Tuesday, May 11, 2010

Politics: US Headed for Greece

TORONTO, ONTARIO - There are some pretty bizarre "truths" floating around about the need to bail out Greece (and potentially Portugal, Spain, Ireland, and Italy), most of them centering around socialism. While the degree of entitlement spending is an element of the problem in Greece and cutting it will have to be part of the solution, it's absurd on the face to claim that it is the root cause. There are plenty of countries with bigger social safety nets who are not in danger of needing bailout (look at basically any country in northern Europe--and no, I don't count Iceland as part of Europe; it deserves a whole separate analysis).

It doesn't take a Nobel Prize in economics to understand the basics of the problem in Greece. Corruption is rampant--listen to any coverage of the Greek economy, and it soon turns to envelopes stuffed with cash in quite a variety of contexts. As a corollary that is not surprising when corruption is common, trust in government is almost non-existent, and hence people openly don't pay taxes. It's not hard to understand the mentality that leads one to deal with corruption in daily life and reject contributing to generic corruption. When the government doesn't receive the expected income from taxes, it's very hard for it to impose measures that allow it to deal with a financial shortfall such as has occurred in the current worldwide economy. All it takes are a few added factors--say, an financial firm helping a government to falsify its books--and a situation like the one in Greece comes to pass.

Greece isn't going to get out of its problems just by cutting public spending. It will require a cultural transformation. People will have to pay taxes. People will have to report and not participate in corruption. People will have to believe in government. Exactly how that's going to happen when the government has just demonstrated that it certainly did not deserve trust in recent times, I really have no idea. Whereas there does seem to be some hope of restored faith in government in most of the other countries currently on verge of crisis in Europe, it's hard to see how it happens in Greece, and thus it's hard not to expect Greece to have to leave the European Union and go through an extended period of economic collapse.

Those in the United States should not be sanguine about what is happening in Europe. The call for evading taxes has been on the rise in the United States my entire life. The attitude of the editorial page of the largest-circulation newspaper, the Wall Street Journal, regularly glorifies the concept of avoiding taxes. Some readers of the paper have been known to argue that it is patriotic to NOT pay taxes. It's not a long conceptual road from that attitude to the inability of government to collect taxes as has happened in Greece, especially when government is completely ineffective. I've made this argument before--California is in deep financial trouble precisely because it cannot act to resolve it; its government is too divided to agree on a plan to resolve its problems, not because there is no conceptual way to do it. Combine lack of government will with tax evasion and getting out of a bad financial situation is close to impossible. California in particular, and the United States as a whole, are heading that direction.

Funny how socialist countries that do have functional governments, minimal corruption, and near-universal tax compliance seem to be doing just fine.

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