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.
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| "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)
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| "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).
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| Jean-Baptiste Say |
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.)
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| "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.