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Archive for the ‘Debt’ Category

When I make speeches about fiscal policy, I oftentimes share a table showing the many nations that have made big progress by enforcing spending restraint over multi-year periods.

I then ask audiences a rhetorical question about a possible list of nations that have prospered by going in the opposite direction. Are there any success stories based on tax hikes or bigger government?

The answer is no, which is why I’ve never received a satisfactory answer to my two-part challenge, even if I limit the focus to fiscal policy.

And nobody will be surprised to learn that the fiscal crisis in Puerto Rico reinforces these lessons.

Writing for the Wall Street Journal, Daniel Hanson explains that the American territory in the Caribbean is on the verge of default.

As Puerto Rico struggles under the weight of more than $70 billion in debt, it has become popular to draw parallels with Greece.

The one theme that is common with the two jurisdictions is that their fiscal crises are the result of too much government spending.

How bad is the problem in Puerto Rico?

It’s hard to answer that question because government budgeting isn’t very transparent and the quality and clarity of the numbers that do exist leaves a lot to be desired.

But I’ve done some digging (along with my colleagues at Cato) and here’s some data that will at least illustrate the scope of the problem.

First, we have numbers from the World Bank showing inflation-adjusted (2005$) government consumption expenditures over the past few decades. As you can see, overall spending in this category increased by 100 percent between 1980 and 2013 (at a time when the population increased only 12 percent).

In other words, Puerto Rico is in trouble because it violated the Golden Rule and let government grow faster than the private sector over a sustained period (just like Greece, just like Alberta, just like the United States, etc, etc).

Here’s another chart and this one purports to show total outlays.

The numbers aren’t adjusted for inflation, so the increase looks more dramatic. But even if you consider the impact of a rising price level (average annual increase of about 4 percent since the mid-1980s), it’s obvious that government spending has climbed far too fast.

To be more specific, Puerto Rico has allowed the burden of government to rise much faster than population plus inflation.

A government can get away with that kind of reckless policy for a few years. But when bad policy is maintained for a long period of time, the end result is never positive.

Now that we’ve established that Puerto Rico got in trouble by violating my Golden Rule, what’s the right way of fixing the mess? Is the government responding to its fiscal crisis in a responsible manner?

Not exactly. Like Greece, it’s too beholden to interest groups, and that’s making (the right kind of) austerity difficult.

Indeed, Mr. Hanson says there haven’t been any cuts in the past few years.

In the past four years, when the fiscal crisis has been most severe, four successively larger budgets have been enacted. The budget proposed for the coming year is $235 million larger than last year’s and $713 million, or 8%, higher than four years ago. Austerity this is not.

What special interest groups standing in the way of reform?

The government workforce would be high on the list. One of the big problems in Puerto Rico is that there are far too many bureaucrats and they get paid far too much (gee, this sounds familiar).

Here are some details from Mr. Hanson’s column.

…more than two-thirds of the territory’s budget is payroll. The proposed budget…contains no plans for head-count reductions. …Median household income in Puerto Rico hovers around $20,000, according to the U.S. Census Bureau, but government workers fare much better. Public agencies pay salaries on average more than twice that amount, a 2014 report from Banco Popular shows. Salaries in the central government in San Juan are more than 90% higher than in the private sector. Even across comparable skill sets, the wage disparity persists.

In other words, life is pretty good for the people riding in the wagon, but Puerto Rico doesn’t have enough productive people to pull the wagon.

So we’re back to where we started. It’s the Greece of the Caribbean.

P.S. This column has focused on fiscal policy, but it’s important to recognize that there are many other bad policies hindering prosperity in Puerto Rico. And some of them are the result of Washington politicians rather than their counterparts in San Juan. Nicole Kaeding and Nick Zaiac have explained that the Jones Act and the minimum wage are particularly destructive to the territory’s economy.

P.P.S. At least Puerto Rico is still a good tax haven for American citizens.

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Back in 2010, I described the “Butterfield Effect,” which is a term used to mock clueless journalists for being blind to the real story.

A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explained that crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.

Here are some of my favorite examples, all of which presumably are caused by some combination of media bias and economic ignorance.

  • A newspaper article that was so blind to the Laffer Curve that it actually included a passage saying, “receipts are falling dramatically short of targets, even though taxes have increased.”
  • Another article was entitled, “Few Places to Hide as Taxes Trend Higher Worldwide,” because the reporter apparently was clueless that tax havens were attacked precisely so governments could raise tax burdens.
  • In another example of laughable Laffer Curve ignorance, the Washington Post had a story about tax revenues dropping in Detroit “despite some of the highest tax rates in the state.”
  • Likewise, another news report had a surprised tone when reporting on the fully predictable news that rich people reported more taxable income when their tax rates were lower.

Now we have a new example for our collection.

Here are some passages from a very strange economics report in the New York Times.

There are some problems that not even $10 trillion can solve. That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises. …But it has not been able to do away with days like Monday, when fear again coursed through global financial markets.

I’m tempted to immediately ask why the reporter assumed any problem might be solved by having governments spend $10 trillion, but let’s instead ask a more specific question. Why is there unease in financial markets?

The story actually provides the answer, but the reporter apparently isn’t aware that debt is part of the problem instead of the solution.

Stifling debt loads, for instance, continue to weigh on governments around the world. …high borrowing…by…governments…is also bogging down the globally significant economies of Brazil, Turkey, Italy and China.

So if borrowing and spending doesn’t solve anything, is an easy-money policy the right approach?

…central banks like the Federal Reserve and the European Central Bank have printed trillions of dollars and euros… Central banks can make debt less expensive by pushing down interest rates.

The story once again sort of provides the answer about the efficacy of monetary easing and artificially low interest rates.

…they cannot slash debt levels… In fact, lower interest rates can persuade some borrowers to take on more debt. “Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts,” the Bank for International Settlements, an organization whose members are the world’s central banks, wrote in a recent analysis of the global economy.

This is remarkable. The reporter seems puzzled that deficit spending and easy money don’t help produce growth, even though the story includes information on how such policies retard growth. It must take willful blindness not to make this connection.

Indeed, the story in the New York Times originally was entitled, “Trillions Spent, but Crises like Greece’s Persist.”

Wow, what an example of upside-down analysis. A better title would have been “Crises like Greece’s Persist Because Trillions Spent.”

The reporter/editor/headline writer definitely deserve the Fox Butterfield prize.

Here’s another example from the story that reveals this intellectual inconsistency.

Debt in China has soared since the financial crisis of 2008, in part the result of government stimulus efforts. Yet the Chinese economy is growing much more slowly than it was, say, 10 years ago.

Hmmm…, maybe the Chinese economy is growing slower because of the so-called stimulus schemes.

At some point one might think people would make the connection between economic stagnation and bad policy. But journalists seem remarkably impervious to insight.

The Economist has a story that also starts with the assumption that Keynesian policies are good. It doesn’t explicitly acknowledge the downsides of debt and easy money, but it implicitly shows the shortcomings of that approach because the story focuses on how governments have less “fiscal space” to engage in another 2008-style orgy of Keynesian monetary and fiscal policy

The analysis is misguided, but the accompanying chart is useful since it shows which nations are probably most vulnerable to a fiscal crisis.

If you’re at the top of the chart, because you have oil like Norway, or because you’re semi-sensible like South Korea, Australia, and Switzerland, that’s a good sign. But if you’re a nation like Japan, Italy, Greece, and Portugal, it’s probably just a matter of time before the chickens of excessive spending come home to roost.

P.S. Related to the Fox Butterfield effect, I’ve also suggested that there should be “some sort of “Wrong Way Corrigan” Award for people like Drum who inadvertently help the cause of economic liberty.”

P.P.S. And in the same spirit, I’ve proposed an “own-goal effect” for “accidentally helping the other side.”

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I detest writing about Greece. I suggested back in 2010 that the best outcome was default, which would have been the most likely outcome of a no-bailouts approach.

And for the past five years, events have confirmed – over and over again – that this was the right approach.

So you can understand how frustrating it is to comment again on this issue.

But sometimes the policy proposals from national governments and international bureaucracies are so blindly insane that I feel compelled to restate obvious points.

Consider what is happening now. The various members of the Troika (the International Monetary Fund, the European Commission, and the European Central Bank) are pressuring Greece to make reforms in exchange for additional subsidies, handouts, and bailouts.

But since the Greek government is run by lunatics, the net result of “reforms” is more and more bad policy. To be blunt, the Troika crowd is subsidizing and encouraging a process that is resulting in suicidal tax hikes in Greece.

Here are some excerpts from a story in the EU Observer.

Greece edged closer to a last-ditch agreement with her eurozone creditors on Monday (22 June), after Alexis Tsipras’ government promised to raise an extra €8 billion over the next two years. Under the proposal submitted to eurozone ministers, the Greek government would raise just under €2.7 billion in extra revenue this year, followed by a further €5.2 billion in 2016. …Tsipras’ government has proposed to raise €645 million over the next two years by increasing health contributions to 5 percent. …As expected, the remaining proposals are almost exclusively based around new tax increases, the most significant of which is a new 12 percent levy on all corporate profits over €500,000, which the Greek government expects to bring in €1.35 billion in extra revenue. …together with €100 million per year from a new TV advertisements tax. It also wants to widen the scope of a so-called ‘luxury’ tax to cover private swimming pools, planes and boats.

Here’s a look at the breakdown of the new deal, which I got off Twitter from a pro-liberty Greek citizen (i.e., an endangered species).

So the latest deal is 93 percent tax hikes and 7 percent spending cuts. And I’m sure those so-called spending cuts are probably make-believe reductions in previously planned increases instead of genuine reductions.

That’s so imbalanced that it makes President George H.W. Bush’s disastrous 1990 tax-hike deal seem good by comparison.

And just in case you wonder whether there’s no fat in the Greek budget, consider this shocking sentence from the EU Observer story.

Public spending on pensions currently amounts to 16 percent of Greece’s GDP.

To give you an idea of how crazy that number is, Social Security outlays in the United States consume “only” 4.9 percent of GDP.

And don’t forget the Greeks also squander money on a bloated bureaucracy and a preposterous regulatory regime (click here and here to see I’m actually understating the problem).

Yet rather than change any of these anti-growth policies, the government wants more and more revenue to prop up a bloated government.

The bottom line is that Greek politicians and interest groups are trying to impose an upside-down version of my Golden Rule.

But while my Rule says that the private sector should grow faster than the government, their version is that the tax burden should grow faster than the private sector.

Needless to say, that’s an approach that is guaranteed to produce economic ruin.

Productive people leave the country or operate in the underground economy. And many others decide that it’s far more comfortable to climb into the wagon of government dependency.

The situation is utterly ludicrous, as explained by George Will.

…a nation that chooses governments committed to Rumpelstiltskin economics, the belief that the straw of government largesse can be spun into the gold of national wealth? Tsipras…thinks Greek voters, by making delusional promises to themselves, obligate other European taxpayers to fund them.

But George sees a silver lining to the dark cloud of Greece’s economic illiteracy.

Greeks bearing the gift of confirmation that Margaret Thatcher was right about socialist governments: “They always run out of other people’s money.” …This protracted dispute will result in desirable carnage if Greece defaults, thereby becoming a constructively frightening example to all democracies doling out unsustainable, growth-suppressing entitlements.  …It cannot be said too often: There cannot be too many socialist smashups. The best of these punish reckless creditors whose lending enables socialists to live, for a while, off of other people’s money.

I fully agree with this final point. Just like it’s good to have positive examples (think Hong Kong, Switzerland, Texas, or Singapore), it’s also good to have bad examples (such as France, Italy, California, and Illinois).

Though it’s unclear whether politicians even care about learning any lessons.

P.S. Don’t forget that some American politicians want America to be more like Greece, as illustrated by this Henry Payne cartoon.

P.P.S. Also keep in mind that Greece is just the tip of the iceberg. Other European welfare states are making the same mistakes and will soon suffer similar fates.

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Last September, I wrote about some very disturbing 10-year projections that showed a rising burden of government spending.

Those numbers were rather depressing, but a recently released long-term forecast from the Congressional Budget Office make the 10-year numbers look benign by comparison.

The new report is overly focused on the symptom of deficits and debt rather than the underlying disease of excessive government. But if you dig into the details, you can find the numbers that really matter. Here’s some of what CBO reported about government spending in its forecast.

The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery. …If current law remained generally unchanged…, federal spending rises from 20.5 percent of GDP this year to 25.3 percent of GDP by 2040.

And why is the burden of spending going up?

Well, here’s a chart from CBO’s slideshow presentation. I’ve added some red arrows to draw attention to the most worrisome numbers.

As you can see, entitlement programs are the big problem, especially Social Security, Medicare, Medicaid, and Obamacare.

Even CBO agrees.

…spending for Social Security and the government’s major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance purchased through the exchanges created by the Affordable Care Act—would rise sharply, to 14.2 percent of GDP by 2040, if current law remained generally unchanged. That percentage would be more than twice the 6.5 percent average seen over the past 50 years.

By the way, while it’s bad news that the overall burden of federal spending is expected to rise to more than 25 percent of GDP by 2040, I worry that the real number will be worse.

After all, the forecast assumes that other spending will drop by 2.2 percent of GDP between 2015 and 2040. Yet is it really realistic to think that politicians won’t increase – much less hold steady – the amount that’s being spent on non-health welfare programs and discretionary programs?

Another key takeaway from the report is that it is preposterous to argue (like Obama’s former economic adviser) that our long-run fiscal problems are caused by inadequate tax revenue.

Indeed, tax revenues are projected to rise significantly over the next 25 years.

Federal revenues would also increase relative to GDP under current law… Revenues would equal 19.4 percent of GDP by 2040, CBO projects, which would be higher than the 50-year average of 17.4 percent.

Here’s another slide from the CBO. I’ve added a red arrow to show that the increase in taxation is due to a climbing income tax burden.

These CBO numbers are grim, but they could be considered the “rosy scenario.”

The Committee for a Responsible Federal Budget (CRFB) produced their own analysis of the long-run fiscal outlook.

Like the CBO, CRFB is too fixated on deficits and debt, but their report does have some additional projections of government spending.

Here’s the key table from the CRFB report. Not only do they show the CBO numbers  for 2065 and 2090 under the baseline scenario, they also pull out CBO’s “alternative fiscal scenario” projections, which are based on more pessimistic (some would say more realistic) assumptions.

As you can see from my red arrows, federal spending will consume one-third of our economy’s output based on the “extended baseline scenario” as we get close to the end of the century. So if you add state and local spending to the mix, the overall burden of spending will be higher than it is in Greece today.

But if you really want to get depressed, look at the “alternative fiscal scenario.” The burden of federal spending soars to more than 50 percent of output. So when you add state and local government spending, the overall burden would be higher than what currently exists in any of Europe’s welfare states.

In other words, America is destined to become Greece.

Unless, of course, politicians can be convinced to follow my Golden Rule and exercise some much-needed spending restraint.

This would require genuine entitlement reform and discipline in other parts of the budget, steps that would not be popular from the perspective of Washington insiders.

Which is why we need some sort of external tool that mandates spending restraint, such as an American version of Switzerland’s Debt Brake (which you can learn more about by watching a presentation from a representative of the Swiss Embassy).

Heck, even the IMF agrees that spending caps are the only feasible solution.

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When I first came to Washington back in the 1980s, there was near-universal support and enthusiasm for a balanced budget amendment among advocates of limited government.

The support is still there, I’m guessing, but the enthusiasm is not nearly as intense.

There are three reasons for this drop.

  1. Political reality – There is zero chance that a balanced budget amendment would get the necessary two-thirds vote in both the House and Senate. And if that happened, by some miracle, it’s highly unlikely that it would get the necessary support for ratification in three-fourths of state legislatures.
  2. Unfavorable evidence from the statesAccording to the National Conference of State Legislatures, every state other than Vermont has some sort of balanced budget requirement. Yet those rules don’t prevent states like California, Illinois, Connecticut, and New York from adopting bad fiscal policy.
  3. Favorable evidence for the alternative approach of spending restraint – While balanced budget rules don’t seem to work very well, policies that explicitly restrain spending work very well. The data from Switzerland, Hong Kong, and Colorado is particularly persuasive.

Advocates of a balanced budget amendment have some good responses to these points. They explain that it’s right to push good policy, regardless of the political situation. Since I’m a strong advocate for a flat tax even though it isn’t likely to happen, I can’t argue with this logic.

Regarding the last two points, advocates explain that older versions of a balanced budget requirement simply required a supermajority for more debt, but newer versions also include a supermajority requirement to raise taxes. This means – at least indirectly – that the amendment actually is a vehicle for spending restraint.

This doesn’t solve the political challenge, but it’s why advocates of limited government need to be completely unified in favor of tax-limitation language in a balanced budget amendment. And they may want to consider being more explicit that the real goal is to restrain spending so that government grows slower than the productive sector of the economy.

Interestingly, even the International Monetary Fund (which is normally a source of bad analysis) understands that spending limits work better than rules that focus on deficits and debt.

Here are some of the findings from a new IMF study that looks at the dismal performance of the European Union’s Stability and Growth Pact. The SGP supposedly limited deficits to 3 percent of GDP and debt to 60 percent of GDP, but the requirement failed largely because politicians couldn’t resist the temptation to spend more in years when revenue grew rapidly.

An analysis of stability programs during 1999–2007 suggests that actual expenditure growth in euro area countries often exceeded the planned pace, in particular when there were unanticipated revenue increases. Countries were simply unable to save the extra revenues and build up fiscal buffers. …This reveals an important asymmetry: governments were often unable to preserve revenue windfalls and faced difficulties in restraining their expenditure in response to revenue shortfalls when consolidation was needed. …The 3 percent of GDP nominal deficit ceiling did not prevent countries from spending their revenue windfalls in the mid-2000s. … Under the SGP, noncompliance has been the rule rather than the exception. …The drawbacks of the nominal deficit ceiling are particularly apparent when the economy is booming, as it is compatible with very large structural deficits.

The good news is that the SGP has been modified and now (at least theoretically) requires spending restraint.

The initial Pact only included three supranational rules… As of 2014, fiscal aggregates are tied by an intricate set of constraints…government spending (net of new revenue measures) is constrained to grow in line with trend GDP. …the expenditure growth ceiling may seem the most appealing. This indicator is tractable (directly constraining the budget), easy to communicate to the public, and conceptually sound… Based on simulations, Debrun and others (2008) show that an expenditure growth rule with a debt feedback ensures a better convergence towards the debt objective, while allowing greater flexibility in response to shocks. IMF (2012) demonstrates the good performance of the expenditure growth ceiling

This modified system presumably will lead to better (or less worse) policy in the future, though it’s unclear whether various nations will abide by the new EU rules.

One problem is that the overall system of fiscal rules has become rather complicated, as illustrated by this image from the IMF study.

Which brings us back to the third point above. If the goal is to restrain spending (and it should be), then why set up a complicated system that first and foremost is focused on red ink?

That’s why the Swiss Debt Brake is the right model for how to get spending under control. And this video explains why the objective should be spending restraint rather than deficit reduction.

And for those who fixate on red ink, it’s worth noting that if you deal with the underlying disease of too much government, you quickly solve the symptom of deficits.

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It’s amazingly simple to reduce the burden of government spending. Policy makers simply need to impose some modest spending restraint so that government doesn’t grow faster than the economy’s productive sector.

In a display of humility that can only be found in Washington, DC, I call this Mitchell’s Golden Rule.

And, amazingly, even the International Monetary Fund agrees that spending caps are the most effective strategy for good fiscal policy.

Since I’m not a fan of the IMF, this is definitely a case of strange bedfellows!

Let’s look at some case studies of what happens when there are limits on the growth of government.

A review of data for 16 nations reveals that multi-year periods of spending restraint lead to lower fiscal burdens and less red ink.

Between 2009 and 2014, a de facto spending freeze at the federal level dramatically reduced burden of spending in the United States.

Thanks to a spending cap, Switzerland has shrunk the public sector, balanced its budget and reduced government debt .

These real-world examples provide compelling evidence on the value of long-run spending restraint.

By the way, when I challenge my leftist friends to provide similar examples of nations that have achieved good results by raising taxes, they become uncharacteristically quiet. Just like you can hear crickets chirping when I present them with my two-question challenge to identify statist nations that are good role models.

But I’m digressing. Let’s get back to the main topic.

In addition to the data cited above, there are also hypothetical examples showing why it is important to have government grow slower than the private sector.

A column published by Investor’s Business Daily reveals that the United States would have avoided the multi-trillion dollar deficits of the Obama years had a Swiss-style spending cap been in effect.

The oil-rich Canadian province of Alberta would have avoided its current fiscal crisis had it followed my Golden Rule over the past 10 years.

Now let’s add to our list of hypothetical examples. Writing for Real Clear Markets, Professor Jeffrey Dorfman of the University of Georgia cleverly suggests that Republicans simply take Bill Clinton’s last budget and then adjust it for inflation and population growth.

…a Clinton is ready to show them a path to nearly everything a dream Republican budget might have. …President Bill Clinton’s last budget was for fiscal year 2001, which began just before the 2000 election. That budget spent $1.86 trillion, less than half of what President Obama is proposing. If this final Clinton budget is adjusted upwards for subsequent inflation (32 percent) and population growth (12 percent), we arrive at a figure of $2.76 trillion, still only 69 percent as much as President Obama wants to spend. This difference is what Republicans should exploit.

And since federal revenues for next year are projected to be $3.46 trillion, that means not only a smaller burden of government spending, but also a huge budget surplus.

Professor Dorfman then proposes that this gives Republicans leeway to show that they can compromise.

… appropriate spending for each agency equal to a minimum of the population and inflation adjusted amount in President Bill Clinton’s final budget plus 50 percent of the additional growth between President Obama’s proposal and the adjusted Clinton budget. That is, Republicans would not even try to roll federal spending back to when we last had a balanced budget, but only move to reverse half of the enormous spending increases that have occurred under Presidents George W. Bush and Barack Obama. Such a budget would spend $3.25 trillion and would come with an estimated budget surplus of $220 billion based on the latest Congressional Budget Office projections of 2016 federal revenue.

Dorfman hypothesizes that this rhetorical approach will give advocates of smaller government the upper hand.

After all, the statists presumably wouldn’t want to say Bill Clinton’s last budget was somehow draconian or heartless. And if Republicans are proposing to take that Clinton budget, adjust it for inflation and population, and then add even more money, it should be equally improbably to characterize their proposals as being draconian and heartless.

At a time when Hillary Clinton certainly appears set to run for president, Republicans can stake their claim to reduced spending in many areas by pointing out that they are being 50 percent more generous in inflation and population adjusted spending than President Clinton was. Will Democrats in Congress, or even President Obama, want to claim that President Clinton was insufficiently generous with the poor and working classes? Will they really want to take a stand in opposition to the Clintons at this point in time? I doubt it. Certainly Hillary Clinton is unlikely to want to criticize a Clinton budget. That will make other Democrats hesitate and likely bite their tongues. Using the Clintons against the rest of the Democrats offers the Republicans in Congress a clear path to almost all their budgetary wishes.

I agree that this is an astute strategy. I particularly like it because it puts the focus on how much government has grown since Bill Clinton left office.

And the notion of letting the budget grow as fast as population plus inflation is very similar to Colorado’s Taxpayer Bill of Rights, which is the best spending cap in America.

That being said, I’m far less optimistic than Professor Dorfman that this approach will produce a victory in the short run. Simply stated, President Obama is too ideologically committed to big government. Moreover, I doubt that he will feel any special pressure to accept Bill Clinton’s last budget as some sort of baseline.

But having this debate would still be useful and could pay dividends in 2017 and beyond.

P.S. Speaking of President Obama, let’s close with some political humor that showed up in my inbox yesterday.

P.S. If you want more Obama humor, check out this t-shirt, this Pennsylvania joke, this Reagan-Obama comparison, this Wyoming joke, this Bush-Obama comparison, this video satire, this bumper sticker, and this very timely bit of Bowe Bergdahl humor.

And sometime there’s even humor that makes me sympathize with the President.

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There’s a big fiscal battle happening in Europe. The relatively new Greek government is demanding continued handouts from the rest of Europe, but it wants to renege on at least some of the country’s prior commitments to improve economic performance by reducing the preposterous burden of spending, regulation, and intervention.

That seems like a rather strange negotiating position. Sort of like a bank robber holding a gun to his own head and saying he’ll shoot himself if the teller doesn’t hand over money.

At first glance, it seems the Greeks are bluffing. Or being suicidally self-destructive.

And maybe they are posturing and/or being deluded, but there are two reasons why the Greeks are not totally insane.

1. The rest of Europe does not want a Greek default.

There’s a famous saying, attributed to J. Paul Getty, that applies to the Greek fiscal fight. Simply stated, there are lots of people and institutions that own Greek government bonds and they are afraid that their investments will lose value if Greece decides to fully or partially renege on its debts (which is an implicit part of Greece’s negotiating position).

So while Greece would suffer if it defaulted, there would be collateral damage for the rest of Europe. In other words, the hypothetical bank robber has a grenade rather than a gun. And while the robber won’t fare well if he pulls the pin, lots of other people may get injured by shrapnel.

And to make matters more interesting, previous bailouts of Greece have created a rather novel situation in that taxpayers are now the indirect owners of a lot of Greek government debt. As you can see from the pie chart, European taxpayers have the most exposure, but American taxpayers also are on the hook because the IMF has participated in the bailouts.

The situation is Greece is akin to a bankruptcy negotiation. The folks holding Greek government debt are trying to figure out the best strategy for minimizing their losses, much as the creditors of a faltering business will calculate the best way of extracting their funds. If they press too hard, the business may go bust and they get very little (analogous to a Greek default). But if they are too gentle, they miss out on a chance of getting a greater share of the money they’re owed.

2. Centralization is the secular religion of the European elite and they want Greece in the euro.

The bureaucrats at the European Commission and the leaders of many European nations are emotionally and ideologically invested in the notion of “ever closer union” for Europe. Their ultimate goal is for the European Union to be a single nation, like the United States. In this analogy, the euro currency is akin to the American dollar.

There’s a general perception that a default would force the Greek government to pull out of the euro and re-create its own currency. And for the European elite who are committed to “ever closer union,” this would be perceived as a major setback. As such, they are willing to bend over backwards to accommodate Greece’s new government.

Given the somewhat blurry battle lines between Greece and its creditors, what’s the best outcome for advocates of limited government and individual liberty?

That’s a frustrating question to answer, particularly since the right approach would have been to reject any bailouts back when the crisis first started.

Without access to other people’s money, the Greek government would have been forced to rein in the nation’s bloated public sector. To be sure, the Greek government may also have defaulted, but that would have taught investors a valuable lesson about lending money to profligate governments.

And it would have been better if Greece defaulted five years ago, back when its debt was much smaller than it is today.

But there’s no point in crying about spilt milk. We can’t erase the mistakes of the past, so what’s the best approach today?

Actually, the right answer hasn’t changed.

And just as there are two reasons why the Greek government is being at least somewhat clever in playing hardball, there are two reasons why the rest of the world should tell them no more bailouts.

1. Don’t throw good money after bad.

To follow up on the wisdom of J. Paul Getty, let’s now share a statement commonly attributed to either Will Rogers or Warren Buffett. I don’t know which one (if either) deserves credit, but there’s a lot of wisdom in the advice to stop digging if you find yourself in a hole. And Greece, like many other nations, has spent its way into a deep fiscal hole.

There is a solution for the Greek mess. Politicians need to cut spending over a sustained period of time while also liberalizing the economy to create growth. And, to be fair, some of that has been happening over the past five years. But the pace has been too slow, particularly for pro-growth reforms.

But this also explains why bailouts are so misguided. Politicians generally don’t do the right thing until and unless they’ve exhausted all other options. So if the Greek government thinks it has additional access to money from other nations, that will give the politicians an excuse to postpone and/or weaken necessary reforms.

2. Saying “No” to Greece will send a powerful message to other failing European welfare states.

Now let’s get to the real issue. What happens to Greece will have a big impact on the behavior of other European governments that also are drifting toward bankruptcy.

Here’s a chart showing the European nations with debt burdens in excess of 100 percent of economic output based on OECD data. Because of bad demographics and poor decisions by their politicians, every one of these nations is likely to endure a Greek-style fiscal crisis in the near future.

And keep in mind that these figures understate the magnitude of the problem. If you include unfunded liabilities, the debt levels are far higher.

So the obvious concern is how do you convince the politicians and voters in these nations that they better reform to avoid future fiscal chaos? How do you help them understand, as Mark Steyn sagely observed way back in 2010, that “The 20th-century Bismarckian welfare state has run out of people to stick it to.

Well, if you give additional bailouts to Greece, you send precisely the wrong message to the Italians, French, etc. In effect, you’re telling them that there’s a new group of taxpayers from other nations who will pick up the tab.

That means more debt, bigger government, and a deeper crisis when the house of cards collapses.

P.S. Five years ago, I created a somewhat-tongue-in-cheek 10-step prediction for the Greek crisis and stated at the time that we were at Step 5. Well, it appears my satire is slowly becoming reality. We’re now at Step 7.

P.P.S. Four years ago, I put together a bunch of predictions about Greece. You can judge for yourself, but I think I was quite accurate.

P.P.P.S. A big problem in Greece is the erosion of social capital, as personified by Olga the Moocher. At some point, as I bluntly warned in an interview, the Greeks need to learn there’s no Santa Claus.

P.P.P.P.S. The regulatory burden in Greece is a nightmare, but some examples of red tape are almost beyond belief.

P.P.P.P.P.S. The fiscal burden in Greece is a nightmare, but some examples pf wasteful spending are almost beyond belief.

P.P.P.P.P.P.S. Since we once again have examined a very depressing topic, let’s continue with our tradition of ending with a bit of humor. Click here and here for some very funny (or sad) cartoons about Obama and Greece. And here’s another cartoon about Greece that’s worth sharing. If you like funny videos, click here and here. Last but not least, here’s some very un-PC humor about Greece and the rest of Europe.

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