Sunday, July 5, 2015

The Greeks Vote 'No' on Their Future ... No Lasting Solution Is in Sight ... In America Several Similar Stories Are Unfolding ... Such as Puerto Rico

The financially bankrupt Greeks voted 'No' on their future today.

{NOTE: They had no good options, but a solid majority voted 'No' and chose the worse one for themselves and their country. See First Official Projection Says at Least 61% of Greeks Voted 'No' in Referendum. Oh well, such is life.}

In any event, Greece remains largely a failed state dominated by the public sector. Its government has grown too big, borrowed too much, spent recklessly and favored passing out vote getting public sector goodies over encouraging private sector investments and productivity improvements.

If that sounds to you like many government entities throughout the U.S. such as Illinois, Chicago, Michigan, Detroit, California, Fresno, Stockton and countless other U.S. government entities, it should. That's because it's true.

So now let's turn to what's happening in our own U.S. backyard, Puerto Rico --- the failed welfare state which, like Greece, for far too long has lived far beyond its means.
America's Greece offers this fact based commentary:

"The Obama Administration is delighted to tell everyone that Greece isn’t America’s problem, but hold the schadenfreude. The U.S. has its own version of Greece in Puerto Rico, and the meltdown could be nearly as ugly when it arrives.

Puerto Rico Governor Alejandro Garcia Padilla this week admitted the open secret that the territory’s $72 billion debt “is not payable.” Europeans will notice the Greek-like reasons: excessive borrowing, anti-growth policies, human and capital flight, and the refusal of local politicians to address the failure of entitlement state politics. Oh, and don’t forget the policy damage from Washington.

Puerto Rico’s economy has been contracting for nearly a decade, and employment has shrunk by 14% since 2005. Its 12.4% jobless rate would be higher if not for its astonishing 40% labor participation rate, compared to 63% nationwide. The island’s population has declined by roughly 300,000 in a decade as young people flee to the mainland, where they can work as U.S. residents.

For those who stay, rich welfare benefits provide a disincentive to work. A household of three can receive $1,743 per month in food stamps, Medicaid, utility subsidies and welfare compared to minimum-wage take-home pay of $1,159. Employers are required to provide 15 days of vacation and 12 sick days annually and a $600 Christmas bonus. Government employees make up a quarter of the island’s workforce.

To pay for all this, politicians have borrowed and taxed to the limit. Public debt has tripled since 2000 and exceeds 100% of gross national product. In 2006 the territory instituted a 7% sales tax, which this year was raised to 11.5% and next year will become a value-added tax. Since 2013 Mr. Padilla Garcia has raised the petroleum tax to $15.50 from $3 per barrel, imposed a 1% tax on insurance premiums and the gross income of financial institutions, and increased sewage rates by 60%.

Puerto Rican officials like to blame destructive Washington policies, and they have a point. The U.S. minimum wage is a killer for a territory with relatively low labor productivity. A 1992 study from the National Bureau of Economic Research found that Congress’s 1974 minimum wage hike reduced Puerto Rican employment by 8% to 10% compared to what it otherwise would have been.

Yet in 2007 Congress raised the minimum wage to $7.25 in 2009 from $5.15 amid the recession....

Puerto Rican politicians exaggerate the impact of the island’s manufacturing tax credit phaseout in 1996. But they are right to blame the 1920 Jones Act, which requires goods transported between U.S. ports to be on ships manned and constructed by American workers. This raises the cost of imported petroleum, the island’s main energy source. Electric rates are twice the U.S. average....

The island has made some reforms at the margin, including a 10% cut in the public workforce and a pension reform. But the government and most of its public agencies are still running deficits with liquidity crises looming. All three public pension funds, which are $34 billion in the red, will run dry by 2020. . . .

The upshot is American Greece. The territory can’t finance its current expenses much less its debt, while ever-higher taxes punish the growth essential to revival. . . .

U.S. states can’t declare bankruptcy, but this constitutional constraint doesn’t apply to Puerto Rico since Article 4 gives Congress the “Power to dispose of and make all needful Rules and Regulations” of territories. . . .

But Puerto Rico also needs a wholesale political restructuring, not a mere debt rescue. Detroit’s bankruptcy provides a model for how Chapter 9 can help a basket case. Steered by emergency manager Kevyn Orr, the city used bankruptcy to rewrite labor contracts, trim pensions, restructure public agencies and reinvest in services like public safety. . . .

Hillary Clinton tweeted the other day that Puerto Rico needs “real tools & real support,” which suggests she thinks this will help her with the Hispanic vote. OK, Madam Candidate, how about an exception to the Jones Act and minimum wage?"

Summing Up

Let's hope enough of We the People awaken to the damage being done by our government 'helpers' who borrow and spend money we don't have.

And let's also hope that public sector unions are recognized by enough of We the People for what they are --- self interested proponents and advocates of big government and ever higher taxes.

And while we're hoping, let's also wish that future government spending increases are essential, productive investments and matched by taxes instead of piling on additional borrowing.

Private sector growth and investment will provide the only viable solution.

Meanwhile, the current out-of-control government spending is an enormous problem in need of a solution.

Greece's problems aren't going away. Their financial problems are only going to get worse -- a whole lot worse.

Neither will the financial problems of the various other government gone wild entities, both throughout America and the rest of the world, disappear anytime soon.

In the meantime, let's hope the politicians don't make them worse than they already are.

That's my take.

Thanks. Bob.

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