Tag: Greece

Two Pictures that Perfectly Capture the Rise and Fall of the Welfare State

In my speeches, especially when talking about the fiscal crisis in Europe (or the future fiscal crisis in America), I often warn that the welfare state reaches a point of no return when the people riding in the welfare wagon begins to outnumber the people pulling the wagon.

To be more specific, if more than 50 percent of the population is dependent on government (employed in the bureaucracy, living off welfare, receiving public pensions, etc.), it becomes difficult for taxpayers to form a majority coalition to fix the mess. This may explain why Greek politicians have resisted significant reforms, even though the nation faces a fiscal death spiral.

But you don’t need me to explain this relationship. One of our Cato interns, Silvia Morandotti, used her artistic skills to create two images (click pictures for better resolution) that show what a welfare state looks like when it first begins and what it eventually becomes.

The welfare state starts with small programs targeted at a handful of genuinely needy people. But as  politicians figure out the electoral benefits of expanding programs and people figure out that they can let others work on their behalf, the ratio of producers to consumers begins to worsen.

Eventually, even though the questionable beneficiaries should realize that it’s not in their interest to over-burden the people pulling the wagon, the entire system breaks down.

Then things get really interesting. Small nations like Greece can rely on bailouts from bigger countries and the IMF, but sooner or later, as larger nations begin to go bankrupt, that approach won’t be feasible.

I often conclude my speeches by joking with the audience that it’s time to stock up on canned goods and bottled water. Many people, I’m finding, don’t think that line is very funny.

Beware of Greeks Demanding Gifts

Our friend Alberto Mingardi of the Bruno Leoni Institute in Italy writes about the Greek crisis:

In a way, the most surprising element of the Greek disaster is that taxpayers in other European countries aren’t outraged at being called to rescue an economy that has been marching towards disaster for so long.

The legitimate fear of contagion affecting other European countries is now being used to persuade the electorates outside Greece that: first, Greece has not manufactured its own fate, but is rather the victim of “locust-like” speculators and, second, a Greek bailout would be an indictment of the European social model, that is, the welfare state.

Where European public opinion is collapsing under its contradictions is in the attempt to reconcile the idea of the EU as the ultimate policeman of public finance with the ideological need to save the “European social model” no matter what. If the European Union has long been a major catalyst for reform in member states, it seems inappropriate that it now aims to artificially remove the ultimate incentive for fiscal wisdom: the possibility of a sovereign default. The problem of “moral hazard” should not be considered the exclusive preserve of too-big-to-fail banks; countries can suffer from it, too.

At two Cato forums last year Simeon Djankov, Steve Hanke, and Takis Michas discussed the background of the Greek crisis. Partial transcript here. Video here and here. Michas blamed the problems on “clientelism,” which he described as “a system in which political support is provided in exchange for benefits…. The largest part of public expenditure was directed, not to public works or infrastructure, but to the wages of public service workers and civil servants…. What makes the case of Greece interesting is that Greece can be said, in a certain sense, to provide the perfect realization of the left’s vision of putting people above markets. Greek politicians have always placed people (their clients) above markets, with results we can all see today.”

Dan Mitchell said “I told you so” about the failure of the previous Greek bailout. My thoughts on the Greek “anarchists” demanding a continuation of government subsidies here. And here’s a comparison between the Greek and U.S. debt problems.

Should American Taxpayers Finance another Big Fat Greek Bailout?

It appears that American taxpayers are about to subsidize another Greek bailout (via the Keystone Cops at the IMF). This is way beyond economically foolish. It is also morally offensive.

To turn Winston Churchill’s famous quote upside down, “Never have so many paid so much to subsidize such an undeserving few.”

Let’s start with a few facts:

  • Greece’s GDP is roughly equal to the GDP of Maryland.
  • Greece’s population is roughly equal to the population of Ohio.
  • Despite that small size, in both terms of population and economic output, Greece already has received a bailout of about $150 billion (actual amount fluctuates with the exchange rate).
  • Don’t forget the indirect bailout resulting from purchases of Greek government bonds by the European Central Bank.
  • Now Greece is angling for another bailout of about $150 billion.

Is there any possible justification for throwing good money after bad with another bailout? Well, if you’re a politician from Germany or France and your big banks (i.e., some of your major campaign contributors) foolishly bought lots of government bonds from Greece, the answer might be yes. After all, screwing taxpayers to benefit insiders is a longstanding tradition in Europe.

But from a taxpayer perspective, either in Europe or the United States, the answer is no. Or, to be more technical and scientific, the answer is “Heck no, are you friggin’ out of your mind?!”

Consider these fun facts from a recent column by John Lott and then decide whether the corrupt politicians of Greece (and the special interest groups that receive handouts and subsidies from the Greek government) deserve to have their hands in the pockets of American taxpayers:

Despite Greece’s promises, government spending is up over last year’s already bloated levels, the deficit is bigger than ever, and it has utterly failed to meet the promised sell-off of some government assets. Not a single public bureaucrat has been laid off so far. …Greece can pay off €300 of the €347 billion debt by selling off shares the government owns in publicly traded companies and much of its real estate holdings. The government owns stock in casinos, hotels, resorts, railways, docks, as well as utilities providing electricity and water. But Greek unions fiercely oppose even partial privatizations. Rolling blackouts are promised this week to dissuade the government from selling of even 17 percent of its stake in the Public Power Corporation. …Greeks apparently believe that they have Europe and the world over a barrel, that they can make the rest of the world pay their bills by threatening to default. Greece’s default would be painful for everyone, but for Europe and the United States, indeed for the world, the alternative would be even worse. If politicians in Ireland, Portugal, Spain, Italy, and other countries think that their bills will be picked up by taxpayers in other countries, they won’t control their spending and they won’t sell off assets to pay off these debts. Countries such as Greece have to be convinced that they will bear a real cost if they don’t fix their financial houses while they still have the assets to cover their debts. …The real problem is the incentives we are giving to other countries. We have to make sure that “Kicking the can down the road” isn’t an option.

Just for good measure, here are a few more interesting factoids in a Wall Street Journal column by Holman Jenkins.

[Greece is] one of the most corrupt, crony-ridden, patronage-ridden, inefficient, silly economies in Christendom. …The state railroad maintains a payroll four times larger than its ticket sales. When a military officer dies, his pension continues for his unwed daughter as long as she remains unwed. Various workers are allowed to retire with a full state pension at age 45.

To be blunt, Greek politicians have miserably failed. Wait, that’s not right. You can’t say someone has failed when they haven’t even tried. Let’s be more accurate and say that Greek politicians have succeeded. They have scammed money from taxpayers in other nations to prop up a venal and corrupt system of patronage and spoils. Sure, they’ve made a few cosmetic changes and trimmed around the edges, but handouts from abroad have enabled them to perpetuate a bloated state. And now they’re using a perverse form of blackmail (aided and abetted by big banks) to seek even more money.

Let’s now re-ask the earlier question: Should American taxpayer finance the corrupt big-government policies of Greece?

  • Or perhaps we should think like economists, so let’s rephrase the question: Should we misallocate capital so that funds are diverted from private investment to corrupt Greek politicians?
  • Or maybe we should think like parents who have to worry about spoiling a child and the signal that sends to the other kids, so let’s ask the question this way: Should we encourage bad behavior in Spain, Italy, Portugal, etc, by giving another bailout to Greece’s corrupt politicians?
  • Or should we think about this issue from the perspective of addiction counselors and rephrase the question: Should we reward self-destructive behavior by providing more money to corrupt political elites in Greece?
  • Or how about we think like moral human beings, and ask the real question: Should we take money from people who earned it and give it to people who think they are entitled to live at the expense of others?

Since we paraphrased Churchill earlier, let’s answer these questions by butchering Shakespeare: “A bailout from every angle would smell to high Heaven.”

I wrote back in February of 2010 that a Greek bailout would be a mistake and every development since that time has confirmed that initial commentary.

But that doesn’t matter. Politicians have a different way of looking at things. They look at a policy and wonder whether it increases their power and generates campaign contributions. And when you understand their motives, you begin to realize why they will answer yes to the previous set of questions.

Block-Granting Medicaid Is a Long-Overdue Way of Restoring Federalism and Promoting Good Fiscal Policy

This new video, based in large part on the good work of Michael Cannon, explains why Medicaid should be shifted to the states. As I note in the title of this post, it’s good federalism policy and good fiscal policy. But the video also explains that Medicaid reform is good health policy since it creates an opportunity to deal with the third-party payer problem.

One of the key observations of the video is that Medicaid block grants would replicate the success of welfare reform. Getting rid of the federal welfare entitlement in the 1990s and shifting the program to the states was a very successful policy, saving billions of dollars for taxpayers and significantly reducing poverty. There is every reason to think ending the Medicaid entitlement will have similar positive results.

Medicaid block grants were included in Congressman Ryan’s budget, so this reform is definitely part of the current fiscal debate. Unfortunately, the Senate apparently is not going to produce any budget, and the White House also has expressed opposition. On the left, reducing dependency is sometimes seen as a bad thing, even though poor people are the biggest victims of big government.

It’s wroth noting that Medicaid reform and Medicare reform often are lumped together, but they are separate policies. Instead of block grants, Medicare reform is based on something akin to vouchers, sort of like the health system available for Members of Congress. This video from last month explains the details.

In closing, I suppose it would be worth mentioning that there are two alternatives to Medicaid and Medicare reform. The first alternative is to do nothing and allow America to become another Greece. The second alternative is to impose bureaucratic restrictions on access to health care—what is colloquially known as the death panel approach. Neither option seems terribly attractive compared to the pro-market reforms discussed above.

Friday Links

  • “PBS used to ask, ‘If not PBS, then who?’ The answer now is: HBO, Bravo, Discovery, History, History International, Science, Planet Green, Sundance, Military, C-SPAN 1/2/3 and many more.”
  • “The fiscal problem that is destroying U.S. economic confidence is not the fiscal balance, however. It is the level of government expenditures relative to GDP.”
  • “The Pentagon’s first cyber security strategy… builds on national hysteria about threats to cybersecurity, the latest bogeyman to justify our bloated national security state.”
  • How ‘secure’ do our homes remain if police, armed with no warrant, can pound on doors at will and, on hearing sounds indicative of things moving, forcibly enter and search for evidence of unlawful activity?”
  • National debt is driving the U.S. toward a double-dip recession

The “I-Told-You-So” Blog Post about the Completely Predictable Failure of the Greek Bailout

Way back in February of 2010, I wrote that a Greek bailout would be a failure. Not surprisingly, the bureaucrats at the International Monetary Fund and the political elite from other European nations ignored my advice and gave tens of billions of dollars to Greece’s corrupt politicians.

The bailout happened in part because politicians and international bureaucrats (when they’re not getting arrested for molesting hotel maids) have a compulsion to squander other people’s money. But it also should be noted that the Greek bailout was a way of indirectly bailing out the big European banks that recklessly lent money to a profligate government (as explained here).

At the risk of sounding smug, let’s look at my four predictions from February 2010 and see how I did.

1. The first prediction was that “Bailing out Greece will reward over-spending politicians and make future fiscal crises more likely.” That certainly seems to be the case since Europe is in even worse shape, so I’ll give myself a gold star.

2. The second prediction was that “Bailing out Greece will reward greedy and short-sighted interest groups, particularly overpaid government workers.” Given the refusal of Greek politicians to follow through with promised cuts and privatizations, largely because of domestic resistance, it seems I was right again. As such, I’ll give myself another pat on the back.

3. My third prediction was that “Bailing out Greece will encourage profligacy in Spain, Italy, and other nations.” Again, events certainly seem to confirm what I warned about last year, so let’s put this one in the win column as well.

4. Last but not least, my fourth prediction was that “Bailing out Greece is not necessary to save the euro.” Well, since everybody is now talking about two possible non-bailout options—either a Greek default (a “restructuring” in PC terms) or a Greek return to using the drachma—and acknowledging that neither is a threat to the euro, it seems I batted 4-4 in my predictions.

But there’s no reward for being right. Especially when making such obvious predictions about the failure of big-government policies. So now we’re back where we were early last year, with Greece looking for another pile of money. Here’s a brief blurb from Reuters.

The European Union is racing to draft a second bailout package for Greece to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday.

If this second bailout happens (and it probably will), then I will make four new predictions. But I don’t need to spell them out because they’ll be the same ones I made last year.

We’ve reached the lather-rinse-repeat stage of fiscal collapse for the welfare state.

Wednesday Links