Truckers, Pharmacists and Lawyers

Many Americans believe that U.S. entrepreneurs are over-regulated, from OSHA safety rules, environmental controls, financial disclosures and limitations to food and drug purity controls, zoning and licensing requirements – layered in from the state, federal and municipal levels. But for a modern society, our entrepreneurs are barely touched compared to European practices or even the social traditions that make breaking into the market a cultural quagmire for all but the smallest Japanese businesses. And unlike many developing nations, the “unofficial” regulation imposed by corrupt officials is actively prosecuted all over the United States. Look at how Egypt is erupting, but maybe this statistic wouldn’t surprise you: “A 2009 study found that 47% of small and mid-sized businesses [in Egypt] admitted to bribing public officials.” DailyFinance.com, January 29^th.

But there is one European example like no other: the flailing and failing Greek economy. Their statutory and regulatory schema are not only archaic and super-bureaucratic (only the United States can top their one attorney for 250 people; we have one for 272), but they have hamstrung local growth to less than a crawl… with little in the way of grassroots pressure to change. Protecting incumbent industries and keeping newbies out has been just par for the course in Greece.

The January New York Times (January 29^th) says that the regulations are particularly beneficial to local heavily protected workers: “For decades, Greece has been a wonderful place to be a lawyer, a pharmacist, an architect, a university president or even a truck driver— all occupations protected by an array of laws that have shielded them from local and foreign competitors. Greek pharmacists are guaranteed a minimum profit on their sales and charge some of the highest prices in Europe. And because they have fixed minimum fees, the 40,000 or so lawyers in Greece receive more for their time than their peers in many other European countries.

“It has been very profitable to be a brewer in Greece, too — if you control 72 percent of the beer market, as Heineken now does… An obscure edict [from circa 1850] requires that brewers in Greece produce beer — and nothing else… The Greek economy is riddled with distortions — the number of trucking licenses has remained unchanged in Greece since 1971, for example, and the country is among the world’s leaders in lawyers per-capita… The effect on Greek competitiveness could not be more pernicious… The cost of labor in Greece from 2005 to 2010 has been, on average, 25 percent higher than in Germany, according to a recent analysis by Variant Perception, a research firm based in London. (Ireland, Portugal and Spain also have relatively high labor costs.) Quite simply, Greece has had trouble producing goods and services that people want to buy — a result being a persistently high trade deficit that even now, amid the deepest of recessions, has hardly budged.”

Folks in Greece have been willing to trade severe limitations on business and labor activities for the relatively high wage rates and outrageously generous benefits, particularly pricing, work hours and retirement. Greece slowly evolved into an isolated economy, with 20% of its economic output finding its way into the export market (half the European average). The country relied heavily on protected markets… basically on built on internal consumption.

If the recent mega-collapse had any overwhelming impact, it is that it has rooted out and exacerbated uncompetitive economic systems and practices. Companies with uneconomic practices have fallen by the wayside where they have been unable to restructure, and wage and benefit packages that are not supported by a consumer-willingness-to-pay have crushed entire nations. So the above Greek trade-off – severe regulations for secure and generous employment – is no longer tenable. Since the simplest solution available to other countries in the same predicament – currency devaluation (whereby local labor rates are effectively reduced as workers are paid the same number denomination but in a lower-value currency) – is not available to Greece (they are a euro-based country with a pan-European currency). Instead, their financial system required a massive $150 billion European bailout, and the press for lower wages and severe austerity programs has resulted in a whole pile of protests, some of them turning violent.

“The International Monetary Fund and the Greek government agree that lasting progress can be made only by instituting reforms that would make it easier for Greek companies to produce export-quality goods. Such measures include cutting taxes, easing the path for companies to win investment permits and… scrapping outdated laws that restrict business production.” NY Times. The handwriting is on the wall, but convincing Greek citizens of the sacrifices they need to make is anything but easy. And even with rule changes, the much-coveted foreign investment capital is still finding other countries a better bet. While exports are beginning to rise for Greece, so is the debt they are incurring to survive: “If current trends continue, by the time the I.M.F. rescue program runs its course in 2013, Greece will be burdened with a debt-to-G.D.P. ratio of close to 160 percent (second in the world, after Japan) — and a requirement to keep its deficit at just 3 percent of G.D.P.

“Without a major restructuring of its debts, Greece can reduce this ratio rapidly only if the economy grows at a rate approaching the 4 percent it averaged before the crisis hit in 2008. Absent government pump-priming, though, Greece must rely on its moribund private sector… Can Greece reinvent itself and become globally competitive?...The question goes to the heart of the euro’s future.” NY Times. Greece is now clearly dependent on becoming and remaining a globally competitive economy, but if they cannot generate a strong export market, they are destined to slide back down into a moribund second world lifestyle.

I’m Peter Dekom, and reality’s puncturing unsustainable economic balloons can be quite explosive.