Sunday, May 16, 2010

Athens Enflamed

The crisis in Greece is multifaceted both in its sources and portents. In addition to the inability of many governments – which includes UK, US and Japan, to name a few - to get serious about taxing sufficiently to maintain a reasonably balanced budget (it’s too easy spending money you don’t have) Greece is faced with corruption at the top and featherbedding on the bottom.

As to the former, wealthy weasels collude with corrupt bureaucrats to avoid paying taxes, which seriously truncates tax revenue.

The latter involves lots of ghost workers and jobs that are way too cushy. Ghost workers are those that only make their presence known when it’s time to collect their paychecks. Featherbedding is best described by an experience I had working on the NY subway system back in 1964. It was World’s Fair time and I got a temporary 6-month job as a car cleaner for the line that served the fair.

It was graveyard shift, 10 pm to 6 am. We had a quota of 8 cars to sweep a night, but most nights it didn’t take much more than an hour to do the work. We’d punch in at 10, sit around the lunch table till after 11, go out and sweep 4 cars and then sleep in one of the cars till lunch at 2. After lunch we’d go back and sweep 4 more cars then take another nap till punch out time at 6. If anybody hadn’t shown up for work, there’d be overtime, 2 hours for 2 additional cars.

If you had a puke to clean up that could take extra time but the cars were new with smooth floors and hard plastic seats so very easy to clean. They also had only lateral seating, that is, against the sides of the car. It was on the city’s IRT line, the oldest of the three subway systems and the cars were narrower and shorter than in the other two newer systems. Since the cars on the newer lines were wider there was room for perpendicular seating so the two types of seats, lateral and perpendicular, alternated, making lots of little corners to sweep. And being older than the new cars I worked on, the floors were kind of rough. Those cars actually took some time to sweep, though still nowhere near one hour per car.

It was union work rules that created lots of easy jobs. I’m somewhat conflicted on the subject. On the one hand I like the idea of jobs not being excessively stressful and frantic. On the other, well, it does get boring not having anything to do and besides there’s always productivity to consider. Breaking down costly and unproductive work rules was part of the Reagan legacy. In some ways it was good, but the industrial world has carried it way too far in the constant drive to push workers harder and harder to eke out every penny of profit. Every downsizing involves forcing the remaining staff to work harder.

In order for Greece to maintain its bloated civil service in the face of inability to raise revenue, compounded by the economic downturn, the country was forced to borrow at unprecedented levels. Their borrowing, by the way, was aided by Goldman Sachs, the investment bank most of us like to hate, which provided ‘innovative financial instruments’ that allowed the country to hide its true debt level.

Now its annual deficit is running at nearly 14% of GDP and total debt is about 115% of GDP. The country can no longer finance its debt, since investors are now asking for very high interest on Greek government bonds out of the very real concern that the country may default. It cannot afford the interest. If it had its own currency instead of using the Euro, it could just print money, thus devaluing the currency and lessening the debt burden. It can’t print Euros so it’s either got to pay or default.

The only way Greece can pay is if it gets bailed out, and the only way it’ll get bailed is if it changes its profligate ways, otherwise no other country will be willing to risk their taxpayer’s money on a country that can’t figure out how to live within its means. In order to get that help they must either end the tax evasion at the top, or severely reduce benefits and cut back on its bloated civil service, the latter much easier to do than the former. They will also be raising value added taxes, which is equivalent to sales taxes, that will hit everybody. The workers are understandably balking. Nobody wants to lose benefits or suffer drastic pay cuts, they will naturally fight. Some workers are suggesting the alternative, defaulting, saying let the fat cats pay.

The high rollers would pay for sure in a default scenario, that’s why European countries and the IMF are frantically putting together a trillion dollars worth of guarantees and bailout money to keep their troubled economies afloat, otherwise their banksters will take a deep hit and they’ll wind up bailing the banks out directly. The Greek bailout is in the form of debt which, though it will be on favorable terms and save the country from default, will seriously add to its total debt burden… so maybe only a temporary fix.

Default, on the other hand, is also no bed of roses. If the deficit is 14% of GDP then the country is getting 40 to 50% of its budget from borrowing. In a default scenario, that source of money instantly dries up so the result is cutbacks far more drastic than proposed in a bailout scenario. Moreover, instantly removing 14% from the economy would throw it into a tailspin with unemployment spiking and economic hardship across the board.

Argentina defaulted about ten years ago. The country was immediately transformed from a middle income country to 60% living in poverty. Much of the economy turned to barter as their only means of exchange. In some cases workers took over shuttered factories. Today, the country seems to be doing ok but it still has not returned to its former economic status.

The root of the debt problem, it seems to me, is the mania for growth. In that scenario, some level of budget deficit is considered a good thing because money is being injected into the economy. According to the theory, borrowing that stimulates the economy is not a problem because the resulting growth lessens the impact of the debt. However, problems arise because governments tend to get hooked on debt – it’s so much easier to borrow than tax – and they become unable to rein in spending to match income. Eventually, as we see in Greece, debt can become so large it is unsustainable and requires drastic retrenching to return to balance.

The debt/deficit situation in the US is actually not far from that of Greece. Total debt is about 100% of GDP. Deficit spending at $1.4 trillion is now about 10% of GDP and that borrowing represents 40% of the budget. The only thing that saves America from Greece’s fate is the use of the dollar as an international currency. For instance, here in Cambodia about 80% of all transactions are in dollars. When Cambodia needs dollars it has to pay for them, which in effect provides interest free loans to the US.

The dollar is temporarily riding high against the Euro because of the Greek problem but Greece is a very small part of the Eurozone and the main countries in it are in fine financial health so unless the US starts to get serious about reducing its deficit the dollar at some point will reverse present course and crash. Meanwhile the idea that America will at any point in the near future begin to bring its finances into balance is risible, unthinkable, almost unimaginable.

However, if the US keeps merrily ignoring fundamental fiscal reality, believing it can be the world’s only exception it will be merrily waltzing over a cliff. The catalyst will be a rise in interest rates. At some point, and in the not too distant future, resource depletion will cause a spike in inflation which will trigger an increase in interest rates (not that raising interest rates in that scenario makes any sense but that’s how the economic establishment thinks about those things) which will sharply increase debt service… and thus begins the downward spiral. You know, yourself, when you get too far into debt, and have to start taking money out of daily life to pay down that debt, it’s very painful living without your usual amenities until you get back on an even keel.

In any case the prognosis isn’t pretty.

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