Cutting the Government—Greek Style

Posted by Marian L. Tupy

After much wrangling and consternation, the Greek government has agreed to the latest round of “drastic austerity measures,” the most significant of which is the promise to cut 15,000 government jobs. In return, the Greeks will receive 130 billion euros ($170 billion) of European bailout money to keep the Greek state afloat and, crucially, in the eurozone. That, anyway, is the plan.

The leaders of the political parties that “support” the Greek technocratic (i.e. unelected) government still have to approve the cuts, which they might not do because the unions threaten a general strike. But, there are additional problems as well. First, many of those 15,000 government workers will likely come from the ranks of those who are close to retirement. While the number of government workers will thus shrink, the government’s unsustainable social security burden will worsen. Second, the government workforce (i.e. public servants and employees of the Greek parastatals) account for over 22 percent of the Greek labor force of 4.4 million. That means that the number of people working for the government will decline from 968,000 to 953,000—a reduction of 1.6 percent. And that is what amounts to a “drastic austerity measure” in Greece!

The Euro Crisis in Prose and Poetry

Posted by David Boaz

The European debt crisis is inspiring public radio to literary analysis. Last week NPR’s Planet Money put the French-German relationship into a “threepenny opera”:

All

Everyone is counting on you
You’ve got the money
We’ve got the debt (Oh yes, we’ve got a lot of debt!)
And do we need a bailout—you bet

Germany

Zat’s it, I’ve had enough
Looks like it’s time now for me to leave…

France

Oh?

Germany

Vhy is ze door locked? You must let me out.

France

Dear when the times are tough
It’s better to give zan to receive

Then Monday Marketplace Radio turned to classics professor Emily Allen Hornblower and economist Bill Lastrapes to discuss Greek debt as classical tragedy—Oedipus? The ant and the grasshopper?

Loyal Cato readers will recognize Bill Lastrapes as the coauthor of the much-discussed Cato Working Paper “Has the Fed Been a Failure?”

And then, if you prefer prose and sober analysis to literary analogies, let me recommend Holman Jenkins’s perceptive column on why Europe hasn’t solved its crisis yet, which unfortunately appeared in the less-read Saturday edition of the Wall Street Journal. (OK, not less read than Cato-at-Liberty, but probably less read than the weekday Journal.)

Neither leader has an incentive to sacrifice what have become vital and divergent interests to produce a credible bailout plan for Europe. To simplify, German voters don’t want to bail out French banks, and the French government can’t afford to bail out French banks, when and if the long-awaited Greek default is allowed to happen….

There is another savior in the wings, of course, the European Central Bank. But the ECB has no incentive to betray in advance its willingness to get France and Germany off the hook by printing money to keep Europe’s heavily indebted governments afloat. Yet all know this is the outcome politicians are stalling for. This is the outcome markets are relying on, and why they haven’t crashed.

All are waiting for some market ruction hairy enough that the central bank will cast aside every political and legal restraint in order to save the euro….

And then the crisis will be over? Not by a long shot.

All these “solvent” countries and their banks will be dependent on the ECB to keep them “solvent,” a reality that can only lead to entrenched inflation across the European economy. That is, unless these governments undertake heroic reforms quickly to restore themselves to the good graces of the global bond market so they can stand up again without the ECB’s visible help.

It’s just conceivable that this might happen—that countries on the ECB life-support might put their nose to the grindstone to make good on their debts, held by ECB and others. Or they might just resume the game of chicken with German taxpayers, albeit in a new form, implicitly demanding that Germany bail out the ECB before the bank is forced thoroughly to debauch the continent’s common currency, the euro.

Why Slovakia May Not Support Europe’s Bailout Plan

Posted by Ian Vasquez

Slovakia is set to vote today on the European bailout plan and may well become a holdout. As my colleague David Boaz noted yesterday, this is due to Slovakia’s libertarian speaker of the house, Richard Sulik, who spoke at a Cato Institute conference in Bratislava last year, and who opposes bailouts of Greece and other EU countries based on sound ethical, political, and economic reasoning. Greece is already bankrupt and a bailout will only add to the country’s debt; an EU “rescue” will continue to create moral hazard, thus encouraging bad policies by reckless governments; relatively poorer and better behaved Slovakia should not be forced to support the irresponsible governments of richer European countries; the EU’s response to the Greek debt crisis has led to blatant violations of EU and European Central Bank rules, thus undermining democratic principles and the EU itself; the scare stories of not approving the bailout should not be believed; the best solution is for Greece is to declare bankruptcy once and for all.

In this document by his Freedom and Solidarity Party, Richard Sulik lays out his party’s opposition to the bailout fund. It is consistent with the views of other leading scholars including that of John Cochrane of the University of Chicago (and a Cato adjunct scholar) as expressed in his recent Wall Street Journal op-ed on how to save the Euro.

Sulik has tapped into popular sentiment among Europeans about the “democracy deficit,” or huge gap between the designs of Europe’s ruling elites and the desires of the region’s citizens. The widespread (and accurate) perception of Eurocrats imposing their agenda on Europe to the benefit of their cronies (e.g., big business, labor unions, and politicians in power) and at the expense of the majority is becoming increasingly difficult to ignore. The Slovak government, which supports the bailout, may well fall on account of this vote, but the prime minister has already indicated that the vote on the bailout fund will be held repeatedly until it is approved. (No doubt there will be little possibility of a repeat vote repealing the bill.)

On a related note, a new Finnish think tank, Libera, provides more evidence that Europeans are rethinking big government. It published a study today which reassesses the record of the Swedish welfare state and praises the numerous market reforms that country has introduced out of necessity since the 1990s.

The Lives of Others 2.0

Posted by Julian Sanchez

Tattoo it on your forearm—or better, that of your favorite legislator—for easy reference in the next debate over wiretapping: government surveillance is a security breach—by definition and by design. The latest evidence of this comes from Germany, where there’s growing furor over a hacker group’s allegations that government-designed Trojan Horse spyware is not only insecure, but packed with functions that exceed the limits of German law:

On Saturday, the CCC (the hacker group) announced that it had been given hard drives containing “state spying software,” which had allegedly been used by German investigators to carry out surveillance of Internet communication. The organization had analyzed the software and found it to be full of defects. They also found that it transmitted information via a server located in the United States. As well as its surveillance functions, it could be used to plant files on an individual’s computer. It was also not sufficiently protected, so that third parties with the necessary technical skills could hijack the Trojan horse’s functions for their own ends. The software possibly violated German law, the organization said.

Back in 2004–2005, software designed to facilitate police wiretaps was exploited by unknown parties to intercept the communications of dozens of top political officials in Greece. And just last year, we saw an attack on Google’s e-mail system targeting Chinese dissidents, which some sources have claimed was carried out by compromising a backend interface designed for law enforcement.

Any communications architecture that is designed to facilitate outsider access to communications—for all the most noble reasons—is necessarily more vulnerable to malicious interception as a result. That’s why technologists have looked with justified skepticism on periodic calls from intelligence agencies to redesign data networks for their convenience. At least in this case, the vulnerability is limited to specific target computers on which the malware has been installed. Increasingly, governments want their spyware installed at the switches—making for a more attractive target, and more catastrophic harm in the event of a successful attack.

Two Pictures that Perfectly Capture the Rise and Fall of the Welfare State

Posted by Daniel J. Mitchell

In my speeches, especially when talking about the fiscal crisis in Europe (or the future fiscal crisis in America), I often warn that the welfare state reaches a point of no return when the people riding in the welfare wagon begins to outnumber the people pulling the wagon.

To be more specific, if more than 50 percent of the population is dependent on government (employed in the bureaucracy, living off welfare, receiving public pensions, etc.), it becomes difficult for taxpayers to form a majority coalition to fix the mess. This may explain why Greek politicians have resisted significant reforms, even though the nation faces a fiscal death spiral.

But you don’t need me to explain this relationship. One of our Cato interns, Silvia Morandotti, used her artistic skills to create two images (click pictures for better resolution) that show what a welfare state looks like when it first begins and what it eventually becomes.

Read the rest of this post »

Beware of Greeks Demanding Gifts

Posted by David Boaz

Our friend Alberto Mingardi of the Bruno Leoni Institute in Italy writes about the Greek crisis:

In a way, the most surprising element of the Greek disaster is that taxpayers in other European countries aren’t outraged at being called to rescue an economy that has been marching towards disaster for so long.

The legitimate fear of contagion affecting other European countries is now being used to persuade the electorates outside Greece that: first, Greece has not manufactured its own fate, but is rather the victim of “locust-like” speculators and, second, a Greek bailout would be an indictment of the European social model, that is, the welfare state.

Where European public opinion is collapsing under its contradictions is in the attempt to reconcile the idea of the EU as the ultimate policeman of public finance with the ideological need to save the “European social model” no matter what. If the European Union has long been a major catalyst for reform in member states, it seems inappropriate that it now aims to artificially remove the ultimate incentive for fiscal wisdom: the possibility of a sovereign default. The problem of “moral hazard” should not be considered the exclusive preserve of too-big-to-fail banks; countries can suffer from it, too.

At two Cato forums last year Simeon Djankov, Steve Hanke, and Takis Michas discussed the background of the Greek crisis. Partial transcript here. Video here and here. Michas blamed the problems on “clientelism,” which he described as “a system in which political support is provided in exchange for benefits…. 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.”

Dan Mitchell said “I told you so” about the failure of the previous Greek bailout. My thoughts on the Greek “anarchists” demanding a continuation of government subsidies here. And here’s a comparison between the Greek and U.S. debt problems.

Should American Taxpayers Finance another Big Fat Greek Bailout?

Posted by Daniel J. Mitchell

It appears that American taxpayers are about to subsidize another Greek bailout (via the Keystone Cops at the IMF). This is way beyond economically foolish. It is also morally offensive.

To turn Winston Churchill’s famous quote upside down, “Never have so many paid so much to subsidize such an undeserving few.”

Let’s start with a few facts:

  • Greece’s GDP is roughly equal to the GDP of Maryland.
  • Greece’s population is roughly equal to the population of Ohio.
  • Despite that small size, in both terms of population and economic output, Greece already has received a bailout of about $150 billion (actual amount fluctuates with the exchange rate).
  • Don’t forget the indirect bailout resulting from purchases of Greek government bonds by the European Central Bank.
  • Now Greece is angling for another bailout of about $150 billion.

Is there any possible justification for throwing good money after bad with another bailout? Well, if you’re a politician from Germany or France and your big banks (i.e., some of your major campaign contributors) foolishly bought lots of government bonds from Greece, the answer might be yes. After all, screwing taxpayers to benefit insiders is a longstanding tradition in Europe.

But from a taxpayer perspective, either in Europe or the United States, the answer is no. Or, to be more technical and scientific, the answer is “Heck no, are you friggin’ out of your mind?!”

Consider these fun facts from a recent column by John Lott and then decide whether the corrupt politicians of Greece (and the special interest groups that receive handouts and subsidies from the Greek government) deserve to have their hands in the pockets of American taxpayers:

Despite Greece’s promises, government spending is up over last year’s already bloated levels, the deficit is bigger than ever, and it has utterly failed to meet the promised sell-off of some government assets. Not a single public bureaucrat has been laid off so far. …Greece can pay off €300 of the €347 billion debt by selling off shares the government owns in publicly traded companies and much of its real estate holdings. The government owns stock in casinos, hotels, resorts, railways, docks, as well as utilities providing electricity and water. But Greek unions fiercely oppose even partial privatizations. Rolling blackouts are promised this week to dissuade the government from selling of even 17 percent of its stake in the Public Power Corporation. …Greeks apparently believe that they have Europe and the world over a barrel, that they can make the rest of the world pay their bills by threatening to default. Greece’s default would be painful for everyone, but for Europe and the United States, indeed for the world, the alternative would be even worse. If politicians in Ireland, Portugal, Spain, Italy, and other countries think that their bills will be picked up by taxpayers in other countries, they won’t control their spending and they won’t sell off assets to pay off these debts. Countries such as Greece have to be convinced that they will bear a real cost if they don’t fix their financial houses while they still have the assets to cover their debts. …The real problem is the incentives we are giving to other countries. We have to make sure that “Kicking the can down the road” isn’t an option.

Just for good measure, here are a few more interesting factoids in a Wall Street Journal column by Holman Jenkins.

[Greece is] one of the most corrupt, crony-ridden, patronage-ridden, inefficient, silly economies in Christendom. …The state railroad maintains a payroll four times larger than its ticket sales. When a military officer dies, his pension continues for his unwed daughter as long as she remains unwed. Various workers are allowed to retire with a full state pension at age 45.

To be blunt, Greek politicians have miserably failed. Wait, that’s not right. You can’t say someone has failed when they haven’t even tried. Let’s be more accurate and say that Greek politicians have succeeded. They have scammed money from taxpayers in other nations to prop up a venal and corrupt system of patronage and spoils. Sure, they’ve made a few cosmetic changes and trimmed around the edges, but handouts from abroad have enabled them to perpetuate a bloated state. And now they’re using a perverse form of blackmail (aided and abetted by big banks) to seek even more money.

Read the rest of this post »

Block-Granting Medicaid Is a Long-Overdue Way of Restoring Federalism and Promoting Good Fiscal Policy

Posted by Daniel J. Mitchell

This new video, based in large part on the good work of Michael Cannon, explains why Medicaid should be shifted to the states. As I note in the title of this post, it’s good federalism policy and good fiscal policy. But the video also explains that Medicaid reform is good health policy since it creates an opportunity to deal with the third-party payer problem.

One of the key observations of the video is that Medicaid block grants would replicate the success of welfare reform. Getting rid of the federal welfare entitlement in the 1990s and shifting the program to the states was a very successful policy, saving billions of dollars for taxpayers and significantly reducing poverty. There is every reason to think ending the Medicaid entitlement will have similar positive results.

Medicaid block grants were included in Congressman Ryan’s budget, so this reform is definitely part of the current fiscal debate. Unfortunately, the Senate apparently is not going to produce any budget, and the White House also has expressed opposition. On the left, reducing dependency is sometimes seen as a bad thing, even though poor people are the biggest victims of big government.

It’s wroth noting that Medicaid reform and Medicare reform often are lumped together, but they are separate policies. Instead of block grants, Medicare reform is based on something akin to vouchers, sort of like the health system available for Members of Congress. This video from last month explains the details.

In closing, I suppose it would be worth mentioning that there are two alternatives to Medicaid and Medicare reform. The first alternative is to do nothing and allow America to become another Greece. The second alternative is to impose bureaucratic restrictions on access to health care—what is colloquially known as the death panel approach. Neither option seems terribly attractive compared to the pro-market reforms discussed above.

Friday Links

Posted by George Scoville

  • “PBS used to ask, ‘If not PBS, then who?’ The answer now is: HBO, Bravo, Discovery, History, History International, Science, Planet Green, Sundance, Military, C-SPAN 1/2/3 and many more.”
  • “The fiscal problem that is destroying U.S. economic confidence is not the fiscal balance, however. It is the level of government expenditures relative to GDP.”
  • “The Pentagon’s first cyber security strategy… builds on national hysteria about threats to cybersecurity, the latest bogeyman to justify our bloated national security state.”
  • “How ‘secure’ do our homes remain if police, armed with no warrant, can pound on doors at will and, on hearing sounds indicative of things moving, forcibly enter and search for evidence of unlawful activity?”
  • National debt is driving the U.S. toward a double-dip recession: 

The “I-Told-You-So” Blog Post about the Completely Predictable Failure of the Greek Bailout

Posted by Daniel J. Mitchell

Way back in February of 2010, I wrote that a Greek bailout would be a failure. Not surprisingly, the bureaucrats at the International Monetary Fund and the political elite from other European nations ignored my advice and gave tens of billions of dollars to Greece’s corrupt politicians.

The bailout happened in part because politicians and international bureaucrats (when they’re not getting arrested for molesting hotel maids) have a compulsion to squander other people’s money. But it also should be noted that the Greek bailout was a way of indirectly bailing out the big European banks that recklessly lent money to a profligate government (as explained here).

At the risk of sounding smug, let’s look at my four predictions from February 2010 and see how I did.

1. The first prediction was that “Bailing out Greece will reward over-spending politicians and make future fiscal crises more likely.” That certainly seems to be the case since Europe is in even worse shape, so I’ll give myself a gold star.

2. The second prediction was that “Bailing out Greece will reward greedy and short-sighted interest groups, particularly overpaid government workers.” Given the refusal of Greek politicians to follow through with promised cuts and privatizations, largely because of domestic resistance, it seems I was right again. As such, I’ll give myself another pat on the back.

3. My third prediction was that “Bailing out Greece will encourage profligacy in Spain, Italy, and other nations.” Again, events certainly seem to confirm what I warned about last year, so let’s put this one in the win column as well.

4. Last but not least, my fourth prediction was that “Bailing out Greece is not necessary to save the euro.” Well, since everybody is now talking about two possible non-bailout options—either a Greek default (a “restructuring” in PC terms) or a Greek return to using the drachma—and acknowledging that neither is a threat to the euro, it seems I batted 4-4 in my predictions.

But there’s no reward for being right. Especially when making such obvious predictions about the failure of big-government policies. So now we’re back where we were early last year, with Greece looking for another pile of money. Here’s a brief blurb from Reuters.

The European Union is racing to draft a second bailout package for Greece to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday.

If this second bailout happens (and it probably will), then I will make four new predictions. But I don’t need to spell them out because they’ll be the same ones I made last year.

We’ve reached the lather-rinse-repeat stage of fiscal collapse for the welfare state.

Wednesday Links

Posted by George Scoville

‘Anarchist’ Idiocy

Posted by David Boaz

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.