quinta-feira, 18 de fevereiro de 2010

On Fiscal Follies and Economic Ne'er-Do-Wells

Nicholas Vardy's The Global Guru
February 16 , 2010
Vol. 5, No.7

Fellow Investor,

On Fiscal Follies and Economic Ne'er-Do-Wells

Every year, at least one member of the European Union seems to earn the title of economic ne'er-do-well, the collapse of its economy threatening the utopian project of European integration. Last year, it was Hungary and the Baltic states of Estonia, Latvia and Lithuania. This year, it is Greece that is grabbing the headlines. Since the country's perilous fiscal position came to light, Greece has become the global poster child for fiscal irresponsibility.

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As remote as it may seem to the United States' own economic problems, how Greece ultimately resolves its fiscal woes offers important lessons on what the U.S. government needs to do to avoid a similar fiscal train wreck -- even as that train is heading down the track toward us with ever-accelerating speed.

Greece: Europe's Ne'er-Do-Well of 2010

Greece's accession to the eurozone -- that is, abandonment of its own currency in favor of the euro -- was always viewed as a kind of economic affirmative action. Greece's lack of genuine economic achievements and transparent statistical sleight of hand, which added 25% to Greece's GDP overnight, was dismissed by European bureaucrats with a wink and nod. Best intentions notwithstanding, admitting Greece to the eurozone did nothing to change its centuries-long culture of government entitlements, lackadaisical tax collection, and widespread practice of petty graft and corruption.

Yet, should the European bureaucrats who are now castigating Greece be surprised? As Carmen Reinhart and Ken Rogoff demonstrated in This Time is Different: Eight Centuries of Financial Folly, Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century.

The United States: The Planet's Ne'er-Do-Well of the Next Decade

Here's the irony. By any objective measure, the U.S. government is in much worse shape than Greece. Greece and the U.S. government's fiscal deficits of 12.7% in 2009 are virtually identical. Yet, while Europe is going apoplectic over whether Greece will meet its objective of reducing its deficit by 2012 to 3% of GDP, an austerity program of similar proportion in the United States is unthinkable.

Unlike Greece, the Obama administration's proposed budget for 2010 shows it is in complete denial. There are a handful of factors -- the inexorable impetus of demographics, the miracle of compound interest and the growing role of government -- that cannot be ignored, no matter what your political persuasion. The fiscal situation of the United States combines all three of these factors and gives the formerly fringe, doom-and-gloom crowd newfound "street cred." And, looked at from the outside, the emerging culture of government entitlements and subsidies in the United States is scarcely different from the benefits enjoyed by Greek workers. As recently as 2007, the Transportation Department had only one person making $170,000 or more a year. Today, it has 1,690. Don't bother telling your kid to study hard so she can go to Harvard or Stanford Law School and to get a job at a top Wall Street Law firm. Chances are, she'd be better paid as a pencil pusher for the government.

How Hungary and New York City Got It Right

The irony is that despite a long tradition of fiscal profligacy, Greece's chance of solving its fiscal problems is much higher than the United States solving its own. The United States does not have the pressure of 15 other larger economies shoehorning it into economic austerity. And, the U.S. economy is a supertanker, compared to a speedboat that is Greece. When their backs are up against the wall, spending cuts and reforms in small countries can happen quickly.

Take the example of Hungary, last year's European bad boy. For all of the disfunction of that country's political system, when push came to shove, Hungary was able to call the political equivalent of a "time out" among incessantly squabbling political parties and appoint a technocratic government that pushed through otherwise politically unacceptable spending cuts. As a result, the country was able, with the help of the IMF, to pull back from economic collapse. By all objective measures, Hungary's Prime Minister Gordon Bajnai, a former colleague of mine, engineered an impressive (and frankly, surprisingly successful) turnaround. His reward? He's one of the most hated men in the country.

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That's not a risk an approval-seeking Barack Obama would ever take. New York City offers the best example of what the federal government would have to do to avoid Greece's fate. Mayor Michael Bloomberg's New York is now facing a staggering $4.9-billion deficit. As with U.S. government workers, New York City public salaries skyrocketed, with teachers enjoying a 43% increase in the last few years. In response, Bloomberg has proposed austerity measures like closing Manhattan swimming pools. Presumably, New York City teachers can now afford their own.

It is tempting to assert that if Bloomberg, a Democrat who is also an ex-businessman, was sitting in the White House, the federal government budget for 2010 would not include a projected deficit of $1.3 trillion. Nor is this a matter of which party's lever you pull when you go into the voting booth. Contrast Bloomberg's response to his fiscal crisis with that of a Republican bodybuilder-turned-actor at the helm of California or a Democratic political parvenu whose modest mastery of rhythmic cadences landed him in the White House.

Sadly, while Mayor Michael Bloomberg can make the necessary spending cuts in New York City, and Prime Minister Gordon Bajnai could do so in a small country like Hungary, it's unlikely to ever happen in the U.S. federal government. Although I am convinced that Greece eventually will do the right thing, the current crisis also shows how quickly things can get out of control. Once a country loses its credibility, things can head south very quickly.

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And sadly, there is no Germany or IMF to bail out Washington, D.C.


Nicholas A. Vardy
Editor, The Global Guru

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