Saturday, March 10, 2012

The End of Economics?

Some years ago it was all the rage to go on about the "end of politics as we know them," the "end of history as we know it," or the "end of big government as we know it." That all seems so long ago, and so wrong.  Not one to be deterred by prologue, and firmly believing in Dr. Johnson's bromide about "the triumph of hope over experience," I have a new one to add to this list of pithy, but wrong, observations. I think this one, however, might have longer legs, at least when it comes to the situation we see in Europe, and to the one, unfortunately, developing at home.

Let me first toot The Diplomad (ret) horn, mind you just a bit. This humble blog has some hits on the foresight chart: a recent one was the observation about modern democratic politics being increasingly about the battle between voters and taxpayers (here and there are others). We got on that theme well before it became a topic of widespread political discourse, and we have had some others on the importance of manufacturing to our economy, and other topics now debated in the electoral period we have entered.

That said, please let The Diplomad (ret) opine that we might be seeing the "end of economics." It's a bit of an exaggeration, but for now go along with it before, like Homer's boss Mr. Burns, you unleash the hounds. As you will see, I eventually will back off a bit.

I have written a great deal about the economic situation in Greece, Spain, Portugal, etc, not JUST to beat up on the Europeans and their silly pretensions, but also because we have a President who wants us to emulate the Europeans. We are not there yet, and our beloved Grand Republic still has time to avoid the Obama Grecian Formula that leads inexorably to the Grecian Urn, but time grows short.  

Greece: The birthplace (sort of) of democracy and perhaps the model for its death. I won't go over it all again, but suffice to say that the Greeks developed the ultimate entitlement culture. The whole country was on the dole, from top to bottom. With the Euro as their currency--and let's be honest, the Euro is just a new version of the German Mark--the Greeks thought themselves fabulously wealthy and in no need to engage in work, real work, the kind that produces national wealth and allows the state to take its taste. The Greeks lived well beyond their means. The average Greek sought to live like a German without working or saving like a German. The Greeks managed to do this for about a decade thanks to the Euro, phony book keeping by the Greek government, and EU willingness to turn a blind eye to the chicanery in pursuit of the obsessive, even mad Imperial Dream to challenge the United States. 

When a nation "lives beyond its means" the government has an open invitation to insert itself more and more into daily life: the Greek government accepted the invitation. With its guaranteed employment, high wages, generous and early pensions, and powerful public sector unions  the government became the preferred employer. The private sector shrank under the impact of the government's subsidized  competition and expansion; increasing regulation; a crushing tax burden to be avoided by all means fair and foul; and the overvalued Euro which made Greece as expensive as Germany but not as productive. For Greeks, it simply was not worthwhile to work.  Their country developed generous public assistance programs and "pro-worker" legislation that made hiring someone more binding than marriage--you could get divorced easier than you could fire a redundant or incompetent worker. 

All this was made possible, as I noted above, by lying Greek politicians; an electorate willing to vote itself ever increasing benefits and to believe that money just comes from "out there"; and a politically driven and pampered EU bureaucracy committed to seeing the "European Project" succeed above all else. We also must lay a share of the blame at the door of German politicians; they were being taken to the cleaners by the Greeks (and the Spaniards, the Portuguese and . . .) but would not say "Nien." Maybe it was WWII guilt. Maybe they saw Germany achieving what neither the Kaiser nor the Fuehrer could, i.e., dominance from Moscow to Lisbon. Maybe it simply results from the low quality of German political leadership which has left the Germans playing second fiddle to the French, and their pan-European aspirations. Whatever the explanation, the Germans paid and still pay to give unproductive southern Europe a living standard worthy of productive northern Europe--and the beaches are better. 

Bottom line: in Greece the government is the economy. That presents a problem for economics.  Shades of the USSR.

The formulas being offered for Greece's salvation will not work. I won't bother linking to them but there are seemingly endless articles in the international press every day announcing that a deal has been reached. The Euro is safe! The European project lives! Stock markets rally! Everybody breathes a sigh of relief. I defy anybody to decipher the different deals being announced and to figure out which if any of them has a chance to be approved by Greece. All these deals, however, share one thing in common: they all claim that "default" has been averted. Ooops! Sorry. They also share one other thing in common: they are lies. Default is not being averted; it is being defined away in a blizzard of verbiage, e.g., "hair cut," or "credit event." You can look up more "neat-o" new words the EUrocrats employ. Baghdad Bob would be right at home.

The typical "deal" involves bond holders, private ones that is as the European Central Bank (ECB) has exempted itself (as Tom Petty says, "It's good to be King") taking a "haircut" of between 50-75%, maybe even more. That is a default in anybody's book. It looks like a duck, walks like a duck, and craps like a duck.  In exchange the Greeks will get more money from the Germans and PROMISE to make significant public sector spending cuts.  Wouldn't you like a deal like that from your banker? The Greeks, however, most likely will not agree to such a deal or will say they do, and then lie about complying with it, and the Eurocrats will go along. That is the European bureaucratic way.  Their bureaucrats are even more unaccountable than ours.

There is no clean solution to the Greek mess and to the mess that is about to befall much of the rest of Europe and which is beginning to knock on our doors.  The Greek situation defies both traditional conservative and left-wing economics, at least in the short to medium term.  A conservative solution is to cut taxes and cut spending. Makes sense except for what I noted above. The government essentially has absorbed the Greek economy: the economy is the government and the government is the economy. If you cut one, you cut the other. The leftist (and ECB) prescription runs afoul of Maggie's old dictum about "running out of other people's money." We are reaching that point. It is now in the political sphere, to wit, can or will Germany keep paying to save an unnecessary political project, the EU, and its golden amulet, the Euro?

What would be the effect of the Germans saying no? My opinion is that we would see a situation not too dissimilar to what we saw happen in the USSR when the rules of economics could no longer be defied. The Greek system would collapse. If the Germans keep paying, however, they will see Spain, Portugal, Italy, and who knows whom else lining up for their dole.  The EU, after all, is all about doles. Could even the mighty German ATM generate that much cash?

Decades of insane leftist economics, of trying to repeal the laws of economics have created disaster for the people of Greece, and of Europe. These decades saw the destruction of private enterprise, and private incentive. The problem that has resulted is immense. In the end, the "solution" is a highly messy and painful one, and easy to prescribe from thousands of miles away but not so easy to live. Greece (probably Spain, Italy, and Portugal as well) must "default," real default not the fake "default" being conjured up by the Eurocrats. It must give up the Euro, and return to its own currency which will float in the international markets to its "true" value, and make Greece, in the long run, admittedly, a more attractive and affordable place to invest. This is not going to be simple or pretty. It will be horrendous, and might even require Greece, much like Haiti in the interwar years, to come under international tutelage, maybe as a protectorate of Germany--something really unpalatable--to redo completely the Greek state. Fantasies. I doubt these things will happen.

What we see are the consequences of defying the age old rules of economics. Like gravity, you can for a bit, but, as that CW song wisely says, "falling feels like flying, for a little while." The Obama mis-administration might want to learn something from what is happening in Europe. They won't. They continue to insist on defying the laws of economics, and for a time "falling will feel like flying." And I am not speaking just about spending. They try to do it in the classic totalitarian way: they will reform us, literally, reform us to be perfect moral creatures who act only for the public good without thought for ourselves. They will decide how much medical care we need. They will decide if our salaries are excessive. They will control the horizontal and the vertical. Greed is bad! Advancement for you and your family is bad, unless it is with the sanction of a government program that insures we all "advance" together. These models of perfect people are exactly the ones our Founding Fathers rejected.

I end this overly long piece by leaving you with the closing lines of the Fable of the Bees by Mandeville.  Those who would try to defy the rules of economics by shaping a new man, would do well to read his words.

THEN leave Complaints: Fools only strive
To make a Great an honest Hive.
T'enjoy the World's Conveniencies,
Be famed in War, yet live in Ease
Without great Vices, is a vain
Eutopia seated in the Brain.
Fraud, Luxury, and Pride must live;
We the Benefits receive.
Hunger's a dreadful Plague no doubt,
Yet who digests or thrives without?
Do we not owe the Growth of Wine
To the dry, crooked, shabby Vine?
Which, whist its neglected flood,
Choak'd other Plants, and ran to Wood;
But blest us with his Noble Fruit;
As soon as it was tied, and cut:
So Vice is beneficial found,
When it's by Justice, and bound;
Nay, where the People would be great,
As necessary to the State,
At Hunger is to make 'em eat.
Bare Vertue can't make Nations live
In Splendour; they, that would revive
A Golden Age, must be as free,
For Acorns, as for Honesty. 


  1. As someone smarter than me said- "Arithmetic never blinks first".

    Glad you're back.

  2. I was thinking about all of that (albeit with out the eloquence) just the other day. Greece and its "test," and the bond holders coming out with a profit because they only lost 70 percent of their investments (30 percent of something, I guess...). And what that all means to us, the good ol' USA. Money, especially the dollar, as once was the real, is the coin of choice. Our government, when China decides it's time to buy another country, will simply declare all government warrants good and legal tender. Private industry will constrict. This will work for several years, maybe even a couple of decades. And then we come to the inevitability of a many from one, vis the former USSR.

  3. Hi. It is May 7th, Mr. Dimitris Christoulas's note is history (I refuse to dig in the garbage dump for dinner). The Greeks electorage just repudiated the right and left and elected refuseniks and anarchists. France just elected a Socialist who is going to reverse the attempts by Sarkozy to cut the growth of social programs. Poor Greece. Poor France.

    Fantasy is no substitute for ecnomic reality and 2 plus 2 is never 5, even if the politicians pretend it is so.