Thursday, May 13, 2010

Chart of the Day

Greece is in economic free-fall, which might have sunk the rest of the Euro-zone were it not for the recent gigantic bail-out. But, as a result, Greece has been forced into an austerity plan that, among other things, will cut the size of government.

So how does Greece compare to the United States? Surf to OECD data:

source: OECD, Greece At a Glance, 2009

source: OECD, USA At a Glance, 2009

Uh, 14.1 percent vs. 14 percent. A good argument for shrinking government, contrary to President Obama's policies. Predictably, Paul Krugman blames the Euro rather than government spending (actually, both are to blame).

BTW, the New York Times originally listed the Greek public sector at 1/3 of all employment, then (without explanation) deleted that figure from its story.

Similarly is WaPo economics columnist Robert Samuelson:
Budget deficits and debt are the real problems; they stem from all the welfare benefits (unemployment insurance, old-age assistance, health insurance) provided by modern governments.

Countries everywhere already have high budget deficits, aggravated by the recession. Greece is exceptional only by degree. In 2009, its budget deficit was 13.6 percent of its gross domestic product (a measure of its economy); its debt, the accumulation of past deficits, was 115 percent of GDP. Spain's deficit was 11.2 percent of GDP, its debt 53.2 percent; Portugal's figures were 9.4 percent and 76.8 percent. Comparable figures for the United States -- calculated slightly differently -- were 9.9 percent and 53 percent.

There are no hard rules as to what's excessive, but financial markets -- the banks and investors that buy government bonds -- are obviously worried. Aging populations make the outlook worse. In Greece, the 65-and-over population is projected to go from 18 percent of the total in 2005 to 25 percent in 2030. For Spain, the increase is from 17 percent to 25 percent.

The welfare state's death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day -- no one knows when -- doubt governments' ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.

Greece illustrates the bind. To gain loans from other European countries and the International Monetary Fund, it embraced budget austerity. Average pension benefits will be cut 11 percent; wages for government workers will be cut 14 percent; the basic rate for the value-added tax will rise from 21 percent to 23 percent. These measures will plunge Greece into a deep recession. In 2009, unemployment was about 9 percent; some economists expect it to peak near 19 percent.

If only a few countries faced these problems, the solution would be easy. Unlucky countries would trim budgets and resume growth by exporting to healthier nations. But developed countries represent about half the world economy; most have overcommitted welfare states. They might defuse the dangers by gradually trimming future benefits in a way that reassures financial markets. In practice, they haven't done that; indeed, President Obama's health program expands benefits. What happens if all these countries are thrust into Greece's situation? One answer -- another worldwide economic collapse -- explains why dawdling is so risky.
Is it merely a "Ponzi scheme"? Just like what's been happening in California.

See also the New Republic's Jonathan Chait and, contra, Assistant Village Idiot on budget cutting in New Hampshire in particular.

(via Thought du Jour, reader Marc)

1 comment:

OBloodyHell said...

> Is it merely a "Ponzi scheme"?

If the Pope is out in the woods for six days, does he s*** in the woods?