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.
But the problem with above argument is that the dire situation that you described has not yet happened in US by large number, though things are getting worse. (I can not imaging the ambulance media will not cover any accident if a patient died due to neglect by hospital.)
US hospitals must take in whoever goes there by law, meanwhile it would take many months in your favored socialized Europe to see a doctor or you just take pain pill and forget about it.
Poor infrastructure is due to poor governing. Remember, there never will be enough money. Money always is tight. The spenders will come up with more programs and entitlements, so they will never be enough money for them. Soon they kill all goose.
Regarding redistribution, see my other post for “the riches’ wealth is not an FIXED beast. It can get larger or smaller or evaporate. It all depends on (how friendly) circumstances are.
Off-topic:
> “the economy is getting STRONGER” (emphasis mine)
1. The ECRI weekly leading index growth rate peaked on October 9, 2009 (at 28.54%; now at 9.0%).
2. The Conference Board’s LEI peaked at 109.4 in March (109.3 in April).
3. ISM orders/inventory ratio peaked at 1.805 in August 2009 (1.33 in April).
4. University of Michigan consumer expectations peaked on September 2009 (at 73.5) – now at 65.3 in May.
5. The UofM index of big-ticket consumer purchases peaked in February-March at 136; is down to 129 as of May.
6. Jobless claims bottomed at 442k on March 11. They had peaked at 651k on March 28, 2009. But they are back at 471k, which is where they were back on December 19, 2009 so the improvement has stalled out. Not only that, but to keep 472k into perspective, claims were at 453k the week after 9/11 (and the economy back then was eight months into recession). Yes, yes, employment has been rising of late; however, keep in mind that nonfarm payrolls are in the index of coincident indicators; claims are in the index of leading indicators. Please let’s not drive looking through the rear window.
7. Single-family building permits peaked at 542k (annual rate) in March (were 484k in April).
8. Mortgage purchase applications peaked on April 30th at 291.3 and now are at a 13-year low of 192.1 even though mortgage rates have come down 20 basis points since the nearby high.
9. Auto production peaked at 7.8 million units (seasonally adjusted annual rate) in January – was at 7.2 million in April.
10. Electrical utility output was down 0.1% YoY as of May 15th. Could be another early sign that the production revival is behind us.
http://pragcap.com/10-leading-economic-indicators-that-are-rolling-over
It is my understanding that no one have the slightest clue on how to solve the situation we are in at the moment. How could they? We are unable to run models on the matter. Why? Because it is difficult forecast the future when something never happened in the past. The cognitive economy is still in early stage and no finalized theory has been validated. Well, at least we will have some important Summits in June. Will see if we can ‘trust’ our representative. Until then buckle-up. It will be bumpy.
Ed,
I am not talking about punishing the rich and I am not talking about the middle-class people like you and me. If Gates makes $100 trillion a year while the government debt is increasing, the infrastructure of the country is crumbling, uninsured people are dying in hospital corners, children get crappy education, and people in below poverty threshold is increasing, I can easily argue that some of those trillions must be taxed and redistributed.
From what I am aware (and please correct me if I am wrong), private sector pensions started going out more than 20 years ago in the US. Very few companies today have pension plans. Retirement plans are funded through 401Ks and IRAs using money that is deducted from the employees’ salary. These are tax deferment accounts where the income tax is paid during retirement when the money is taken out. This is not a bribe paid by politicians in order to get elected. It is not something that is clearly on the balance sheets of government. By the same token, Social Security taxes to pay for the program are taken out of employees’ pay checks. The SS benefits that are paid out are based on how much over how many years have been paid in. It’s not a free gift from the government that someone else pays for. If the politicians spent all the money on pork (bridges to nowhere, extra B1 bombers, wars for their daddies, etc.), it’s not something that most (middle class) people feel they directly benefited from.
The public sector seems to be a different story, where fat payrolls were constructed to make political payoffs, apease unions, “give my buddy a job”, etc..
When the largest economy in the world has liabilities of 890% of GDP, you know you are in trouble. Here are some ideas. You get out of this by focusing on having a healthy economy and growing GDP (as mentioned by Ed). Increased GDP lowers the ratio and increases tax revenues (not rates). You decrease expenditures but downsizing government (e.g. increase efficiency using IT, etc.). You get the school system to foster creativity not crush it. No Child Left Behind has unfortunately meant fewer children are inspired to excel and create. You then use these citizens to form businesses that make innovative products that readily sell in makets throughout the world (e.g. APPL, GOOGLE, SLB, MSFT, etc.). And you create a system of transparency and regulations so that white collar criminals in the financial system can’t destroy the world’s economies so they can get rich.
Never heard that socialism was supposed to be good for bankers. Great feeds for my next movie.
If the war took us out of the great depression, it’s worth pointing out that is government spending. In long term economic terms (not political ones), it’s not very smart government spending either, since, unlike bridges or trains or health, or whatever, when you create assets that you blow up they are no longer productive. Some still want their big government, and government welfare, only in a large military and military contracts (Bush era welfare).
What we are seeing in the media is an enactment of Regan’s strategy which was to starve the beast–spend without taxing until you have to roll back social services. This policy of bringing economies to the point of crisis by shifting wealth to the wealthy, first, and then cutting services of the middle class is case in point. Unlike in Greece, wages have _not_ gone up in the US for since the 1970s (esp if you factor in number of people working in a family–http://www.kyklosproductions.com/articles/wages.html), but they have for the rich. Now, if that is on account of investing in the productivity of cheaper foreign labor, it’s worth asking, again, why that productivity gain should only go to the few and not to the nation–i.e. why that is not taxed to support the lower wages here at home on account of moving jobs overseas? The only solution is not tarriffs, but also global safety, pollution, and labor standards so that jobs can’t move simply to get around our child labor laws, pollution laws etc.–say to the Maquladoras along the border–where men are no longer hired (because they will fight for better benefits), and the enviornment is readily degraded. See this documentary: http://www.maquilapolis.com/project_eng.html.
I don’t deny the enormous wealth generated by global trade and freer trade, but that doesn’t mean we simply throw our hands up in the air when confronting the gross inequality our low-tax, crisis, cut standards of living culture is generating.
No one is calling for killing the rich!! But the good old American policy of taxing them down to size is very much in order.
Jim, right on with this post.
The issue is that to solve the European debt crisis (or the US recession for that matter) one will need some (or a lot of) politocal courage, and that will unfortunately not happen, because politiocal courage, tough choices and so causes to lose elections and not win them.
So, kind of like the mortgage crisis” spend now worry about later” , the European leaders promised to spend and did in fact spend to buy vote and it is now time to pay.
It takes real courage to tackle tough choices and it is widely unpopular, just look at the health care reform or the babnk reform in this country, everyboday talks about the need to getting something done buts as soon as someone has the courage to get something done, everybody pounces and count the days until the enxt election. Truly pathetic.
In the meantime, there are some good deals to be made on Wall Street today!!
The other point for my argument:
Just like you don’t want to work for noting, nor do the riches. If you squeeze them too hard, they’ll either bankrupt or leave. Just look how many high-end homes are for sale in US now. The riches’ wealth is NOT a fixed beast. (That’s the key missed point.) They can get larger or smaller. They can evaporate too. It all depends on circumstances.
Additionally, there are many countries in the world which would roll out welcome mat for them. Like it or not, the world has ALWAYS had much more labor than capitalists. As we try to dig out of the great recession, capitalistic entrepreneurs are more important than ever! They create jobs. Unfortunately, the business environment is getting worse and worse for the job creators in this country.
BTW, if you hate the fat riches so much, why don’t you go to start your own business, be your own boss and pay yourself a FAT salary and bonus too? Why are you still there begging the evil riches to give you a job?
FDR’s high taxes prolonged the great depression as many historians wrote. What got US out of the great depression was the war. But I don’t think US is even close to any position to rage that kind of massive war again. (Although smaller wars with Iran and N Korea are possible to divert domestic attention.) Neither did the high taxes adopted by Japan made any good for that country. As result Japan went into a “lost decade”. (I believe Japan adopted a national VAT type tax then.) Japan only got little better in the last several year because of the China demand! (That’s why the Japanese proposed to set up a EU type deal for a Far East Asian countries, so it can export even more freely to China.)
By contrary, Ronald Reagan took over the country when it had DOUBLE DIGIT inflation, interest rate and unemployment. It’s national pride took nosedive (over the Iran hostage). He cut the highest tax bracket from 90%(!) down to 40%. The result is the greatest nation on earth we saw in the past 30 years. Both economically and militarily.
Hatred or blasting does not help solving the real problems.
Definitely agree that we can’t turn back the clocks to the 70’s. Yes, more middle class would be great. However, globalization is destroying the U.S. middle class, while bringing relative prosperity to billions in developing markets. The world economy is growing, but it may not feel like it in the U.S. or other developed markets.
Waiting to see how far we’re going to drop on this leg down. Looking forward to hearing some bargain hunting tips from Jim.
I think we promise people too much with some of these pensions. My father in law worked for the federal government in the intellegence field. He now gets over $100,000 because he is in the old system. The new system would not have given him as much. Now he saved acordingly as if he would have this pension. If it gets watered down it would not be fair. But it is not fair that he was promised something that may not be able to be delivered. There is no good answer.
I say this the answer is not to divide rich and poor. The rich have the power to manipulte things so they come out the winner. The rich have created jobs but we are no longer in the post WW II economy where jobs are being created in the US. The rich are busy creating jobs in China and other countries that don’t have our interest in mind. This is very dangerous.
I read a study a while back (sorry I don’t have a link) that showed the most the government can ever obtain in tax revenues is 20% of GDP. This is regardless of tax rates, tax systems, etc.
If you want more money in tax revenues, improve the economy. More government does NOT equal a growing economy.
If you just want to punish the rich, take them out back and shoot them. Personally, I don’t care if Bill Gates makes $100 trillion a year, as long as I’m living comfortably.
The problem with that argument is the whole planet is full of cheap labor (at least 4 billions. You can easily add it up). When there are billions of people who don’t mind to work for much less and they fight hard for the limited job supply, it’s hard for wage to go up regardless our desire, unless US adopts trade barrier AND completely close its border, so no excess labor supply. (To make it clear. I am not promoting either.) However, we all know that NEITHER IS POSSIBLE.
Trade barriers will immediately create same barrier on the other side in a NY minute! (Don’t forget US exports a lot of things too.) People from around the world will continue to push into US and Europe’s doors for jobs no matter what. That all add to labor supply.
By the way, the average US household income is about $40K. The recent report on public sector is over $100K while the country drowning in $13T debt and more to come (as I remember reading such reports recently.) I even saw a report saying some state’s average pension is more than $90K a piece. They are paid $90K for not working.
(Sorry I did not attach links immediately, but I believe they can all be found in internet.)
I too think the two trillion in tax cuts given to the rich in the last 10 years alone is part of our problem, a problem that goes back, I agree, to the 80s when Regan septupled the deficits with tax cuts for the same group. The argument that rich people create jobs by investing overlooks the fact that if you gave working people more of their share of productivity they too could invest for their childrens’ college, their retirements in the same stock markets, the same mutual funds, hiring the same financial advisors and so on. We currently tax money invested at lower rates than money earned by sweat, so trust fund loafers pay lower rates than a working men and women. It’s high time that disabuse ourselves of the notion that people only work for for money–they also work for respect, pride, integrity, community standing, and by constantly reinforcing the canard that you need to pay executives astronomical sums to get good performance or that you need to give the rich a cheap ride for good national GDP, we create incentives for the rich and executives to put their own profit over the company’s, the shareholders, and the national economy’s. Bring back the 50s and tax ’em away. That’s how you create a middle class.
> The riches (even though I am not one) create jobs and wealth for this country. Public sectors spend (sock in) wealth.
We all know how many jobs they created and where they created and how much of the profits they repatriated.
> NY state employees receiving more than $100K a year pension while the state de facto broke!
We all know who got fat bonuses (incomes 100s of times the lowest paid worker) the while their companies went bankrupt.
> Politicians over promise pay and benefits over
We all know real income of the working class went down, not up! Do you need a chart for that too?
Yeah, yeah, yeah…to all the astute political and financial implications…Investment strategies??? short term? long term??
The whole European mess is a perfect example of socialism. It shows the great benefit of government run healthcare, generous retirement and vacations, combative unions……Let’s follow this European model!
To the cliff.
The riches (even though I am not one) create jobs and wealth for this country. Public sectors spend (sock in) wealth.
NYT recently had article saying that more than 3000 former NY state employees receiving more than $100K a year pension while the state de facto broke! Similar things in CA and many other states.
Politicians over promise pay and benefits over the past decades and the voters keep electing them. It’s time for voters of this country stop valuing those politicians who bring home pork or promise your own little petty benefit. The whole country is under water!
And:
http://www.ritholtz.com/blog/2010/05/top-tax-rate-socialism/
> I’d love to see cuts from pensions/unions…but during a Democratic gov’t…
You’d rather cut the bank account balances of the people who got rich during the last 30 years.
60% of this country is working class and counting… They will not let anybody touch their benefits. If you don’t believe me, look at the marginal tax rates that were in effect prior to Regan presidency at which time the current plundering began.
http://www.ritholtz.com/blog/2010/04/tax-burden-on-various-americans/
Pull those “immigrants” comments, please, before I say “Kapitalism über alles!” Did someone say “be civil”?
> hard-working immigrants.
??? There are plenty of hard working but unwanted immigrants in this country.
I guess you mean immigrants with plenty of money to buy those unsold houses.
I’d love to see cuts from pensions/unions…but during a Democratic gov’t…I just don’t see it. In IL, teachers/fire/police can retire after 35yrs. Seems long, but since neither police/fire necessitate a college degree, you could retire by 54/55 (58ish w/ a college degree, but doesn’t include the 3yrs of ‘sick time’ they can apply to retire early). They then get 75% of their salary based on last 3yrs pay. If that wasn’t egregious enough, they routinely take on OT, summer classes, etc to artificially jump their salaries so they are making close to the same salary at retirement….FOR LIFE…with full health care benefits paid. Tell me that’s affordable. I know the reasons my property taxes haven’t dropped even w/ the housing mkts in shambles…
Jim,
Sounds like we should be opening our doors to even more of those young, hard-working immigrants.
Woulod this be one of those “panic” selling or “fundamentals” selling moments?? The pre-market futures are not too encouraging.
Jim,
I know this may sound depressing to some people, but personally I consider it a good thing. We need to make fundamental changes to our country to avoid the constant pattern of “low interest rates-economic boom-recession” that we seem to be stuck in.
I just hope we learn our lessons and apply some different thinking to our future planning. It will take a great crisis like you described to get people to wake up.
No one talks about taxing the rich…
By PROPERLY back-taxing the beneficiaries of the last glorious 30 years, these problems can be alleviated at worst, solved at best! If the current politicians don’t have the inclination to do that (because they are representative of the rich few), suitable politicians will get elected. Democracy never runs out of solutions!
To clarify, it may be right, it just “smells” a little off…
Jim,
Can you explain how the U.S with a much more modest social safety net is outpacing the rest of Europe by such a significant amount? Are the projected health costs that much higher? Or did the source material for this post have some kind of political axe to grind?
I expect the markets will fix what the politicians (and fawning public) would not a lot quicker than 20 years. Risk appetite is shrinking very fast. But it will also mean less liquidity around the world and therefore slower growth.