“Death by a Thousand Cuts”

Sydney M. Williams

Thought of the Day

“Death by a Thousand Cuts”

February 13, 2012

Few things incense me as much as the stupidity and injustice that is taking place in Europe, in the name of equality and fairness. And few things worry me so much as watching our country travel the same road toward so-called social justice, which requires a larger state, massive borrowings and promises to the electorate that are impossible to keep, and which serve only to keep unions in power and incumbents in office. The early morning vote today in Greece’s Parliament, which needs approval of EU finance ministers, only prolongs the agony. It will not solve the problem. For the problem in Greece is not genetic; it’s political.

Blame begins with the proliferation of Socialism, a blissful concept, perpetrated by politicians seeking power; for it provides immediate comfort to citizens and helps keep incumbents in office. But it imposes burdens for future generations, as it substitutes dependency for responsibility and ignores the basic principal that everything in life must be paid for.

Obviously blame lies with the Greek government that employs about 25% of the workforce and whose pension plans are considered the most generous in the European Union. A law introduced in 2002 to make provision for private pension funds (defined contribution plans) has largely been ignored. While the cause of the problem in Greece is easy to understand – a function of promises that exceed abilities, the cure involves pain (and already has.) Unemployment is running in the country at 21% and GDP fell 11.3% in December from a year earlier. When Greek Prime Minister Lucas Papademos says, as he did Saturday night, that failure to accept a tough new austerity package would result in bankruptcy, he was ignoring reality; Greece is bankrupt. The question now must be: How to return to solvency? Government spending represents about 32% of GDP, with healthcare and pensions accounting for a third of that third. There is no easy way out. With Europe’s troika demanding a debt-to-GDP ratio of 120% by 2020, implementing austerity measures mean that the denominator in that ratio declines.

Blame, in my opinion, also lies with the Germans who have done everything to keep alive a currency that is flawed. It is flawed in the sense that a monetary union was established ten years ago without political and fiscal authority. Of the 23 countries that use the Euro, the principal beneficiary has been Germany. The country spent the previous two decades merging their east and west, and then addressing their economy – reducing their debt ratios, alleviating demands of their entitlement obligations and improving their manufacturing. They entered the Euro from a position of economic strength and have become stronger. For them the currency is cheap. For most of the others, it is expensive, especially for those countries along the Mediterranean who spent the past decade irresponsibly expanding social services. Greece, Portugal, Italy, etc., have had to function with a currency whose strength does not reflect the reality of the facts on the ground.

Greece needs a growth strategy, which would involve a change in cultural attitudes and a dramatic reduction in government-sponsored entitlement programs? It means providing incentives to the private sector. Tax evasion in Greece is ubiquitous (a “national pastime” as described last July in the New Yorker.) For example, since pools are prevalent among the wealthy in Greece and are taxed, the sale of green, grass-like pool covers have been brisk. However, is it not possible that one reason for cheating on taxes is that many ordinary citizens are simply disgruntled as to how their tax dollars are spent? Like many socialist governments, Greece relies heavily on a VAT, an insidious and stealth-like means of raising revenues. Its chief attractiveness to believers in big government is that, once instituted, it is an easy tax to increase. Nominal upticks are absorbed with little pain and less opposition. It is, though, highly regressive. Recently Greece raised their rate from 16% to 22%, further penalizing the people at a time of high unemployment and reduced wages, simply to support out of control government spending.

In my opinion and as I have written for a year, Greece needs to quit the Euro. Willem Buiter, chief economist for Citigroup, disagrees. He said back in November that “the bottom line of an exit for Greece is financial collapse and an even deeper recession – or even a depression – with significant collateral damage to the rest of the Euro zone.” But the country is bankrupt. It has a solvency problem, not a liquidity one. Death has been slow and painful. It is agonizing to read of the suffering of the people in Greece, while their leaders negotiate in Brussels or Berlin, each time returning to Athens with more austerity and no plans for growth. A quotation from Emanuel Derman’s new book, Models Behaving Badly, seems appropriate: “In physics you’re playing against God, and He doesn’t change his laws very often. In finance, you’re playing against God’s creatures.” And we all know the value of ephemeral opinions. Greece needs a shock. Would immediate default be worse for the citizens? They need to restart. And the sooner that occurs the better. Former Greek Prime Minister George Papandreou, in a quote in Sunday’s New York Times has it exactly wrong when he said, “We’ve gone too far to turn back now.” The country has gone too far; they have to head in a new direction. For an alcoholic the answer is not another drink.

The reality is that government spending on social services is what created the problem. They have created a culture of dependency. A system of responsibility and accountability must be restored. The question during this time of hardship cannot be how to best preserve the status quo – a socialist system, but how to revitalize the spirit of entrepreneurship and stimulate economic growth. A new and lower valued currency would help spur both tourism and exports.

Dutch Finance Minister Jan Kees de Jager recently said he sees much fewer risks from Greece leaving the euro zone than a year ago. European Commission Vice President Neelie Kroes echoed the sentiment: “It’s not the end of the world if someone leaves the euro zone.” They will eventually and the sooner they do, the sooner they can begin recovery.

In the early 1990s, Canada had got themselves into a fiscal mess with out-of-control spending. By 1993 they were spending $0.36 of every tax revenue dollar on interest on federal debt. Three years later the country was in surplus. Their success could be attributed to Finance Minister Paul Martin. He laid three principles: 1) Focus on spending cuts, not tax increases - $7.00 in cuts for every $1.00 in taxes. 2) Focus on short term goals that are realizable. 3) Assume the low end of all economic forecasts. Greece needs an equally radical response that serves the interests of the Greek people, not the Germans. They have suffered enough.

A treatment of symptoms is well and good, but the penultimate solution will only be found in addressing and fixing the cause – socialism, which breeds dependency and slothfulness and destroys aspiration. Greek history goes back thousands of years. It is impossible to believe that a nation with such a glorious past and that has contributed thousands of immigrants to our shores who have achieved success in the arts, business and politics cannot be a success in the future of their own country. As I wrote earlier, the problem is not genetic; it is political. They need a bold leader, willing to stand up to those that have led them down this primrose path and to their new masters in Berlin.

The United States has put itself on a trajectory that leads in the same direction. A graph on the front page of Sunday’s New York Times is telling. Over the past fifty years, while inflation adjusted increases in spending in defense, education, transportation and interest have been relatively modest, those in entitlements have skyrocketed to $7,448 from under $1,000 for every man, woman and child in our country. The most significant question for Americans today is: what kind of a country do we want? Are we willing to forego economic growth, which will serve to lower everyone’s standard of living, or are we willing to face the fact that we cannot be all things to all our citizens? It is easy to give and to promise, as Mr. Obama does as he campaigns. But that route leads to perdition. We must recognize that all the riches we have as a nation (including all the money Mr. Obama is so freely spending) is because of the initiative, creativity and entrepreneurship of risk-taking individuals. It is not because of a paternalistic government that encourages dependency. The choice is ours.