Sunday, June 28, 2015

How and Why Democracies Can Fail to Function Effectively --- Lessons from Greece Concerning Government, Citizens, Economic Growth and Debt Management

Greece is the birthplace of democracy. So far, so good.

In democracies voters rule and elected politicians follow the will of the majority of voters. Sometimes that's bad.

Because sometimes following the will of the majority results in unsustainable debt burdens. As voters we like to receive goodies from government, but we don't like to pay for them. And we frequently choose not to see that when someone receives, someone else must pay.

Thus, politicians win votes by giving people what they want --- until they no longer can. That's the situation in Greece today.

Democracies can fail when their debt burdens become unmanageable and economic growth and taxes are insufficient to keep the democracy financially afloat.

Of course, over time the majority of citizens determine what happens through their behaviors and votes, but when the takers outnumber the payers, politicians invariably side with the takers. That's where the votes are, and the majority rules.

And when it gets bad enough, those citizens and companies who still have financial resources stop investing and perhaps choose to take their money and go elsewhere. Then economic growth disappears as a result of this lack of confidence and private sector investment. At this point there's no way to service the outstanding debt, let alone borrow more money. Along with the investors, the 'investing' creditors stop playing the game as well.

{NOTE: Of course, Greece isn't alone. Similar situations are beginning to play out in various cities and states in the U.S. today --- such as the cities of Chicago, Detroit and Fresno, as well as the states of Illinois, Michigan, California and elsewhere. It's also happening with our debt ridden overpromising central government with Social Security, Medicare and ObamaCare, but that's another story for another day. So let's stick with the lessons being taught by Greece herein.}

Financially, Greece has been an unmitigated economic disaster for many years. See European Central Bank Limits Aid to Greek Banks Amid Crisis.

Unemployment in Greece is ~25%, the country is bankrupt and economic growth is virtually absent. Approximately 50% of its workers are employed by the unproductive and corrupt government. It's now very much on life support from its fellow European nations. But those countries aren't exactly thriving either as France, Italy, Spain, Portugal and others make clear.

Government has been accurately described as that great fiction by which everybody attempts to live off everybody else. And governments around the world have promised their citizens benefits for which not enough money has been set aside to pay for them.

In the U.S. we call these set asides entitlements, and that's a pretty good description of what their intention is with respect to the recipients. But what about the future payers? To what are they entitled --- such as future generations of Americans?

That doesn't appear to be part of the entitlement equation or society's collective conscience, either in Greece, here or in much of the rest of the world. The parasitic politicians certainly don't worry about that 'future stuff.' They just make promises for future generations to pay --- not today's unwilling and voting taxpayers and certainly not the immediate recipients of the 'entitlements.'

Now we'll briefly look at the world as it is and not as we'd like it to be.

New Indexes Attempt to Predict Countries' Readiness for Change provides an overview of the state of the world today. While the U.S. is definitely not yet anywhere close to becoming another Greece, neither are we displaying the ability to 'skate to where the puck will be:'

"Hockey star Wayne Gretzky once said, “I skate to where the puck is going to be, not where it has been.” That is great advice for hockey players and economy-watchers alike. Yet most economic data are backward-looking. Numbers on gross domestic product and employment point to where the economic puck has been, not where it’s headed.

Analysts at KPMG International have developed annual country indexes that try to look ahead. The Change Readiness Indexes are designed to focus how well each nation is positioned to adjust to coming change, whether it is a sudden event like a tsunami or a slow-moving structural shift like an aging population.

“We built these [indexes] to be forward-looking,” said Timothy Stiles, global chair for KPMG’s International Development Assistance Services and a co-author of the report. ”We looked at the way people have to behave to make change happen” without big disruptions to the economy or society. . . .

The first is enterprise capability, which covers how the business sector and labor markets are set up for change.  Next is government capability, which includes the rule of law, regulations, fiscal planning and the relationship between the business and government sectors. Last is the people and society capability. This segment covers how engaged people are in their nation’s culture and society. People need to feel they have a stake in their society and economy, said Trevor Davies, executive director for KPMG’s IDAS Center of Excellence and another author of the report. . . .

Top 10 Nations Best Prepared to Handle Change
  1. Singapore
  2. Switzerland
  3. Hong Kong
  4. Norway
  5. United Arab Emirates
  6. New Zealand
  7. Qatar
  8. Denmark
  9. Sweden
  10. Finland
Source: KPMG International

Mr. Stiles said, “Wealthy nations are not necessarily the best able to cope with change.”. . .

What of the U.S.? It ranks No. 20 on the list of 127 nations. While the world’s biggest economy ranks high in enterprise and society inputs, it lags in the government component.

“The demographic challenges hurt the U.S.” Mr. Stiles said. “The U.S. lacks planning for the aging of its population.”

Although the coming pension burden from retiring baby boomers has been known for decades, politicians have done little to cover the liabilities ahead. In fiscal matters it seems, the U.S. is not skating to where the puck will be."

Summing Up

The world is awash in debt.

America is aging rapidly.

In much of the world, including the U.S., individuals are financially unable to take care of themselves as they enter retirement. Instead of saving for a rainy day --- they often have borrowed excessively to enjoy today.

And in similar fashion, the government sector has continued to spend money that it doesn't have. For example, 'free' schools (K-12 and college) are now too expensive, and the same thing has happened with health care and Social Security as well.

Pension and health care promises have been made to citizens by various governments throughout America, including the federal government, but not enough money has been set aside to pay for them.

Does all this sound to you a little or a lot like another Greece may be in the making? Me too.

That's my take.

Thanks. Bob.

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