Is the failure of the great Keynesian experiment in public spending and government intervention in national economies about to get some traction in the popular media? In other words, are the alphabet media dupes at ABCNBCCBSCNNWPTIMENWMSNBC finally figuring out what people that used to read and watch them began to intuitively understand years ago? An article by Robert J. Samuelson in the Washington Post today suggests that there may be hope. Unfortunately, it required a crisis in Europe, and specifically, riots in Greece, to summon his plain English explanation of what plagues not just the US economy but European economies also. Some in the poular media are coming to understand what Margaret Thatcher warned us of decades ago: socialism works well until it runs out of other people's money to spend.
The European Union is putting that opinion to the test now with their trillion dollar version of TARP.
Markets rallied around the world in response to the extraordinary show of solidarity in defending the euro, which topped even the U.S. government's support for its collapsing financial system in 2008. A broad index of European blue chips closed up more than 10 percent and Wall Street was up more than 3 percent in afternoon trading.
But analysts pointed out that the package did nothing to reduce overall debt -- it just spread it onto more shoulders.
There will also be a risk that, by in effect shielding Greece, Portugal, Spain and other over-indebted countries from the harsh verdict of the open market, the measures will make it harder for political leaders to overcome public resistance to the deep budget cuts needed to get spending and borrowing under control. Strikes in Greece led to a riot last week that left three people dead.
And therein is the problem. The EU marched in with a large band aide today when the patient required an amputation. I might say that response is both uniquely Keynesian and European but that would not be true. The United States has done the same thing by refusing to address the root problems of excessive government spending. As Samuelson notes:
What we're seeing in Greece is the death spiral of the welfare state. This isn't Greece's problem alone, and that's why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven't fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.
Americans dislike the term "welfare state" and substitute the bland word "entitlements." Vocabulary doesn't alter the reality. Countries cannot overspend and over borrow forever. By delaying hard decisions about spending and taxes, governments maneuver themselves into a cul-de-sac. To be sure, Greece's plight is usually described as a European crisis -- especially for the euro, the common money used by 16 countries -- and this is true. But only to a point.
Euro coins and notes were introduced in 2002. The currency clearly hasn't lived up to its promises. It was supposed to lubricate faster economic growth by eliminating the cost and confusion of constantly converting between national currencies. More important, it would promote political unity. With a common currency, people would feel "European."
Their identities as Germans, Italians and Spaniards would gradually blend into a continental identity. None of this has happened. Economic growth in the countries using the currency averaged 2.1 percent annually from 1992 to 2001 and 1.7 percent from 2002 to 2008. Multiple currencies were never a big obstacle to growth; high taxes, pervasive regulations and generous subsidies were. As for political unity, the euro is now dividing Europeans. The Greeks are rioting.
The European "financial contagion" is spreading. Look for quarantines between states in the U S soon.
Note: Frequent commenter Brett made this connection earlier.