It seems to me….
“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” ~ John Maynard Keynes.
The ongoing Greek financial crisis, though perhaps initially seeming to superficially share several characteristics to what has been occurring in the U.S., is totally dissimilar. Both countries have a high level of national debt. Both have supposedly high worker salary levels. Tax audit rates are very low (less than 1 percent in the U.S.). Neither is prepared for another recession. But that is about where similarities end.
Greece, officially the Hellenic Republic (Greek: Ελληνική Δημοκρατία, Ellīnikī́ Dīmokratía) and known since ancient times as Hellas; is a country located on the Mediterranean coast in southeastern Europe with a population of about 10.8 million. It is a democratic and developed country with an advanced high-income economy based mainly on tourism, a high quality of life, and a very high standard of living.
I was one of those in favor of the European Union (EU) when it was proposed though many well-regarded economists were not and predicted the current financial problems facing Greece (and to a lesser extent Italy, Spain, and several other EU members). The economists might have been correct “economically” but failed to factor into their assessment the political concerns of a continent drained by centuries of war and fighting.
The European debt crisis was indirectly created by the euro. Countries that do not have an ability to alter their exchange rate relative to other currencies are vulnerable to self-fulfilling panics in a way countries with their own currencies are not. The ability of a nation to float currency exchange rates would solve many of the EU’s current problems – but so would greater political integration. The next ten years will prove interesting depending upon what lessons Europeans take from this crisis.
Though EU members share responsibility by encouraging higher Greek debt without sufficient oversight to determine credit risk, Greece’s economic crisis is primarily the result of mass consumption and government waste. While painful austerity corrections are essential, imposing additional austerity on a nation already immersed in a deep recession is unlikely to result in any rapid recovery. Without financial stimulus and foreign investment, which under current circumstances no one is willing to provide, recovery will be long and difficult.
The Greek government encouraged a profligate living style. It has a retirement age of 57, low compared to the U.S. where retirees can start taking benefits at age 62. While good for Greek workers, it creates a major financial burden on the government. Constant government borrowing to fund promises by politicians is a direct source of Greece’s monetary difficulties.
Tax evasion is high compared to other nations resulting in less revenue for Greece’s debt-strapped government. One study indicated that perhaps only about 20 cents of every dollar of income is reported to the Greek government. Tax collectors are poorly trained, there are personnel shortages within the finance ministry, and tax administrators have been politically motivated appointments.
With Greece heading towards bankruptcy in early 2010 and the threat of a new financial crisis looming, the country received its first of two international bailouts totaling €240 billion ($268.8 billion in U.S. dollars at current exchange rates) from the so-called “troika”: the European Central Bank, the International Monetary Fund, and the European Commission. Much of what Greece owes is to this troika, not to European banks.
Even faced with certain insolvency, Greece kept doing business as usual never making obviously necessary policy changes. Consequently, most of the bailout money Greece receives is used to repay loans from its creditors. It is virtually impossible for Greece to pay down its enormous debt when the economy is underperforming.
Bailout terms have been stringent requiring a combination of less spending, higher taxes, a crackdown on tax evasion, and other measures designed to get Greece’s finances back on track but Greece still had insufficient funds to pay its bills. As a result, Greece’s financial situation continued to worsen. Its unemployment rate is above 25 percent and its GDP has fallen by roughly 30 percent since 2008 according to World Bank data. Greece’s debt is nearing 200 percent of GDP.
Economic output has fallen by 25 percent. Youth unemployment is over 50 percent. Public sector employment has been reduced by over 40 percent increasing unemployment by more than an additional 400,000 people whose support places further stress on the government. Almost half of retirees on pension income are now living below the poverty line.
While agreeing to additional loans estimated to be €82 – 86 billion ($90 – 94 billion), creditors are requiring additional structural reforms in addition to those already mandated by the two previous bailouts. Under these reforms, the Greek government is required to impose additional significant spending reductions, tax increases, and reduce admittedly bloated public-sector employment.
Opening closed-shop industries to competition is a more certain path to growth than austerity but even if carried out, structural reforms take considerable time to pay off. One hope is privatization: the agreement requires Greece to transfer assets to an independent fund that will generate €50 billion by selling them off; over the past five years Greece’s government has managed to raise only €3 billion from asset sales.
Tax collection enforcement is necessary but this might require additional oversight and assistance possibly necessitating outside management. Corruption must be eliminated; a fakelaki (small envelope) is considered a normal cost of doing business. In a recent survey, 90 percent of Greek households consider their political parties to be either corrupt or extremely corrupt.
Recent negotiations have deepened tension between sovereignty and stability that bedevils the euro. If it is to work, the euro zone requires more fiscal centralization but the Greek referendum and the most recent agreement exposed some of the trade-offs involved in moving away from national self-determination and towards more intrusive external control. Returning Greece to solvency will be difficult; securing the euro from future challenges will be even harder as it will require all EU members to relinquish some political autonomy.
Total debt forgiveness is not a solution. For Greece to recover financially, stimulus perhaps managed by the EU rather than further additional austerity will be necessary. Unemployment reduction, perhaps by rebuilding the nation’s infrastructure, is required to place money back into the economy and revitalize the financial system. Reliance on tourism is insufficient for recovery; it will be necessary to invest in education, innovation, and intellectual capital for Greece to compete with other EU nations but this also will require time. With lender’s emphasis on short-term austerity, they are further weakening Greece’s ability to return to financial independence.
Any direct impact of the financial crisis on the U.S. is likely to be small. The U.S. has little direct exposure to the Greek debt crisis and central banks have created firewalls against a broader panic. Only if the crisis spreads to other countries such as Portugal and Italy would there be any justification for concern. Contrary to some political Cassandras, similar difficulties are not in store for the U.S. but there are some lessons from Greece’s experience that neither those on the left or right will like. A full comparison would be too lengthy to present here so only a couple items will be mentioned.
One possible problem is that if the Greek crisis proves severe, the Federal Reserve may be less inclined to raise interest rates and investors may be even more willing to turn to U.S. assets for security. U.S. interest rates could then decline even lower than their current extremely low rate. U.S. interest rates need to be higher so as to be prepared to react to the next economic downturn.
A prolonged Greek debt crisis is likely to slow an already sluggish European economy which in turn could negatively impact U.S. exports (though the impact would be relatively minor as exports account only for 13 percent of U.S. GDP). More than 20 percent of U.S. exports are to Europe and many U.S. companies with operations there already have experienced an earnings reduction from weaker sales and the strong dollar, partly resulting from the European Central Bank pumping more money into their economy.
Conservatives claim the Eurozone debt crisis is an example of what awaits the U.S. if it continues its supposedly fiscally irresponsible ways. The Congressional Budget Office (CBO) estimates in its alternative fiscal scenario that U.S. publicly held debt could grow to 180 percent of GDP (thus possibly exceeding the current Greek level) by 2039. Many economists consider U.S. debt to already be in the danger zone dragging down current growth prospects. Continued deficit spending remains critical in an economic recovery that has experienced difficulty creating jobs or improving wages but done much to restore profits.
The U.S. national debt must be substantially reduced so as to prepare for future economic instability. While economic policy dictates the necessity to incur expenditures in excess of taxation revenues during periods of economic stagnation, that debt must eventually be reduced. The correct time for austerity at the Treasury, however, is during the boom, not the slump. This basic principle was ignored by former President George W Bush who rather than continuing to reduce the national debit during a time of budget surpluses, intentionally created a deficit through two totally ill-advised tax reductions, two unfunded wars, and indiscriminate over-spending leaving the U.S. with only limited resources to react to the 2007-2009 financial crisis.
Europe is in the position it is in because it insisted on austerity for Greece and because Europe has a central bank prohibited from financing government deficits and whose sole policy mandate is to limit inflation. Without an insistence on austerity, and without having relinquished these basic tools of economic policy, both of which the United States retains, the crisis in Europe would probably never have happened.
The U.S. is experiencing increasing difficulty with tax evasion. Last month, however, a House subcommittee voted to reduce the IRS budget by another 8 percent claiming the draconian cut would force the agency to improve its management. This rationale ultimately will leave the country with a tax collection agency so small and ineffective that U.S. tax laws could safely be ignored with as much impunity as Greece’s. The tax rate on high-income earners must be increased considerably, tax loopholes closed, subsidies eliminated, and the corporate tax code restructured to prevent corporations from moving profits to other countries.
While there is pressure for Greece to further reduce their minimum wage requirement, their minimum wage is already lower than in many other EU member nations. The current U.S. minimum wage is likewise well within normal range of economically advanced nations. Additionally, there isn’t any evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America. Since most minimum wage jobs involve repetitive tasks, the primary negative impact might be eventual worker replacement by an automated system. Many minimum wage jobs have not been automated since humans are less expensive than their machine replacement. If wages increase above that level, workers could anticipate being displaced.
The U.S. economy is much more diversified than Greece’s which is primarily dependent upon tourism. The U.S. has erroneously significantly reduced its investment in recent years in the very areas of its primary area of economic strength. Education, especially in STEM curriculums, and research must be encouraged. Educational standards must be raised and education provided without cost as is standard practice throughout much of the world if the U.S. is to remain competitive and retain its current relatively high standard of living.
Perhaps now is a good time to visit Greece. The dollar is strong relative to the euro – you could have an enjoyable vacation at a bargain price while aiding the Greek economy.
That’s what I think, what about you?
 John Maynard Keynes, 1st Baron Keynes, CB, FBA, was a British economist whose ideas fundamentally affected the theory and practice of modern macroeconomics and the economic policies of governments.
 Pain Without End, The Economist, http://www.economist.com/news/leaders/21657806-deal-between-greece-and-europe-averts-one-disaster-and-hastens-next-pain-without-end?fsrc=nlw|hig|16-07-2015|NA, 18 July 2015.
 Bornmann, Lew. Fiscal Crisis Response, WordPress, https://lewbornmann.wordpress.com/2015/07/06/fiscal-crisis-response/, 6 July 2015.