America's Long-Term Fiscal Crisis: Worse than Greece?

Professor Larry Kotlikoff has some very sobering analysis of America's fiscal status. Instead of just looking at current deficits, he examines the "present value" of all future expenditures and revenues. Simply stated, America is in worse shape than Greece because of the long-term burden of entitlement programs. Kotlikoff's conclusion that America is "one foot away from a deep and permanent economic grave" may be a bit too strong, but he is certainly correct that unrestrained spending is going to cause serious damage.

Greek long-term government bond yields are running 700 basis points above comparable US Treasuries. The inference is that America is in far better fiscal shape than Greece. Nothing could be further from the truth. Greek debt totals 120 per cent of gross domestic product, twice the US figure. But debt alone tells us little about a country’s fiscal condition. ...During the past half-century, the US has sold tens of trillions of unofficial IOUs, leaving it with liabilities to pay Social Security, Medicare and Medicaid benefits that total 40 times official debt. ...Fortunately, theory suggests a label-free measure of fiscal status: the fiscal gap, or the present value difference between all future expenditures and receipts. The Greek fiscal gap is staggering. Calculations developed with my colleagues at Freiberg University put it at 11.5 per cent of the value of Greece’s future GDP. And this huge figure already incorporates Greece’s recently legislated fiscal policy retrenchment. But the US figure, based on the Congressional Budget Office’s just-released projections, is even larger: 12.2 per cent. Clearly, Greece is in terrible fiscal shape. To get its books in order it would have to pull in its belt each year by another 11.5 per cent of GDP. This provides new meaning to the word draconian. But the US is in much worse shape, because the CBO’s projections that reveal the 12.2 per cent fiscal gap already assume a 7.2 per cent of GDP belt-tightening by 2020. ...Wishing won’t fix America’s fiscal mess. The US is one foot away from a deep and permanent economic grave. It is far past time to do meaningful long-term fiscal planning, level with the public, and implement radical reforms that permanently put America’s fiscal house in order.

Meet Olga Stefou, a Perfect Symbol of Greece's Downfall

The Los Angeles Times has a story that provides an inside look at the attitudes that have contributed to Greece's fiscal collapse. Let's start with Olga Stefou, who is a good (or bad) symbol for her nation's downfall. She protests in favor of bigger government, naively asserting that the budget shortfall can be solved by pulling 122 troops out of Afghanistan and taxing the Orthodox Church. Olga's entitlement mentality is not unusual. The story also notes that young Greek women think a government job is the most desirable thing in a potential mate. At the risk of being politically incorrect, the people of Greece (at least the ones in the moocher class) deserve a miserable future.

Olga Stefou is 20. She speaks passable English and studies political science. These days she goes into the streets to shout slogans against the government and the International Monetary Fund. She has no choice, she says: She believes that upon graduation she'll be lucky to land a job that pays $500 a month. "I'll be forced to live with my parents and work three jobs," she said, pausing among the throngs trickling into the street as a recent demonstration got underway. "I'll be doomed to a fate I haven't chosen. This is the state of my generation." Stefou believes that the government is bound to respond to her discontent. And she has suggestions: Greece should make up its budget shortfall by pulling its 122 troops from Afghanistan and levying steep taxes on the Orthodox Church rather than squeezing the workers, she says. The government is "in some way afraid of us," Stefou said with a shrug. "There are too many of us." A hot spring night was creeping over Athens. Thousands of demonstrators packed the street; many of them looked to be about Stefou's age. They marched in a slow circle down Stadiou Street to Parliament and then back again, yelling slogans: "Down with the junta of the IMF!" "Euro is here and it makes you poorer!" "Thieves, thieves, banks, stockbrokers and politicians!" ...Last year, Michas did a study of Greek marriage agencies. He found that the top attribute sought by middle-class young women in a potential mate was a job in the civil service or the military. Government service has long been prized because of the elaborate set of benefits attached to the position. "This is the mind-set now," Michas said. "It's a culture of dependency, first on parents, and it becomes a dependency on the state."

The End of the World in 3 Minutes

I don't know who did this, and I'm not sure what point they are trying to make, but it's rather amusing and it also makes a good point about the idiocy of bailouts.

Fiscal Centralization Will Accelerate Europe's Debt Crisis

David Ignatius continues his odd habit of drawing wrong conclusions from Europe's fiscal crisis. In a previous post, we made fun of one of his columns because he said America needed a value-added tax to avoid a Greek-style crisis. Yet since Greece has a VAT, he was, for all intents and purposes, arguing that we should copy Greece's policies to avoid Greece's problems. Now he has a column saying that Europe needs fiscal centralization to make the euro work. This is a rather interesting assertion since Ignatius comes from a nation that shows that it is possible to have a common currency with 50 different states with 50 different fiscal policies. Perhaps this is why he wrote an entire column on the topic without ever offering any analysis or evidence for his position. Here's an excerpt:

...there's a radical mismatch between the ideal of economic integration and the reality that the eurozone has 16 different fiscal regimes -- a disconnect that helped produce this crisis. ...With this crisis, [Italian President Giorgio Napolitano] argued, Europeans must finally accept that union "implies a partial transfer of national sovereignty." The current halfway integration simply isn't strong enough to support a common currency, he suggested. ...Investors keep pounding Europe in part because they don't yet see the mechanisms that will enforce discipline. The European Union just established a trillion-dollar bailout fund, but what happens when it runs out? There's a pledge to impose strict conditions on Greece, Portugal and the rest in exchange for loans, but it still isn't clear how Brussels will make this austerity regime work. ...What worries me is that the dictates of economics and politics are now in conflict in Europe. To sustain its common currency, Europe needs integrated fiscal policies that are enforceable on all members.

Given his reliance on empty assertions, let's step into the vacuum and make two observations. First, letting Greece officially default would have been the best way to enforce fiscal discipline. A default would have radically curtailed Greece's ability (and the ability of other European nations) to overspend by borrowing cheap money and leaving the bill for future generations. The bailout, by contrast, rewarded profligacy and sent a signal to other European nations that it is possible to over-tax and over-spend and send the bill to taxpayers in other nations.

Second, a centralized fiscal policy would exacerbate Europe's fiscal problems by creating a tragedy of the commons. The existence of a pot of money in Brussels would encourage every nation to maximize its share of the loot, in the same way that a bloated federal government in Washington subsidizes bad fiscal behavior by state politicians. It wouldn't matter whether the centralized fiscal policy replaced a portion of national budgets or (more likely) represented an additional source of government largesse. Europe's problems exist because too many people have learned to try to live off the labor of too few people. Another layer of government makes that problem worse, not better - especially since it would open up the possibility of having people from other nations bear the burden.

The United States of Greece

Americans should not get too smug about the troubles in Europe because the Bush-Obama policies of wasteful spending are bringing us down the same path. The latest evidence comes from a well-researched article about personal income in USA Today showing that the share from private paychecks fell to a record low and the share from government handouts reached a record high. As Veronique de Rugy of the Mercatus Center points out in her quote, this is the pattern that led to fiscal disaster in Greece:

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds. At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010. ...The result is a major shift in the source of personal income from private wages to government programs. The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says. ...Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs. Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. "People are paid for being rather than for producing," he says.

Europe's Reforms, I Fear, Will Be Too Little and Too Late, Part I

Governments that tax work and subsidize sloth are committing a form of slow-motion suicide, and the Greek fiscal crisis is the canary in the coal mine of this phenomenon. Interestingly, some European governments are trying to halt the downward slide, though I suspect that most of them will fail to take the necessary steps. But it's nonetheless good news that this is getting coverage since it is equally important that the United States learn the right lessons so we can reverse the reckless big-government policies of the Bush-Obama years. Here's an excerpt from a thorough AP story:

...the welfare state — cherished by many Europeans as an alternative to what they see as dog-eat-dog American capitalism — is coming under its most serious threat in decades: Europe's sovereign debt crisis. Deep budget cuts are under way across Europe. Although the first round is focused mostly on government payrolls — the least politically explosive target — welfare benefits are looking increasingly vulnerable. "The current welfare state is unaffordable," said Uri Dadush, director of the Carnegie Endowment's International Economics Program. ..."We have to adjust our social security systems in a way that they motivate people to accept regular work and do not give counterproductive incentives," German Finance Minister Wolfgang Schaeuble told news weekly Frankfurter Allgemeine Sonntagszeitung on Saturday. ...Demographers and economists began warning decades ago that social welfare was doomed by the aging of Europe's baby boomers. Some governments had been trimming and reforming, but now almost all are scrambling to close deficits in order to prevent a wider collapse of confidence in the euro. The [British] government has promised to raise the age at which citizens receive a state pension — up from 60 to 65 for women, and from 65 to 66 for men. It also plans to toughen the welfare regime, requiring the unemployed to try to find jobs in order to collect benefits. ...Ministers are reviewing the long-term affordability of the country's generous public sector pensions. ...France's conservative government is focusing on raising the retirement age. Many workers can now retire at 60 with 50 percent of their average salary. ...Unions in France are organizing a national day of protest marches and strikes on Thursday to demand protection of wages and the retirement age. [Spain] has proposed hiking the retirement age for men from 65 to 67. ...After sharp cutbacks imposed as the condition of an international bailout this month, Greeks must now contribute to pension funds for 40 instead of 37 years before retiring, and the age of early retirement is set to 60 at the earliest. Civil servants with monthly salaries of above 3,000 euros ($3,750) will lose two extra months of salary — one paid at Christmas, the other split between Easter and summer vacation.

Senate Unanimously Rejects Greek Bailout

In an uncharacteristic display of fiscal rectitude, Senators voted 94-0 against the Greek bailout. But don't get too excited. They only voted to instruct the White house to oppose the bailout in the absence of a plan to pay back the money. Needless to say, the Greeks, the IMF, and/or the White House will lie if the amendment becomes law. Speaking of which, approving an amendment in the Senate means nothing unless the provision is included in a final bill. Last but not least, the amendment is too weak. It should have blocked any bailout. Heck, it should have withdrawn the United States from the IMF altogether. But a baby needs to learn to crawl before it can walk, so I suppose we should be happy that the kleptocrats in Washington at least cast a symbolic vote to defend taxpayers. Here's a report from the EU Business:

The US Senate on Monday easily approved a measure aimed at blocking International Monetary Fund (IMF) aid packages like the one for Greece absent a guarantee that the money will be repaid. Lawmakers voted 94-0 to approve the measure, crafted by Republican Senator John Cornyn of Texas, attaching it to broad legislation to overhaul financial industry rules in the wake of the 2008 global economic meltdown. The amendment calls for President Barack Obama's administration to measure any IMF aid package to a country whose public debt exceeds its annual gross domestic product in order to certify that the loan will be repaid. If the administration were unable to make such a certification, it would be directed to oppose the assistance and vote against it at the IMF. "Greece is going to get 40 billion dollars in loans from the IMF, out of which seven billion dollars is attributable to the contributions of the American taxpayer. They shouldn't have to do that unless we have an assurance that it will be paid back," Cornyn said shortly before the vote. ...If the Senate passes the overhaul legislation, Cornyn's measure would still need to survive a House-Senate "conference" to reconcile their rival versions of the bill before it can go to Obama to be signed into law.

Pathetic Greek Government Tries to Blame Speculators

Making himself and the Greek government even more of a global laughingstock, Greece's President says he wants an investigation into the role of so-called speculators. Yes, I'm being serious. According to Bloomberg, he wants to blame investors who wisely (albeit belatedly) realized that reckless and wasteful spending meant the Greek government was increasingly unlikely to honor its debts. Here are key excerpts:

Greece is considering taking legal action against U.S. investment banks that might have contributed to the country’s debt crisis, Prime Minister George Panandreou said. ...Papandreou said the decision on whether to go after U.S. banks will be made after a Greek parliamentary investigation into the cause of the crisis. “Greece will look into the past and see how things went,” Papandreou said. “There are similar investigations going on in other countries and in the United States. This is where I think, yes, the financial sector, I hear the words fraud and lack of transparency. So yes, yes, there is great responsibility here.” In the days leading up to the May 10 announcement of a loan package worth almost $1 trillion to halt the spread of Greece’s fiscal woes, European Union regulators were examining whether speculators manipulated the prices of bonds and equities and contributed to the crisis. The Committee of European Securities Regulators said on May 7 it was investigating “exceptional volatility” in the markets and would work with other regulators, including the U.S. Securities and Exchange Commission, as part of a coordinated clampdown.

The 10 Most-Likely-to-Default Governments

Here's a fascinating table that was linked on Marginal Revolution. Of all the political jurisdictions in the world, the one most likely to default (according to market perception) is Venezuela. No big surprise, of course, but I was surprised to see California in 8th place. That's worse than Portugal and Spain (neither of which are in the top 10, though perhaps bottom 10 would be a better description of this list). This is a very damning indictment of the modern American welfare state. How about a new motto? Instead of "The Golden State," California's new motto can be "Better than Ukraine, Worse than Iraq."

The Real Reason for the European Bailout

Here's a great chart put together by the New York Times. It shows the degree to which government debt issued by profligate nations such as Greece and Spain is owned by banks in Germany, France, and the United Kingdom. It is quite reasonable to describe what happened as an indirect bailout of domestic banks dressed up as a bailout of the Mediterranean nations.

I Hate the Greeks (and the French, and the Brits, and the Americans)

Actually, that's too broad of a brush, but I do despise people of any nationality who think that they are entitled to mooch off the labor and capital of others. I also fear for my country because of such people. Benjamin Franklin is rumored to have said that, "When the people find they can vote themselves money, that will herald the end of the republic." I don't know if that is a real quote, but it accurately captures the problem with modern democracy (which is why our Founders gave us a constitutional republic, where our rights to life, liberty, and (especially) property were not subject to the tyranny of the majority). Writing for the City Journal, Theodore Dalrymple makes the essential point that what is happening in Greece is democratic corruption. In other words, the Greek people no longer have the social capital needed for a functioning democracy:

When the crowd tried to storm the Greek parliament, shouting, “Thieves! Thieves!,” its anger was misdirected. It was a classic case of what Freudians call projection: the attribution to others of one’s own faults. It is true that the Greek politicians are much to blame for the current situation, and no doubt many of them are thieves; but their real crime was not stealing, but offering a substantial proportion of the Greek population a standard of living that was economically unjustified, maintained for a time by borrowing, and in the long run unsustainable, in return for votes. The crime of that substantial proportion of the Greek population was to accept the bribe that the politicians offered; they were only too prepared to live well at someone else’s expense. The thieves were not principally the politicians, but the demonstrators. Such popular dishonesty is by no means confined to Greece. In varying degrees, most countries in the West have displayed it, Britain above all. It is perhaps an inherent problem wherever the universal franchise is unaccompanied by widespread virtues such as honesty, self-control, providence, prudence, and self-respect. Greece is therefore a cradle not only of democracy, but of democratic corruption. The Greek demonstrators did not understand, or did not want to understand, that if there were justice in the world, many people, including themselves, would be worse rather than better off, and that a reduction in their salaries and perquisites was not only economically necessary but just. They had never really earned their wages in the first place; politicians borrowed the money and then dispensed largesse, like monarchs throwing coins to the multitudes.

Meanwhile, Mona Charen is rightfully amused at the absurdity of the press writing about "anti-government" riots when the rioters are overpaid government workers and the target of their wrrath is a socialist government. She also makes an excellent point that the bureaucracy is so pervasive in Greeece that government unions just elect the people who promise to give them absurdly unaffordable pay and benefits:

That “anti-government mob,” it must be understood, consisted of civil servants, tens of thousands of whom took to the streets to protest austerity measures. ...One in three Greeks works for the government. Government employees enjoy higher wages, more munificent benefits, and earlier retirements than private-sector employees. Civil servants can retire after 35 years of service at 80 percent of their highest salary and enjoy lavish health plans, vacations, and other perks. Because they are so numerous, and because Greece is highly centralized, public-sector unions hardly have to negotiate. They simply vote in their preferred bosses. Some civil servants receive bonuses for using computers, others for arriving at work on time. Forestry workers get a bonus for outdoor work. All civil servants receive 14 yearly checks for twelve months’ work. And it’s almost impossible to fire them — even for the grossest incompetence.

Europe's Über Bailout

I'm semi-impressed with the Europeans for choosing the hog-wild approach to bailouts. Not because it is good policy, but rather because it will be a useful demonstration of the old rule that bad policy begets more bad policy (which begets God knows what, but it won't be pretty). The background is that many European nations have been over-spending, over-taxing, and over-regulating. This has created a poisonous combination of weak economies, pervasive dependency, and political corruption, with Greece being the nation farthest down the path to Krugman-topia. Europe's political elite at first thought they could paper over the problems with a $140 billion Greek bailout. The ostensible motives were to stop contagion and to demonstrate "solidarity," but behind-the-scenes lobbying by big European banks (which foolishly own a lot of government debt from profligate nations such as Greece, Portugal, Spain, and Italy) may have been the most important factor. Regardless of the real motive, the original bailout was a flop, so the political class has decided to go with the in-for-a-dime-in-for-a-dollar approach and commit nearly $1 trillion of other people's money to prop up the continent's welfare states. The Wall Street Journal reports on the issue, noting that American taxpayers will be involuntary participants thanks to the financial world's keystone cops at the International Monetary Fund:

The European Union agreed on an audacious €750 billion ($955 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide. The money would be available to rescue euro-zone economies that get into financial troubles. The plan would consist of €440 billion of loans from euro-zone governments, €60 billion from an EU emergency fund and €250 billion from the International Monetary Fund. Immediately after the announcement, the European Central Bank said it is ready to buy euro-zone government and private bonds "to ensure depth and liquidity" in markets, and the U.S. Federal Reserve announced it would reopen swap lines with other central banks to make sure they had ample access to dollars.

Back when Greece first began to collapse, I argued that bankruptcy was the best option. And I noted more recently that my colleague Jeff Miron reached the same conclusion. Everything that has since happened reinforces this viewpoint. Here are a few additional observations on this latest chapter in the collapse of the welfare state.

1. A bailout does not solve the problem. It just means that taxpayers bear the cost rather than the banks that foolishly lent money to corrupt and incompetent governments.

2. A bailout rewards profligate politicians and creates a moral hazard problem by letting other politicians think that it is possible to dodge consequences for reckless choices.

3. A bailout undermines growth by misallocating capital, both directly via bailouts and indirectly by signalling to financial markets and investors that governments are a "safe" investment.

4. A bailout will cause a short-term rise in the market by directly or indirectly replenishing the balance sheets of financial institutions, but this will be completely offset by the long-run damage caused by moral hazard and capital misallocation.

The last point deserves a bit of elaboration. Assuming markets continue to rise, the politicians will interpret this to mean their policies are effective. But that is akin to me robbing my neighbor and then boasting about how my net wealth has increased. In the long run (which is probably not too long from now), though, this system will not work. At best, Europe's political elite have postponed the day of reckoning and almost certainly created the conditions for an even more severe set of consequences. No wonder, when I was in Europe a couple of weeks ago, I kept running in to people who were planning on how to protect their families and their money when the welfare state scam unravels. Their biggest challenge, though, is finding someplace to go. People use to think the United States was a safe option, but the Bush-Obama policies of bigger government have pushed America much closer to European levels of fiscal instability.

Left-Wing Columnists Says We Should Copy Greek Policies to Avoid a Greek-Style Fiscal Crisis

Only in the artificial bubble of Washington do you find people who are willing to make preposterous statements such as those contained in this David Ignatius column. He writes that we should adopt a value-added tax to avoid a Greek-style fiscal crisis, apparently oblivious to the fact that Greece adopted a VAT and still had a fiscal crisis:

The sensible real-world answer, many economists argue, is a value-added tax that would encourage saving at the same time it pays down the deficit to manageable levels. ...A particularly dangerous example of this law of political inaction is the Greek debt catastrophe in Europe. Americans haven't been paying much attention to this one (because . . . it's Europe!), but it's getting scary in financial markets.

He also does not understand how a VAT works. It does not encourage savings. Just the opposite. It doesn't discourages savings as much as an income tax, to be sure, but it creates a larger wedge between income and consumption. The best that can be said is that the larger wedge applies equally to current consumption and future consumption.

Wall Street Journal Savages Greek Bailout

I always appreciate a column that sounds like I could have been the author, and this editorial from the WSJ hits the mark. The IMF/EU bailout is just masking the problems of a bloated welfare state and giving politicians some breathing room to avoid making the real reforms that are needed:

It hasn't been a week since the terms of Athens's €110 billion ($145 billion) bailout were set, and already the reviews of this latest Greek drama are saying it's a flop. Yesterday the euro sank to its lowest level in a year. Stock markets across Europe fell nearly 3%, and the carnage spread to Wall Street and beyond. Greek interest-rate spreads climbed higher again, and market players have turned their attention to the euro zone's other weak sisters as everyone tries to figure out who is most likely to follow Greece down the road to national insolvency. The bailout, in other words, hasn't stopped the much-feared contagion. If anything, it has spread it. Part of the problem lies with the bailout's terms. The €110 billion agreed over the weekend was more than twice the €45 billion originally proposed, but it came with revised deficit projections that immediately made even the higher number look inadequate to fund Greece's bloated state. ...According to the latest official projections, Greek public debt, currently 108% of gross domestic product, will top 149% of GDP in 2013, the year that the bailout loans, in theory, come due. Assuming an average interest rate of 6% on that debt, Greece would be left paying 9% of its GDP to bondholders, 80% of whom are located abroad. Put another way, 25% of Greek tax revenue would go toward interest payments to foreign bondholders. Meanwhile, Greece's government spending equals more than 50% of GDP and labor productivity is well below the EU average, neither of which bode well for growth going forward. ...It's time that Greece and the rest of Europe started listening to the market instead of attacking it. Greece needs a debt restructuring and wholesale reforms that reduce the state's share of GDP and promote economic growth. As for the rest of Europe and the U.S., Greece's predicament is a warning to stop the tax and spending binge before it leads to crisis.

Is Japan the Next Greece?

Total government debt is about 115 percent of GDP in Greece, which clearly is one of the factors that spooked investors and led to the bailout. But Japan - at least on paper - is in much worse shape with government debt approaching 200 percent of GDP (see page 80). And with a grim demographic outlook (lots of aging people and comparatively few young people to enter the workforce), the nation's fiscal position seems dismal. Yet the Japanese government is widely perceived as more trustworthy, particularly by domestic savers who finance much of the government's debt. At some point, however, one would imagine that the proverbial chickens will come home to roost and Japan will face a fiscal crisis. Here's some interesting background from a New York Times story:

Seeking to bring its spiraling debt under control, Japan has undertaken an unlikely exercise: lawmakers are forcing bureaucrats to defend their budgets at public hearings and are slashing wanton spending. The hearings, streamed live on the Internet, are part of an effort by the eight-month-old government of Prime Minister Yukio Hatoyama to tackle the country's public debt, which has mushroomed to twice the size of Japan's $5 trillion economy after years of profligate spending. Greece's debt crisis, which has panicked investors and forced the rest of Europe to put together a multibillion-dollar bailout, has fed fears in Tokyo that if spending is unchecked, Japan could become the center of the next global financial crisis. ...The target of the most recent hearings, which began Friday, is Japan's web of quasi-government agencies and public corporations - nonprofits that draw some 3.4 trillion yen ($36 billion) in annual public funds, but operate with little public scrutiny. Critics have long argued that these organizations, many of which offer cushy executive jobs to retired public officials, epitomize the wasteful spending that has driven Japan's public debt to dangerous levels. The daily testimony by cowering bureaucrats, covered extensively in local media, has given the Japanese their first-ever detailed look at state spending. So far, viewers have looked on in disbelief over the apparent absurdity of some of the government spending. In one example scrutinized on Tuesday, the National Agriculture and Food Research Organization, which is government financed, spent 130 million yen ($1.4 million) last year on a 3-D movie theater used to show footage of scenery from the countryside. The movie dome, which also plays recordings of chirping insects and babbling streams, is closed to the public and is used to study how the human brain reacts to different types of scenery, said Takami Komae, head of the organization's rural engineering department. The findings will be used to help rural areas think of ways to attract more tourists, he testified. Politicians ridiculed the project. "The dome is located in the countryside anyway, isn't it?" said Manabu Terada, a Democratic Party lawmaker, at a public hearing in Tokyo. "Can't we just step outside and see the real thing?" ...Under particular scrutiny at the hearings have been the retired ministry officials who take comfortable positions at the government-linked organizations in a practice known as "amakudari," or "descent from heaven." The network of these agencies is complex, including 104 large organizations supervised directly by the government and 6,625 smaller public corporations. Critics say that many of the former bureaucrats use their connections in government to win public money for dubious construction and research projects, then delegate the work while their organizations pocket much of the budget as administrative fees. Aki Wakabayashi, an author and former worker at a government-supported labor think tank, has been one of the most fervent critics of government spending on these organizations. In 2001, she blew the whistle on her institute, describing lavish foreign "research" trips for the former bureaucrats leading the institute - complete with first-class air travel and stays in five-star hotels - and clerks who drew researcher salaries while spending their days chatting and reading magazines.

Will the Greek Bailout Work?

As expected, the European Union and International Monetary Fund have chosen to subsidize the profligacy of Greek politicians. A deal has just been announced. As the Washington Post reports:

Greece on Sunday announced a long-awaited deal with the European Union and International Monetary Fund for a $145 billion financial rescue, an unprecedented package... The three-year package is also the largest international rescue to be backed by the IMF. ...The proposed cuts in Greece include a new round of reductions in salaries for state workers, more flexibility to fire them, an increase in the value-added tax from 21 percent to 23 percent, and higher taxes on fuel, tobacco and alcohol. More state-run industries are expected to be privatized, and military spending will be slashed.

I'm not terribly optimistic about the long-run consequences. I also can't resist pointing out that the VAT has jumped from 19 percent to 21 percent to 23 percent during this crisis, which underscores how easy it is for politicians to use the tax as a bottomless ATM machine. My Cato colleague Jeff Miron shares my pessimism, writing in Forbes that:

A bailout will not address the fundamental causes of Greece's fiscal problems. Greece has an expansive but highly inefficient civil service and an economy stifled by regulation, favoritism and rent-seeking. These policies have generated double-digit deficits and a debt-to-GDP ratio well over 100%. The situation is not even close to sustainable, so absent a bailout Greece will default on its debts. A bailout, however, does nothing to fix the misguided policies that have generated Greece's existing debt and ongoing deficits. Bailout therefore merely postpones the day of reckoning. Worse, bailout both rewards Greece's bad past behavior and encourages such behavior in future. Greece will never change its misguided policies if the E.U. and IMF infuse it with new cash, just as no teenager who has overspent an allowance will reform if the parents merely expand that allowance. ...The negatives do not end with the current bailout. Greece will be back for additional bailouts in short order, since under a bailout it will not fix its underlying problems. And once the EU and IMF have bailed out Greece, they will find it impossible to resist bailouts for Portugal or Spain. As the recent downgrading of these countries' bonds suggests, they (perhaps along with Italy and Ireland) are also at risk of default in the near future. ...Rather than bail out Greece, therefore, the E.U. and IMF should allow it to default. This will hurt Greece's creditors, but those entities assumed the risk when they loaned to a country long known for its profligate ways. In contrast, a bailout forces unwitting taxpayers to foot the bill for Greece's sins. This can only breed resentment, not to mention reduced incentives for other countries to restrain their own spending.

Greece's Problem Is High Tax Rates, not Tax Evasion

The New York Times has an article describing widespread tax evasion in Greece, along with an implication that the country's fiscal crisis is largely the result of unpaid taxes and could be mostly solved if taxpayers were more obedient to the state. This is grossly inaccurate. A quick look at the budget numbers reveals that tax revenues have remained relatively constant in recent years, consuming nearly 40 percent of GDP. The burden of government spending, by contrast, has jumped significantly and now exceeds 50 percent of Greek economic output.

The article also is flawed in assuming that harsher enforcement is the key to compliance. As this video shows, even the economists at the Paris-based Organization for Economic Cooperation and Development admit that tax evasion is driven by high tax rates (which is remarkable since the OECD is the international bureaucracy pushing for global tax rules to undermine tax competition and reduce fiscal sovereignty).



Ironically, the New York Times article quotes Friedrich Schneider of Johannes Kepler University in Austria, but only to provide an estimate of Greece's shadow economy. The reporter should have looked at an article that Schneider wrote for the International Monetary Fund, which found that:

Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments... The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. ...Several studies have found strong evidence that the tax regime influences the shadow economy. ...In Austria, the burden of direct taxes (including social security payments) has been the biggest influence on the growth of the shadow economy... Other studies show similar results for the Scandinavian countries, Germany, and the United States. In the United States, analysis shows that as the marginal federal personal income tax rate increases by one percentage point, other things being equal, the shadow economy grows by 1.4 percentage points. ...A study of Quebec City in Canada shows that people are highly mobile between the official and the shadow economy, and that as net wages in the official economy go up, they work less in the shadow economy. This study also emphasizes that where people perceive the tax rate as too high, an increase in the (marginal) tax rate will lead to a decrease in tax revenue.

It is worth noting the Schneider's research also shows why Obama's tax policy is very misguided. The President wants to boost the top tax rate by nearly five percentage points, and that's on top of the big increase in the tax rate on saving and investment included in Obamacare. Based on Schneider's research, we can expect America's underground economy to expand.

Shifting back to Greece, Schneider does not claim that tax rates are the only factor determining compliance. But his research indicates that more onerous enforcement regimes are unlikely to put much of a dent in tax evasion unless accompanied by better tax policy (i.e., lower tax rates). Moreover, compliance also is undermined by the rampant corruption and incompetence of the Greek government, but that problem won't be solved unless politicians reduce the size and scope of the public sector. Needless to say, that's not very likely. So when I read some of the details in this excerpt from the New York Times, much of my sympathy is for taxpayers rather than the greedy politicians that turned Greece into a fiscal mess:

In the wealthy, northern suburbs of this city, where summer temperatures often hit the high 90s, just 324 residents checked the box on their tax returns admitting that they owned pools. So tax investigators studied satellite photos of the area — a sprawling collection of expensive villas tucked behind tall gates — and came back with a decidedly different number: 16,974 pools. That kind of wholesale lying about assets, and other eye-popping cases that are surfacing in the news media here, points to the staggering breadth of tax dodging that has long been a way of life here. ...Such evasion has played a significant role in Greece's debt crisis, and as the country struggles to get its financial house in order, it is going after tax cheats as never before. ...To get more attentive care in the country’s national health system, Greeks routinely pay doctors cash on the side, a practice known as “fakelaki,” Greek for little envelope. And bribing government officials to grease the wheels of bureaucracy is so standard that people know the rates. They say, for instance, that 300 euros, about $400, will get you an emission inspection sticker. ...Various studies have concluded that Greece’s shadow economy represented 20 to 30 percent of its gross domestic product. Friedrich Schneider, the chairman of the economics department at Johannes Kepler University of Linz, studies Europe's shadow economies; he said that Greece’s was at 25 percent last year and estimated that it would rise to 25.2 percent in 2010.

American and German Taxpayers Should Be Rioting, not Blood-Sucking Greek Bureaucrats

My blood pressure spiked after reading this story from the UK-based Times. The Greeks are rioting in the streets because they want our money (i.e., an IMF bailout) and they want to keep all the inefficient and wasteful government policies that caused the crisis. In other words, these bums and leeches want my fiscal burden to increase so they can get bonuses for things such as (this is not a joke) using a computer or (gasp!) getting to work on time. They want me to pay more so that children can "inherit" parents' pensions and some bureaucrats can get 18 months of pay for 12 months on the job. Unbelievable.

The violence came as negotiations were concluding between the socialist government of George Papandreou, the IMF and the EU over a multi-billion-euro rescue package for Greece. ...Economists regard the bloated civil service with its jobs for life and generous pensions as a cancer consuming the country’s resources. The older generation, the experts grimly concur, turned the state into a giant cash machine to be plundered at will. ...Bureaucrats will raise their fists at the barricades in a general strike and protests on Wednesday to protect their considerable perks from the IMF. They and other public sector workers are virtually unsackable, can retire as early as 45 and get bonuses for using a computer, speaking a foreign language and arriving at work on time. Some of them get as many as four extra months’ salary a year, compared with the 14 months that are paid to other Greek workers. One of the most generous bonuses is paid to unmarried daughters of dead employees in state-controlled banks: they can inherit their parents’ pensions. ...It costs more to transport a sack of potatoes from northern Greece to Athens than from Athens to Dusseldorf, because haulage, like many other sectors of the Greek economy, is an impenetrable cartel. When Michalos started a commodities trading business in London in the 1980s, the paperwork took him 48 hours, he said. In Greece’s “Soviet-style” economy he had to go through 117 bureaucratic procedures to get the right government permits. A wealthy friend of his had taken 10 years to win permission to put up a hotel.

Greek Chutzpah

There's an old joke that if you owe a bank $10,000, you have a problem, but if you owe a bank $10,000,000, the bank has a problem. The Greek government certainly seems to have that attitude. Short-sighted and corrupt politicians in Athens have spent their nation into a fiscal ditch and they now want to mooch from both the IMF and other European nations (especially Germany). The German Prime Minister (if only for political reasons) is talking tough, saying that Greece should do more to reduce subsidies and handouts. Why should Germans work until age 67, after all, so Greeks can enjoy overpaid government jobs and retire at age 61? So what is the response from the Greeks? Amazingly, one of the politicians had the gall to say his nation "cannot accept" further wage cuts. Here's an excerpt from the Daily Telegraph:

It is far from clear whether Athens will agree to further austerity as strikes hit the country day after day. Andreas Loverdos, Greece’s labour minister, said the EU-IMF team wants further wages cuts. “We cannot accept that.” Greece knows it can opt for default at any time, setting off an EMU-wide crisis and bringing down Europe’s banks. It also knows that key figures in the Bundestag favour debt restructuring. “Those who chased high yield by purchasing Greek debt must share the costs,“ said Volker Wissing, chair of Bundestag’s finance committee. Leo Dautzenberg from the Christian Democrats said banks should prepare for a `haircut’ of up to 50pc. The ECB, Brussels, and the IMF have been fighting feverishly to head off such a move, fearing a financial chain-reaction.

If the Germans have any brains and pride, they will tell the Greeks to go jump in a lake (other phrases come to mind, but this is a family-oriented blog). And if this means that German banks take a loss on their holdings of Greek government debt, there's a silver lining to that dark cloud since it is time for financial institutions to realize that they should not be lending so much money to corrupt and wasteful governments.

Greetings from Spain

I arrived in Madrid yesterday for a speech to the annual Convention of Independent Financial Advisors, and it is somehow fitting that Spain was downgraded by Standard and Poor's as I entered the country. I'm not a fan of the bond-rating agencies, and the fact that it has taken so long for Spain to be downgraded simply reinforces my skepticism about their value. So let's focus instead on identifying the sources of Spain's fiscal crisis. If you look at the OECD's fiscal database, you will see that Spain's short-run problem is solely the result of a growth in the burden of government spending. Over the past seven years, the budget in Spain has skyrocketed from 38.4 percent of GDP to 47.2 percent of GDP. And since tax revenues have stayed the same as a share of national economic output, it is difficult to see how anyone can conclude that the fiscal crisis is the result of inadequate revenue. In the long run, the problem also is excessive government spending, largely because demographic factors such as an aging population will push up outlays for pensions and health care.

In other words, Spain is in trouble for the same reason that Greece is in trouble. Government is too big and politicians are unwilling to take the modest steps that are needed to rein in dependency. This, of course, is exactly why there should not be a bailout. Subsidizing Greek politicians and Spanish politicians - regardless of whether the bailout comes from German taxpayers and/or the IMF - will send a signal to other European nations that there is an easy way out. But the "easy way out" simply postpones the day of reckoning and makes the eventual adjustment much more challenging. Here's an excerpt from the Washington Post report:

European and International Monetary Fund officials on Wednesday were considering a dramatically increased $158 billion bailout package for Greece as the country's debt crisis continued to ripple across Europe, with Standard & Poor's downgrading the credit rating on Spain, the continent's fourth-largest economy. ...In Europe, the most intense focus remains on Greece, but fears were intensifying elsewhere, especially in Portugal and Spain. Though analysts noted that both countries are in better shape than Greece -- with lower ratios of debt -- they both shared large fiscal deficits and poor long-term economic prospects. On Wednesday, the government in Portugal announced that it would move up a program of painful spending cuts to shrink its budget deficit and shore up confidence amid signs that fearful depositors were moving capital out of Lisbon banks. After lowering Greek debt to junk bond status on Tuesday, Standard & Poor's kept Spain at investment grade status, but lowered its rating one notch, to AA.