Greece . . . or how NOT to do austerity
By D.J. McGuire | Tuesday, September 27th, 2011 | Economics, International, PoliticsThere hasn’t been mch discussion about Greece in the blogosphere. You see endless references to Greece as the poster child for all that is wrong about social democracy, Europe, or out-of-control deficits. Yet no one around here in cyberspace seems to have paid attention to how Greece is trying to balance its books. That’s unfortunate, because the Greeks are showing us all how not to do it – and neatly impugning the IMF and EU as a bunch of fools in the process.
Like most outsiders who didn’t pay close attention, I assumed Greece was going with a combination of crippling tax increase and painful service cuts. As it turns out, I was wrong . . . badly wrong. Here’s the New York Times – of all papers – detailing the missing piece of the puzzle:
Since 2010, the government has raised taxes and slashed pensions and state salaries across the board, in an effort to rein in the bloated public sector that today employs one in five Greeks. Last week, the government announced it would put 30,000 workers on reduced pay as a precursor to possible termination and would cut pensions again for nearly half a million public-sector retirees.
Notice something missing? That’s right, no bureaucrat has actually been fired. They’re hinting about it, but not actually doing it. The Times delves deeper (emphasis added) . . .
Critics say the country has failed to adequately crack down on tax evasion among the wealthiest segments of society — and failed to carry out more focused cuts because it is reluctant to take on some public-sector unions that protect a small, powerful cadre of workers who have deep ties to the governing Socialist Party.
It’s so blaringly obvious that even a Greek government archaeologist demands the government take on the aforementioned unions. When the folks on the public payroll are calling for that, you know something is seriously amiss.
Supposedly, the left-wing Greek government is finally considering letting bureaucrats go (Guardian, UK), but ths is nearly two years into the crisis, with nothing but sky-high taxes, a bloated public workforce with massive pay cuts, and no lightening of the heavy burden of government that helped cause this in the first place.
The lesson is abundantly clear: big government on the cheap is no better than big government high on the hog. So long as the size and scope of government is still huge, it will have the same damaging effects to the economy no matter how much money is “saved” by cutting everyone’s taxpayer-funded salary. Government power and influence must be reduced, not just the budget. Sure enough, the Greek Leviathan – even on half-pay – continues to erode the private sector , while tax increases are strangling it. Suddenly, the continued and unyielding opposition from the right-wing New Democracy Party in Greece makes more sense (although they did nothing do reverse state growth before they were bounced in 2009).
In short, Greece is trying to balance its government books while enlarging government’s role in the nation and its economy. Its repeated failure to make it work should be a lesson to all of us.
Cross-posted to the right-wing liberal
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Former candidate for Board of Supervisors in Spotsylvania, current blogger, economics teacher, and long-rumored windbag. There are two causes closest to the heart: steering the country away from the social democratic nonsense that is sinking Europe, and convincing the rest of the "rightosphere" that the NBA really is a joy to watch.
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11 Responses to "Greece . . . or how NOT to do austerity"
The size (number) is probably more important than the scope. If the number of government workers is a modest proportion of the total workforce then there is less pressure to feed the beast. Once it becomes a brontosaurus even if it tries to mind its own business it tramples everything without even noticing. Unionization should also not be permitted for taxpayer funded positions but that’s another fight.
“There hasn’t been mch discussion about Greece in the blogosphere.”
You hang out at the wrong sites. You should read Zerohedge several times a day. Add a dose of Denninger at Market-Ticker dot org.
Forgive me for pounding this theme, but if you hang out on political sites, you are right, there is little discussion about Greece, and that is because politicians and the political class do not understand and are not really interested in economics.
Greece is the hub of EU contagion. EU has estimated they need a 2 Trillion Euro bailout fund. Of course, no one has this much capital lying around, so they are going to create it out of nothing by using leverage in virtually the same manner as Enron did. One Zerohedge author referred to this as a “suicide pact,” which it is.
When the definitive history of this event is written 100 years from now, I believe that Iceland will be seen as the fuse. Iceland has done it right: they defaulted, told the international bankers to get stuffed, and now they are recovering. Us, not so much. The Fed is pursuing the Japanese model (zombify the banks), which won’t work here for multiple reasons I have expounded elsewhere.
Greece thinks they can’t layoff anyone because that would cause more unemployment…Greek unemployment is reported at 16%. This is why the only one hiring here in the U.S. is…the government. And they’re hiring people for jobs created using borrowed money.
“Iceland has done it right: they defaulted,”
Iceland is not an official member of the EU so they had more flexibility (I believe they are still a member of the EU Free Trade Area though). In addition I believe the nature of the default was quite different than what is going in Greece etc. Icelandic banks assumed huge liabilities which the Icelandic government refused to assume. I don’t think the government defaulted on any of its own bonds. Also the total amount of Icelandic debt was not comparable to Greece et al. Interestingly they have applied for EU membership even while defaulting with certain UK and Dutch banks!! But it was Iceland that told the banks they would default not the EU bankers suggesting it.
The EU has done everything backwards by issuing a common currency before different countries standardized their economic operations. It would be like the US in 1900 letting South America issue the US dollar. (In 2011 sadly the differences aren’t that great.)
Greece is breath-taking is its descent into economic collapse. You really need to spend some time there to appreciate the sense of entitlement, greed, and gamesmanship that permeates every facet of their society. Cheating is not dishonest, it is a national pastime.
Greece has one out of five people on the public payroll? Guess who came close to that statistic in the United States? Marion Barry’s District of Columbia, who couldn’t balance a budget even with half of its revenue directly appropriated by the Federal government. Can you imagine an entire country being run with the fiscal recklessness of DC? Worse, for years no one really knew how big the Greek deficits were. Successive governments simply lied about the problem–lied to their own citizens, lied to the European banks, and lied to the EU.
As I said, cheating is a national pastime in Greece. Employees, both public and private sector, cheat on their hours. They show up late for work and leave early to make up for it. And their lack of work ethic while on the job is surpassed only by Russians, whose favorite expression is, “we pretend to work and they pretend to pay us.” Then, at least in the public sector, they retire at full salary at age 50. Sweet, as long as it lasts.
As for tax evasion by the wealthy, well of course they don’t pay their taxes. First, why should they when following the rules is a “fail” in the cheating game? Second, their taxes would be ridiculously high if they actually paid them. Are you paying attention, President Obama, in regards to a “millionaire tax?”
Greece is a failed democracy plunging into chaos (and remember, chaos is a Greek concept). The only question is how much economic damage it is going to cause the EU to buy up Greece’s worthless sovereign debt.
Greece? Small potatoes. The French are up to their necks in Greek debt. Their banks have already been getting overnight loans from our Fed in order to keep a cash crisis from sinking everything. The Germans are almost to a tea party moment because their politicians keep committing the country to bailouts that are several times their annual GDP. Expect a $400B stimulus package for the EU from our buddies in DC. The G20 is working together on this problem because Greece hauls Italy and Spain over the cliff with it. And then it’s our turn.
If Greece had a large military like ours I bet you they’d cut a lot of non “defense” spending.
Why don’t we?
Tor,
I’m not sure what your comment means–if Greece had a large military then they would cut non-defense spending?
Greece has a very small military budget. Despite that, they are in the toilet economically because of extraordinarily high entitlements spending and a progressive tax system that ensures cheating. Does that sound anything like the program that the Democrats want?
@HR,
You nailed it…just my use of non “defense” didn’t really make sense.
If they had a large military budget (like we do)
Then they would cut non “defense” spending – ie, spending trillions deploying our military around the world and engaging in every war and military conflict on earth that have little to do with our “defense”: Iraq, Afghanistan, Bahrain, Germany, South Korea, Japan, UK and the 100 other countries where we have troops deployed.
Cuts need to come across the board. What I’m saying is that military spending is the largest chunk of our Federal spending, it should receive the largest cuts.
Tor,
Your heart might be in the right place, but your math is weak. Look up the numbers: we spend more every three weeks on Social Security and Medicare/Medicaid than we spend during an entire year in Iraq and Afghanistan combined. You could eliminate the entire Defense budget and entitlements spending will still grow to consume over half of our GDP by mid-century. That will put us where Greece is now–no self-defense outside of NATO and their Coast Guard and in a death spiral of worthless sovereign debt.
BTW, we don’t spend “trillions” deploying our military; our entire Defense budget, including R & D and space programs, is about $690B. But we spend “trillions” every year on Social Security and Medicare/Medicaid.
“The Germans are almost to a tea party moment because their politicians keep committing the country to bailouts that are several times their annual GDP.”
There’s no “almost” IMO. Recall, the EFSF (european / ECB bailout fund) is to be based on leverage.\, very dangerous leverage that endangers the individual creidt ratings of member states.
“In Germany, arguably the lynchpin to any such plans, the debate has become more rancorous, as politicians on all sides seek to gain advantage from the government’s perceived mishandling of the crisis, with even the chairman of the constitutional court, Andreas Vosskuhle (correctly spelled: Voßkuhle) now weighing in. In particular, several members of the sinking ship, the FDP, are saying that they will not vote for ratification of the July agreement unless they are credibly assured that no EFSF leveraging will occur. Vosskuhle meanwhile opines that [b]if Germany is planning to cede more of its fiscal sovereignty to Europe, then it must amend its constitution – a clear signal that the court will no longer just rubber-stamp the government’s bailout escapades. Vosskuhle even insists that it will not be enough to alter the constitution via an act of parliament: instead, he demands a referendum. This is bad news for the eurocrats, as a referendum will without a doubt prove a lost cause for them.”[/b]
Damned radical fiscal conservatives; who the hell do they think they are?
Problem with the Greeks is that their entire government is broken. Corruption is rampant, everyone’s at the till, no one wants to give up anything, and you have two political parties literally at one another’s throats.
Greece is broken. Has been since its inception as a modern state. The only way peace and prosperity comes to Greece is if it’s *imposed*.
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