Someday the euro debt crisis that started in Greece and spread to engulf Europe will be over. Politicians in the 16 nations that currently use the euro will figure out the right mix of carrot and stick to get Greece, Portugal, Spain and other member states to adhere to the European Monetary Union limits on debt. They’ll figure out a way to balance national pride and the clear need for more integrated fiscal systems among the members. They’ll gradually earn back the trust of financial markets and someday we’ll all be back talking about the euro as a rival to the U.S. dollar as a global reserve currency.
Hard to believe right now when the euro’s troubles are driving a plunge in all the world’s stock markets and rampant fears that the world is about to plunge back into economic and financial crisis.
Hard to believe but still true.
Here’s something, however, that may be even harder to believe: The euro debt crisis for all its power to shake financial markets and the global economy is just Chapter One in a story that will run for the next two decades. This crisis is actually only our introduction to the kinds of wrenching changes that every national economy in the world—yes, even China–will face over the next 20 years as the world ages.
The next chapter of euro debt crisis story is a crisis coming to a nation near you.
And let’s hope the next chapter suggests that there’s an ending to this story that doesn’t involve riots in the street and the long-term decline in living standards for entire national populations.
Let’s hope. But the lesson from the euro debt crisis is that it’s not going to be easy. It may not even be possible.
You probably don’t think of the euro debt crisis as part of some larger global story that is going to pull you and your family in as starring characters. But it is. This isn’t just a story about some feckless Greeks who went on a wild shopping spree with money lent to them by hard-working German’s who didn’t bother to check the books any too carefully. (But, of course, it is that story too.)
Some basic economics make the Greek crisis universal.
From the first quarter of 2001 to the third quarter of 2009 unit labor costs in Greece—that’s how much a worker earned for producing one unit of something—rose by 33%. That’s a 33% increase in the cost of producing one gimcrack in Greece after you’ve deducted all the benefits of any increase in the productivity of Greek workers. In other words if a Greek worker went from making 1 gizmo an hour to making two an hour and got paid twice as much for that hour, the unit labor cost increase would be 0%.
Greek productivity did climb—at an average annual rate of about 2% from 2000-2010 Greece showed the same productivity growth as Germany—but wages climbed faster. According to the National General Collective Labor Agreement, wages rose by 6.2% in 2006 5.4% in 2007, 6.2% in 2008, and 5.7% in 2009.
The result was that Greece priced itself out of global export markets. If your unit labor costs climb 33% while those of Italy go up just 30% and Spain 28%–and those in Germany climb just 6% and in the United States unit labor costs from 2001-2009 fall by 27%–you can be sure that selling Greek exports is getting harder and harder.
At the same time as Greece was getting less competitive, it was also getting older. In 1971 11.1% of Greeks were 65 years old or older, according to the OECD (Organization for Economic Cooperation and Development.)Â By 2001 that was up to 17%. By the end of 2009 18.7% The OECD takes its estimates out all the way to 2050. By 2031 25% of Greeks will be 65 or older. By 2050 the figure is closing in on a third at 32.5%.
The combination of falling competitiveness and an aging population would be lethal enough—How are fewer workers making less competitive products going to support an increasing number of retired workers?—but the Greek government made it worse. To win voters’ support governments of all parties didn’t just promise those hefty wage increases of 6% a year, they threw in promises of generous pensions at ever earlier ages. (And resemblance between the doings of Greek politicians and those of the folks who run states like California, New York, and New Jersey is purely intentional.)
Before the crisis, for example, a Greek civil servant employed before 1992 could retire after 35 years on the job if they’re 58 or older. And the pension benefit is 80% of pre-retirement salary. The legal retirement age for all workers was just 61 before the crisis. In reaction to the crisis the current government has proposed raising the retirement age to 63. (No wonder German taxpayers are steamed at the idea of having to fund a Greek rescue plan. The German retirement age is already at 67. For more on how German politics are making the crisis worse, see my post https://jubakpicks.com/2010/05/19/germany-makes-the-euro-crisis-worse/ )
To understand the full extent of Greece’s debt problem you have to look not just at the current deficit problem. That’s bad enough with the net debt level forecast to rise to 120% of GDP this year.
But you have to add in the value of all those promises made to the retired and soon to be retired. Economist Jagadeesh Gokhale in a report for the Cato Institute calculates that adding the value of the liabilities in those promises brings the level of government liabilities to 875% of GDP.
Greece can‘t pay that bill by cutting public sector wages, eliminating extra bonus months of holiday pay, and the like. Yes, the government will have to impose drastic spending cuts and tax increases, but it will also have to massively renege on those retirement promises.
I mean massively renege. The current change to a retirement age of 63 from 61 is just a very modest down payment.
Greece isn’t alone in Europe in facing this long-term problem just as it isn’t the only country in Europe with an unsustainably large current deficit. All of Europe is aging: 21% of the French population will be 65 or older by 2022 and in that year 24% of Germans will fall into that demographic category.
The United States isn’t aging as fast. Only 17% of the U.S. population will be 65 or older by 2022, the OECD calculates. China is just at 13% in that year but it catches up quickly: by 2036 20% of Chinese will be 65 or older. (Looking for youth? Try India where only 7.1% of the population will be over 65 in 2022 or Brazil at 9.3% in 2022.)
And Greek politicians weren’t alone in promising future benefits to voters. The average burden of debt plus liability for pension and other social service promises averages 434% of GDP across the European Union. France, with its relatively generous social benefits, comes in at 549%. The United Kingdom stands at 442% and Germany at 418%. Spain, which has a bigger current deficit but relatively modest promises to its citizens, shows up in Jagadeesh Gokhale’s calculations at 244%.
And the United States? By these calculations the debt plus promises burden comes to 890% of GDP. Move over Greece. Who’s your Daddy?
 Now governments could take the next decade or two to plan ways to meet or shirk this burden. Countries could set a schedule for raising the retirement age so that everyone would know what was coming and could plan for it. More generous incentives for private savings for retirement and retirement healthcare could help make reductions in government funded pensions less punishing. Subsidies could give some retirees incentives to choose less expensive retirement housing.
Governments could do that.
But the evidence of the Greek crisis is that they won’t. Politicians in Greece didn’t take action until the country’s back was to the wall and they had the cover of a crisis to excuse their cuts to wages and future promises. It’s sad to think that a country’s leaders would prefer riots in the street to proposing painful measures before the situation reaches a crisis, but that’s the conclusion I draw after watching how the Greek crisis has played out.
The transition that I’m describing from a world of glorious promises to an admission that we can’t pay for the promises to a long period of reneging on those promises would be painful enough if carefully planned and managed. But without that planning, I think we’re going to see most—but not all, I hope—countries lurch from crisis to crisis as governments downsize their promises to fit an aging world. (For more on how Europe’s politicians see a falling euro as the way out, see my post https://jubakpicks.com/2010/05/18/why-the-euro-is-headed-to-1-10-politicians-see-its-the-easy-way-out-of-the-euro-debt-crisis/ )
I don’t know how this story comes out. But I know that the Greek chapter has only introduced us to the characters and plot twists that we’ll see over and over again in the next twenty years.
Will we look back some day and see that the “correction” to ballooning and freedom infringing government is an aging population?
I remember a book I read a few years back that described an interesting way to reduce our future unfunded liabilities. I believe the title was something like “The coming generational storm.”
The basic premise was that the only practical political choice to reduce the unfunded liabilities of programs like social security, medicare, etc. is to cut the programs off. The method the author proposes is to institute a “freeze” on all benefits that each member of the population has earned as of a specific date. This way, none of the voting population would lose any benefits that they earned thus far under each respective program. Each person then receives the benefits they have earned through the “freeze” date for the rest of their life according to the current guidelines of each program.
It’s an interesting way to reduce future costs, though it would require discipline to prevent the future liabilities of replacement programs from simply replacing the amounts that were saved.
The two trillion in tax relief for the US rich did “trickle down” to create jobs in new, modern factories IN CHINA. This, with their lower wages, closed US factories or made huge outsourcing necessary for them to stay open.
For example, Warren Buffett, owns 10% of BYD motors, etc.
You are absoutely correct; particularly about the U.S. I have never seen it cited in any articles or blogs, but Richard Fisher, President of the Dallas Federal Reserve Bank, gave a speech on May 28, 2008 (see Dallas Fed website) in which he said that the unfunded liability for just Social Security and Medicare was $99.2 TRILLION. It was also his view that no combination of increased taxes or decreased spending would be sufficient to cover this shortfall.
yx
I don’t think unions lobbying really negates my argument about lobbying being a problem. I would love to see where this 3 to 1 ratio came from, maybe I’ll join you in your frustrations with unions.
Buy a farm in south dakota, andn save your money in gold.
BTW, DC is not just a reccesion proof town, it’s the only boom town in US!
No, cwt334, the richest and the most powerful lobby in this country is the union! In the last national election, the unions outspent big business by 3 to 1. Their representatives now control two of the three government branches and they are poised to take over the last one with Kegan nomiantion. Yes, that’s the inbalance we need to watch out.
Many business owners woud llike to have the unions’ $120K a year pay package!
“There is no difference bet. Republican and Dems?”. That’s a smoke screen.
yx
You are correct that DC has always had a reputation for being somewhat recession proof because of the federal government. The government has expanded greatly over the past 10 to 15 years. I don’t think it mattered if there was a democrat or a republican in office.
I think a huge problem are the lobbyist influencing our political leaders. The system was set up so not too much power was in anyones hands at a given time ( system on checks and balances, three branches of government, term limits, etc) When these lobbyist get in there they circumvent the process and get laws to meet their needs for the moment. As a result the rich get richer and the poor work in the service industry.
When you talk about businesses being pushed against the wall, I assume you mean small businesses. I think the large businesses are doing a lot of the pushing. It is the large businesses that can hire lobbyists and get laws changed to favor themselves to make more money and crush small businesses. It is large businesses that send jobs overseas so that there is less money in the USA. Don’t get me wrong government has a role to play in all this. I’m not excited to pay self employment taxes. However, we have had a huge recession not because government was too big but because government was ineffective. I am just as worried about big businesses influencing the process of government and there is no system of checks and balances on them. It doesn’t matter if it Bush or Obama in the white house. This why it is frustrating to hear people only talk about their concern for big government. Ok, I don’t want big government taking over, but at least the government is voted in by the people. Also, keep an eye out for big business. Sure people should be able to work harder and smarter and get rich, but those people should not have more of a say by buying politicians.
“gizmos” and “gimcracks”? I thought workers in illustrations of economic principles only produced “widgets”.
cwt334:
I know at least one DC business owner is not as fortunate as you are. The Korean dry clean owner who was sued $30+ million for lost one pair of pants. (this case made national news.) Even though he offered to pay more than $10K for the damage, the court let the case proceed. This is why I am saying business in this country are being pushed against wall.
Another case. One business manager who had to lay off some people because his business was hurting really bad. He went to his local labor dept. asking about what kind of potential costs would be to his business. (His understanding was that his company not only has to pay for the full jobless benefits of the laid off employees, but also much higher unemployment premiums going forward. Don’t think your boss enjoys lay off you! It costs him a lot of money to let go anyone. ) After long conversation, the local labor officer told him that he does not know anything about it! The manager was shocked that someone spent his whole life in this dept. and does not know a thing about it. That’s why I think our bureaucracy is the best solution to our problems. We need to empower the bureaucracy.
BTW, this labor official may also has a life time pension, all paid health care, early retirement in addition to his life time employment. What a great society!
That’s why I am saying businesses in this country are being pushed against wall.
cwt334:
Did you say you own a business in Washington DC and doing quite well?
First of all, I am glad for you. Secondly, no wonder you are doing well. The only boom town in US now is WASHINGTON DC! (There was an article few months ago saying DC is the only boom town in US thanks to the expanding government.)
What ever business you may in, with so much new bureaucracy being created everyday and so many new lobbists and new lawyers descending into DC every day, you’ll benefit from it greatly from this great government boom! Until people paying DC collapse….
I am glad for you, but sad for even more people getting less pay, at least according to USATODAY.com which has an article today saying private pay plummeted to historic low while government pay skyrocketed. (I attached a link earlier today.)
Regarding loan, we have agree the disagree.
Ed:
I agree with your view on money and politics in this country. As much as I hate money’s role in our political process, money sometimes balances out the uninformed majority. If it’s not because of the money from the rich individuals and corporations, this country’s majority would have voted to decapitalize the riches and corporations long time ago. It happened every time tried. From French revolution to Soviet and Chinese revolution. The riches were marched down to streets and got the max humiliation and some even got executed. The majority felt better at the moment for getting even with the rich, but what followed after is even worse slum and absolute joblessness!
Ed
I think we both agree that it is not good to let the rich use their money to influence the political process. It breeds corruption to have the power in the hands of a few. Communism is corrupt because of this and capitalism without rules or rules that are bent to favor the wealthy does not work either. Unfortunately the rules have been bent, and the regulators are in the back pocket of the companies. Of course we don’t want to over regulate and stifle productivity. There is a balancing act that is difficult to get.
yx
I do own my own business and am doing quite well. In fact I own my house outright in the Washington DC area which is not a cheap place to live and for the most part has been saved in the housing crash.
I don’t think I’m a redistributionist. I think your Two sides to every loan is a bit of an oversimplification. People bought homes based on values which were overpriced because rates were held too low for too long and no one was looking at the big picture. Loan instruments were created by the private sector (no interest loan ect) which were manipulative. 22 year old kids with no education and no vested interest in making good loans sold loans to make fast money and no one was looking at the big picture. Ceo’s had to justify huge bonuses by making sure the next quarter was better and no one was looking at the big picture. The government turned it back on regulating the market because the market owns those people on capital hill and they are not looking at the big picture. It was all about the here and now. Of course people that take out a loan are responsible for their actions, but I think it was a little bit more complicated then a loaner and a borrower. I haven’t even mentioned the derivatives market that Greenspan did not even understand.
The more you tax the rich, the smaller your tax base and tax revenues get. Law of nature.
The more you want to screw the rich, the more you find yourself screwed in the same process!
The best way to show the rich you are as good as you think is to stop begging the rich for jobs.
Someone mentioned that “history” does not have examples of what we are facing and future is unpredictable. Well, what do you think happened to the Roman empire? Recall your history but analyze it differently from how your 10th grade teacher explained.
As for the future, it is not that unpredictable. Nothing much wrong with math/statistics modeling, it has more to do with the fact that we do not “like” to include all the variables. Also, the outcomes can be narrowed but the timing will always be off.
In any case, as long as the politicians can buy votes by promising lollipops now, none of our (or any one else s) problems can be solved. Just kick the can down the road while whistling along the way (better than playing a “fiddle” though!)
cwt334:
There are TWO sides on every coin and there are TWO sides in every loan. Lender and borrower. It’s irresponsible for lenders to give money to people who can not pay. It’s EQUALLY irresponsible for borrowers who can not pay back to “borrow now and think later”. It’s even worse if the government force the lenders to do it and the poor sue the lenders to do it.
Additionally, national debts are the works of our politicians who are democratically elected. There are more poor than rich in this country and the riches only have one vote per voter, how could they be more responsible for the failure of our elected politicians?
Who said the poor don’t have that kind of power? THE ONE represents everything that the poor want. The trillions he has spent largely went to benefit or pay back the so-called poor many of whom making more than $90K while not working! Meanwhile the businesses in this country are being pushed against wall. Don’t think so? Just try to be a business owner for few days and see what happens to you.
USATODAY has article today saying “private pay plummeted to historic low, government pay soured”.
I suggest all the redistributionists (or fat cat haters) to go out and start your own business! Don’t you want to pay yourself a fat salary and bonus? So, do the riches do. Start or manage a company now! I heard you saying you can’t. Take some risk just like the riches do. See how easy it is.
cwt334,
Considering that Medicare and Social Security are our two largest expenses, and that the elderly are the wealthiest segment of our society, then you are somewhat correct about the more financially secure in our country being most responsible for our national debt.
The gap between the rich and the poor is irrelevant IF the poor are able to survive and IF the rich aren’t using their political connections to enrich themselves. The poor are able to survive in this country quite well, so that part of the equation is not an issue for me. The gap between the rich and the middle class IS an issue, and most of that is due to the second part, where the rich use their political connections to make themselves richer.
The Chinese comparison is actually an interesting example, although not perfect. In China, just like the U.S., you have companies using their political connections to ensure their own market supremacy. By the way, would you rather be in the “growing” middle class in China or the “dying” middle class in America?
Ed
The the rich are more responsible for the national debt. The poor don’t have that kind of power. I agree with you about the infleunce the rich and there money is having on politics. The gap between rich and poor has grown. The middle class is dying while the middle class in China is growing.
The problem with all fat cat haters is that they have severe deficiency of seeing wealth can easily evaporate if the circumstances are not friendly. Even when it happens right in front of their eyes, they still can’t see it. I guess no point to argue with someone who can not see.
I suggest all fat cat haters go to start your own business and see what’s like to be a fat cat.
Ed:
Well said!
bsdgv,
Big government cannot solve the problems you describe. In England, they have INSURED people dying in hospital corners. Children get crappy educations here on the public dime. The reason people in the below poverty threshold are increasing is because of 10% unemployment.
Mind you, where I have a problem with the wealthy is NOT the money they have, but the way they use it to influence politicians. I would even be willing to accept a “socialized” campaign finance system. You only have to look at the obscenely complex tax code to see the many ways in which the wealthy get out of paying their fair share.
Having said that, I also find it disgraceful that half our population either pay no taxes or receive more in benefits than they pay in taxes. The middle class and the working poor are both every bit as guilty for our current national debt as the wealthy are.
Private Pay Plummeted, Gov. Pay skyrocketed.
ttp://www.usatoday.com/money/economy/income/2010-05-24-income-shifts-from-private-sector_N.htm