Fury in Athens – The Economic Reason

Fury in Athens – The Economic Reason

June 29th, 2011 // 11:29 am @

The debt crisis is keeping many journalists fully employed, especially the more lurid parts of the crisis, such as the riots in Athens. But they have done little to really explain the underlying issue, or where that issue came from.

It may seem ludicrous to us that people are on the streets rioting to get the Greek government to spend money it clearly does not have. But remember, people never do things that seem illogical to them, however illogical they may seem to people around them. The people of Greece are rioting because their government has been funding false living standards for its people for decades. And doing so on borrowed money and not being honest with the public.

This is an extreme example of what is happening across the world, with governments borrowing money to fund improved living standards for their people. Sadly this is in the long term unsustainable.

Background

There is history to this situation.

Today, in the western world we see democratic government as the norm, and treat it like it is, and always has been the only form of government. We are uninformed as to the reality that as late as the 1930s in many parts of the world democracy was seen as a failed idea.

The historical reality is there were powerful non-democratic extreme political groups in all western countries before the war. We tend to forget Mussolini was in power for 10 years before Hitler even got to power and what he achieved in Italy was well regarded in many parts of the world.

It is only since the end of WW2 and the end of the Soviet Union that democratic government has become fully ingrained in western culture. That is good for personal freedom, but what Churchill said is true, “democracy is the worst form of government except all the others that have been tried”

Since WW2 these governments have swung from left to right in their political makeup and outlook. Although that process became less pronounced during the Reagan / Thatcher years and those that followed them, as left wing parties moved to the center to gain power. The socialist government post Thatcher is as right wing as any previous conservative ever was. And I doubt Reagan could really have found much to complain about in the Clinton government despite coming from opposites of the political spectrum.

Post War Governments & Borrowing

However, an irresistible force that makes them spend more characterizes these governments. They talk much of fiscal responsibility, but almost never have much.

To understand why they do this one has only to understand that every politician lives to get elected, they are normally insecure types seeking validation, and being elected is to be validated.

They have gotten away with this profligacy because for some strange reason the public does not seem to make the link that when governments spend money, it is the electorate’s money they are spending. Therefore spending money that seems to come from a miraculously never empty government pot is a great way to get reelected.

Therefore over the past 60 years government spending as a percentage of gross domestic product has risen relentlessly around the world. The example is from the USA, but other western governments are similar.

The problem is that this ever increasing spending could not be met by taxation alone. Most governments now take around 50% of all income in one form of tax or another. And the public baulk at paying anymore.

So, governments discovered borrowing! Reagan was the one who really got the ball flowing in the 1980s, but no president since Eisenhower has balanced a budget! The USA – the powerhouse of the world economy for 50 years – has itself been living at least partly on increasing amounts of borrowed money for all of that half century.

To put that debt in perspective, the US government now owes around $14 Trillion Dollars, which is around $45,000 per man, woman and child in the US. As well as taking taxes from the public, the government has borrowed $45,000 on your behalf and spent it.

Again, the graph below shows US government debt growth, but most western governments are no better and some dramatically worse!

So, what are seen as major stable economies are carrying significant public debt. The IMF estimate as a percentage of GDP the following debt levels: USA 59%, France 84%, UK 77%, Canada 81% and Germany 74%. Greece’s debt is well over 100% and climbing

Countries now aim at what is euphemistically called “Primary Balance” which is not spending more than you get in before interest payments. Even this modest goal, which is at best medium term, is beyond many countries.

Economic Reality

The reality is there are certain basic economic rules that will catch up with you, whether you are a single person or a government.

A few key ones now are:

  1. You cannot go on spending more than you earn.
  2. If you keep borrowing more and more, the cost of that borrowing will overwhelm you.
  3. When people start worrying about your ability to repay your debts, the cost of those debts climb dramatically.

The riots we are seeing on the streets of Athens are the extreme consequence of the lack of willingness for governments and the electorates to face up to the realities of economics. Somehow we all believe that governments are beyond simple economic truths, sadly they are not.

The underlying message from governments has been for decades “Yes you can have all the government services you want, and you will not have to fully pay for them”. As a theory it is no more sustainable than any one of us thinking we can spend more than we earn in the long term.

The debt crisis, which is causing the riots in Athens, is merely the pinnacle of a problem that faces most of the world, at national and state level governments.

We hope the world economy will improve, which will help ease the issue, but the time may have come for us and our politicians to face up to the fact that we need to balance the books!

 

 


Category : Blog &Other Thoughts

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