Tight Belts and Broken Promises

It's a story that will be repeated in every corner of the Western world where people were promised social benefits and government workers were pledged fringe benefits: sorry, they will be severely reduced if not eliminated. Economist Paul Krugman calls what is going on in global finance a “third depression,” one that looks more like the one that began in 1873 and dragged on for years (the Long Depression"): “We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression (of the 1930s). But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.” Writing for the New York Times (June 27^th). Krugman fears austerity programs of government around the world as a trigger for more deflation and believes, as the Obama administration has recently announced at the G-20 meeting in Toronto, that excessive governmental austerity might backfire and sink the world into a deeper malaise. Unfortunately, Mr. Krugman, austerity is the name of the game, and the G-20 nations even set a three-year timeline for deficit reductions of at least 50% for member nations (including the U.S.).

The impact of the first stages of the weakest European economies imposing austerity has already produced strikes and deadly riots in Greece; Ireland is falling on its face, and Spain is grappling with the lending requirements imposed by the EU Central Bank. Things are looking pretty grim for the locals. "'Europe is in a tough bind,' said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and now a Harvard professor. 'If you want to escape default, the Irish path is the only way to go. But the Ireland experience points to the profound challenges that the current strategy implies.'… Politicians here have raised taxes and cut salaries for nurses, professors and other public workers by up to 20 percent. About 30 billion euros ($37 billion) is being poured into zombie banks like Anglo Irish, which was nationalized after lavishing loans on developers… [Ireland's] budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of gross domestic product last year — worse than Greece. It continues to deteriorate. Drained of cash after an American-style housing boom went bust, Ireland has had to borrow billions; its once ultra low debt could rise to 77 percent of G.D.P. this year." New York Times (June 29^th).

Spain's no better. Taxes are going up across the board and services have been slashed. Infrastructure projects are freezing in their tracks, spitting off even more jobless souls. Where jobs aren’t being eliminated, government salaries are dropping, fringe benefits contracting, pension benefits are freezing (even where the law requires cost of living increases!) and the retirement age increasing (and it is not entirely clear that there will ever be enough money to support the requirement contributions to fund these retirement pledges). Subsidized day care for civil servants, once a point of pride for the government, is going to cost participants a lot more, and look to interest-free mortgages to qualified government employees to slide into the abyss. The baby bonus, $3,300 per birth, is vaporizing. They took lower-paying government jobs for the stability and the benefits, and both seem to be slipping away.

The government continues to struggle to find new cuts to make and new taxes and fees to hike: “With each new proposal, the popularity of the Socialist government has plummeted. One recent poll found that more than 50 percent of the population wanted Prime Minister José Luis Rodríguez Zapatero to call early elections, which he would lose by more than 10 percentage points… When Mr. Zapatero announced a move to stimulate the economy last week — an overhaul of the country’s labor laws, which make it virtually impossible to fire older workers — unions, traditionally his allies, called for a general strike in September, the first one in nearly a decade.” The New York Times (June 28^th). The “cradle to grave” web of European social benefits – that big safety net in the sky – is no longer sustainable.

A typical impacted government worker reacts: “He would like to see the bankers he considers responsible for the country’s problems taxed and prosecuted. He does not think much of government officials, either. The day the first austerity measures were announced, he saw the mayor of Madrid and his minister of public works on television attending a sporting event in Germany… ‘If we have no money, why are they there?’ he said. ‘I don’t understand why we are making social cuts. Look at the [Spanish] monarchy. What is that worth? Why are we paying for that? And there is a lot in the public service that could be cut — official cars, official trips.’” The Times. Right behind the euro economies of Greece and Spain are Ireland, Italy and Portugal, but all European nations have announced austerity measures, and if this “recession/depression” rolls on for years longer, France and Germany may well join Greece with strikes and riots. Is austerity the right path? How sure are you?

I’m Peter Dekom, and perhaps I can get a job as an aging domestic in a Shanghai household someday.