Greece (and the West): Enlarge the pie, already

posted at 12:54 pm on June 28, 2011 by J.E. Dyer
[ Economics ]   

It is sadly predictable that as the Eurozone nations negotiate a solution to Greece’s government debt crisis, the focus is entirely on “increasing revenue” through tax adjustments and “cutting spending” in a crude, linear manner.

The Greek problem

There is no doubt that these measures represent a part of the solution.  But they are incredibly discouraging for Greeks who have no freedom to do anything other than participate in their nation’s appallingly dysfunctional economy.  Almost anywhere else in the developed world, people of working age perceive themselves to have better opportunities.  There is something legal to do, other than continue at (or angle for) public-sector jobs that promise only to pay less in the future, with pension benefits turning from iffy to completely unreliable.

Greeks facing pay cuts in the public sector can’t just go home and polish up their resumes for the three dozen private companies that might want to hire them.  Many public-sector workers were hired originally through de facto political quotas, and have no marketable skills.  Families benefit from having at least one member employed in the public sector, not just because of the (previous) reliability of the paycheck and the guaranteed holidays, but because of the contacts in the state bureaucracy.  Corruption and bureaucratic whim are facts of life in Greece, and relatives in the public sector can save a family money and time in at least some of its routine dealings.

The private sector, meanwhile, is hard to get into, even on merit.  With the public sector accounting for a colossal 40% of the economy, there’s definitely less opportunity than there is in other OECD nations.  Unemployment has been on a steady upward climb for nearly three years, hitting more than 16% as of March 2011 – but the truly eye-popping figures are the 42.5% unemployment among Greeks 24 and under, and the 22.6% for those 25-34.

The US Bureau of Labor Statistics doesn’t provide exactly parallel data, but for comparison, in March 2011, the following unemployment percentage figures applied for Americans:

Men 16-19:  26.2%

Women 16-19:  22.7%

Men 20-24:  16.4%

Women 20-24:  13.5%

Men 25-34:  9.3%

Women 25-34:  9.0%

So, basically, the 25-34 demographic in Greece faces the same unemployment picture as the current crop of burger-flipper-age teens in the US, and the entire nation of Greece has no better prospects than men ages 20-24 in recession-plagued America.

Unemployment has been ugly for Europe’s young for a long time now; breaking into professional private sector employment is particularly difficult.  But Greece’s private sector is even smaller than the European average.  It simply doesn’t generate enough jobs to employ new generations of Greeks.  That is the central problem, and the root of it is the sheer size and weight of the state regulatory apparatus.

Greeks thrive in foreign climes; they are hard-working, successful entrepreneurs and professionals in the US and Canada, for example, and in enclaves of Western Europe, Latin America, and the Far East.  There is nothing wrong with Greeks.  What’s wrong is with the political, economic, and regulatory climate of Greece.  Greece won’t let her people succeed.

Lightening the regulatory load in Greece is easier said than done.  Many people’s livelihoods currently depend on its existence.  Their prospects are not merely a matter of their salaries as bureaucrats or other state employees (e.g., doctors and dentists, electric power professionals), but of the bribes they receive to get things signed off, facilitate the jumping of lines, or offer higher levels of service.

There is zero production in this parasitical segment of the economy; it’s all overhead – and much of it, even the statutory regulation, is unnecessary, as witness the numerous other economies that do better without it.  Regulation and state employment amount to a giant rent-seeking scheme that idles an enormous amount of labor and potential capital.

Greece doesn’t have to be doomed.  Greece is organized about as stupidly as possible, outside of full-blown communism.  Everything in the political economy is designed to discourage the productive employment of the nation’s most economically powerful demographic:  householders between the ages of 25 and 55.  Millions of young, healthy, alert, smart, reasonably well educated Greeks are sitting around with no prospect of legal, productive work, but instead, only of a life of economic parasitism, cloaked in the fiction of “work.”

If this changed, Greece could wipe the floor with her debt problem.  No unbudgeable, systemic economic factor has dictated this situation.  It was created entirely by politics.  It can’t be fixed by trying to balance a ledger while leaving Greeks without hope and a future.  Greeks have to be able to do what they are unable to do today because of the layers of regulation and corruption:  start new businesses, expand existing ones, attract foreign investors, and generate production, jobs, and profit.

China and Russia ready to buy Greece?

One major cost of not addressing this problem could well be the purchase of Greece’s infrastructure industries – for which there is a proposed privatization scheme – by China and Russia.  These industries include virtually the entire energy and transportation sectors, from oil, gas, and power generation to rail, air, shipping, and warehousing.  There is a legitimate fear that Western companies will be unwilling to take on the problems – the political headaches, the unlikelihood of profitability – that would come with buying out the Greek government’s holdings; whereas China and Russia operate with different priorities, seeing the privatization plan as an opportunity to gain a strategic foothold in Asia’s gateway to the West.

The Russian oil and gas industry – Moscow’s major sources of global revenue and a key arm of state policy – has Greek interests already, but Russian military interest in Greece has been heating up as well.  Turkey’s new activism and the recession of US power are driving Moscow and Athens into each other’s arms; in the context of tightening military ties between the two countries, the chief of Russia’s naval staff was quoted by Greek media in August 2010 wishing for a forward naval base in Greece.  Russia had a naval concession in the Balkan port of Tivat (in former Yugoslavia, now in Montenegro) for years during the Cold War; there is no question the Russian navy would know what to do with another one nearby.

But China is hovering as well, having stepped in to bolster Greek solvency last year, shortly after the historic visit of China’s naval antipiracy task force to the port of Piraeus.  The Chinese defense minister is in Greece this week – while the world’s attention is fixed on the debt crisis and the exertions of the Greek parliament and the Eurozone managers – negotiating “closer military ties” between Beijing and Athens.

Neither Russia nor China is in anything close to invincible economic shape.  China’s export-dependent economy is taking a beating with every downturn in US indicators; China’s countryside is wracked with an unrest prompted by rising expectations in a time of economic recession.  China has been working to minimize her exposure to US Treasury debt, but her finances are broadly and perilously exposed to global debt.  It is a myth that China is in better economic shape than other nations.  The same would be true for Russia if there were any myth to debunk, but Russia’s economic woes are widely recognized.

Competition for the future

China and Russia aren’t lining up to pick over Greece’s public-sector yard sale because they’re better positioned for an economic rescue than the West.  Their interest is strategic and geographically competitive.  While Western nations are acting from fear of Greece, and preaching austerity lest Greek weakness bring everyone down, China and Russia are acting on a strategic vision of purposeful engagement with Greece.

The West could be doing that too.  Russia and China don’t have nearly as much to offer in terms of models for political and economic freedom and long-term success.  They are after geographic position and raw materials; their ideas are centered on the getting and keeping of concentrated power, whether political or economic.  Under their tender ministrations, Greek unemployment and economic dysfunction will remain dominant; a politically connected elite will benefit, but empowerment of small entrepreneurs and the aspiring middle class will not be on the agenda.  This is the pattern wherever Russia and China invest in economically troubled nations.

The West has a better idea to offer.  Even in the deepest recession since the 1930s, economies that operate on the Western model still outperform their centrally managed, socialist counterparts.  We have all behaved foolishly with public debt and entitlements, but that’s a choice, not a pattern dictated by the inexorable workings of an indifferent universe.  We can and should treat Greece as a brother, not a leper; police up our own financial problems; and help Greece recover her economic vitality – constructively, and laying prudent groundwork for the future.  A “visit from the Chicago economists,” on the model of Chile in the 1980s, would not come amiss.  Greece needs tough love, not mere stringency or strategic exploitation.  The future of Western civilization is riding on it.

J.E. Dyer’s articles have appeared at The Green Room, Commentary’s “contentions,” Patheos, The Weekly Standard online, and her own blog, The Optimistic Conservative.

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