The Greek Tragedy: A Labyrinth of Debt
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Alexis Tsipras caved. He swapped bailout for more festering pain exacted externally, rather than suffer pain on Greece's own terms. Bailout equals austerity. But the price is higher taxes and spending cuts that will benefit international creditors. These austerity measures will have very predictable effects on the Greek economy. Austerity is the new dominant macroeconomic zeitgeist, having supplanted Keynesian economics. Austerity has become the policy of choice anywhere when economies are in trouble. It is also the policy of choice in a segment of congressional polity.
This capitulation is a mind-blowing turn of event that spits in the face of the Greek voters who resoundingly voted "No" to austerity. Certainly, the "troika" was in a better negotiating position: the power of the purse gave them a bargaining advantage. They were bargaining from a position of strength: Greece, with hands extended for alms, bargained from a position of weakness. Creditors want their money back, and they don't much care the price the Greek people will have to pay going forward. The financial price is facile to assess: payment of interests and principal on the debt. Wall Street rejoiced at this and DJI rose 211.79 points the day (July 10, 2015) after the Greek prime minister Alexis Tsipras folded. The performance of stocks signaled satisfaction of creditors with the deal. It does not reflect the pain that the Greek people can be expected to have visited on them. Government must trim their sails in an economic storm. The return to sustained economic growth is hypothetically based on a restoration of investor confidence in a bloated government. Further, government is inefficient by its very nature, although voters vote the government it wants. Privatization makes companies' CEO accountable to shareholders: the quest for profits forces companies to be efficient. They must maximize profits by finding ways to reduce costs. Government has no such constraint, as the goal of government is to maximize welfare. This is why the pain inflicted on Greek citizens is of only passive concern moneylenders. This is also why the Greek unemployment rate is about 25 percent, its health budget has been slashed, and the suicide rate is up. (See Vox) There have been other costs in terms of human suffering that includes a rise in the incidence of HIV and malaria. (See The Guardian)
Real economic and physical pain isn't the concern of profit seeking companies--although they stand to benefit from economic growth: CEOs and shareholders gain from higher profits and stock prices. But a country such as Greece faced with real human pain, is not good for business profitability. Bargain basement selloff of public assets to the wealthy doesn't mean there will be fewer suicides, HIV, and malaria victims. It does mean that a handful of people will derive huge profits from the conversion of public goods to private businesspersons.
The Greek people's sentiments were shunted aside to satisfy the demands of lenders. But how will bailing out Greece turn the country around? It's like a person down on his luck because he has lost his job and has a mortgage, who racked up a $20,000 balance on 10 percent credit card. He makes the minimum payment every month. Unless his circumstances change dramatically, he'll never get from under that debt. Similarly, a bailout will only add to Greece's problem. However, austerity is not a pro-growth strategy. How do higher taxes and spending cuts encourage growth? It doesn't! One would have to assume that the turn-around in the government finances is sufficient in itself to grow the Greek economy. It isn't enough to restore confidence in the government, when Greeks lack the wherewithal (income) to buy business goods. Higher taxes reduce disposable income. When you raise taxes people have less money to spend on food, shelter, and clothing. So business profits fall. When the government cuts spending on a host of public goods, public workers are laid off. They lose their source of income, which they use to buy goods and services in the marketplace. So, again, business profits fall. A poor performing economy is one in which government revenues fall. Advocates of austerity might welcome this since it would force the government to institute further cuts in spending. This is a downward spiral that does not culminate in a good place for the country. When a country falls under the grips of recessionary forces, it is difficult to right itself--Japan suffered from anemic performance for a "lost decade." (See BBC) Don't be fooled by this, Japan is the third largest economy on the globe. In addition, remember how difficult it has been for the U.S. economy to come back from the 2008 Great Depression. Bad times can be stubborn, protracted, sometime insoluble for countries. For instance, developing countries find it difficult to lift themselves out of the grips of poverty. That is why it is hard--perplexing even--to comprehend why some policy makers willfully travel the road to economic hardship, although it is easy to see why international creditors don't give a hoot. Lenders are pragmatic not ultruistic: they want their money back. Austerity has become the new paradigm in economic thinking. The terms of the bailout might force Greece into a long winter of poor economic performance, much like the "lost-decade" slump Japan experienced.
There's a simple solution to the Greek problem. It's one no austerity ideologue would seriously contemplate because it goes beyond everything they believe: the government can do nothing right. On the other hand, private business has an inbuilt measure of success: profits. Profit seeking leads to efficiency, ignoring corruption of banks (the Libor problem, for instance), and the failures of Bear Stern, AIG, and the Wall Street complicity in the Great Recession, and the auto bailout, and the banking bailout. What's this Greek solution? Answer: complete debt forgiveness. However, the route chosen by lenders will, all most certainly, guarantee more pain on Greek citizens, who had stated unequivocally in a referendum they're no longer willing or able to bear.