Greek debt: parallels and contrasts with the US

Greeks who remember the German occupation, according to the BBC, are now talking about another invasion by Germany without a shot being fired.

Greece will, it seems, stay in the Euro. At least for the moment. It will do so at the cost of measures that apparently represent more severe austerity than the terms rejected by Greeks in a referendum just over a week ago. It feels like Greek voters have lost, but German politicians – apparently the fiercest critics of Greece and the harshest in their demands of them – have won.

Merkel may have avoided this destiny so far
But certainly not be being gentle with Greece

This reminds me of how the United States dealt with a similar crisis, when it faced debt problems not unlike those of Greece within the Eurozone.

The original constitution of the United States was deeply unsatisfactory, giving almost no power – certainly no power to raise funds – to the national government, and leaving most authority in the hands of the States. It became increasingly clear over just a few years that the situation was untenable and something with a more serious Federal government at its centre would have to be set up.

A Convention met and drew up the Constitution of the United States that we know today (though at that stage without any amendments, of course). George Washington became the first President and, among an all-star cast of Ministers, he appointed Alexander Hamilton as his Secretary of the Treasury (Minister of Finance).

Now there’s little on which I agree with Hamilton, particularly his views of popular sovereignty, but that’s for another debate. On finance, he was something of a wizard. And one of his first major measures concerned what came to be known as Assumption – not a religious moment, except for those whose God in Mammon, but the initiative by which the Federal government would take over the debts incurred by the individual States in fighting the War of Independence.

That was great news for Massachusetts and South Carolina, which were saddled with heavy debts (viz Greece) but not so good for Virginia and North Carolina which had cleared most of theirs, and didn’t appreciate having to pick up the tabs for the others (viz Germany). There was a battle royal. James Madison, destined to become the Republic’s fourth president, was a Congressman at the time and led the campaign against Assumption. He defeated the proposal.

The story has it that Alexander Hamilton met Thomas Jefferson, then Secretary of State but destined to be the third President, in the street outside Jefferson’s house. He was distraught and Jefferson invited him in. Hamilton explained that without Assumption, certain States would be driven towards bankruptcy, and also the Federal government would be shown to be powerless to face up to dealing with a financial crisis (viz the Eurozone).

What’s more, Hamilton maintained the apparently paradoxical view that the Federal government would be accepting a “national blessing” by taking on the debt: it would oblige it to collect taxes and establish it as creditworthy (viz the Eurozone again).

Jefferson was a close ally of Madison’s and increasingly an opponent of Hamilton’s. But he allowed his then-colleague to convince him, and took it on himself to win Madison round.

The two allies came up with a compromise solution: Madison would not block the question of Assumption coming up again in Congress; he would vote no, but would not speak against the proposal. That’s what happened, and Assumption was adopted, over the silent opposition of Madison.

At the time, the US had a population of under 4 million. Even the UK had 8 million, and France 20 million. GDP was around $200 million, corresponding to about $4.5 billion today – when US GDP is about $17.7 trillion. The US was, in other words, a minor sideshow in geopolitics back then; today it is the wealthiest and most powerful nation on Earth.

There is no need for Europe to aspire to that status. European nations have been massive global players in the past, and places like Amritsar or Algiers testify to how badly that went. But it strikes me that Europe needs to get its act together if it is only to defend its status in a world increasingly dominated by huge nations, such as the US, China and Russia.

The success of the US wasn’t naturally entirely down to acceptance of Hamilton’s proposals on handling debt. But they certainly contributed: they set up the notion of the Union has owing a duty to all its components, and therefore being more powerful than any of them, capable of playing a full role on the world stage.

So the US passed its test over Assumption.

I’m not sure the Eurozone has done anything like so well over Greek debt.

Eggs broken, but where's the omelette?

You can’t make an omelette without breaking eggs.

That’s a sentiment that’s repeatedly used, and for one purpose only: to justify damage to individuals to serve some more general and, supposedly, lofty goal. 

The present British government came to office determined to make omelettes, and it’s certainly broken a lot of eggs.

It’s aim was to wipe out the ‘structural’ budget deficit on public expenditure over its five year term. In effect, that would mean bringing public expenditure nearly into balance. Equally they were going to get public debt falling, because they regarded the high level of indebtedness as a disaster in itself as well as an indictment of the previous Labour government. Finally, with George Osborne, Chancellor of the Exchequer, in the lead, they set up an acid test of their performance, protection of Britain’s triple-A credit rating.

George Osborne:
great at breaking eggs, not so good on the omelette

To achieve those aims, they cracked a lot of eggs, principally among the working and non-working poor. Systems that made life possible on low incomes, such as tax credits or housing benefits, have been eliminated or scaled back. The disabled have been forced off benefits by being classified as fit for work, with large numbers of these fit people subsequently dying. 

They also introduced what’s come to be known as the Bedroom Tax. This measure means that people on housing benefit who have a spare room, lose a proportion of their benefit to pay for it. For many this has created a double-bind: unable to cover their rent and unable to find smaller accommodation into which they could move, they face eviction and being made homeless.

Charities dealing with homelessness report large increases in their workload.

At the same time, Britain has half a million people dependent on food banks, compared to 40,000 when the government was formed.

So much for the broken eggs.

What about the omelette? Growth is back but at an anaemic rate. The coveted triple-A credit rating has been lost. The deficit is dipping but is still far higher than it was under Labour before the crisis struck. Even the government admits that the target of eliminating the ‘structural’ element within a parliament has been irretrievably missed.

As for debt, far from starting to fall, it’s risen from around 70% at the end of the Labour government to nearly 100% under the present one. The Tories liked to attack the previous, Labour government for amassing an unacceptable level of debt and leaving it to the next generation to manage for us.

Far from wiping out that debt they’ve hugely increased it. And since they’ve taken youth unemployment to nearly 20%, the highest level for 17 years, they’ve made it significantly more difficult for the next generation to deal with it.

And what has George Osborne's reaction been to this track record?

He wants to take another £25 billion out of the benefit budget.

That’s going to plunge a lot more people into grinding poverty. It will break a lot more eggs. But will it produce a better omelette? Or will it just give the same results of the cuts we've seen so far, and make things a lot worse?

Would Labour make things better? Well, they did last time. They got many things wrong, but they spent a lot on improving the NHS and they took a million kids out of poverty. Under the present government, 300,000 have been driven back in, and the NHS is groaning at the seams.

Osborne has at least made the choice before us clear. On the one hand, Labour which made some limited progress in dealing with a series of fundamental problems. On the other hand, a Conservative Party which has failed to achieve its stated goals despite inflicting devastating cuts on the rest of us. And, with that enviable track record, they’re asking us to give them a chance to do a lot more of the same for another five years.

Does anyone really want to give them that opportunity? Or, putting it another way, if you’re contemplating voting Tory – are you sure you can really afford it?

Debt: if this is the cure, let's stick with the disease

It’s sometimes a bit of a thankless task to keep writing these posts – people pay so little attention to them.

I mean, some weeks ago, I gently pointed out to David Cameron that his picture of UK indebtedness as similar to a maxed-out credit card wasn't entirely credible. I thought I'd made it clear that personal debt had little in common with national debt. But there he was again, last weekend, trotting out the same old platitudes about ‘paying off the credit card.’ Woeful. Is he simply beyond training?

Then there's another much repeated sentiment doing the rounds, viz: we mustn’t leave a massive debt to our children and grandchildren. Stated like that, it sounds self-evident doesn’t it? It’s appallingly irresponsible to saddle future generations with that crippling burdern of debt.

The problem is that the idea only sounds plausible as long as you don’t think about the alternatives. Clearing down debt means cutting public expenditure to the point that our schools, our medical services and our job opportunities are seriously jeopardised. Will our under-educated kids with their blighted career prospects, denied access to decent healthcare services to treat  their depression, really thank us for inflicting all that on them? Might they not have preferred a bit of debt instead?

Will they wonder whether we were really thinking of them or just trying to avoid paying more tax ourselves?

This is particularly striking given that the debt isn’t even that high in historical terms. Obviously, the situation varies from country to country, but in Britain debt today as a percentage of GDP is about a quarter of what it was at the end of World War 2. The British war debt to the US wasn’t finally cleared until 2006.

I think back to my time as a teenager in the sixties, as a young adult in the seventies. Do you know, my mind was occupied by a great many things in those turbulent times but the crushing burden of debt on my shoulders never really figured among them.

The sixties: a pevious generation crushed by the burden of debt

Postscript. All this talk of debt puts me in mind of the story of Moishe tossing and turning in bed until the small hours of the morning. Finally Rachel shakes him and says, 'what is it Moishe? Why can't you sleep? You're keeping me awake.'

'I'm so worried,' he says, 'it's Shlomo next door, I owe him £500 and I don't know how to pay him.'

Rachel leaps out of bed and goes over to the window. Throwing it open she shouts out, 'Shlomo! Hey, Shlomo! My husband Moishe owes you £500 and he doesn't know how to pay you.'

She closes the window and gets back into bed.

'Now let him worry about it,' she says as she composes herself again for sleep.