Greece is going to have an election on January 25th. The leading party is the neo-Marxist Syriza led by Alexis Tsipras. Latest opinion polls show that Syriza has the support of 30% of Greek voters or about 3% ahead of the ruling party, New Democracy Party.
How did, Syriza, a coalition of Maoists, Socialists, greens, communists and Trotskyists, get to top the opinion polls? To answer this question, we have to go back in time.
Greece had leftist governments that created a huge welfare state. Taxes were high but still not enough to pay for all that government spending. Making matters worse are the facts that there are a lot of tax and welfare cheats.
So the government had to borrow money to make up for the shortfall in tax revenues. This is the problem in nearly all democracies as politicians promise all sorts of free stuff to win votes. Responsible politicians who want to cut spending find it hard to get elected.
But the problem was worse in Greece than anywhere else. Greek debt as a percentage of GDP exploded to 164% in 2012 according to the World Bank. Unlike the US, Greece cannot print more of its own currency to pay for this debt. It is a member of the EU and must repay its creditors in Euros which is beyond its control.
So it had to agree to austerity measures in exchange for loans arranged by the Troika – the IMF, the European central bank and the EU. The troika insisted that the Greeks cut their spending and reform their economy in exchange for fresh loans.
But after five years of austerity, the Greeks are fed up. So they fall for the snake oil Syriza is selling them. Tsipras is promising them an end of austerity by renegotiating the bailout terms with the troika. Apparently, he believes or pretends to believe that he can persuade the troika to continue lending the Greeks money to maintain the lifestyle they have grown accustomed to but cannot afford.
Why would the troika do that? Allowing Greece more lenient terms would only increase demands from Portugal, Spain and Italy for an easing of austerity. Germany is wary of any easing of the austerity measures. Angela Merkel has already said that it expects Greece to abide by its earlier agreements no matter who gets elected.
Her party had taken a beating at recent polls because Germans felt that she was doing too much for the Southern Europeans. This European drama has lessons for the US as well. At the bottom of the matter, each nation must make a living by selling goods and services that the world wants to buy. The income generated from the work you do will determine how well you live.
Governments cannot do that for the people. All it can do is to transfer wealth from one group of people to another group by taxing and spending. Politicians know that the second group of people will give them more votes than the first group that they offend.
This is politics in a nutshell. I will refer to the first group as the producers and the second group as the moochers. This was what happened in Greece and is happening in the US, albeit to a lesser degree. Taxes have to be raised to pay for politicians’ promises made to get them elected.
But taxes are not enough and so they had to borrow. This means that the future generation has to pay. This is effectively a tax on our kids who of course cannot vote.
Promising people free stuff is always popular. Cutting spending is unpopular.
A responsible politician proposing cuts in entitlement programs will get thrown out. That is why it pays politicians to be irresponsible. All they want to do is to get elected to satisfy their desire for power. With power comes money.
Have you seen a poor politician? One way or another, they are going to get rich from politics, legally or illegally. Money can come legally from making speeches, book sales, consultancies and starting businesses after they had retired, capitalizing on the contacts they made while in office. They can also make money from insider trading according to the book, ‘Throw them all out’, by Peter Shweizer.
While insider trading for a corporate executive is illegal, it is not illegal when a politician does it, according to Shweizer. Apparently, Congress never got round to making it illegal. Is that a surprise?
The US is heading the way of Greece is we do not watch out. It has the same disease. Currently, US federal government debt as a % of GDP amounts to about 103% or $18 trillion. This is way too high. Entitlement spending and interest payment on existing debt amounts to 66% of the US Federal budget.
You can’t solve the problem without making some cuts in the entitlement spending. Cutting spending will bring long term benefits to the economy. But politicians who have to face periodic elections are short term in the outlook. In the short run, cutting spending will be unpopular.
As the European Commission President, Jean Claude Juncker once said, ‘We all know what to do. But we do not know how to get re-elected after we have done it.’