07 May 2010

The True Lesson from Greek Debt

The deeper lesson in the Greek debt debacle is that welfare states paint themselves into a corner until they reach a tipping point of no return. All democratic, debt-ridden countries are heading for the same fate, and it is too painful and unpopular for governments to take the necessary austerity measures to avoid collapse. Any politicians proposing austerity measures will lose the votes of those who receive the benefits of government largesse. Once the group of people who believe they receive more from government than they pay reaches a majority, collapse is assured.

The political candidate's dilemma is: propose austerity and not get elected, or run on a free lunch campaign, get elected, and perhaps try to slip a little austerity in with the largesse. Even those who propose austerity as candidates tend to take little substantive action against it once they are elected. Note that the worst fate a politician faces by over-spending is getting elected out of office. If austerity policies guarantee such evictions, then largesse in the hope that the consequences will fall on a future government seems to be the best option.

Externally enforced austerity only works temporarily until either a new election, where communist candidates become attractive, or until the uprisings in the street reach a tipping point, forcing the government to declare bankruptcy. Either way, the government debt will ultimately go unpaid, and the currency will be devalued. In short, external bailouts, much like chapter 11 bankruptcy protection and domestic corporate bailouts, merely tax nations that aren't yet quite as bad off and delay the inevitable collapse. By taxing the healthier nations, such bailouts serve to weaken everybody, making it increasingly inevitable that the healthier nations will fall a little sooner than they otherwise would because of their own economic imprudence. The linked currencies of the euro merely guarantee a combined collapse rather than a selective one.

The solution to failing nations is the same as the solution to failing individuals and companies: unassisted, liquidation bankruptcy. It is unpleasant, and that is precisely the point. It needs to be unpleasant and inevitable in order for citizens to be a little less inclined to vote for governments promising a free lunch. Further, we need to let week countries fall in order for them to more quickly get on to the road to recover. It is a road that only starts from the bottom. Does only democracy lead inevitably to collapse, or is it a symptom of every form of government which has forgotten frugality and freedom?

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