Unthinkable, Predictable Disasters

The disintegration of the euro, like America’s entitlement bomb, is both unfathomable and inevitable.

You’d have to be willfully ignorant to be surprised by Greece’s potential exit from the common European currency. First the famously misgoverned country failed to meet the initial 1999 fiscal and monetary targets for euro integration: a budget deficit below 3 percent of gross domestic product, a national debt below 60 percent of GDP, inflation within 1.5 percentage points of the lowest euro-member country’s rate, and a stable currency for more than two years. Then Greek officials were forced to admit in 2004 that they had lied when they said they did meet those targets.

In late 2009 the newly elected Greek government let slip that its annual budget deficit was coming in at double its predecessor’s previous forecast, which was already double what was technically allowed. The news was hardly startling, given that in its first eight years within the euro zone (2001–08) Greece averaged annual budget deficits equal to 5 percent of GDP, compared to the other members’ average of 2 percent; gorged itself on an extravagant 2004 Summer Olympics; and capped off the party in October 2009 by voting in the Panhellenic Socialist Movement party, which promised to spend even more money.

This reckless behavior was in keeping with Greece’s checkered modern history, which includes being the first country to be booted out of the euro’s main predecessor, the Latin Monetary Union, back in 1908 and suffering through at least four significant devaluations since World War II. That history was why the single biggest question about the common European currency as it was being established in the late 1990s was whether messy, balkanized Greece could coexist monetarily with disciplined, inflation-phobic Germany. Since October 2009 we have had a conclusive answer.

Yet European Union officials still refused to contemplate the inevitable. In January 2010, Joaquin Almunia, the E.U.’s economic and monetary affairs commissioner, insisted that “we have no Plan B” for Greece. Shockingly, some eurocrats were still expressing that attitude as recently as late May of this year. Keeping Greece in the euro zone, European Central Bank (ECB) executive board member Jorg Asmussen said at a conference in Germany, is “Plan A; that’s what we’re working on.” What about the elusive Plan B? “There’s already been criticism that there is none,” Asmussen acknowledged. “But as soon as you start talking about ‘Plan B’ or ‘Plan C,’ then ‘Plan A’ is automatically thrown out of the window.”

You can’t plan for disasters by refusing to talk about them. Yet that was the European approach to monetary disintegration until May 6, 2012, when the SYRIZA party won second place in Greece’s parliamentary elections after promising to rip up all post-2009 bailout agreements with Brussels. Only at that late date did you begin to hear the first real official war gaming of what a euro-less Greece, and a Greece-less euro, may look like. Unsurprisingly, the last-ditch reality check looked grim.

The National Bank of Greece waited until late May to warn Greeks that exiting the euro would result in a 22 percent reduction in GDP, 30 percent unemployment, 34 percent inflation, a 55 percent loss of income, and a 65 percent devaluation of the new currency. ECB President Mario Draghi, meanwhile, informed the European Parliament on May 31 that the common currency had become “unsustainable unless further steps are undertaken.” 

We should not feel too smug as we watch this fiasco unfold on the other side of the Atlantic. Americans display similar habits of mind in the way they talk about, and mostly avoid talking about, our own utterly predictable yet practically unfathomable fiscal maladies. On page 24, reason online Editor in Chief Nick Gillespie and reason Contributing Editor Veronique de Rugy lay out in damning detail what almost every policy thinker knows but almost no politician dares acknowledge: Social Security and Medicare are bankrupting the country and jeopardizing our ability to provide a social safety net. The numbers are daunting: In 1940, Gillespie and De Rugy note, there were 159 workers for each beneficiary in Social Security’s pay-as-you-go system; today there are fewer than three. In 2011 Social Security and Medicare accounted for 37 percent of all federal outlays; that share is projected to hit 44 percent in 2020 and 50 percent by 2030. 

If you are not serious about confronting the time bomb of automatic entitlement payments going out to every retiring baby boomer, you are not serious about public policy. Regrettably, though predictably, the two major-party presidential nominees are not serious about this issue. Democrat Barack Obama claimed in May (falsely) that Republican Mitt Romney would cut individual Social Security payouts by 40 percent. Romney, meanwhile, has attacked Obama all campaign season for cutting Medicare, and in May he pledged to keep the country’s grossly excessive level of military spending at 4 percent of GDP indefinitely. This is how we are debating a debt crisis that is every bit as inevitable as the Greek withdrawal from the euro.

Washington does not even have the excuse of trying to avoid a bank run, which is surely contributing to European bankers’ reticence to discuss disaster planning. Instead, American lawmakers have mostly concluded that confronting our demographic demons is a one-way ticket out of power.

But that’s not the only reason the inevitable feels so unthinkable. Some of it, I suspect, is the same reason that Southern Californians keep building houses in the fire- and mudslide-prone foothills, that New Orleans was woefully underprepared for Hurricane Katrina (for more on that, read Tate Watkins’ “After the Storm,” page 36), and that even the most skeptical investors keep betting on ever-inflating bubbles: We lack the imaginative scope to comprehend the potential devastation, and life is more fun when you believe in the fantasy.

This psychological tendency has produced a damaging political truism: If you promise voters free goodies and no consequences, you win; if you bum people out by saying the party’s over, you lose. This helps explains why, as Veronique de Rugy points out in her column on the “Student Loan Scam” (page 20), both major-party presidential candidates support subsidizing federal student loans at below-market rates. For similar reasons, President Barack Obama’s cut in employee-side payroll tax contributions, which has made Social Security even more insolvent, retained a bipartisan support even after a Tea Party–influenced Republican majority took over the House of Representatives in 2010.

We don’t know which brave political souls—outside of libertarian stalwarts such as Rep. Ron Paul (R-Texas) and Libertarian Party nominee Gary Johnson, both discussed in comic artist Peter Bagge’s reportage “Shenanigans!” on page 46—will dare utter the truth about the punishing costs of guaranteeing massive payouts based on birth certificates. But in a sense, that doesn’t matter. America will soon face what Europe finally began to confront in May: a reality so brutal that all the usual incentives for kicking the can down the road no longer apply. When that day of reckoning arrives, the best that we can hope for is that enough people will have prepared for it by mapping out how we can convert a disorderly retreat into a sensible withdrawal.

Editor in Chief Matt Welch is co-author, with Nick Gillespie, of The Declaration of Independents: How Libertarian Politics Can Fix What's Wrong with America (PublicAffairs).

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Pro Libertate||

    Yes, there's the cliff we're accelerating towards. Maybe if we go really fast, we can achieve orbit rather than fall to our deaths.

  • R C Dean||

    Keynesian economics in a nutshell.

  • Pro Libertate||

    Little do the Keynesians realize that automobiles are sadly lacking as orbital vehicles--no propulsion system for maintaining orbit, no life support for passengers, no capability of safe reentry, no parachutes. . .really, cars simply aren't made for spaceflight.

  • fresno dan||

    Nonsense. A car powered by a perpetual motion dollar printing device (AKA the FED)will develop enough thrust to easilty propel us to infinity and beyond! A trillion trillion thick dollar bubble enveloping the car will trap oxygen and provide a gamma ray sheild as well. There is nothing that printed dollars cant do!!!!
    I mean, the evidence is all around us, what with our 0% unemployment rate, and constant spontanous orgasms.

  • Pro Libertate||

    I stand corrected.

  • Ska||

    Needs more excelsior!

  • Brandybuck||

    Frankly, I wish I had fewer orgasms. A few here and there are fine, but all the time? No way! Open the refrigerator, orgasm. Talking on the phone with my boss, orgasm. Visiting my grandma in the hospital, orgasm.

    Damn you Keynes!

  • Major Johnson||

    Actually I think Keynesian economics requires that after borrowing to spend in order to float the economy through rough times (dubious though that is) that debt should be paid down immediately upon good times. The only Keynesian thing on either side of the aisle is the borrow and spend part, and that seems to include borrowing and spending even when times are good.

  • JoshSN||

    Couldn't someone on the Reason staff take some responsibility for ignorant comments like these?

    Doesn't anyone on the Reason staff think Reason.com would be a better place if completely ignorant comments activated an educational moment.

    No, dumbasses, that is not Keynes in a nutshell.

  • Caleb Turberville||

    ...Or like in Speed, we might be able to jump the gap and land safely.

  • Palin's Buttplug||

    Class Warfare!

    (meaningless trope of the year)

  • Bill||

    Jellybeans!

  • Rich||

    We lack the imaginative scope to comprehend the potential devastation

    Perhaps this will refresh our imagination.

  • ||

    Why all the bullshit about gas prices?

    Oil prices are not high because of lack of supply...oil prices are high because of an over supply of dollars.

    Also what I find most disturbing is that very soon (this year) all headlines will be black text over yellow boxes.

  • SIV||

    Inflation and a VAT should buy us a few more decades.

  • sarcasmic||

    Socialism keeps working as long as people have wealth to steal.

    So I'm thinking that they'll start by seizing retirement accounts and replacing them with bonds, like the Social Security "Trust Fund", and move on to a wealth tax after that.

    As long as there is accumulated wealth to steal, the machine will roll on.

  • creech||

    Retirement accounts are full of money you've stolen from the workers, right?
    So it's going back - not necessarily to the workers but to the Top Men who watch out for their welfare.

  • sarcasmic||

    Retirement accounts are for retirement, right?
    So you don't need the money until you retire.
    Therefor it's just sitting there, unused, when it could be spent on some government largess.
    They'll give it back to you when it comes time to retire.
    Really.
    I promise.

  • fresno dan||

    What an optimist.
    Retirement accounts are for raiding.
    Retirees are for soylent green. There really is no good reason not to leverage the fats and proteins in old farts to "invest" in the future.
    The retirees will all go voluntarily because they believe in gubermint programs that send them to the retirement "heaven" bingo hall, where the bingo cards are free and every card pays out a million bucks.
    And if you don't like bingo, your unpatriotic and greedy...

  • wareagle||

    So you don't need the money until you retire.

    it's worked so well with Social Security, hasn't it? Imagine if there was an actual SS Trust Fund and someone invested it.

  • Enjoy Every Sandwich||

    They've been salivating over retirement accounts for a long time. I can remember hearing Jesse Jackson propose such a thing on CNN back in the '90s, in order to "fund a massive whoa-ah on poverty in owah innah cities". I figure that sooner or later they will nerve themselves to make the attempt.

  • aelhues||

    It's been a year or so since I checked, but if you compare tax receipts to spending, and figure imaginary cuts, it's difficult to work out. If you cut everything that isn't social security, medicare/caid, and welfare, we're still bleeding red ink, and that didn't even include interest payments on debt.

    The way I figure it, we're heading for the cliff no matter what. Hitting the accelerator of the brake is going to make little difference.

  • aelhues||

    "or the brake" jeez.

  • DJK||

    I'm not sure what your point is here. Everyone knows that SS and Medicare (and to some extent defense spending) are the only budget items that matter. Welfare and Medicaid don't even come close.

    Slamming on the brakes would be reductions in SS and Medicare (and defense) spending, not gutting the budget of every other program. This would definitely stop us from speeding off the cliff.

  • Palin's Buttplug||

    True. Wellpoint is buying their largest Medicaid rival today and will own 60% of the dual eligible market if completed. Those voters won't let their benefits be cut.

    http://news.yahoo.com/wellpoin.....wAH3nQtDMD

    Once the buyout is complete, WellPoint and its affiliated Medicaid plans will serve more than 4.5 million beneficiaries of state sponsored health care programs. WellPoint currently has nearly 1.9 million people enrolled in Medicaid plans.

    It is a sweet deal for shareholders.

  • some guy||

    Yep. Stock went up for both companies on the news. Amerigroup went up like 40%. And why not? Medicaid is one of the biggest teats on the planet and growing every day.

  • Sheldon J. Plankton||

    You’d have to be willfully ignorant to be surprised by Greece’s potential exit from the common European currency....

    Screw the PIIGS. It's Germany that should pull out.

  • Mike M.||

    Need more evidence that the world is collectively going insane?

    France has apparently started selling bonds with a negative interest rate.

  • BakedPenguin||

    Germany, too.

  • Whiterun Guard||

    Hrm...I wonder if there's a way to short them.

  • BakedPenguin||

    Nice idea, but you might as well short Spanish bank stocks - they have larger losses, almost guaranteed. NBG, the Greek bank, has already fallen below the $2 mark.

  • BakedPenguin||

    larger losses coming...

  • Lord Humungus||

    a few years ago, I made some good money on the ups and downs of AIB.

  • R C Dean||

    I doubt you can short Spanish bank stocks through a discount broker. When I tried recently, there were no shares available to short.

    I'm sure, however, that full-service brokers (and of course hedge funds and investment banks) can short all the Spanish bank stocks they want.

    How it is that publicly traded stocks can be available to some but not others is a mystery to me. Well, not really, but you know what I mean.

  • ||

    "How it is that publicly traded stocks can be available to some but not others is a mystery to me. "

    Because when you're shorting you're borrowing shares, usually from your broker or one of its clients, so supply is limited and risk is higher, so deals are usually only made to people who can cover the short if the price ends up going up instead of down. Essentially, you're being extended credit so the usual caveats apply.

  • Mike M.||

    These insane governments, by declaring that they're going to take people's money by hook or by crook, are just guaranteeing that there will eventually be bank runs all over the place.

  • BakedPenguin||

    What I don't get is why anyone would deliberately take a negative return. I have to assume that these are large institutional investors, constrained into only investing in government debt. Even then, France? Not exactly bedrock, financially.

  • NotSure||

    Its a perceived flight to safety, some investors are so worried about losing it all, they would rather have negative interest rates than risk some of the volatile markets.

  • Mike M.||

    Even in these horrible times we're in, there are still truly great companies out there doing great things, and great values to be found.

    Anyone who would seriously "invest" money in government bonds with negative interest rates isn't fit to be called an investor. I suspect almost all of these bonds will be bought by other governments in the great ongoing shell game.

  • anon||

    Yeah, I think hiding the money under the mattress actually does have a higher rate of return.

  • R C Dean||

    If these bonds are being sold to the public, and the public is buying, that means the public believes that they cannot trust the banks to return cash on deposit with them.

    Ponder what means for the future of Euro banking.

  • anon||

    Correct me if I'm wrong, but there's no international deposit insurance scheme for Euros is there?

  • some guy||

    Why not buy gold then? If you're that terrified of paper and electrons, move to something more durable.

  • R C Dean||

    Thanks. I have. Some silver, too. With the recent correction/range on gold, I'm still up over 10% on my physical PMs.

  • Brett L||

    Gold is way outside (high) of its past pricing and coming down. It looks like a short market, not a long. robc (I think) likes the gold:crude price ratio. By that standard gold is about where it should be.

  • R C Dean||

    Gold has been range-bound for quite some time, with the current floor apparently being set by governments and central banks buying the physical. Personally, I think its a pretty safe buy under 1600, if you are holding it for the (very) long term as insurance rather than speculation.

    But gold is funny - the most heavily manipulated market on the planet, right now. I wouldn't buy it on speculation, but I sure like having a roll of Eagles in the safe.

  • ||

    but I sure like having a roll of Eagles in the safe.

    Don't fucking tell us that.

    FYI, My parents safe just got ripped off recently.

  • ||

    France has apparently started selling bonds with a negative interest rate.

    How does that even work??

    Who the hell buys them?

    Do they give out loans to banks and even higher negative rates then the banks buys bonds and somehow the less negative add up to a positive...WHAT THE FUCKING FUCK

    How does this even work at all?

  • Tom Beebe||

    End the follies that are our tax code an1. No federal taxes other than provided in this act. No federal payment to any person, group or other entity except in return for goods or services rendered to it, or as provided for in this act.
    Each year congress shall set by legislation a "minimum wage" and a "tax rate",to be applied to the previous year’s reported incomes to determine budget.
    The following shall be exempt:
    • A year's earnings at minimum wage rate, for each adult reducedto 50% at age 15, and increased 150% at age 70.
    • Necessary health care by a recognized health care professional Health care insurance premiums may be deducted but not health care expense paid for by such insurance.
    • Education including day care, that portion of state and local taxes identified as spent on education, that portion of parochial school expenses for non-sectarian education, private school education
    • Income saved to an account from which investments may be made. Withdrawals for the benefit of any member of the household shall be reported as income to that member. The "tax rate" shall be applied to any income over and above the deductions listed above, regardless of amount.
    There shall be no federal tax on businesses.

    When deductions exceed income, government shall make payment equal to the tax rate multiplied by the difference.

  • DJK||

    Fucking with the tax code doesn't do anything to solve the entitlement crisis. Which is what this article is all about. If anything, your suggestions would speed us toward fiscal oblivion by decreasing IRS revenue.

    Looking at things from a revenue perspective is pointless. The only way to solve these crises is through recognition that we have a spending problem. While I agree with (at least some of) your ideas about the tax code, talking about the revenue side only distracts from what really matters - the spending side.

  • Eduard van Haalen||

    "On page 24, reason online Editor in Chief Nick Gillespie and reason Contributing Editor Veronique de Rugy lay out in damning detail what almost every policy thinker knows but almost no politician dares acknowledge: Social Security and Medicare are bankrupting the country and jeopardizing our ability to provide a social safety net. The numbers are daunting: In 1940, Gillespie and De Rugy note, there were 159 workers for each beneficiary in Social Security’s pay-as-you-go system; today there are fewer than three. In 2011 Social Security and Medicare accounted for 37 percent of all federal outlays; that share is projected to hit 44 percent in 2020 and 50 percent by 2030."

    That can't be true. I saw a video produced by Congressman Bernie Sanders which showed that all criticism of Social Security was simply part of a propaganda barrage by the Koch Brothers.

  • Eduard van Haalen||

    Here it is - the Koch Brothers want to destroy Social Security because its a federal program which has been enormously successful:

    http://www.youtube.com/watch?v=WFymBUsoNWY

  • Eduard van Haalen||

    You know Sanders is credible because he has a cartoon octopus in his video.

  • SIV||

  • ||

    He's credible because he's a democratic socialist who masquerades as an independent on the ballot.

  • Concerned Citizen||

    Maybe I could fix up an Obamamobile, complete with thousands of aborted fetuses on the roof.

  • Brett L||

    I thought this was a Colonel Sanders led conspiracy theory.

  • VG Zaytsev||

    That video is a crazy auto-parody.

    Produced by the "Brave New Foundation" -Really?

    And does anyone miss the irony of an eighty year old socialist congress critter complaining about the dastardly plan to raise the retirement age.

  • Anonymous Coward||

    If you are not serious about confronting the time bomb of automatic entitlement payments going out to every retiring baby boomer, you are not serious about public policy.

    B-b-b-but the old people will vote against their duly elected masters! How can you be so heartless as to expect politicians to do something that might offend the elderly? Old people are dangerous force and might run them over with their Rascals or throw their dentures at their rightful overlords? Even worse, without an office, our philosopher-kings of the Potomac might even be ejected from the D.C. Cocktail Party circuit!

    Que horror!

  • NotSure||

    As this article states, Greece did not qualify on the rules the EU itself made. When people say its all about lack of regulating the banks thats the problem, they never see that the people that make these rules are the same people that break them all the time.

  • Bill Dalasio||

    Ah, NotSure, but you forget, Greece got brainwashed by Goldman Sachs' space-based mind control lasers into doing soooper-scary DERIVATIVE deals that caused the records not to show that they didn't qualify. Next Goldman Sachs turned the knobs to those lasers to "stupid" so that none of the super-honest and otherwise brilliant top men of the European Union could ever consider the effect of derivative transactions on financial accounting.

  • T||

    Speaking hypothetically, could I use space-based mind control lasers to give people some common sense? Because if so, I have a cunning plan...

  • Bill Dalasio||

    Common sense?! Now, if you go around doing something like that, how on earth do you think you'll be able to amass the resources to afford a space-based mind control laser?!

  • T||

    I was going to steal Goldman-Sachs lasers.

  • anon||

    I don't understand what the big deal is. All we need is more windows to break and everything will be fine.

  • Enjoy Every Sandwich||

    Just start another world war and blame it on the Germans. It worked before, didn't it?

  • Dylan||

    We have plenty of windows, the problem is the evil property owners who won't let us break them.

  • Peter L||

    Here are a couple ways to solve our problem:

    1: Cut military spending by 50%. Close bases in foreign places, stop buying so many fricking bombs. Whatever it takes, stop spending so much on war.

    2: Increase the retirement age for social security. By at least 10 years.

  • Dylan||

    If you cut spending you will reduced GDP. Everybody knows that GDP is a magic number that makes us all rich.

  • Robert||

    ...heh..."balkanized Greece"...heh....

  • Nike air max womens||

    But in a sense, that doesn’t matter. America will soon face what Europe finally began to confront in May: a reality so brutal that all the usual incentives for kicking the can down the road no longer apply. When that day of reckoning arrives, the best that we can hope for is that enough people will have prepared for it by mapping out how we can convert a disorderly retreat into a sensible withdrawal.

  • Coach Panto||

    Ditto. America will be one big Chicago. Read Peter Schiff's "The Real Crash" for the economic case.

    When the dollar tanks, and Mama State's teats run dry, the disorderly retreat will include millions looters, some with guns, raiding stores and houses in a chaotic free for all, once they realize police can't prevent mass looting.

    The only way to prevent being victimized is to store a year of food and gas, barracade your property, band with two other families, rotate sentry, and shoot looters on sight. This situation will continue until either local militias can be organized or the feds deploy troops in all major cities and enforce martial law with checkpoints in alliance with the sparse police that will be left.

    If you're not in a major city, you will need a militia.

    The interesting part will be how small militias can hold of well armed urban gang warlords and their superior firepower. To do this we need to cache semi-autos and convert them to full auto when the scheiss hits the fan.

    Other than that, we're doing fine.

  • galiana||

    Alas, I failed to buy a ton of Euros when they were worth 72 cents on the dollar. This is mostly because I was 8 years old at the time. In good news, I might be able to buy them when they drop to 72 cents again, which will be shortly after Greece and Spain burst into a large ball of flames.

  • شات عراقنا||

    thank you

  • tipuasher||

    These are excellent practical tips, not simply for major innovations but also for individuals who are seeking to influence others on more mundane matters.
    http://hoffmanab.com

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Progressive Puritans: From e-cigs to sex classifieds, the once transgressive left wants to criminalize fun.
  • Port Authoritarians: Chris Christie’s Bridgegate scandal
  • The Menace of Secret Government: Obama’s proposed intelligence reforms don’t safeguard civil liberties

SUBSCRIBE

advertisement