The Anatomy of False Economics as Revealed by the Greece Crisis

We have been told by economic ideologues that spending translates to prosperity especially if this is done by government via ‘free lunch’ socio-welfare programs.

The Greece debt and entitlement crisis should be one good example of how quant economics gets it so badly.

From the Daily Mail, (all bold highlights mine) [ht: Prof William Anderson]

There is another bonus for users of this state-of-the-art rapid transport system: it is, in effect, free for the five million people of the Greek capital.

With no barriers to prevent free entry or exit to this impressive tube network, the good citizens of Athens are instead asked to 'validate' their tickets at honesty machines before boarding. Few bother.

This is not surprising: fiddling on a Herculean scale — from the owner of the smallest shop to the most powerful figures in business and politics — has become as much a part of Greek life as ouzo and olives.

Indeed, as well as not paying for their metro tickets, the people of Greece barely paid a penny of the underground’s £1.5 billion cost — a ‘sweetener’ from Brussels (and, therefore, the UK taxpayer) to help the country put on an impressive 2004 Olympics free of the city’s notorious traffic jams.

The transport perks are not confined to the customers. Incredibly, the average salary on Greece’s railways is £60,000, which includes cleaners and track workers - treble the earnings of the average private sector employee here.

The overground rail network is as big a racket as the EU-funded underground. While its annual income is only £80 million from ticket sales, the wage bill is more than £500m a year — prompting one Greek politician to famously remark that it would be cheaper to put all the commuters into private taxis.

‘We have a railroad company which is bankrupt beyond comprehension,’ says Stefans Manos, a former Greek finance minister. ‘And yet, there isn’t a single private company in Greece with that kind of average pay.’

Significantly, since entering Europe as part of an ill-fated dream by politicians of creating a European super-state, the wage bill of the Greek public sector has doubled in a decade. At the same time, perks and fiddles reminiscent of Britain in the union-controlled 1970s have flourished.

Ridiculously, Greek pastry chefs, radio announcers, hairdressers and masseurs in steam baths are among more than 600 professions allowed to retire at 50 (with a state pension of 95 per cent of their last working year’s earnings) — on account of the ‘arduous and perilous’ nature of their work.

We are further told that by devaluation Greece would solve its problems.

From Wall Street Journal’s Holman Jenkins Jr., (bold highlights mine) [ht: Dan Mitchell]

Whether Greece gets debt relief now or later, the Greeks will not escape sweeping structural reform of their economy—one of the most corrupt, crony-ridden, patronage-ridden, inefficient, silly economies in Christendom. Its tax system operates on voluntarism and fine judgments about whether the bribe or the tax would be more burdensome to pay. The state railroad maintains a payroll four times larger than its ticket sales. When a military officer dies, his pension continues for his unwed daughter as long as she remains unwed. Various workers are allowed to retire with a full state pension at age 45.

Those who say if only Greece still had its own currency, so much pain would have been avoidable, exaggerate. Under no possible currency regime would Greece have been able to go on forever borrowing money from foreigners to live beyond its means or its willingness to work. The same is true to lesser degree of other troubled European economies, including Portugal and Spain.

All along, the challenge of the euro was the challenge that undid the gold standard—to make "the law of one price" prevail across multiple countries in the age of interest group democracy. "One price" in one country works—Americans will pick up and move 3,000 miles for a job, but even in America, not without pain.

Yet the nostalgia for a Europe of independent currencies is mostly nostalgia for an illusory shortcut—even more so as services, rather than tradable goods, become the overwhelming source of employment in modern economies. Greece, with its sun and history, has every potential to make a happy, privileged existence inside the euro zone. Today's growth gap between Europe's north and south, which some say proves the unwisdom of a common monetary policy, is hardly organic—it's the product of their common mistake in loading too much debt on unreformed southern economies in giddy expectation of euro-based prosperity.

Putting into perspective the scale of Greece’s predicament from the accrued free lunch policies, from the Foxnews.com (bold emphasis mine)

Greece's Finance Ministry estimates that, on its current track, government debt will reach €501 billion by 2015. That comes to a debt of over $66,000 per person, and Greece’s personal income is only about two-thirds our own. Greater deficits and 17 percent interest rates can cause difficult problems to grow into impossible ones very quickly.

Greece can and should do much more. Both the European Central Bank and the IMF estimate that Greece can pay off €300 of the €347 billion debt by selling off shares the government owns in publicly traded companies and much of its real estate holdings. The government owns stock in casinos, hotels, resorts, railways, docks, as well as utilities providing electricity and water. But Greek unions fiercely oppose even partial privatizations. Rolling blackouts are promised this week to dissuade the government from selling of even 17 percent of its stake in the Public Power Corporation.

It takes common sense and self-discipline to realize that:

-Spending more than what one earns cannot happen indefinitely

-Redistribution has its limits. Picking on someone’s pocket is a zero sum game.

-Welfare programs engender a culture of entitlement and dependency.

-Printing money won’t solve the problems of insufficient production. Greece’s problem has been about the chronic or deep-seated culture of over-dependency from political-welfare programs than from the lack of ‘aggregate demand’.

-Where politics determines economics, or where zero sum (free lunch) political economics is applied, poverty is the outcome.

Economic reality eventually exposes false economics.