets developed over the years. They will likely have quite a range of relative debt loads as well, but that is (bar at the bottom of the scale) going to be derived from their ability and willingness to defer gratification (and various accidents), not their quantum of human capital.

  • Mike Petrik says:

    Art,
    I’m not suggesting that the US’s deficit is predominantly caused by welfare spending as such — I do recognize that lack of discipline, but then again I’ve never suggested that the US is a welfare state. My point is that welfare states invite serious long term fiscal problems because (i) paying for cradle to grave security requires high tax rates that discourage the work and investment that produce the tax base upon which those rates are applied and (ii) cradle to grave security is a pretty good option compared to work, which increases the need for more spending while simultaneously decreasing the number of workers paying taxes. The ensuing fiscal challenges can presumably be met by living with substantially lower standards of living and greatly reduced economic and social mobility, but most people don’t really want to live with these things, so politicians respond by deficit spending. Now of course you can say then the problem is still one of lack of discipline in such a case, and you’d be right. But one cannot say that welfare state spending does not increase the pressure to deficit spend. And it does so more than most other types of spending because of the perverse incentives that cannot be eliminated, at least in a true welfare state. The bottom line is that cradle to grave security is an expensive proposition in a modern society, and raising the revenue necessary to pay for it encounters both political and economic difficulties.

  • RR says:

    The Scandanavian countries are net lenders despite their larger welfare states. And they have great economic growth. Yes, they have higher taxes but they also have better incentives. They have low corporate tax rates. They use school vouchers. The American tax and welfare system is the world’s most complex yet we have little to show for it.

  • Tito Edwards says:

    Donald,

    Thank you for sharing that enlightening video clip.

    My opinion of Sweden has increased.

    I’m also now going to add Reason.tv to my video-roll of viewing.

    Incredible.

    He advises the U.S. not to increase taxes for a poorly efficient public sector.

    Sweden owes the vast majority of it’s high level of living standard to “free markets, de-regulation, lowering of progressive tax rates, and privatization of many formerly government owned sectors of the economy”.

    Fascinating.

    And Obama wants us to be more like Europe.

    What a maroon.

  • Micha Elyi says:

    The problem is not ‘the welfare state’, but a welfare state incorporating perverse incentives…-Art Deco

    No “welfare” scheme can escape “incorporating perverse incentives.” Making “welfare” a State function only adds to the number and intractability of its perverse incentives. This is especially so in any State based on a principle of equal rights.

  • Mike Petrik says:

    RR,
    First, I acknowledge that our patchwork welfare system is inefficient, likely more inefficent than those employed by other western nations. For that reason I have long favored replacing all transfer payments, including social security, with a negative income tax. My instinct (and that is all it is) is that the additional costs associated with the work disincentive caused by such a program would be overwhelmed by the savings permitted by gutting the existing myriad of programs.

    Regarding Sweden, (I think Don’s video addressed other issues), which incentives exactly are you talking about?

  • Mike Petrik says:

    Micha is correct. A true welfare state necessarily diminishes the incentive to work or engage in entrepreneurship by rewarding doing nothing, especially if the safety net is more generous than bare subsistence. Without necessity, no invention, as they say. As workers gravitate to participate in the safety net, program costs increase necessitating tax rate increases that add to the discouragement of workers and investors.

    Unlike many conservatives, I do not oppose income or wealth redistribution entirely. While I favor private action, I think government can have a significant role. But government policy must be carefully crafted to strike a balance between assisting the truly needy, especially children and the disabled, and avoiding the enablement of able-bodied adults to avoid work. Crafting such policy necessarily requires imperfect compromises given the competing considerations. All too often liberals have an excessively rosy understanding of human nature. People will take advantage of any system you give them. The capacity for rationalization is not limited to Greek protestors. Indeed, in this very forum I’ve read orthodox Catholic posters insist that it is morally acceptable to walk away from an upside down mortgage even if one can make the payments — because the lender never should have given you the loan, you see. People are self-interested, and while generous welfare programs may be well-motivated they will encourage perverse behavior. Moreover, government assistance inevitably becomes perceived as entitlements that can be relied on as opposed to charity that is uncertain.

  • Mike, I was talking about exactly the things that the video that Don posted talks about. The Scandinavian welfare states are more efficient. Freer trade. Lower corporate taxes. School vouchers. VAT.

    I too would like to see all transfer payments replaced with something like a negative income tax.

  • Charity creates perverse incentives. Perverse incentives can’t be avoided if you want to help the needy but they can be minimized. I have an idea for a welfare system: If you’re able to work, the government can offer $5/hour make-work jobs picking up trash, watering plants, or even just running around in circles.

  • Mike Petrik says:

    restrainedradical:

    Yes it does, but government charity is far more pernicious in creating such incentives than is private charity. The former is viewed as a legal entitlement whereas the latter as voluntary. The latter cannot be counted on and is understood as a gift that has not been earned.

    “Workfare” proposals have been around forever, but never seem to secure traction. I seem to recall that there are some reasonable and sound explanations for this, but cannot recall what they might be.

  • j. christian says:

    If you’re able to work, the government can offer $5/hour make-work jobs picking up trash, watering plants, or even just running around in circles

    As someone currently employed by the government, I can honestly say that some public sector employment is nothing more than a thinly-disguised version of this. What some people would do without it, I don’t know. Starvation is not an acceptable answer.

  • j. christian says:

    I should hasten to add that during my time working for large corporations, I saw plenty of “make work” jobs. Those employees were perhaps in a more precarious situation than their civil service counterparts, but it was a similar type of job nonetheless.

  • Mike Petrik says:

    “What some people would do without it, I don’t know. Starvation is not an acceptable answer.”

    Repair my roof? Cut my lawn? Wallpaper my kitchen? Paint my garage? Clean my gutters? I’d pay more than $5 per hour.

  • Micha Elyi says:

    …government policy must be carefully crafted to strike a balance between assisting the truly needy, especially children and the disabled, and avoiding the enablement of able-bodied adults to avoid work. Crafting such policy necessarily requires imperfect compromises given the competing considerations.- Mike Petrik

    Ahh, but in a State founded the principle that all men are created equal in the sight of the law making such distinctions between people leads to the creation of legions of bureaucrats trapped into robotically following rulebooks of every growing size, complexity, and loopholes inevitably spawned by such complexity. The “imperfect compromises” ultimately lead to “the enablement of able-bodied adults to avoid work” and some of “the truly needy” being denied State assistance.

    Alas, the attempt to “strike a balance” within a State welfare scheme in a nation founded on a principle of equal, individual rights is thus doomed to be the pursuit of an illusion. In America, that has become a very costly pursuit and the costs are not only borne by the nation in mere dollars and cents.

    Perhaps a welfare State in a nation of culturally and ethnically homogenous people that has a class system is less encumbered by the consequences of the necessary imperfect compromises required by a State welfare scheme. Homogeneity of the populace in a welfare State has been discussed elsewhere. Less commented upon is that in a class system, the bureaucrat who is of the upper class can deny or approve the lower class supplicant based on consideration of individual circumstances with no or very circumscribed possibilities for appealing the decision.

    P.S. There is no such thing as “government charity.”

  • Mike Petrik says:

    Micha,
    I don’t think that the Declaration’s claim that all men are created equal is particularly at fault here, though I do agree that the 14th Amendment’s equal protection clause has very gradually given rise to a culture that seems to demand equal treatment in every way under every circumstances, even though court decisions, while imperfect and not completely consistent, do not demand anything like this. That said, I do agree with your general point that equal protection reasoning, and equal protection psychology, permeates and paralyzes bureaucracies. And I acknowledge that this makes the compromises I describe somewhat more difficult, but improvements can be made. The Clinton Administration’s welfare reform was certainly a step in the right direction, and was not derailed by equal protection obsessions. And it is worth noting that benefits are far more available to mothers with children than single men, which is a terrific example of well-intended rules with perverse incentives.
    I have no brief on the use of the word “charity” to describe transfer payments. I normally don’t prefer the word for the reason you suggest, but it can certainly be justified on the ground that it is the expression of the will of the people to voluntarily tax themselves to provide for others in need, even if imperfectly. The government is acting as the agent of its citizens, nothing more. I understand that this view of government action does not sit well with libertarians, but I’m not a libertarian.

  • Art Deco says:

    There are mixed economies, and there are mixed economies.

    I was once involved in local politics and in that capacity a careful student of the New York State Statistical Yearbook. It has been a while, but working from memory here and bits and pieces of data I have seen in recent years, I will draw up a back of the envelope grocery list:

    –School vouchers
    (for primary and secondary eduction)… 4.5% of GDP

    –Medical Insurance (for acute care,
    structured per Milton Friedman) … 6.0% of GDP

    –L/T Care Insurance (nursing homes,
    group homes, asylums, &c., structured
    similarly to the above) … 2.0% of GDP

    –Unemployment compensation … 1.5% of GDP

    –Remittances to those with a
    negative income tax liability
    (structured per M. Friedman) … 3.5% of GDP

    –Child Protective & Foster Care … 0.5% of GDP

    –Miscellaneous (public defender,
    legal aid society, public service
    jobs & clinics on Indian
    reservations, disaster relief,
    refugee resettlement, deficits
    of mass transit systems). … 0.5% of GDP

    –Intergovernmental transfers to
    impecunious states and localities
    (net) … 1.0% of GDP

    That amounts to 20.5% of domestic product and covers the waterfront (from my perspective, not the President’s). Prior to 1914, the ratio of public expenditure to domestic product in occidental countries was, if I am not mistaken, around 0.10, and some portion of that was devoted to the common provision of the day, most typically manifest in public agencies (schools, asylums, city hospitals, sanitariums, orphanages, veterans’ hospitals, poor houses, &c.). Here in New York, public expenditure apart from welfare, education, and law enforcement typically amounts to about 5.5% of domestic product, I think. Law enforcement at one time amounted to about 2% of domestic product; it is now more than that and money well spent, but other occidental countries may be able to get by with less for similar results. The United States spends about 5% of domestic product on the military and espionage services. I think the global mean might be around 2.5%. Provision of gas, electricity, and water are properly undertaken by public agencies or regulated monopolies and might amount to 2% of domestic product.

    In other words, a welfare state with a baseline of public services can generally be had with a ratio of public expenditure to domestic product of 0.33 (in peacetime and barring a banking crisis), give or take some portion dependent upon local circumstances.

    By way of contrast, at the time Margaret Thatcher took office in 1979, the ratio of public expenditure to domestic product was about 0.43; the output of state-owned industry amounted to 10% of domestic product; and about a third of all metropolitan households were living in public housing. All told, the state sector amounted to about 55% of domestic product.

    Borrowing from abroad (and note that Greece’s balance of payments deficit on current account is running at 14% of domestic product) is not sustainable; routinized public sector borrowing is not (after a generation or two) sustainable. Demographic implosion makes for an unsustainable society as well as an unsustainable state. All of these are phenomena distinct from maintaining a vigorous ethic of common provision.

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