Europe declared war on Keynes, and Keynes is winning.
In the United States, Republicans lambaste President Obama’s stimulus package as a failure and insist on bone-crunching budget-cutting. If you want to know how well that works, come visit Europe — especially Greece.
Yes, Greece needed a wake-up whack and economic reform, but Republican-style austerity knocked the patient unconscious. Contrast the still-shrinking economies of Europe with the stirrings of recovery in the United States, and you feel lucky to be an American and a beneficiary of President Obama’s stimulus.
It’s stunning here in Athens to see many traffic lights not working, to see beggars pawing through garbage for food, to see blackened ruins of shops burned in rioting. I was even greeted by a homeless man who spoke impeccable British-accented English.
That man, Michael A. Kambouroglou, 35, claims that he studied English literature at Cambridge University and worked for years in the tourism industry, most recently at a five-star hotel. He told me that he had enjoyed a good life, visiting the United States and traveling around the world, until the day nearly a year ago when the collapsing economy caught up with him, and he was laid off.
“To be honest, I never thought it could come to me,” he recalled. “It happened in a flash.” Kambouroglou says he goes out every morning, knocking on doors and looking for work, but in this economy it seems hopeless. The overall unemployment rate here is 21 percent — 48 percent among young people — and the European Union forecasts that the Greek economy (and all of the euro zone) will shrink further this year.
When Kambouroglou’s savings ran out, he moved under a bridge in Athens. The suffering is widespread. Some 250,000 Greeks now receive free meals from churches or shelters, according to the Greek Orthodox Church.
There’s no doubt that Greece had been living recklessly and needed structural reforms. While much of Europe was fundamentally healthy until the crisis hit — the caricature Americans hold of a socialist Europe in decline is a vast exaggeration — Greece truly was a mess.
For example, if you’re a business owner, taxation often works like this: Instead of paying a tax bill of, say, $100,000, you pay $40,000 to the state, hand a $20,000 bribe to the tax collector, and keep $40,000.
Republicans are right to see in Greece some perils of an overgenerous government: The state sector was bloated, early retirements and pensions were sometimes absurd, and rigid labor markets undermined Greece’s competitiveness. But the problem was not a welfare state — Greece has much less of a safety net than northern Europe. Rather, it was corruption, inefficiency and a system in which laws are optional.
I drove around Greece and found driving here easy because traffic rules don’t seem to matter. If you’re blocked by a one-way street, you barrel through in the wrong direction. Stop signs are merely suggestive. No-passing markers before blind turns mean: pass anyway, and pray. When an entire economy operates without rules, it has a problem.
Yet instead of structural reforms or improved tax collection, what has changed in Greece, so far, has mostly been slashed budgets. And, as in the rest of Europe, austerity in the middle of recession has made matters worse — just as John Maynard Keynes predicted.
Granted, there are no easy solutions for Greece, but this path doesn’t seem to be working. “It might end up as a social revolution,” Kambouroglou said grimly. That’s too pessimistic, but my hunch is that the latest rescue package will fail (except that it will buy time, perhaps its purpose) and that Greece eventually may leave the euro zone. In any case, the rescue packages seem more about saving French and German banks than saving Greece.
Countless Greeks are giving up on their homeland and emigrating to northern Europe or Australia. Gloom is as thick as a morning fog on the Peloponnesus.
“The state has ceased functioning,” editorialized an Athens newspaper, The Kathimerini.
That’s an exaggeration, but schools, hospitals and social services are devastated. Staff at some halfway houses for the mentally ill haven’t been paid for six months, and electricity has been cut off. “And it’ll get worse,” predicted Dr. Cristos Panettas, the chief psychiatrist of the Psychiatric Hospital of Attica.
One of the earliest recorded economic crises in the Western world came in Athens in the 5th century B.C. Fortunately, Athens was then led by the great Pericles, an early Keynesian who did not respond by slashing budgets.
Instead, he ordered a public works initiative and built the Parthenon. I dropped by the Parthenon the other day, seeking inspiration, and a guide, Miranda-Maria Skiniti, was incisive about the lessons: “We need Pericles today.”
There’s ageless wisdom there for Greeks, Europeans — and Americans.
Indeed, where is Pericles today? Jon Henley of the Guardian reports, Greece on the breadline: amid the fury, solidarity:
Last week's news that Greece had won enough support from its private-sector creditors to finally secure the latest crucial €130bn (£109bn) bailout package was greeted with relief in Europe's capitals and undisguised joy in Greek government circles, where the deal was hailed as a "triumph".
It certainly gives Athens a breather. But for ordinary Greeks the price will be at least five more years of swingeing austerity measures that will change the country beyond recognition. EU officials have admitted that after seeing their wages cut by a third since 2009, Greeks will suffer a further 15% reduction in the next three years, and probably more after that.
The economy is forecast to shrink by up to 5% this year, after a 7% contraction last year. Stuck in recession for five straight years, Greece has seen its GDP shrink by a crushing 17%. That, is the level to which unemployment is expected to fall in two years' from 21%, at present.
Far from rescuing Greece, the austerity measures dictated by the IMF, European Union and European Central Bank, many here believe, will turn the eurozone member into a marginalised, third-world economy for decades to come. Not, of course, that Greece – in particular its swollen, corrupt and often hopelessly inept and wasteful public sector – didn't need reform. But at what cost?
Behind the numbers lies the reality that an estimated one-third of the Greek population has now fallen below the poverty line. Even for conservative analysts, the heavy and repeated cuts in salaries and pensions, spiralling tax hikes and never-ending public spending cutbacks are pushing Greece to the brink of economic, if not social, collapse.
Even the minimum wage is being slashed by 22%. The queues for the soup kitchens are lengthening; each day, the Greek Orthodox church is handing out emergency food rations to a quarter of a million people. An estimated 20,000 Greeks find themselves suddenly homeless, more than half of them in Athens.
Anger, particularly against the country's political class, is mounting, perhaps to dangerous levels. Commentators predict not just an explosion but an eruption, extraordinary scenes, even the breakdown of civil society. Elections scheduled for next month could prove a momentous test of strained resolve.
That said, alongside the fury there is solidarity. Self-help groups are emerging, citizen activists joining forces and several grassroots initiatives taking shape. Academics are offering free tuition; community web radio stations provide a forum for advice and support; volunteer soup kitchens deliver food to places the town hall can't reach. In municipalities around the country, farmers have started selling potatoes and other staple foods – including Easter lamb – to consumers directly, at ultra-low cost.
There is solidarity in Greece. My sister in Crete (which is better off than other parts of Greece) tells me food and clothing drives are being organized every other week and people are coming together to donate and help out. One thing about Greeks, Italians, Irish, Spanish and Portuguese - the so-called "PIIGS" -- is that when the going gets tough, they do come together to help those less fortunate (more than I can say about the real PIGS on Wall Street!).
But Greece desperately needs more reforms and policies centered on growth and investments. I had dinner last night with my brother's sister-in-law and her husband who are in town visiting. He is an entrepreneur running a business software company in Athens and told me that they haven't done much to cut the bloated public sector. Moreover, the EU investment programs have been frozen as the Greek government doesn't have the money to fund the 20% it's suppose to cover. This is a major impediment to investments in Greece.
I told him I watched the Greek news yesterday and they caught some farmer with 10 million euros in his bank account, a Porsche and a Ferrari! They also caught a ring of public sector workers from IKA, the state-run pension and health insurance system, who were skimming millions off the fund. He rightly noted :"If this happened in Canada, the government would be brought down!"
As far as austerity, I watch policymakers carrying out marching orders of the IMF/troika, ramming austerity measures onto everyone except the rich and tax evaders and wonder how long before the Greek experiment leads to social anarchy and a major revolution.
And it's not just Greece. The winds of austerity threaten most developed economies struggling to control debt and deficits as unemployment keeps soaring. What is going on in the world today is insane. The restless many are asked to pay more taxes, endure cuts in their wages, pensions and health care to pay down debt and 'save' the banksters who created this mess and continue bleeding the system dry.
And by the way, pensions are also playing a role in all this, increasingly funding hedge funds and private equity funds looking to profit off market dislocations to buy distressed assets on the cheap. That is why I laugh when I hear of pensions engaging in "socially responsible investing". If they were that concerned about 'socially responsible investments', they would slash the funding to most of these financial parasites.
But it's the political parasites I am most concerned about nowadays. They are the ones making policy decisions shaping the future of our global economy. Below, listen to Michael Hudson discuss the limits of austerity with Max Keiser (he appears half way through). I think Michael is a bit harsh on Krugman who continues to make the case against austerity, but he does add a fresh perspective that is rarely discussed in mainstream media.