Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes

Just a continuing proof that BIG government is wrong, is also the continuing debt and financial turmoil in Europe. Of course, the same heavy debt burden is also experienced in North America, Japan and other developed economies, regardless of their forms of government -- parliamentary, presidential, federal, centralized, unitary, etc.

Here are some news headlines yesterday, June 5, from BBC, CNN, FT, WSJ. They look self-explanatory.

A good chart from The Economist, Crunch Time, May 28th 2012.

...According to The Economist's credit-crunch index, credit is now tighter in the euro area than it was at the height of the financial crisis (see top-left chart). This is having a detrimental effect on the real economy, as demonstrated in the following three charts. When the index was last at a similar level during 2008-09, economic output tanked, unemployment shot up and stockmarkets plummeted. Unless policymakers find a lasting and credible solution soon, it seems likely that the same will happen again.

Another chart below from the same magazine, A rebalancing act, May 22nd 2012.

GREECE is in a bind. Because it is stuck with the euro, it cannot become more competitive by currency depreciation. Instead it must lower its real exchange rate, by cutting prices and wages. This is proving a painful process. One measure of progress, unit labour costs (the average cost of staffing per unit of output), is declining and will continue to do so, according to the OECD’s latest Economic Outlook. Cheaper labour should result in cheaper goods, making Greek exports more attractive to foreign buyers and helping to improve the trade deficit. But with less money in workers’ pockets domestic demand—the sum of consumption, investment and stock-building expenditure—is likely to fall further. The OECD recommends that trade-surplus economies, such as Germany and the Netherlands, push up costs. This would make Greece more competitve, without dragging on Greek workers' incomes.

And one more chart, also from The Economist, The German motor, May 15th 2012.

(Germany's) economy surpassed expectations by managing to grow by 0.5% during the first three months of the year. As a whole, the euro area registered stagnant growth, and without Germany its economy would have declined by 0.2%. Germany accounts for about 28% of euro-area output, yet its contribution to euro-area growth has increased markedly since 2004. It was responsible for 65% of the region's growth in output on average since 2007. Meanwhile the euro zone's peripheral countries—Portugal, Ireland, Italy, Greece and Spain—have seen their contribution decline from a pre-crisis average of 45% to a drag of 10% since 2007.

Look at that, a 0.7 percent GDP growth is already "high" in EU situation these days. The economic contraction, negative change in GDP size, has spilled over beyond the PIIGS, now covering Britain and the Netherlands.

Being an advocate of lean and limited government -- for limited coercion, regulations, restrictions and taxation -- it does not make me happy either to see these figures of bad economic performance by those economies under BIG governments.  But since those governments and the respective political parties and political groups and NGOs that support them, cannot be convinced easily of the mistake of further expanding government size and costly welfarism, we have to allow the natural course of events to teach them, the public, some hard lessons.

Some libertarian anarchist friends would question, "Why have limited coercion, why not zero coercion by abolishing government entirely?" Well, sports and gun clubs, rotary and other civic clubs, village and professional associations, etc. are mini-governments actually. They have their own bureaucracies, their own set of rules and regulations with respective rewards and punishments, collect mandatory annual dues and other fees that appear like taxes. In the event of conflict among their leaders, or an inter-club (say gun club) disputes, there is a need for a bigger force with its own coercive power, to settle disputes with finality. And we are referring to the promulgation of the rule of law, enforcement of contracts, between and among people, private enterprises, various civil society organizations, as the main "raison d etre" of government.

Suffice it to say that somehow we need government, but it should be a lean one focused on implementing very few functions. Big and expansive, highly intrusive government is wrong.

Ok, one last data for now. The world's largest economies in terms of GDP size, in trillion US$ current prices, 2001, 2006 and 2011.

Source: CNN Money

* Trivia: If the basis for G8 membership is being the "world's largest economies", then Russia and Canada should be out of G8 and China and Brazil should be in. One way to correct this is to expand the association to G10 and Russia and Canada can remain. But it's all about politics by the G8 member-governments.
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See also:
Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011
Fiscal Irresponsibility 18: Greece Bailout, October 29, 2011
Fiscal Irresponsibility 19: Rich Countries' Debts, November 24, 2011
Fiscal Irresponsibility 20: Trade and Budget Balances, January 06, 2012
Fiscal Irresponsibility 21: Eurozone Debt, GDP and Unemployment, March 06, 2012
Fiscal Irresponsibility 22: China Borrows, China Lends. April 16, 2012
Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012
Fiscal Irresponsibility 24: More on the PIIGS and European Debt, May 16, 2012

Fiscal Irresponsibility 24: More on the PIIGS and European Debt

Below are some charts that I got from various sources, on some fiscal and economic data of Portugal, Italy, Ireland, Greece, Spain (PIIGS) and the other major EU economies. I will limit commentary to the sub-heading in each chart. These images are mostly self-explanatory anyway.

(1) Declining GDP growth while rising unemployment, PIIGS.

source: NYT,   http://www.nytimes.com/2012/05/16/business/economy/leaving-the-euro-may-be-better-than-the-alternative.html?_r=1&ref=global-home#


(2) Government spending 40 to 60 percent of GDP (They need lots of taxes to finance it; taxes not enough, so they borrowed like crazy).

source: Dr. Ed's Blog,  http://blog.yardeni.com/2012/05/europes-wonderland.html

h/t: Prudent Investor Newsletters,  http://prudentinvestornewsletters.blogspot.com/2012/05/unraveling-of-europes-wonderland.html


(3) Governments of G7 countries notorious for fiscal irresponsibility.

source:  http://www.economist.com/blogs/graphicdetail/2012/05/daily-chart-4


(4) 13 European economies have unemployment rate of 10 percent or higher

source:  http://www.economist.com/blogs/graphicdetail/2012/05/european-economy-guide

Meanwhile, in a facebook discussion, my German friend posted that one has to "question the collective wisdom of markets a bit when you see them panicking on the news about Greece..."

I think those bankers and market traders were just watching how much other EU governments (Germany, France, Belgium, etc.) would use their taxpayers' money to bail out Greek pensioners, welfare dependents and the huge bureaucracy. Meaning if more taxpayers' money from other European countries are expected to flow in, those bankers and stock traders will do their usual stuff. If less taxpayers money from other countries are coming in, they will panick and head for the exit. So its a question of how much moral hazards problem is being contributed by those bail out money from other European taxpayers. The bankers and traders mainly react to those moral hazards problem and do their thing as profit-maximizing or loss-minimizing individuals.

Governments created those huge public debts, they are not personal or private debts. These are accumulation of past over-spending and excesses. So the bankers and market traders are watching how much of those excesses in the past will be reformed and thrown away, or how much will be retained or even expanded, via bail out money from other European (or Chinese) taxpayers. Internal reforms like deregulation, liberalization and privatization of some (or many) government assets, and more personal responsibility in many social sectors, do not seem to be highlighted there.

Fiscal irresponsibility, spending always larger than revenues,  living beyond one's means, heavy welfarism even if revenues are not enough to sustain it, reliance on endless borrowing. These are the marks of statism bordering on near socialism policies.

* See also Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012

Today is 11-11-11

Wonderful date today, 6 one's. Many groups and individuals marked this day for the launching of some of their big programs and projects.

Me, I will attend the Philippine Economic Society (PES) annual meeting and conference, a whole day activity to be held at the Bangko Sentral ng Pilipinas (BSP). Will meet many friends there in the economics profession. I've been inactive of the PES lately. Well, I did not like the themes and topics of previous conferences before. This year, still another cheesy topic, but the good thing is that there are so many simultaneous panel discussions, something like 6 to 7 panels on-going at the same time, so I can just hop from one panel to another if one panel is boring. This is the main reason that attracted me to attend today's PES big event.

In the morning session, I plan to attend the discussion on "Understanding Institutional Change in the Philippines". I want to see if the speakers will mention topics like rule of law and property rights, two of the most important but often overlooked concepts in many economic and social literatures in the country. Or I can jump to the panel on International Trade.

In the afternoon, I plan to attend the panel on "Labor and Migration", or "Issues on Restraining Firm Market Power". Restrain market power? Why not restrain government power? There will also be cocktails after the conference, yeah, beer or wine, I prefer beer.

November 2011 is quite pivotal for some countries. The government in Greece sank, Berlusconi in Italy is sinking. Thailand manyprovinces are "sinking" literally due to heavy flooding. The floods are still rampaging for weeks now. Some folks will definitely argue that "warming causes cooling", yeah right.

State welfarism is very costly, many countries on both sides of the Atlantic are realizing it slowly. Paying someone for not working, or giving "free" healthcare for many if not all people, early retirement (like 50 years old in Greece?) and long pensions, are slam dunking their public finance with tons and tons of public debt. Public Debt/GDP ratio of 50 percent seems mild these days, as many countries are on the 60 to 100 percent or higher ratio already.

And talks of Israeli strike of Iran's nuke facilities has resurfaced. Here in the Philippines, talks of "all out war" against the communist CPP-NPA and the secessionist MILF rebels is also resurfacing, at least among a few sectors who want to end these 42-43 years old armed conflict. Me too, I'm tired of all these war, even if they are limited to far away municipalities and barrios. I don't want to see, support, finance through endless taxes and fees all those wars and bloated military bureaucracies for the next decades. It's an endless war it seems.
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The PES conference was great, lots of good papers presented, big audience too, should be 200+ participants. I actually came late, past 10am. The morning plenary session has already started, about Public Private Partnership (PPP) on various infrastructure projects. There were four speakers, one from the PPP Office, one from the Department of Finance, and two from the Asian Development Bank (ADB). I forgot the conference kit at home, I don't remember their names, but will write about it further. Peter Wallace was the moderator.

The two ADB guys talked a lot about public goods, like hard infrastructures (roads, energy, ports, etc.) and education. During the open forum, I was one of those who asked questions. I said something like this.

My question and comments are addressed to the two speakers from the ADB. You talked a lot about public goods, state responsibility, but I think one important public good now that government can provide is how to reduce the public debt, reduce the interest payment burden. The ongoing debt problems in Greece, Italy, the US and other developed countries clearly show that high public debt leading to economic turmoil is one clear proof of government failure, of government as creator or instigator of economic instability. So why not push for private sector investments even with no public sector participation? When government comes in, they bring lots of bureaucracies, as earlier mentioned by Mr. Vic Valdepenas where the PPP Office is duplicating the functions of the ICC (Investment Coordinating Council), the BOI (Board of Investments) and other agencies. Government also contract more debt, and get more taxes to finance those debts. So it is possible to have more private sector investments with no additional public debt.

Interest payment alone of the Philippine government is around P330 billion per year, average for 2010 to 2012, principal amortization not included yet, clearly a huge public finance burden. If private investors come in, government can only ask them, "Will you be involved in drug pushing, human trafficking, related activities?" If their answer is No, then government should tell them, "Ok, start your business tomorrow" and that's how we proceed with investment-led growth.

Perhaps it was somehow a shocker for the two ADB guys to be told that government -- and ADB-pushed new debts -- should step back. My gift for them on 11-11-11. In fairness to the two guys, they admitted that bigger private sector involvement is possible and desirable, that high public debt is a big issue for many economies.

More stories later in this blog.

Welfarism 4: Italy's Fiscal Woes, Kid Glove to Criminals

Like Germany, France and Spain, Europe's big but highly indebted economies, Italy is in a serious fiscal bind. The EU stability pact says that member-countries' budget deficit should be no more than 3 percent of their GDP. For the past few years, habitual violators include Italy, France and Germany.

This year, Italy'y deputy finance minister, Vincenzo Visco, was reported* to have said that the country's deficit could be more than 4.5 percent of GDP, much bigger than earlier forecasts.
Like many of its neighbors, the expensive cost of generous welfare system makes the expenditures bloat to sizes.

The cycle of (1) high and multiple taxes (2) to finance generous welfare system, sometimes (3) make many productive citizens and entrepreneurs reduce working if not leave the country, (4) resulting in huge budget deficit and government borrowings, (5) resulting in higher debt payments, further bloating of the expenditures, and you need (1) high and multiple taxes...

You reduce personal responsibility and assume more "collective" and government responsibility, you encourage the emergence of more subsidy- and welfare-dependent people, while discouraging more self-driven and ambitious people.

* See: "Italy warns of growing budget deficit", May 23 2006
http://news.ft.com/cms/s/fbf1c528-ea7b-11da-9566-0000779e2340.html


Light Fines in a Welfare State

A teenager with no criminal record just went on a stabbing rampage in Berlin, Germany, May 26 evening. He stabbed 35 people randomly, 6 of whom needed emergency surgery. The police caught him and charged with 24 counts of attempted murder, and could face a youth sentence of up to five years in prison, according to a report in the Financial Times today, http://news.ft.com/cms/s/71bce60c-ee64-11da-820a-0000779e2340.html.

This man from a poorer economy asks, "5 years imprisonment only?" I can't believe that after attempting to harm and kill as many people as he can, he'd get only 5 years in prison? If that thing happened here in the Philippines, that guy when caught by the public would be a mutilated body if not a dead meat before the police could get him. Stabbing and attempting to kill people randomly is the mind of a sick and deranged person; he does not deserve to live another day.

Sure, Philippine laws will also give some consideration and protection to teenage criminals. I do not know how many years imprisonment a Filipino teenage criminal would get if he did the same act as that Berlin teenager. But chances are, the public will get the boy first even the police could find him, and public anger is more spontaneous and more fierce than government laws would impose.

If I am a family member of one of those 35 people randomly stabbed, I would ask the Parliament why the fines are so light and non-intimidating to other potential criminals. Sure Germany is a welfare state, but the welfare and protection should not be extended to deranged people with clear and explicit plans of harming and killing other people.

* See also: Welfarism 3: Spiraling Costs and Rent-Seeking, April 24, 2006