Tag: Greece

Wednesday Links

‘Anarchist’ Idiocy

The Washington Post splashes a story about “anarchists” in Greece across the front page today. The print headline is “Into the arms of anarchy,” and a photo-essay online is titled “In Greece, austerity kindles the flames of anarchy.” And what do these anarchists demand? Well, reporter Anthony Faiola doesn’t find out much about what they’re for, but they seem to be against, you know, what the establishment is doing, man:

The protests are an emblem of social discontent spreading across Europe in response to a new age of austerity. At a time when the United States is just beginning to consider deep spending cuts, countries such as Greece are coping with a fallout that has extended well beyond ordinary civil disobedience.

Perhaps most alarming, analysts here say, has been the resurgence of an anarchist movement, one with a long history in Europe. While militants have been disrupting life in Greece for years, authorities say that anger against the government has now given rise to dozens of new “amateur anarchist” groups.

Faiola does acknowledge that the term is used pretty loosely:

The anarchist movement in Europe has a long, storied past, embracing an anti-establishment universe influenced by a broad range of thinkers from French politician and philosopher Pierre-Joseph Proudhon to Karl Marx to Oscar Wilde.

So that’s, let’s see, a self-styled anarchist who was anti-state and anti-private property, the father of totalitarianism, and a witty playwright jailed for his homosexuality.

Defined narrowly, the movement includes groups of urban guerillas, radical youths and militant unionists. More broadly, it encompasses everything from punk rock to WikiLeaks.

And what are these various disgruntled groups opposed to?

The rolling back of social safety nets in Europe began more than a year ago, as countries from Britain to France to Greece moved to cut social benefits and slash public payrolls, to address mounting public debt. At least in the short term, the cuts have held back economic growth and job creation, exacerbating the social pain.

And Greece is not the only place in which segments of society are pushing back.

So these “anarchists” object that the state might cut back on its income transfers and payrolls. That is, they object to the state reducing its size, scope, and power. Odd anarchists, as George Will told the crowd at the 2010 Milton Friedman Prize for Advancing Liberty dinner:

It leads to the streets of Athens, where we had what the media described as “anti-government mobs.” Anti-government mobs composed almost entirely of government employees going berserk about threats to their entitlements!

Lots of talk in the Post article about anarchists:

“They are taking everything away from us,” [19-year-old law student Nikolas] Ganiaris said. “What will happen when I finish law school? Will I only find a job making copies in a shop? Will I then need to work until I’m 70 before I retire? Will I only get a few hundred euros as pension? What future have I got now?”

A radical minority is energizing the anarchist movement, a loose network of anti-establishment groups….

Since then, experts say, the economic crisis has helped the movement thrive, with anarchists positioning themselves as society’s new avengers. Long a den of anarchists, the graffiti-blanketed Exarchia neighborhood is alive anew with dissent. Nihilist youths are patrolling the local park, preventing police from entering and blocking authorities from building a parking lot on the site. On one evening at a local cafe, an anarchist group was broadcasting anti-government messages via a clandestine radio station using a laptop and a few young recruits.

The last vignette in the story is about 20-year-old Nikos Galanos, who has joined the anarchist movement in anger over his mother’s losing her government job and his father’s being the victim of a 15 percent salary cut in his own government job.

“I don’t support violence for violence’s sake, but violence is a response to the violence the government is committing against society,” Galanos said. He later added, “It is now hard for any of us to see a future here. I feel it’s my duty to fight against the system.”

In fact, the government has been committing violence against society for decades, by taxing people, overregulating business, and spending money it didn’t have. No wonder youth unemployment is 35 percent. And what is the actual “system” that Mr. Galanos wants to fight? Greek journalist Takis Michas described it at a Cato Forum:

In Greece, the fundamental principle that has been dictating economic and political development since the creation of the Greek state in the 19th century is political clientelism.

This is a system in which political support is provided in exchange for benefits.

In this situation, rent-seeking — the attempt by various groups and individuals to influence the location of political benefits — becomes paramount. The origins of political clientelism can be traced back to the origins of the Greek state in the 1830s. As a left-wing political historian puts it, “The fundamental structure of Greece has never been civil society. Ever since the middle of the 19th century, nothing could be done in Greece without its necessarily passing through the machinery of the state.”…

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.

Real anarchists, of either the anarcho-capitalist or mutualist variety,  might have something useful to say to Greeks in their current predicament. But disgruntled young people, lashing out at the end of an unsustainable welfare state, are not anarchists in any serious sense. They’re just angry children not ready to deal with reality. But reality has a way of happening whether you’re ready to deal with it or not.

The Value-Added Tax Must Be Stopped - Unless We Want America to Become Greece

Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax revenue is needed to turn the United States into a European-style social welfare state. But that’s exactly why the VAT is a terrible idea.

I explain why in a column for Reuters. The entire thing is worth reading, but here’s an excerpt of some key points.

Many Washington insiders are claiming that America needs a value-added tax (VAT) to get rid of red ink. …And President Obama says that a VAT is “something that has worked for other countries.” Every single one of these assertions is demonstrably false. …One of the many problems with a VAT is that it is a hidden levy. …VATs are imposed at each stage of the production process and thus get embedded in the price of goods. And because the VAT is hidden from consumers, politicians find they are an easy source of new revenue – which is one reason why the average VAT rate in Europe is now more than 20 percent! …Western European nations first began imposing VATs about 40 years ago, and the result has been bigger government, permanent deficits and more debt. According to the Economist Intelligence Unit, public debt is equal to 74 percent of GDP in Western Europe, compared to 64 percent of GDP in the United States (and the gap was much bigger before the Bush-Obama spending spree doubled America’s debt burden). The most important comparison is not debt, but rather the burden of government spending. …you don’t cure an alcoholic by giving him keys to a liquor store, you don’t promote fiscal responsibility by giving government a new source of revenue. …To be sure, we would have a better tax system if proponents got rid of the income tax and replaced it with a VAT. But that’s not what’s being discussed. At best, some proponents claim we could reduce other taxes in exchange for a VAT. Once again, though, the evidence from Europe shows this is a naive hope. The tax burden on personal and corporate income is much higher today than it was in the pre-VAT era. …When President Obama said the VAT is “something that has worked for other countries,” he should have specified that the tax is good for the politicians of those nations, but not for the people. The political elite got more money that they use to buy votes, and they got a new tax code, enabling them to auction off loopholes to special interest groups.

You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

For further information on why the VAT is a horrible proposal, including lots of specific numbers and comparisons between the United States and Western Europe, here’s a video from the Center for Freedom and Prosperity.

Which Nation Will Be the Next European Debt Domino…or Will It Be the United States?

Thanks to decades of reckless spending by European welfare states, the newspapers are filled with headlines about debt, default, contagion, and bankruptcy.

We know that Greece and Ireland already have received direct bailouts, and other European welfare states are getting indirect bailouts from the European Central Bank, which is vying with the Federal Reserve in a contest to see which central bank can win the “Most Likely to Appease the Political Class” Award.

But which nation will be the next domino to fall? Who will get the next direct bailout?

Some people think total government debt is the key variable, and there’s been a lot of talk that debt levels of 90 percent of GDP represent some sort of fiscal Maginot Line. Once nations get above that level, there’s a risk of some sort of crisis.

But that’s not necessarily a good rule of thumb. This chart, based on 2010 data from the Economist Intelligence Unit (which can be viewed with a very user-friendly map), shows that Japan’s debt is nearly 200 percent of GDP, yet Japanese debt is considered very safe, based on the market for credit default swaps, which measures the cost of insuring debt. Indeed, only U.S. debt is seen as a better bet.

Interest payments on debt may be a better gauge of a nation’s fiscal health. The next chart shows the same countries (2011 data), and the two nations with the highest interest costs, Greece and Ireland, already have been bailed out. Interestingly, Japan is in the best shape, even though it has the biggest debt. This shows why interest rates are very important. If investors think a nation is safe, they don’t require high interest rates to compensate them for the risk of default (fears of future inflation also can play a role, since investors don’t like getting repaid with devalued currency).

Based on this second chart, it appears that Italy, Portugal, and Belgium are the next dominos to topple. Portugal may be the best bet (no pun intended) based on credit default swap rates, and that certainly is consistent with the current speculation about an official bailout.

Spain is the wild card in this analysis. It has the second-lowest level of both debt and interest payments as shares of GDP, but the CDS market shows that Spanish government debt is a greater risk than bonds from either Italy or Belgium.

By the way, the CDS market shows that lending money to Illinois and California is also riskier than lending to either Italy or Belgium.

The moral of the story is that there is no magic point where deficit spending leads to a fiscal crisis, but we do know that it is a bad idea for governments to engage in reckless spending over a long period of time. That’s a recipe for stifling taxes and large deficits. And when investors see the resulting combination of sluggish growth and rising debt, eventually they will run out of patience.

The Bush-Obama policy of big government has moved America in the wrong direction. But if the data above is any indication, America probably has some breathing room. What happens on the budget this year may be an indication of whether we use that time wisely.

American Taxpayers Should Not Bail Out the European Union

The fiscal disintegration of Europe is bad news, though I confess to a bit of malicious glee every time I read about welfare states such as Greece and Portugal getting to the point where they no longer have the ability to borrow enough money to finance their bloated public sectors (I have mixed feelings about Ireland since that nation at least has been a good example of low tax corporate tax rates, but I still think they should get punished for over-spending and bailouts). This I-told-you-so attitude is not very mature on my part, but one hopes that American politicians will learn the right lessons and something good will come from this mess.

I have not written much about the topic in recent months, in part because I don’t have much to add to my original post about this issue back in February. All the arguments I made then are still true, particularly about the moral hazard of bailouts and the economic damage of rewarding excessive government. So why bother repeating myself, particularly since this is an issue for Europeans to solve (or, as is their habit, to make worse)?

Unfortunately, it appears that all of us need to pay closer attention to this issue. The Obama Administration apparently thinks American taxpayers should subsidize European profligacy. Here’s a passage from a Reuters report about a potential bailout for Europe via the IMF.

The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday. “There are a lot of people talking about that. I think the European Commission has talked about that,” said the U.S. official, commenting on enlarging the 750 billion euro ($980 billion) EU/IMF European stability fund. “It is up to the Europeans. We will certainly support using the IMF in these circumstances.” “There are obviously some severe market problems,” said the official, speaking on condition of anonymity. “In May, it was Greece. This is Ireland and Portugal. If there is contagion that’s a huge problem for the global economy.”

This issue will be an interesting test for the GOP. I think it’s safe to say that the Tea Party movement didn’t elect Republicans so they could expand the culture of bailouts - especially if that means handouts for profligate European governments. Some people will argue that American taxpayers aren’t at risk because this would be a bailout from the IMF instead of the Treasury. But that’s an absurd and dishonest assertion. The United States is the largest “shareholder” in that international bureaucracy, and there’s no way the IMF can get more involved without American support.

In some sense, this is a corporatism vs. free markets battle for Republicans. Big banks and Wall Street often support bailouts since they like the idea of somebody else saving them from their bad investment decisions (though American financial institutions fortunately are not as exposed as their European counterparts). Economists despise bailouts, by contrast, since they subsidize risky choices and lead to the misallocation of capital.

Which side is John Boehner on? Or Mitch McConnell? And what about Mitt Romney, or Mike Huckabee?

Fannie Mae and Greece’s Problems Enabled by Basel

On the surface the failures of Fannie Mae and Freddie Mac would appear to have little connection to the fiscal crisis in Greece, outside of both occurring in or around the time of a global financial crisis.  Of course in the case of Fannie and Freddie, primary blame lies with their management and with Congress.  Primary blame for Greece’s problems clearly lies with the Greek government. 

Neither Greece or Fannie would have been able to get into as much trouble, however, if financial institutions around the world had not loaded up on their debt.  One reason, if not the primary reason, for bailing out both Greece and the US’s government sponsored enterprises is the adverse impact their failures would have on the banking system.

Yet bankers around the world did not blindly load up on both Greek and GSE debt, they were encouraged to by the bank regulators via the Basel capital standards.  Under Basel, the amount of capital a bank is required to hold against an asset is a function of its risk category.  For the highest risk assets, like corporate bonds, banks are required to hold 8%.  Yet for those seen as the lowest risk, short term government bonds, banks aren’t required to hold any capital.  So while you’d have to hold 8% capital against say, Ford bonds, you don’t have to hold any capital against Greek debt.  Depending on the difference between the weights and the debt yields, such a system provides very strong incentives to load up on the highest yielding bonds of the least risky class.  Fannie and Freddie debt required holding only 1.6% capital.  Very small losses in either Greek or GSE debt would cause massive losses to the banks, due to their large holdings of both.

The potential damage to the banking system from the failures of Greece and the GSEs is not the result of a free market run wild.  It was the very clear and predictable result of misguided and mismanaged government policies meant to create a steady market for government borrowing.

The Welfare State, Taken to Its Logical Conclusion

The economic tragedy unfolding in Greece is the welfare state taken to its logical conclusion.  When groups of people use the state to live at the expense of others, the feedback loop about the costs of those transfers is attenuated – often by design.  The welfare state therefore makes commitments that it cannot honor.  By the time creditors or taxpayers say, “Enough,” the welfare state has created a clash between expectations and means that leads to unrest and hardship – a clash that never had to occur.

Reuters reports that this tragedy is playing itself out in Canada, where the Medicare system is straining the budgets of taxpayers and provincial governments – even as Canada remains infamous for providing inadequate access to care.  According to Reuters, the provincial government in populous Ontario predicts that “health care could eat up 70 percent of its budget in 12 years, if all these costs are left unchecked.”  Toronto-Dominion Bank senior economist at Derek Burleton remarks:

There’s got to be some change to the status quo…We can’t continually see health spending growing above and beyond the growth rate in the economy because, at some point, it means crowding out of all the other government services.  At some stage we’re going to hit a breaking point.

The provinces are contemplating measures that would further reduce access, such as ratcheting government price controls downward, “health taxes” on medical services, and (gasp!) charging patients. (Speaking of feedback loops, an economist at Scotia Capital reasons that patients “will use the services more wisely if they know how much it’s costing…If it’s absolutely free with no information on the cost and the information of an alternative that would be have been more practical, then how can we expect the public to wisely use the service?”)

The Greek and Canadian dramas are a preview of what the welfare state, aided by its most recent expansion, will provoke here in the United States.  Again, Reuters:

Canada, fretting over budget strains, wants to prune its system, while the United States, worrying about an army of uninsured, aims to create a state-backed safety net.

Burleton captures the problem nicely:

[F]rom an economist’s standpoint, we point to the fact that sometimes Canadians in the short term may not realize the cost.

Indeed, that’s the very essence of the welfare state, and why its logical outcome is crisis.