Wednesday, February 15, 2012

America's Future ... Pogo's View

Greece has a story to tell us. Will we listen to what Greek Economy Shrinking Rapidly has to say?

And if we won't listen to Greece, then how about Portugal, Spain, Italy, France or England?

The story is a simple one. European style welfare states based on Keynesianism and big government aren't sustainable over time.

In the U.S., we have a broken government. Democrats want to fix our problems by taxing the few, aka rich people, to pay for all the promises our government has made to everybody. That won't work, because the rich don't have enough money to pay for everything our government has promised.

But even if they did, at some point they'd quit playing this silly game of redistribution. Then there would be nothing left for government officials to redistribute. We all know that.

{For a brief but refreshing tale of redistribution, fairness, beer drinking, friendship and free choice, please refer to the earlier posting dated August 28, 2011 titled "A Story About Normative Economics and Taxes." The story of the beer drinking buddies is one of my favorites.}

In any event, U.S. politicians of both parties are fearful of advocating seriously less entitlement spending or seriously higher across-the-board taxes, or both. And too many voters are willing to ignore reality for as long as possible, so we continue not to see the elephant in the room.

As mentioned, Democrats defend the welfare state as it exists currently, and they propose to tax those individuals earning more than $200,000 annually to pay for it. Of course, this wouldn't come close to closing the gap between government spending and receipts, which the Democrats very well know, but the Robin Hood approach sounds good and may win the Dems enough votes this fall in the 2012 election. So they propose to keep the entitlements and taxes for the vast majority of Americans as they currently exist. As a result, annual trillion dollar deficits and growth in the national debt will continue indefinitely under the president's plan. Just like European countries have done.

Similar to Democrats, Republicans plan to keep the welfare state largely intact, and especially its entitlement programs such as Medicare, Medicaid and Social Security. And, like the Democrats, neither do these Republicans propose a broad based tax increase to properly pay for these entitlements.

Of course, something has to give. The only question is when.

We can't grow the economy sufficiently with large tax increases, and so we can't get our financial house in order without curtailing entitlements spending. Accordingly, neither party is showing us a credible way to rein in annual trillion dollar budget deficits and corresponding increments of debt as far as the eye can see.

Looking at today's Greece saga, Pogo says he's seen the U.S. future if we the people don't cause our U.S. politicians to start acting as grownups. He advises us to look at Greece and see how bad it will get if we don't get our act together someday soon.

The Chaos of Greece says much about the lessons of the Greek drama. See if you can recognize the various U.S. counterparts to the Greek actors. It won't be hard to do:

"When it comes to naming the bad guys in this Greek tragedy, the net can be cast very widely. Both leading political parties acquitted themselves dishonorably, one by lying about the country's fiscal position, the second by failing to do much about it. The country's government unions have resisted every serious reform and paralyzed the economy with strikes. An anarchist movement with an appetite for destruction rarely misses an opportunity to feast on mass discontent.

Greeks themselves seem unable to choose between taking another bailout and adopting austerity, or abandoning the euro and accepting the consequences of default. It's so much more convenient to blame foreign creditors ("thieves") for demanding repayment of loans that funded the lavish welfare benefits Greeks could never have afforded on their own. And when that fails, blame the Germans for being such demanding paymasters.

To top it off, the technocrats in Brussels and at the IMF have misdiagnosed the crisis from the beginning. First, they thought Athens had a liquidity problem that could be eased by large infusions of loans, rather than a fundamental solvency problem. Second, they believed that what Athens needed most was a balanced budget and a smaller debt load, to be solved arithmetically with less spending and higher taxes. But Greece's real problem is the lack of economic growth, itself a product of policies that discourage private enterprise. That's why Greece ranks 100th on the World Bank's most recent rankings of "ease of doing business"—right behind Yemen. . . .

But the crisis will not end until Greeks understand that they must live off what they produce, and adopt the policies that enable them to produce more. The larger question is whether the rest of Europe and America will learn from Greece's chaos before they experience the same fate."

An even more compelling description of Greece's drama and its larger significance is contained in this excerpt from Fear and Loathing In Athens:

"Yet Athens is filled with a broader sense of dilapidation. On some blocks every other storefront is shuttered, victims not of vandalism but five years of economic contraction. Official unemployment in Greece stands at 21%, and as part of the measures passed Sunday, the government plans to cut 150,000 public-sector jobs over the next few years.
Whether those cuts will come to pass remains to be seen; so far the Greek government has failed to deliver on the comparatively moderate cuts of some 30,000 public employees it promised in 2010.

For years, Greece has been living beyond its means, engaged in a kind of accidental experiment in Keynesianism on steroids: Overpaid public employees helped lift the income of the entire country for years, their paychecks covered by money borrowed cheaply from abroad after Greece's entry into the euro in 2001.

This borrowed money, which also went to support the incomes of those on unemployment or state pensions, drove up demand without increasing productivity or production in Greece. Rather, it had something of the opposite effect by driving up wages across the economy and creating an illusory sort of prosperity.

Between 2000 and 2008, Greece's nominal private-sector labor costs rose an astonishing 62%, compared to 15% in Germany over the same period. And that income was only one side of the ledger—the other half was the debt that Greece is now desperately trying to shed.

Politically, Greece's problem is that the population still doesn't understand the extent to which economic activity in recent years was driven by the government spending borrowed money. At the time, the borrowing was largely invisible because the average Greek didn't bear the cost—and until late 2009 the government was covering up the extent of its borrowing. But now the end of the party is all too visible and painful.

The Greeks burning down shops and breaking windows feel they're having something taken away from them. But they have the wrong baseline. The reality is that for years they enjoyed a prosperity they borrowed rather than earned. The come-down from that was never going to be easy. As government stimulus is withdrawn, incomes will have to fall or productivity to rise to make up the difference.

More than anything else, the percentage of Greeks employed by the state, rather than by the private sector, will have to fall dramatically. About one-third of the Greek work force is now in the public sector, and everyone else in the country has to work that much harder, or pay more in taxes, to support those payrolls."

The lesson from Greece is simple. Government doesn't produce; it only takes and redistributes part of what the private sector produces. When the private sector can't produce enough to sustain that government's spending, government borrows. Later when creditors become unwilling to loan money at low rates of interest, the economy weakens and austerity measures are required. When austerity kicks in, the economy weakens further. As the economy becomes even weaker, more people suffer and people already suffering suffer even more. It starts with the poor and goes from there. The downward spiral continues unless and until the private sector resumes growth. The situation becomes uglier each day. People lose hope. Then the riots, burning and looting begin.

How long before that could happen here? Pogo suggests that we not take the time to wait around and see. He further suggests that we learn from the Greeks and begin to stress small government and a strong private sector jobs creating machine. Finally, he urges us to look carefully at what we're doing and resolve to live within our means.

If we don't produce something of value, we can't afford to consume that which we have yet to produce. Other than by borrowing, of course. In that regard, Greece teaches that too much borrowing is extremely dangerous to a nation's health.

To quote Edward R. Murrow, a likely follower of Pogo, "The obscure we see eventually. The completely obvious, it seems, takes longer."

Well, many of us in the U.S. are now able to see the completely obvious. Let's hope that our fellow Americans are seeing that same reality and its causes.

As they do, the politicians will get the message that we've gotten the message. Then they'll begin to act as grownups. Or we'll show them the door.

Pogo was right. We are our own worst enemy.

Thanks. Bob.

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