Greece, Democracy, Debt, and Decline

“The earliest democracy in the world began in Athens, in 510 BC . . . . Democracy means the rule of the people (in Greek). That is where each individual person has a vote about what to do. Whatever the most people vote for wins.”   —  www.History For Kids.org

 What the most Greeks voted for was a steady increase in government benefits and government jobs, with a good part of the expense pushed onto their under-aged, non-voting children.  In 2009 government spending (federal, state, and local) was half—50.4%—of the entire Greek economy.  And a third of the spending was financed with borrowed money.

 It’s the Achilles Heel of democracy.  Once voters discover that they can vote money into their own pockets, they will.  Politicians will be happy to help, buying their way into office with cash harvested from future generations (who can’t vote) and from taxpayers (who are in the minority). 

 Growing debt means rising interest costs.  And when investors noticed that Greece was deeply in debt they became nervous, and began to demand an 11% rate of interest to compensate them for the risk.  If we (the United States) have to pay 11% when our public debt reaches $10 trillion 18 months from now, we’ll find ourselves paying $1.1 trillion in interest every year, or more than half of the $2.1 trillion that the federal government collected in tax revenue in 2009.

 Investors have been running around in a panic, but they are only just now arriving at a realization that there are really two separate problems.  There are nations, like Greece, that risk spiraling interest costs on debt owed to foreigners; and there are nations, like Greece, whose economies have been crushed by the weight of government spending that sucked the vitality out of all other sectors of the economy.

 Japan is a case in point.  It has the largest debt in the developed world, but 95% of the bonds are owned by the Japanese themselves.  In 2010 the land of the Rising Sun won’t borrow money from foreigners, but rather lend to them.  That’s what it means to run a trade surplus each year;  we run a trade deficit, so Japan will buy American bonds (we hope).  Forget what the pundits have been saying;  trade deficits matter.

 Japan’s economy has nevertheless been moribund for most of the last 20 years, following a period of growth that seemed unstoppable.  Japan was the “it” country in the 1980s, with a 2% unemployment rate, a strong social safety net, omniscient and omnipotent government planning, and active government intervention in industries and individual businesses.  Many Americans argued that we should put our own economy in the hands of wise government technocrats who would manage every industry like puppet masters.

 Then Japan’s real-estate and stock-market bubbles burst, and the economy soured.  The nation undertook spending programs (railroads, bridges, “social infrastructure”, bank bailouts) in 1992, 1993, 1994, and 1995.   Like Franklin Roosevelt in 1937 the Japanese then tried to reduce the huge deficits by increasing taxes, but found that their government had weakened their economy by sucking up skilled workers, entrepreneurs, and investment capital.  It plunged back into recession, the deficits and malaise continued, and by 2006 the nation’s debt had grown to 180% of GDP, up from 63% in 1991.

Big Government has also slowed the growth of most of the economies of Europe.  The nickname, after all, is Eurosclerosis;  the loss of health and vitality that results when too few workers labor to feed and clothe and house too many bureaucrats.  Slower growth means less tax revenue, which leads to higher tax rates that further stifle economic growth.

 Yet Europe is sharply divided, between those who borrow from foreigners (the nations running trade deficits) and those who lend.  Greece, Spain, Italy, Portugal, Ireland, and Britain have been borrowers, while Germany, Sweden, and the Netherlands add to their wealth each year by exporting more than they import.  The countries with the big foreign debts are the ones that have to worry that their debt will spiral upward as a result of sharply rising interest rates.

 As the crisis unfolded in Greece, investors around the globe moved their money into US dollars, with little thought to the fact that Uncle Sam faces both problems.  Our government has grown, and it has reached this new heft with the help of money loaned by foreigners.  Japan, China, and other exporting nations helped us finance the bailouts of Chrysler, General Motors, AIG, Citigroup, FNMA, and Freddie Mac, and we’ll need further financing to pay for the projected deficits of the next 10 years.

In the short term, we need to provide assurance to our foreign creditors that we aren’t going to default.  There’s enough fat in the budget that Congress should be able to brighten the picture cosiderably by taking a nip here and a tuck there.   What Congress cannot do, without external pressure from The American People, is actually balance its budgets—and keep them balanced as entitlement spending begins to gobble up everything in sight.  We’re going to have to force our representatives to do their jobs, in the year 2021 and the year 2725.  We’ll need every tool at our disposal to rein them in.

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