Should American Taxpayers Finance another Big Fat Greek Bailout?
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.
The IMF—A Reading List
Now that Dominique Strauss-Kahn has resigned as head of the International Monetary Fund, the debate has turned to who will lead the lending agency as it goes through its usual non-transparent and politicized selection process. (Of course, virtually all decisions at the IMF are politicized since it is primarily a political institution, a club in which rich countries’ governments with diverse interests and political priorities typically lend money to governments with track records of mismanaging their economies.)
The IMF is a fundamentally flawed institution, a problem independent of whether the new Fund chief is French or South African. Here’s a brief reading list for anybody more interested in the scandal of IMF lending than of the scandals of IMF personalities.
- In this Cato Handbook essay I provide an overview of the IMF’s poor record at promoting growth or reform, and of the moral hazard of providing big bailouts to countries, beginning with Mexico in 1995.
- In “The IMF’s Imprudent Role as Lender of Last Resort,” Charles Calomiris describes how IMF rescue packages undermine global financial stability.
- In this Cato study, I review the evolution of the IMF, show that its lending tends to last for decades rather than be short term, and that it tends to slow rather than accelerate reforms. I argue for market solutions to debt crises.
- In “International Financial Crises: Myths and Realities,” Anna Schwartz explains that financial contagion during the Asian financial crisis—a key justification for IMF intervention—was not occurring. Only countries with flawed economic policies suffered crises.
- Here, Swami Aiyar argues that the IMF has no business lending to Greece.
- In “Asian Problems and the IMF,” Allan Meltzer criticizes the Fund’s subsidization of risk.
- Here Anna Schwartz takes on the Fund’s “dubious proposal” to turn itself into a sort of bankruptcy court for nations.
- In this study Swami Aiyar takes on another bad idea: creating an IMF currency to rival the dollar.
’1099′ Repeal Speaks Volumes About ObamaCare
From my latest Kaiser Health News op-ed:
When 34 Senate Democrats joined all 47 Republicans last week to repeal ObamaCare’s 1099 reporting requirement, their votes confirmed what their talking points still deny: ObamaCare will increase the deficit, no matter what the official cost projections say…
This public-choice dynamic [of concentrated benefits and diffuse costs] is why the Congressional Budget Office, the chief Medicare actuary, and even the International Monetary Fund have discredited the idea that ObamaCare will reduce the deficit. It is one of the principal reasons why, as Thomas Jefferson wrote, “The natural progress of things is for liberty to yield, and government to gain ground.” In other words, the game is rigged in favor of bigger government.
It also explains why the Obama administration is sprinting to implement ObamaCare in spite of a federal court having struck down the law as unconstitutional. The White House needs to get some concentrated interest groups hooked on ObamaCare’s subsidies – fast.
Read the whole thing here.
The IMF Is Urging Governments to Impose Regulatory and Tax Cartels to Benefit Politicians
Price fixing is illegal in the private sector, but unfortunately there are no rules against schemes by politicians to create oligopolies in order to prop up bad government policy. The latest example comes from the bureaucrats at the International Monetary Fund, who are conspiring with national governments to impose higher taxes and regulations on the banking sector. The pampered bureaucrats at the IMF (who get tax-free salaries while advocating higher taxes on the rest of us) say these policies are needed because of bailouts, yet such an approach would institutionalize moral hazard by exacerbating the government-created problem of “too big to fail.”
But what is particularly disturbing about the latest IMF scheme is that the international bureaucracy wants to coerce all nations into imposing high taxes and excessive regulation. The bureaucrats realize that if some nations are allowed to have free markets, jobs and investment would flow to those countries and expose the foolishness of the bad policy being advocated elsewhere by the IMF. Here’s a brief excerpt from a report in the Wall Street Journal:
Mr. Strauss-Kahn said there was broad agreement on the need for consensus and coordination in the reform of the global financial sector. “Even if they don’t follow exactly the same rule, they have to follow rules which will not be in conflict,” he said. He said there were still major differences of opinion on how to proceed, saying that countries whose banking systems didn’t need taxpayer bailouts weren’t willing to impose extra taxation on their banks now, to create a cushion against further financial shocks. …Mr. Strauss-Kahn said the overriding goal was to prevent “regulatory arbitrage”—the migration of banks to places where the burden of tax and regulation is lightest. He said countries with tighter regulation of banks might be able to justify not imposing new taxes.
I’ve been annoyingly repetitious on the importance of making governments compete with each other, largely because the evidence showing that jurisdictional rivalry is a very effective force for good policy around the world. I’ve done videos showing the benefits of tax competition, videos making the economic and moral case for tax havens, and videos exposing the myths and demagoguery of those who want to undermine tax competition. I’ve traveled around the world to fight the international bureaucracies, and even been threatened with arrest for helping low-tax nations resist being bullied by high-tax nations. Simply stated, we need jurisdictional competition so that politicians know that taxpayers can escape fiscal oppression. In the absence of external competition, politicians are like fiscal alcoholics who are unable to resist the temptation to over-tax and over-spend.
This is why the IMF’s new scheme should be rejected. It is not the job of international bureaucracies to interfere with the sovereign right of nations to determine their own tax and regulatory policies. If France and Germany want to adopt statist policies, they should have that right. Heck, Obama wants America to make similar mistakes. But Hong Kong, Switzerland, the Cayman Islands, and other market-oriented jurisdictions should not be coerced into adopting the same misguided policies.
Did the IMF Deliberately Exaggerate the 2008 Financial Crisis?
This month, two vice-presidents of the Czech National Bank (CNB) have made very serious allegations against the International Monetary Fund. Below is the summary of their claims so far:
- Speaking to the Austrian daily newspaper Der Standard on April 2, Mojmir Hampl, the vice-president of the CNB, said that the IMF under Dominique Strauss-Kahn “wanted to expand its role in Eastern Europe and obtain new financial resources.” Hampl claimed that the IMF exaggerated problems with the financial systems in Eastern Europe. “We have always emphasized that the instability of the financial system [in 2008] was a Western European problem. That proved correct… According to a recent EU report, only nine out of 27 EU member states did not have to introduce any financial stabilization measures [during the crisis]. All nine were new [mostly Eastern European] member states.”
- Hampl’s claim was echoed by his colleague, CNB vice-president Miroslav Singer, in today’s edition of the Czech daily Hospodarske Noviny. According to Singer, “I cannot say nice things about the IMF’s role in the 2008 crisis.” The Financial Times, Singer continued, carried a lot of nonsensical stories about the state of the Czech financial sector prior to the crisis. Instead of dispelling those stories, the IMF produced a study about the Czech Republic based on incorrect data and then leaked it to the Financial Times. “It is difficult to be certain… that the IMF wanted to harm the Czechs, Slovaks or Poles on purpose… More likely it was a combination of panic, lack of expertise and a desire to see problems everywhere.”
If true, these claims raise troubling questions about the incentives behind the largest increase of resources in the Fund’s history.
Latvia Retains Flat Tax, Disappointing Class-Warfare Advocates
The Baltic nation of Latvia is in the middle of a serious economic downturn resulting largely from a credit bubble and excessive government spending. This created an opening for those who have long wanted to undo the nation’s flat tax and impose a discriminatory system. Indeed, the economic Luddites at the Tax Research Network were already celebrating the expected demise of the single-rate tax. Unfortunately for them (but fortunately for Latvians), the government made a stunning announcement that the flat tax will be retained according to Reuters:
Latvia’s government is to reduce old age pensions and state sector salaries but not raise taxes, it said on Thursday as it tries to win more loans and avert crisis and possible currency devaluation. The five-party coalition government agreed with social partners such as unions and employers on ways to find savings of 500 million lats ($1.01 billion) to win further loans from the International Monetary Fund and European Union, which are seen as the only way to survive a deep economic slump. “It was a difficult decision and it will not be popular but it had to be done,” Prime Minister Valdis Dombrovskis told reporters after a marathon and sometimes chaotic government session of almost 12 hours. “Our decision is sending a signal to the EU that we are serious,” he added. Against expectations, the government decided against introducing a progressive income tax for the first time to replace the current flat tax of 23 percent. The moves will include a cut in old age pensions of 10 percent, a whopping 70 percent cut in the pensions of those who still work, and a 20 percent cut in state sector salaries.
To be sure, this may not be the last word on this issue. Latvian politicians eventually may decide to undo the flat tax. Or perhaps Iceland’s new left-wing government may be the first nation to backslide to a so-called progressive tax system. Regular readers of the blog may recall that we have a theme song that we include every time there is an announcement of a new flat tax nation. In preparation for bad news, we have selected a theme song for when a nation decides to go in the wrong direction.
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