As expected, the European Union and International Monetary Fund have chosen to subsidize the profligacy of Greek politicians. A deal has just been announced. As the Washington Post reports:
Greece on Sunday announced a long-awaited deal with the European Union and International Monetary Fund for a $145 billion financial rescue, an unprecedented package… The three-year package is also the largest international rescue to be backed by the IMF. …The proposed cuts in Greece include a new round of reductions in salaries for state workers, more flexibility to fire them, an increase in the value-added tax from 21 percent to 23 percent, and higher taxes on fuel, tobacco and alcohol. More state-run industries are expected to be privatized, and military spending will be slashed.
http://www.washingtonpost.com/wp-dyn/content/article/2010/05/02/AR2010050200621.html
I’m not terribly optimistic about the long-run consequences. I also can’t resist pointing out that the VAT has jumped from 19 percent to 21 percent to 23 percent during this crisis, which underscores how easy it is for politicians to use the tax as a bottomless ATM machine. My Cato colleague Jeff Miron shares my pessimism, writing in Forbes that:
A bailout will not address the fundamental causes of Greece’s fiscal problems. Greece has an expansive but highly inefficient civil service and an economy stifled by regulation, favoritism and rent-seeking. These policies have generated double-digit deficits and a debt-to-GDP ratio well over 100%. The situation is not even close to sustainable, so absent a bailout Greece will default on its debts. A bailout, however, does nothing to fix the misguided policies that have generated Greece’s existing debt and ongoing deficits. Bailout therefore merely postpones the day of reckoning. Worse, bailout both rewards Greece’s bad past behavior and encourages such behavior in future. Greece will never change its misguided policies if the E.U. and IMF infuse it with new cash, just as no teenager who has overspent an allowance will reform if the parents merely expand that allowance. …The negatives do not end with the current bailout. Greece will be back for additional bailouts in short order, since under a bailout it will not fix its underlying problems. And once the EU and IMF have bailed out Greece, they will find it impossible to resist bailouts for Portugal or Spain. As the recent downgrading of these countries’ bonds suggests, they (perhaps along with Italy and Ireland) are also at risk of default in the near future. …Rather than bail out Greece, therefore, the E.U. and IMF should allow it to default. This will hurt Greece’s creditors, but those entities assumed the risk when they loaned to a country long known for its profligate ways. In contrast, a bailout forces unwitting taxpayers to foot the bill for Greece’s sins. This can only breed resentment, not to mention reduced incentives for other countries to restrain their own spending.
http://www.forbes.com/2010/04/29/greece-bailout-default-opinions-contributors-jeffrey-a-miron.html
Obama’s Weak Economy. I’ve explained on several occasions that Obama has a legitimate point when he says he inherited a mess. After all, Bush spent the economy into a ditch and the Fannie/Freddie/Federal Reserve-caused financial crisis put the economy into recession. That being said, economies normally rebound from a deep recession with a big recovery and this has not happened (at least so far) this time. The Wall Street Journal editorializes about how weak the current recover is compared to the Reagan expansion:
One way to judge the strength of a recovery is to compare it to the growth after downturns of similar severity. The best recent comparison to the recession of 2008-2009 would be that of 1981-1982. …both periods had steep declines in output and jobless rates that hit 10%. The 1982 recession officially ended in November, and the recovery came roaring out of that year, gaining momentum throughout 1983 and carrying 8% growth into 1984 with an expansion that lasted six more years. …By comparison to that boom, the current recovery has been about half as strong. …The full incentive-enhancing impact of the 25% Reagan reduction in marginal tax rates finally kicked in on January 1, 1983…. At the same time, an era of deregulation was lowering costs across most industries. The groundwork for a durable expansion had been laid in lower taxes, lower inflation and lower business costs. In the current recovery, the policy headwinds are very different. Taxes are set to rise significantly on January 1, 2011, and the political class is signaling the need for still more taxes to pay for the costs of stimulus and the expanding entitlement state.
http://online.wsj.com/article/SB10001424052748703871904575216282773704608.html
