May 17, 2010

Greece: Coming Attractions?… Or Wake-Up Call?

by Hal Gershowitz

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It is not the magnitude of the rapidly collapsing Greek economy that should concern us in America.  It is, rather, that Greece is unquestionably the proverbial canary in the coal mine that should have the American ruling class burning the midnight oil to extract us from the mess they and their predecessors have created for us.  Instead, our government is ignoring the warning from the dead canary and even the waning peeps from the other moribund canaries in the coal mine.

The liberal left in America, along with conservatives in name only, has flirted with the European economic welfare paradigm for years and now we have an Administration that has morphed that flirtation into a full blown love affair.  Greece, which has spent itself into oblivion providing unsustainable benefits (mostly to ever-growing public payrollers) is, we are told, an aberration and the Administration will, no doubt, say the same thing about Portugal and Italy and Ireland too.  But then we have Spain and Great Britain and even France (and let’s not forget Iceland) staggering down the same path toward economic never-never land, all suffering from the same delusional affliction that is now being pursued with gusto by our ruling class…the belief that we can best improve life for all Americans, nearly half of whom pay no taxes, by raising taxes on the declining number of Americans who do.

The left has always believed that prosperity is something that can be bought through government taxation of society’s income, rather than something that is simply a by-product of society’s productivity.  Let us say it again.  Government cannot create sustainable wealth or prosperity.  Only the people, individually and through the commercial and industrial institutions they create, can do that.

Healthy societies are growing societies that earn the means (the capital) for reinvestment in continued health and growth.  In this process of market-driven growth everyone who participates eventually prospers. Healthy societies are not those such as we are witnessing in Europe, whose earnings are sucked dry by government for redistribution to accomplish objectives as dictated by government planners.   Yet it is this withering European model that our current Administration and its congressional majority have embraced, notwithstanding the warnings screaming at us from across the Atlantic and throughout nearly every precinct in America.  President Obama has stated, unambiguously, that he personally believes that at some level of income no one needs to earn any more, presumably the point at which government should take the balance for redistribution. He acknowledged, however, that this view was, “not the American way.”

While there are structural differences between the debt-laden welfare states of Europe and America, there are very frightening similarities between the course we are now pursuing and the course that has brought so much of Europe to such sorry circumstance.  The primary difference, of course, is that Euro-denominated states cannot monetize the burgeoning debt created by their own individual budget deficits.  That is, they do not have the ability to devalue a national currency as we can by printing more of it.  That is because the twenty-seven Euro countries are all yoked to the Euro.   That said, the problem being experienced in Europe is not, at its core, currency driven.  It is caused by excessive overborrowing to support programs that cannot be paid for from current revenue, which results in accumulated debt that cannot be retired through economic growth because the debt service burdens consume the capital which would otherwise be available to create that growth.

Greece, like the other PIGS countries (Portugal, Italy, Ireland and Spain) as well as Great Britain, France and Iceland got into so much hot water (or red ink) by spending (and committing to spend in the future) far more money than their already high tax rates could fund, so they borrowed with the same abandon that the United States is now funding its commitments.  They, like the United States, have turned time and time again to taxes and debt to stay afloat but never to sustained reductions in spending.  Never, of course, is a very long time and, in Europe, time has finally run out.  The creditor nations (or, we should say, the central banks of the creditor nations) have had enough and severe spending cuts are being imposed on Greece, as they surely will be on the other high spending countries of the EU if defaults on national debt are to be avoided.

One in three Greeks work for the government and they enjoy higher wages and better benefits than their countrymen working in the private sector.  The people who have been manning the barricades and rioting in Greece are not primarily the unemployed or under employed. To the contrary, they are the well and very securely employed and many are eligible to retire after 35 years of service at eighty percent of their highest salary after which they continue to be eligible for government paid health plans and other perks.  The reality is that they are being paid with money their government doesn’t have and can no longer borrow.  That is the real cause of the violent backlash to the bitter medicine the creditor nations are requiring of Greece and soon will be requiring of the other newly debt-burdened nations of Europe.  It is also ironic that it is government employees who are rioting against the government they serve, in opposition to the consequences of the policies they themselves put in place.

Perhaps, we in America shouldn’t be too hasty in our criticism of Greece (or the other PIGS) and its bloated public payroll.  The American taxpayer is funding quite a public sector gravy train too.  Federal, state and municipal payrolls have actually increased during the recession both in numbers employed and wages paid.  To make it worse, President Obama announced last week a program to make it easier to apply for and land a government job.  His objective, he says, is parity with the private sector.  However, recent data shows that the average public employee in America already earns significantly more than his private sector counterpart.  Real wages are significantly higher in the public sector and public sector benefits are exceedingly higher than private sector benefits.

Private sector wages and benefits must ultimately come from the income of private enterprises.  Public sector wages and benefits come primarily from the taxes paid by private sector employees and the companies that employ them.  We certainly don’t begrudge paying anyone an honest day’s pay for an honest day’s work whether they work in the public or the private sector.  But we certainly understand the palpable angst in the country engendered by an ever-growing and over-reaching public sector.

There was a time when most people understood that public sector jobs that were funded by private sector taxes may not have paid quite as well as private sector jobs, but that the benefits were generally more attractive.   Federal employees earn thirteen days of vacation leave a year for the first three years of service, twenty days a year for the next twelve years and twenty-six days a year after fifteen years of service.  And that is in addition to thirteen days of sick leave each year.  Today, however, those same federal employees are, according to the Bureau of Labor Statistics, on average, also earning significantly more in wages for doing comparable work and the federal payroll has also been expanding throughout the recession while virtually all sectors among private enterprises have been contracting.

The same phenomenon is taking place on the local level as well, where public employee unions have negotiated for early retirement and lifetime pensions and health benefits which have exhausted state and municipal budgets and sent government officials scurrying to enact new taxes and to charge new and increased fees on almost every municipal service.  Park in front of your own home…pay the government; plant a tree…pay the government; need a bag to carry your groceries…pay the government.

Someone once said that nothing and no one is all bad.  And we suppose we can find some good in the debacle unfolding in Greece and elsewhere in Europe.  It is, after all, an incredibly fortuitous wake-up call for America.  As Yogi Berra once said, “when you come to a fork in the road…take it.”  We are at Yogi’s fork in the road.  Our public debt (on-balance sheet debt) does not yet mirror that of Greece (114% of GDP) or the other PIGS of Europe.  Our consolidated obligations, however,  (public debt added to our unfunded liabilities and the public debt and unfunded liabilities of our states and municipalities) are astronomical.  The federal unfunded liabilities alone stand at just under $110 trillion, or many times more than our entire GDP.

With the price of an ounce of gold having now broken through the $1200 threshold and with the EU’s leaders having just announced a $1 trillion rescue package to help steel world financial markets against blow-back from the mess in Greece, we in America must stop and reassess what we are doing and where we are going.  We have to slash every dime of unnecessary spending.  Even our own Secretary of Defense has urged cutting back on the substantial bloat in defense spending. Every other agency should do the same.

Perhaps, most importantly, we need seriously to think anew about which needs in our daily lives are personal responsibilities and which are the roles of government. In other words, we need seriously to reconsider the very essence of America’s social contract.  Expanding government’s role in health care, and mandating expanded Medicaid costs to states, many of which already have busted budgets, attempting to control through regulation, and yet new taxes, the wax and wane of climate change, turning a blind eye toward skyrocketing pork and earmarks, rapidly expanding the federal payroll and spending trillions to stimulate an economy that just needs the federal government to get out of its way does not augur well for the economic health of the country.

We should stop and rethink raising taxes that will retard economic growth and reduce individual initiative and productivity.  We have no chance of avoiding a PIGS type debt crisis without sustained robust economic growth. Capital formation and investment should be encouraged, yet we are about to raise tax rates on capital appreciation. Corporations should be encouraged to distribute dividends from earnings beyond that which is needed to fund growth, yet we are about to triple the tax rate on distributed dividends (even though earnings from which dividends are paid are already fully taxed at corporate tax rates). Everyone should pay a fair tax, yet nearly half of our tax filers pay no taxes at all, and those who pay the most are about to have their taxes raised.  Our unfolding tax policy may be good for those engaged in cultivating class warfare, but it will not be good for the American economy since it will suck finite resources from those people and businesses upon whom we must rely for that very growth.  Ultimately, this boils down to a political decision.  If Americans want everything from government, then the price will be paid in both diminished American growth and economic power.  We simply cannot have it both ways.  Reality has caught up with smoke and mirrors and the proverbial piper is knocking on the door and demanding to be paid.

Greece and the other PIGS of Europe needn’t foreshadow America’s coming attractions. What is currently unfolding across the Atlantic needn’t be a prediction of what is soon going to happen here.  Greece may well be the economic Dunkirk of 21st century Europe.  We should make sure it is a morning wake-up call for America and not a national nightmare.

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