Last Thursday we said there is a viable solution to the Greek debt crisis, and it isn’t austerity. What we didn’t say was that the solution is either simple or easy. It is, in fact, pretty harsh if you’re a politician, government worker, or anyone receiving government benefits, especially in the beginning, and probably for three to five years until the program kicks into high gear and starts generating significant income in and of itself.
|"You must pay the rent. . . ."|
It’s also going to sound complicated, but that’s only because the current system defies common sense. First removing the nonsense from the system and then implementing common sense will be consequently complex.
The first step is to reschedule the debt, and put a moratorium on debt service payments until essential reforms can be implemented. This does not mean forgiveness of the debt, although it could include forgiveness of interest payments — which are technically usury in any event, as the loans clearly were not used for anything that generated a profit.
Why? Because you can’t get blood from a turnip. Greece obviously can’t make its payments, and there’s no sense in the creditors trying to get what doesn’t exist.
In return, Greece must agree to “austerity measures.” Immediately. This cannot be negotiable, or the politicians will talk until the cows come home just to delay the inevitable . . . and there aren’t any cows, which is a major part of the problem.
This does not mean that Greece breaks its promises to pensioners and government employees. It will definitely have to delay keeping them in full, however, possibly even reduce them if the law permits. For example, although many Americans are unaware of it, Congress reserved the right to adjust Social Security benefits at any time for reasonable cause. This has almost without exception been used to increase benefits, but it can — and has been — used to decrease or deny benefits as well. (Fleming v. Nestor, 1960)
|"Hope they don't run out afore I gets there."|
It may be that Greece will have to pay pensioners and government employees just enough to enable them to survive, but allow them to build up non-interest bearing arrears, to be paid when the government can afford it. It would seem reasonable, however, that arrears could be passed on to heirs if not fully paid at death, but otherwise be non-transferable. There is another thing that can (and, frankly, must) be done, but it’s in addition to the austerity, and we’ll get to that when we get to the solution.
In other words, assuming it recognizes the obligation, the government would book a legal liability owed to pensioners and government employees, subject to similar conditions as other portions of the national debt. As such, the liability would be due to the heirs. This, while harsh, might make reductions and delayed payments marginally palatable politically — especially if the alternative is national bankruptcy and writing down of all obligations, with employees and pensioners getting nothing — and, again, we haven’t mentioned the more important feature, but should in a future posting in this series.
Something similar was done in Austria-Hungary following government bankruptcy early in the 19th century. Significant numbers of civil servants worked for years without pay, supported by family members, to accumulate pension benefits that were, eventually, paid.
Austerity is not a solution, however, but a way of buying time until a solution can be implemented. The only way out of the hole is not to cut spending (consumption), especially since there is a level below which you cannot go, but to increase income (production).
This is “Say’s Law of Markets.” It is based on Adam Smith’s first principle of economics, articulated in The Wealth of Nations: “Consumption is the sole end and purpose of all production.” The obvious corollary, of course, is that you can’t consume what hasn’t been produced — which is exactly Greece’s problem.
In short, you can mint, print, or borrow all the money you want, but if you’re not producing a marketable good or service for consumption, even if you have a mountain of gold, silver, or government debt paper backing your currency, you are trying to get out of a hole by digging it deeper.
If something doesn’t exist, you can’t consume it. Period. As Jean-Baptiste Say pointed out when giving the facts of life to the Reverend Thomas Malthus,
“To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.” (Jean-Baptiste Say, Letters to Mr. Malthus On Several Subjects of Political Economy and on the Cause of the Stagnation of Commerce (1821), Letter I.)
|"Getcher Keynesian economics right cheer, good for what ails ye!"|
If this holds true for individuals, it also holds true for countries — we reject the equivocation of John Maynard Keynes that what is true for individuals or a single business enterprise is not necessarily true for nations or the world in aggregate. It’s glib to say that traditional ethics and principles are a fallacy of equivocation, but that’s all it is: a glib response to a serious problem.
That being the case, the only thing that’s going to get Greece out of the hole it’s in is to increase production dramatically, not just cut consumption, however essential austerity is in the short run.
And it can be done, as we will see starting tomorrow. Again, however, we never said it would be easy or simple. Keep that in mind.