Tuesday, June 28, 2011

Greece must suffer

Greece since it joined the EU in 1981 has been thoroughly corrupt and economically misgoverned by any reasonable standard. Andreas Papandreou, the current prime minister’s father who led Greece for the first decade after joining the EU, was a uniquely unpleasant combination of corruption and academic leftism (he had chaired the Economics Department at Berkeley.) Instead of steering the Greek economy to reap the enormous potential benefits of its premature EU membership, the internationally sophisticated Papandreou manipulated the EU system of slush funds so as to keep a gigantic stream of resources flowing to the bloated Greek public sector. The result was an economy focused almost entirely on the public sector and tourism (which also benefited from innumerable EU grants) with the populace enjoying living standards far in excess of their ability to pay their way.

Greece joined the euro in 2001 based on false statistics, its debt total manipulated by an extremely expensive deal arranged by the ineffable Goldman Sachs. Once a euro member, it took no notice of the “Maastricht Treaty” strictures against excessive public sector deficits, other than to falsify its figures for a number of years in order to avoid excessive criticism which might have blocked the flow of slush funds.

The result of all this was to give Greeks as a whole, and particularly the Greek public sector, living standards hugely in excess of those justified by their productivity. By 2008, Greek GDP per capita, based on purchasing power parity, was a staggering $32,000. That was almost level with the EU average ($33,600), not much below Germany ($34,800), above Italy ($31,000) and South Korea ($26,000) and far above Portugal ($22,000) which in reality had productivity well ahead of Greece. By sucking in borrowing and massive EU grants Greece had distorted its economy as much as the former East Germany, which in 1989 was reckoned by the Economist to be richer than Britain. In productivity Greece’s real comparables were its neighbors Bulgaria (GDP per capita $12,900) and Macedonia (GDP per capita $9,000). While Bulgaria and Macedonia had suffered under a communist dictatorship and a social-ownership dictatorship respectively, by now, 20 years after their liberation, both countries have decent governments and economies more market-oriented, with more productive businesses, than a Greece that willingly succumbed to 30 years of Papandreouism.

Because of the size of the required adjustment and the misconceptions of its people, Greece is now quite unable to remain within the euro and converge its productivity to its living standards. Latvia managed to adjust its living standards successfully (it was not a euro member, but the lats was fixed against the euro), but the required adjustment was much less and the Latvian people were less pampered and much more disciplined. Even in this deep recession, Greece runs a substantial current account deficit, while its budget deficit in 2011 is almost 10% of GDP in spite of alleged massive and painful austerity measures.

At this point the incentives are all wrong. Greece cannot solve its own problems, so its best hope is to get massive “loans” from the EU and the IMF, while reforming as little as possible. Privatization, touted by the EU as a potential partial solution, is not going to work because the Greek public sector is so featherbedded and unproductive that its assets are worth very little. Thus Greek public sector workers throw paving stones, the Greek government produces “reform” programs that do as little as it can get away with and pressure is continually put on the EU, the European Central Bank and the IMF to find more money from somewhere.

Not only does this make no progress towards reform in Greece, it produces perverse incentives in the other weaker euro members that make the currency’s position increasingly precarious. While Portugal and Ireland have thrown out the governments that caused most of the trouble, in Italy and Spain it is becoming increasingly clear to the populace that the best way to maintain their living standards, especially in the public sector, is to reform as little as possible, thereby gaining access to cheap public sector funding from the EU, the ECB and the IMF rather than relying on the expensive and doubtfully available free market.

In other words, just as was the case for the admirals of 1756, the weaker sisters of the EU need a little “encouragement” to convince them that reining in their public sectors and reforming their economies is truly in their interests. As George II was well aware, this can best be achieved by making an example of an unlucky backslider.

One cannot shoot a country, or even an economy, but the EU can achieve the required effect by compulsorily drachmaizing the Greek economy (if necessary, by refusing to lend any more money, to accept euro payments from Greek banks, or to deliver any further euro currency within Greece’s borders.) This can be done quite quickly; the new currency can be printed by an international security printer in a few weeks, and the exchange can be mandated over a weekend. The process would be very similar to the “pesoification” of the Argentine economy in December 2001. For a temporary period, Greeks would be placed in the same position as Bulgarians and Romanians, without full rights of movement in the EU. To keep the Greek banks solvent, their euro deposits would be converted compulsorily into new drachmas. The Greek government might also find it needed exchange controls in the short term as no new international funding would be available.

Following the conversion, the drachma would probably drop to about one quarter of its previous value, as did the Argentine peso in 2002. This would not reduce Greek living standards by three quarters, but by about half – Mercedes in Athens would become four times as expensive, but haircuts and moussaka would not. Greece would then need to renegotiate its international debt, involving a substantial write-down of principal. Greek banks would be insolvent, but could be recapitalized with new drachmas by the government, while foreign banks which suffered losses on Greek paper could be bailed out by their own governments if that was mistakenly thought desirable.

With wage costs at one quarter of their previous level, around those of Bulgaria and Macedonia, Greece would now be able to export successfully, and within a year or two its payments deficit would become a surplus. At that point, the future would be in the hands of the Greek people. If they continued to elect Papandreouists, expanded their public sector and presented a surly attitude to foreign tourists and investors, they would stay poor. Their lives would be much less comfortable than those of the post-2003 Argentines, because unlike Argentina Greece has few natural resources. If on the other hand Greece developed its now bargain-priced tourism on a free market basis, cut back its overgrown government and remained a haven for shipping services, then from their new lower level the Greeks’ living standards would rapidly improve, this time on a sound unsubsidized basis.

Either way, EU subsidies should be cut off altogether, to keep the Greek government honest and assist in repaying EU taxpayers for the costs of the bailouts followed by default. If Greece foolishly wished to leave the EU because of the new austerity, it should be free to do so.

For the rest of the eurozone’s weak sisters, and their inhabitants, the Greek example would be salutary. They would see that the cost of misbehavior is truly gigantic, and is imposed by a cruel world rather than by politicians who can be badgered for more loans and subsidies. Instead of a formula to which lip-service is paid, the Maastricht Criteria on budgets and debt, or even tighter restrictions, would be taken as genuine constraints. Since the consequences of failure would now be visible, weak sister politicians would no longer have the incentive to continue wasteful spending and subsidies, fudge the figures, beg for funding from international lenders and engage in anti-market demagoguery. Instead, they would have to take steps to slim down the weak sisters’ public sectors, reform their labor laws and improve their education and training systems. Thereby their economies would once more become productive members of the euro area.



The crumbling of the Welfare State

The welfare state is taken for granted as the "normal" state of affairs, as if it has always existed. At least, it is assumed that the welfare state has been around for so many decades that the current crisis is just a temporary aberration, a rough patch that we can get through with only minor reforms. But the actual economic history does not bear this out. The welfare state "as we know it"--that is, at its current size--is a product of recent decades. In all of its branches, it has vastly increased just in the past 30 to 40 years. So the current crisis is not some temporary aberration. It is cause and effect. It is a direct consequence of the modern welfare state

Let's take a look at the major branches of the welfare state, particularly the ones that are in crisis. They are: education, government employment, health care, and retirement.

The first two are interconnected. State governments are in crisis, not because of firefighters and policeman, but mostly because of salaries and pensions for public school teachers. Government spending on all levels for public education has more than doubled since 1970, after adjusting for inflation, with no improvement in the system's results.

Something similar has been happening in higher education, mostly through the indirect mechanism of student loans. I recently had a conversation with some folks who went to college in the 1960s. When they went to school, none of them had even heard of such a thing as a student loan. It is an institution that grew in the 1970s, with vigorous government encouragement and guarantees, as part of an effort to make college education an entitlement. By the time I went to college, in the 1980s, student loans had become ubiquitous. Since then they have become ruinous. Subsidized loans have fueled decades of rapid growth in tuition, an increase that makes the housing bubble look modest.

Now let's turn to government employment. This, also, is an integral part of the welfare state. It has long been a means for politicians to provide jobs, salaries, benefits, and pensions to blocs of highly motivated political supporters. Here again, we find that the large-scale looting of the public treasury is relatively recent.

Consider a recent report about the origin of disastrous pension and health-care obligations for city employees in Providence, Rhode Island. In 1989, the city's Retirement Board, which had been packed with a majority of union representatives, discovered it had the power to unilaterally increase pensions and disability payments--and they proceeded to do so. An exasperated city official rushed into the mayor's office to report, "They just broke the city." A new report, in the New York Times of all places, describes a similar shakedown effort, "Operation Domino," in which representatives of government employees' unions in California went town to town bullying government officials into voting for ever more generous wages and benefits.

And then there is the great example of Greece. We're used to assuming that the Europeans are a bunch of socialists, but the Greek welfare state is actually relatively recent, dating to the rise to power of the Panhellenic Socialist Party in 1981, which created comprehensive entitlements to health care and old-age pensions. The system immediately caused a crisis, particularly a shortage of doctors and hospitals. But serious reform was put off by Greece's entry into the European Union. One of the main functions of Europe's monetary union was to allow the welfare states of Southern Europe--the so-called PIGS nations, Portugal, Italy, Greece, and Spain--to ride off of Germany's good credit and borrow enormous sums of money. They used this debt to delay the day of reckoning, which has finally arrived.

Add all of this up and we can roughly measure the half-life of the welfare state, its rate of fiscal decay. The time from the creation of a generous welfare state to its fiscal collapse is about 30 years.

Yes, many of the institutions of the welfare state were in place, both here and in Greece, for longer than 30 years. But they had not grown to full size. Social Security, when it was first adopted, provided benefits only for the last few years of the average person's life. These institutions were just the camel's nose in the tent. It is primarily in the past 30 years that the camel has nosed itself all the way in and filled up the tent.

In the US and Northern Europe, the process of decay has arguably taken a little longer. That is partly because we started with a much more productive economy, and also because we have benefited from a stronger political opposition, which slowed the expansion of the welfare state. This has delayed the inevitable collapse, but it has not fundamentally changed our direction.

The overall conclusion remains: the generous welfare state is a relatively recent experiment, and it is in the throes of a spectacular, world-wide economic failure.

I remember when the financial crisis hit, two and a half years ago, hearing a decrepit old British Marxist declare that this would do for capitalism what the fall of the Berlin Wall did for socialism. He had it completely backwards. By accelerating the financial collapse of the welfare state, the economic downturn will provide the second half of the lesson we should have learned when the wall fell. Back then we learned that full-blown, totalitarian socialism was a failure. Now we are learning that the moderate, "democratic" welfare state is a failure.

The only question is: why did anyone think otherwise? That's especially true when you recall that defenders of capitalism warned decades ago about all of the consequences we are seeing today. Why did everyone think we could avoid them?

The big task of our era--which we are beginning to see in the austerity measures in Europe, in state-level votes to curb unions and slash the pay of government employees, and in proposals for reform of the big middle class entitlements--is a slow, painful, reluctant unwinding of the welfare state.

What we need to realize is that the modern welfare state is a temporary aberration, historically, economically, and morally. It was a brief historical holiday from the basic principle that wealth is earned through work. It was a system that could not work because it tried to defy the laws of nature. We need to grasp that basic lesson now, and proceed deliberately and quickly with the task of dismantling the welfare state and rebuilding our economies on the secure footing of individualism and capitalism.




Soros trying to stack courts, say critics: "Billionaire George Soros spends tens of millions each year supporting a range of liberal social and political causes, from drug legalization to immigration reform to gay marriage to abolishing the death penalty. But a less well-known Soros priority -- replacing elections for judges with selection-by-committee -- now has critics accusing him of trying to stack the courts. Soros has spent several million dollars in the past decade in an attempt to get more states to scrap elections and adopt the merit method. Supporters say it would allow judges to focus on interpreting the law rather than on raising campaign funds and winning elections."

Secret survey to gauge doctor access: "Alarmed by a shortage of primary care doctors, Obama administration officials are recruiting a team of 'mystery shoppers' to pose as patients, call doctors' offices, and request appointments to see how difficult it is for people to get care when they need it. The administration says the survey will address a 'critical public policy problem': the increasing shortage of primary care doctors, including specialists in internal medicine and family practice. It will also try to discover whether doctors are accepting patients with private insurance while turning away those in government health programs that pay lower reimbursement rates."

Biotech fights medical rationing panels: "Robert Coughlin faced a busy agenda recently when he landed in Washington. He and a team of Massachusetts life sciences executives attended an evening fund-raiser for Senator John F. Kerry. The next day, he pressed his case to Kerry’s staff members. Coughlin’s objective: get the Massachusetts Democrat to help torpedo a new government panel designed to reduce Medicare costs. Coughlin, president and chief executive of the Massachusetts Biotechnology Council, is part of an army of health care industry representatives from Massachusetts and around the country who want to block creation of the Independent Payment Advisory Board, a key piece of President Obama’s healthcare overhaul law."

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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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