Thursday, May 6, 2010

Other People's Money

Close your eyes and imagine in the year 2013 the noisy but peaceful political revolution culminates with the Tea Party, Libertarians and conservative Republicans taking total control of Congress and the Presidency.

Imagine the government cutting spending by a minimum 10% in all sectors except military defense. Included in the domestic cuts is entitlement programs. Medicare is reduced by 15%, Medicaid eliminated. All Social Security benefits such as pensions cut 20% and special programs for the disabled cut 50%. The budget for Section 8, the rent and home subsidy for the poor administered by  Housing and Urban Development slashed by 35%.

It is all part of the government's austerity program to balance the budget to get it under 3% of national gross product and cut the national debt designed to end the burden previous administrations placed on the shoulders of our children, grandchildren and generations to come.

Now imagine the reaction. Seniors in a newly invigorated Grey Panther movement throw rocks at their doctor's offices. Hundreds of thousands march on Washington where union leaders instigate riots and try to set Congressional office buildings on fire. Police fire upon and kill at least three rioters.

Now open your eyes and consider this.

That's essentially what is going on today in Athens, Greece.

The only difference is that the imagined scenario in the United States is a result of failure by our system of capitalism. In Greece, it is the failure of socialism. The common thread is both nation's played reckless with other people's money.

Led by union leaders out to protect their lucrative pensions, paid vacations and universal health care subsidies, the rioters in Athens were met with a response from police that resulted in three deaths.

Observers said the 24-hour national strike was the most violent show of force so far since Prime Minister George Papandreou unveiled the budget cuts dictated in return for the $146-billion bailout lifeline of loans from the European countries and the International Monetary Fund to prevent Greece from facing a humiliating default.

The government is $400 billion in debt, its ratio of  13.6% debt to gross national product far above the EU guidelines of 3%.

Protesters yelled "thieves, thieves," at police and banks. Black-clad anarchists, as the Los Angeles Times correspondent described them, threw rocks and homemade bombs. Police retaliated with smoke bombs that created plumes of acrid smoke around the capital city considered by historians as the cradle of democracy.

The austerity plan has unleashed vociferous opposition from unions and social activists who view the new measures – mainly hikes on sales tax and deeper cuts in pensions and public servants' pay – as a savage attack on workers' rights.

Those of us in the United States must take note of events that occurred in Greece strikingly familiar in what has taken place here. The Times report:

Papandreou surged to power in October after trouncing a scandal-plagued center-right government with promises to protect salaries and pensions. The new government announced a $4.5-billion stimulus package designed to resuscitate the economy through infrastructure projects and environmentally sustainable development.

Yet, just weeks later, Athens backpedaled on all its pledges, shocking the EU and world markets... Facing spiraling costs for borrowing and a debt repayment later this month, the Greek government decided to accept the three-year rescue package of loans from other Eurozone countries and the IMF.

Notes a public policy expert:

Our recent financial crisis was one of those periodic nervous breakdowns.
What's going on in Europe today is a remake of that movie, only this time filmed by a socialist director. It's a debt crisis, just like ours. It may prove just as serious. And in its own way it is just as characteristic of the system that spawned it. If American capitalism came close to suicide in 2008, the European welfare state now seems no less bound for self-destruction, even if the process occurs in slow motion.

The writer is Daniel Akst. a public policy fellow at the Levy Economics Institute of Bard College in Annandale-on-Hudson, N.Y.

In both cases, these excesses are based on what is known among investment pros as OPM, which stands somewhat disdainfully for Other People's Money....
In Europe's economically troubled peripheral states, the crisis comes from the slow but steady accretion of good intentions. Unlike capitalism, collectivization runs riot at a snail's pace in democracies. But there, too, culture broke down — the culture of self-sufficiency, which is always at risk in a welfare state. And just as they did here, people there spent more than they earned, even if their governments did the borrowing and spending for them. In both places, elected leaders are loath to let creditors take a bad haircut for fear of dragging the entire system down.

And, this:

In both Europe and the U.S., moreover, easy money has been at the heart of the crisis. Here, Alan Greenspan and the Chinese gave us too much credit, which pumped up home prices, which led to even more borrowing. In Europe, countries such as Greece got to trade in their second-rate currencies for euros, which enabled cheaper borrowing — and that much more spending and tax evasion.
Attitudes toward lenders, who in both Europe and the U.S. seem at last to have awakened from their greedy trance, are remarkably parallel. Over here, people are mad at bankers and investors for lending us so much in the first place. And over there, anger arises because lenders are increasingly unwilling to lend at all, potentially leaving Greece and God knows who else unable to finance their deficits. It's remarkable that in both capitalism and socialism, the trouble is the same: Sooner or later you run out of OPM.

Readers comments are welcome as long as they remain civil. We reserve the right to delete any comments that are vulgar, libelous and totally irrelevant to this posting. -- Jer

1 comment:

twoods said...

actually if we did those things in 2013 we'd balance the budget, according to CBO's forecasts. we don't need to anything nearly as drastic as Greece is doing to get our deficit below 3% of GDP.

of course if the 2012 election puts tea party / hard-right republicans in power, they're probably going to prioritize tax cuts over spending cuts anyway, because that's what they've done every time they've gained power for the past 30 years.

and it should be noted, the sever austerity that Greece is engaging in is going to weaken, not strengthen, their ability to pay off their debts; and the only reason they have to do it is that the German reps on the European Central Bank are unwisely basing their policies on fears about inflation, when the risk of deflation is obviously much greater right now.

i think, anyway.