The Economy, It’s All Greek To Me
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” – Friedrich von Hayek, The Road to Serfdom
As we here in the United Sates settle into our cozy summer routines, the economic world around us is in chaos. It is hard enough to get people interested in their own country’s economic stability, harder still to get people to focus on the financial woes of another country. However, the turmoil in Greece is a cautionary tale for all nations, especially the United States of America.
First things first, our current financial state, the American economic condition is nowhere near the desperate situation the Greeks now find themselves in, again. That’s right, Greece has been here before, many times. From their first official loan default in the early 1800’s to this most recent crisis, Greece has a history of fiscal mismanagement and corruption. The last big catastrophe was in 1981, when Greece entered the first iteration of European Union (EU), let’s call it EU 1.0. However, the negative tenets applied by Greeks have taken root in other parts of the world, including the United States.
Greece was accepted into EU 1.0 promising to adhere to EEC (European Economic Community) rules. Unfortunately for the rest of Europe, Greece’s entry into EU 1.0 also happens to correspond with the takeover of the Greek government by the Socialist Party. The Greek Socialist Party immediately walked away from their commitment to be better stewards of other people’s money. Instead, the Greeks took the money and ran. The Greek Socialist Party took the loans they had received when they joined EU 1.0, abandoned the payment structure they agreed to, and went on a spending spree. The Greek Socialist Party managed to redistribute the wealth in the country, while at the same time nationalized private industries and growing the public sector, providing exaggerated salaries and lavish entitlements to public sector employees. As the public sector grew, taxes increased, and so did unemployment, inflation, and budgetary holes.
History repeats itself, not just in Greece, but around the globe. The actions of former Greek Socialists was one of the catalysts for British Prime Minister Margaret Thatcher’s most famous quotes – “The trouble with Socialism is that eventually you run out of other people’s money.” It is not just a problem with Greek socialism, it is a problem with socialism, period. This brings us to back to the shores of America, and America’s Greece, Puerto Rico. In both Greece and Puerto Rico, the government powers applied the failed economic model known as Keynes’s General Theory, which have led both to the brink of collapse.
Puerto Rico recently declared that they were $70 billion dollars in debt. Puerto Rico’s population is roughly 3 million people, which means that each Puerto Rican is on the hook for approximately $23,333. Puerto Rico’s financial chaos is far more dangerous for the U.S. markets than what is happening in Greece. 20% of U.S. bond funds are tied directly into Puerto Rico’s debt crisis. The Washington Post warned that this could “roil municipal bond markets.” I do not know about you, but roil does not sound very pleasant. Worse still is that Puerto Rico’s financial instability has been a long time coming, and no one did anything. The Puerto Rican government continued to spend, and lenders continued to give more money to Puerto Rico.
The simple understanding of Keynesian Economic theory, the fancy name for socialist economics, is the increase of public spending in an effort to ‘stimulate’ the economy. What in fact happens is that the unproductive public spending pulls an economy down. History has shown us that such public spending, mainly because it takes budgets into deficit, inevitably makes matters worse, like it did for Japan in the 90’s (and beyond).
It is not just the increase in public spending on ‘shovel ready projects’ that the Keynesian model promotes, but it is also the increase spending on ‘free’ programs, which in fact need to be funded by deficit spending, printing more money, and borrowing (with potentially increasing interest rates). Since neither Greece nor Puerto Rico can just ‘print’ more money, both spent beyond and borrowed beyond their means thanks to their faith in Keynesian Economic theory. The sad reality is that Keynes’s only interest in writing his general theory was to encourage greater levels of public spending, not to help steady the economy. Like Japan before them (and Ireland, Italy, Portugal, and many more governments), Greece and Puerto Rico bought into the theory because they lacked any sense of fiscal discipline, like so many other countries, including the United States.
Puerto Rico can’t declare a Chapter 9 bankruptcy because the bankruptcy law excludes American territories from its use. In its place, PR Governor García Padilla has delivered an edict to Puerto Rico’s creditors, while offering them no assurances in return. Additionally, some in Congress are considering a bailout to reward Puerto Rico’s reckless spending. Making matters worse is President Obama’s move to normalize relations with Cuba. Could this move allow Cuba ‘to lend a hand’ to its Caribbean neighbor? In the end, both Puerto Rico and Greece are holding the world hostage, and expect to be ‘rewarded’ for the bad behavior.
How much more of the reckless mishandling of the economy, both at the local and global level, can we bear? At any given time roughly 30 States in America are on the brink of economic peril. Countless U.S. cities such as Detroit (MI), Stockton (CA), Chicago (IL), Providence (RI), and Harrisburg (PA), and many more have mishandled their finances (and the public trust) to the point of bankruptcy. The Manhattan Institute has identified Strafford County, New Hampshire as a region whose public liabilities has placed it in great financial peril.
So enjoy the sun and the wonderful New Hampshire scenery. Because come the fall, the presidential candidates drop promises faster than the falling leaves. Listen very carefully to these promises. The Keynesian Theory is touted by many on the U.S. political Left, such as presidential candidates Hillary Clinton and Bernie Sanders. Keynesian economics has never been successful over a prolonged period of time, because eventually, you run out of other people’s money.
Author’s Note – Article Correction:
In the orginal article the personal debt for each PR citzens was stated incorrectly. This artice reflects the actual number of $23,333