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Greece: Crumbling Further, Faster

The U.S. must heed the warning. Update: "Greece: More in the same vein"

by
Ray Hartwell

Bio

February 21, 2012 - 12:00 am
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Is There a Message Here for Americans?

One might fairly ask: does this have anything to do with us? Greece is a small country, and far away. Perhaps its crises deserve no more than the relatively thin coverage they receive in our media.

Still, by this point we should all be sitting up and paying attention. For, like it or not, what’s happening in Greece is an unhappy harbinger of things to come in our country, if we continue to follow the same irresponsible path charted by our friends in Athens.

From its entry into the eurozone, Greece has lived beyond its means. The European Union contributed to the problem, ignoring in the case of Greece its own prohibition on lending to countries with debt-to-GDP ratios higher than 60%. Greece’s ratio is now the highest in Europe, having steadily escalated to more than 160%.

Current austerity measures aim at bringing the Greek government debt-to-GDP ratio down to 120% by 2020. But with the country’s GDP falling at an accelerating pace — down at a 5% annual pace, as I noted in December; and now, only two months later, falling at a 7% annual rate — that will be tougher and tougher to achieve.

Here in the United States, under the current administration, our own ratio has roared upwards from 70% in 2008 to about 110% currently. (For some handy charts on this sad subject, see http://www.usgovernmentdebt.us/.) Against a GDP of just over $15 trillion, adding debt at President Obama’s rate of about $1.3 trillion annually will have us past 120% (assuming a stable GDP) in another year or so. Catch Greece? Yes we can!

Moreover, although its unsustainable spending problem was no secret, until recently Greece did not eliminate a single government job. Government employee positions, pay, and pensions all were protected, even as the country’s private sector was bleeding jobs in a big way.

In the U.S. we’ve been on a parallel path. President Obama has created hundreds of thousands of federal government jobs, while his private sector “job creation” efforts have essentially transferred billions of tax dollars to campaign donors (green energy companies) and unions (GM, Chrysler). At the same time, his policies have killed massive numbers of private sector jobs in energy production and assorted smokestack industries, in “red states” in particular.

In sum, there are ominous parallels between the U.S. and Greece. When politicians engage in the politics of envy and class warfare, seeking to divide the electorate and promote dependency, unrealistic expectations are created about the sustainability of excessive spending. We’ve now seen, courtesy of this month’s rampages in Greece, how things can get very ugly when even the most unreasonable expectations are dashed. Just because more than 50% of the people are “takers,” and vote that way, does not mean the unsustainable can continue indefinitely.

Here at home, we have electoral candidates and media organizations who for political ends are encouraging the same mentality that has led to chaos in Greece. If this goes on, it is not likely to end well.

One Distinction That May Not Make a Difference

I’ll note one major distinction between Greece and the U.S., and explain briefly why it provides us no solace.

In Greece, the culture of corruption is far worse than it is here (although, ours is ramping up smartly in this administration); one manifestation of this culture is extremely poor tax compliance. The Greeks can raise taxes in an attempt to increase revenue, but they have a very poor record of actually collecting taxes from businesses and individuals alike, at all income levels.

Higher tax rates do not result in higher revenue in Greece. Rather, tax increases simply drive businesses and jobs further into the well established “cash” economy, where jobs and incomes are neither reported nor taxed.

By contrast, in the United States we have a very effective tax collection apparatus, and a strong tax compliance culture. Here, the people who make the most money already pay far and away the most taxes. Higher tax rates do not simply encourage even more adroit tax evasion. But neither do they necessarily result in higher revenues, as numerous studies have shown.

In the U.S., as tax rates go up, those in a position to choose often opt for lower incomes (call it the John Galt effect, or what you will). For most producers, migration to a robust cash economy is not a real option here. Thus, when taxed more, the most productive may produce less. Here, this can not only reduce their own tax obligations, but also lead them to eliminate jobs in their businesses — so that the taxes paid by workers are also lost, along with the workers’ jobs.

So, the view that our superior tax compliance culture will somehow enable us to continue the party that has come crashing down around the Greeks is, in my view, seriously flawed.

Therefore we should follow events in Greece carefully, and pay close attention to our own president and our tax and spend politicians. Thus far, it does not appear that our “leaders” are learning the lessons of Athens. Perhaps the lesson for us is that we need new leaders.

Update: “Greece: More in the same vein“

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Ray Hartwell is a partner in the Washington office of a major law firm, where he specializes in competition law and white collar criminal matters. Over the past decade he has also served as a trustee of his alma mater, Washington and Lee University. He is a Vietnam-era Navy veteran, having served as antisubmarine warfare and nuclear weapons officer aboard a guided missile destroyer. His opinion articles have appeared in various publications, including the Washington Times and the Richmond Times-Dispatch.
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