Politics and Economics

The Problem with the Greek Government’s Economic Policies.

Mr. Tsipras and his government are socialists. The basic philosophy of socialism is a strong sense of entitlement to other people’s wealth.

His logic will be the same as any other socialist, who has a strong social agenda but rarely a credible economic one:

i.e. “I need a certain amount of income to live a decent life therefore I am entitled to have it.

If I’m unable to earn this much myself then somebody else must make up the difference:

1.   My employer must pay me more for my efforts (minimum wage)….or……

2.…. my next-door neighbour (who earns more than me) must give me some of their income (intra-generational redistribution of wealth)….or

3.…The Government must borrow more money, give some to me and get my children and grandchildren to pay back the debt (inter-generational redistribution of wealth)…..or…..

4.….a combination of 1,2 and 3.”

As a country Greece cannot demand a salary increase from its employer, although this would doubtless appeal to Mr. Tsipras if it could.  So he is resorting to 2. Expecting his rich European neighbours, such as Germany, to give him money by writing off debt and 3. Taking on more Government debt and expecting his country’s current and future children to pay it back.

Socialism is often merely self-interest justified by ideology and in a normal socialist economy the sense of entitlement to other people’s wealth is legitimised by democracy.  i.e. to claim that most people in the country voted for redistribution of wealth so it is legitimate to implement it.  Mr. Tsipras is using democracy as justification for his current stand.  But he has forgotten that whilst Greece has democratically voted itself the right to more free money, that Germany, as a separate country, is equally democratically entitled to refuse to give it.

It reminds me of the worse days of the trade union excesses of the 1970s when they would decisively vote themselves a 40% wage increase and then were scandalised when their “democratic will” was not fulfilled by “management” or the prevailing government. They failed to understand that voting for something didn’t automatically mean it was practical or affordable.  All the Greeks have done in electing Syriza is to vote for an end to austerity. As did the French in 2012.  Look where it got them.

The concept of earning the money you want to spend does not compute in the socialist psyche.  So Greece has now reached the inevitable fatal flaw with socialism:  Eventually you run out of somebody else’s money to spend.

Politics and Economics

Is Syriza the solution to Greece’s economic problems?

The root of the Greek economic crisis is that they have been living beyond their means.  They paid themselves too much for producing too little and made up the gap with excessive borrowing.

Greece is an extreme example of a problem that left-leaning economies in the West have failed to address for more than a generation.  There is a significant disparity in global labour costs.  The average worker in the West earns $135 per day; the average worker in urban China earns $12 per day.

What entitles the rich world’s 500 million workers to salaries ten times greater than the 1.1 billion workers in urban bits of the developing world?

(Full, brilliant article is here:    $135 – $12 = the pay gap the West can’t bridge.)

Greece has bigger problems because this issue is compounded by massive tax evasion, out-of-control corruption and a culture of taking Government hand-outs and public-sector salaries without giving anything in return.  Greeks can retire at 58 and some professions retire even earlier.  Clearly this has to end and the previous government was working hard to achieve this.

So now that Greece cannot borrow any more it must stop overpaying itself.

There are three ways to do this:

1. Devalue your currency.

Advantage:  A tried and trusted mechanism that would have lowered their wages on international markets.  This lowers domestic costs of production, which boosts exports and reduces imports whilst maintaining domestic living standards – so long as Greeks buy home grown goods and services.

Disadvantage:  Doesn’t address the main structural problems of the Greek economy.  It is just delaying much needed economic and structural reform required to address low productivity, tax evasion, corruption and a “something-for-nothing” culture.  Also devaluation only works if a few countries use it.

Greece cannot devalue its currency as it is in the Euro.  So it must choose from the other two options:

2. Cut Wages.

Advantage:  This quickly addresses the problem allowing Greece to regain competitiveness in international markets, boosting exports, attracting internal investment  and creating economic growth.

Disadvantage:  Causes an instant reduction in living standards, which creates hardship, which reduces consumer spending, which slows down the internal economy further.  i.e. the economy gets worse before it gets better.

This is painful solution but it is a shortcut to growth.  Ireland used this method and quickly returned to growth after initial hardship.  It concentrates the pain over a shorter time period than the only other alternative which is…..

3. Freeze Wages

This is a slower way to achieve a wage cut because it relies on inflation slowly eroding the wages compared to living costs –  i.e. eventually causing an effective pay cut.  The UK government has adopted this approach along with devaluation.

Advantage:  Less painful way of cutting wages but…

Disadvantage:  …delays the time it takes to regain competitiveness on international markets.

This is effectively the same solution as 2 but stretched over a longer time period.

The Greeks have suffered over the last few years but they required significant restructuring in order to develop a strong, sustainable economy.  The medicine was working as Greece has slowly returned to growth and even has a small budget surplus.

Now Syriza want to adopt the usual socialist solution to a budget deficit – that is to get somebody else to pay for it.  In this case they want Germany to write off their debt.

Many reference the 1953 London Debt Agreement that reduced Germany’s war debts by 50% and stretched the repayment of the remaining debt over a longer period.  This led to German economic growth so surely this could also work for Greece?  This may well be true, but at the time it was only Germany’s debt that was being written off.  Poor old Britain repaid all its war debts, with the last payment being made to the USA on 29th December 2006.  But this time we have France, Italy, Spain and Portugal waiting in the wings with beaks wide open and palms out-stretched.  Any hint of weakness towards the Greeks will cause a landslide of similar political extremism and a similar expectation that their debts will also be forgiven. Why should Greece have special treatment?

In any case the Greeks have already been given voluntary debt forgiveness by private creditors.  Banks have slashed billions from their debt.  Their remaining official debt has a 16-year maturity and an average coupon of 2.4%. So despite Greece’s extraordinarily high public debt (175% of GDP last year) successive concessions have already eased its debt-servicing charges so that annual cash interest payments are now only 3% of GDP.

And yet Syriza has pledged to go on yet another spending spree. They have promised to launch a welfare package worth €2 billion; to rehire 12,000 sacked civil servants; to give a massive increase in the minimum wage and to freeze privatisations. They have agreed to tackle tax-avoidance and cronyism but these are unlikely to do enough to pay for their profligate promises.  They will quickly return Greece to the mire from which it is slowly extricating itself.

The best compromise is for Syriza to jettison their ludicrous socialist economic policies and negotiate some further debt relief, perhaps by further pushing back the payment schedule (as did Britain in the 1950s), in return for further political and structural reforms.  Greek wages must be linked to productivity, they must retire later, reduce their public sector costs to an affordable level and clamp down on corruption and tax evasion.

Politics and Economics

The Greeks vote for Syriza. Is this the end of austerity or fantasy economics?

The Greeks voted emphatically for the radical left wing Syriza party who claim they will reject austerity.  The UK Labour party might look wistfully for inspiration from Syriza, reassured by Ipsos Mori polling that shows half of voters in the UK think no more cuts are needed.

This coincides with some 15 Labour MPs led by Michael Meacher and Diane Abbott leaping on the success of Syriza in the Greek elections by demanding that Ed Miliband reject austerity. They released a signed statement aimed at persuading the Labour leader to pledge significant state investment in the economy and jobs, instead of backing swingeing public cuts.

It’s difficult to know if these Labour politicians and voters are being economically illiterate or populist or both.

It reminds me of the worse days of the trade union excesses of the 1970s when they would decisively vote themselves a 40% wage increase and then were scandalised when their “democratic will” was not fulfilled by “management” or the prevailing government. They failed to understand that voting for something didn’t automatically mean it was practical or affordable.

All the Greeks have done in electing Syriza is to vote for an end to austerity. As did the French in 2012. Look where it got them.

These statements avoid the obvious question of how they will pay for the public services and welfare they want and this in turn highlights two of the many problems with socialist economics.

Firstly they believe money comes from taxation, an impersonal and limitless ATM in the sky, rather than the hard earned income of taxpayers. Extra taxation can always come from the “rich” – a vague, nebulous, undefined collection of immoral capitalists who are just queuing up to hand their money over to the exchequer. Somehow they always overestimate their numbers and under-estimate their global mobility. Something the French have learned very quickly.

Secondly they have not grasped the simple fact that if you want to borrow money somebody has to be prepared to lend it to you. The more you owe, the higher the risk of default so the more the lenders charge to cover the extra risk. Eventually the risk becomes so great, because the interest is so high, that lenders will stop lending. The UK’s interest rates are only low because the lenders see a plan to bring spending under control.

Have you noticed that left-wing politicians love applying fancy labels? The group of 15 leftist MPs were given a boost by Peter Hain, the veteran Labour MP and party grandee, who made a separate intervention yesterday that echoed their sentiments. He said “capitalism that dominates today requires far more radical responses than the neoliberal, right-wing orthodoxy of the post banking crisis era could ever provide”. This sounds very grand. Giving contrived labels to things is a trick used by many academics to make a simple subject sound intellectual. Pompous language helps left-wing politicians fool naïve voters that they are thoughtful and clever and know what they are talking about. This is because the simple language “we hope to spend our way out of our catastrophic debt ” is not as convincing.

These statements by Labour’s back benchers is the reason why Labour cannot be trusted with the economy. Labour must now convince the country that they can manage the country’s massively reduced public spending capacity for the foreseeable future. The Labour front bench may believe they can do this, but it is clear that their political paymasters (Unite and the GMB trade unions) and their socialist Labour backbenchers will not let them.