Sunday, June 12, 2011

Greece and the labors of Hercules

Greek government is considered to be down and out. But may not be though a rescue is certainly a herculean task. The difficulty of Greek situation is not the economics, but the intersection of problems of different dimensions, primarily political and economic.

Problems with economics
Political parties need to understand that the first task is to get the greek economy moving. It means unemployment must reduce, demand, preferably localized demand and supply needs to get moving. Usually, housing and construction are good bets to create localized demand-supply dynamics going. However, in the recent crisis, this very sector was at the center of the recession. Hence the onus of recovery should lie with some other sector. Probable alternatives could be tourism (outside demand, localized supply), infrastructure (hopefully localized) etc.

However, even with full employment and reasonably stable demand Greek government may not be able to pay back the debt. That means some hair-cuts are required. This is also aligned correctly with incentives. Lack of due-diligence from borrowers is no excuse and they must take a hair-cut.

Problem with politics
The problem of politics is vastly bigger than the economic problem. The greeks do not trust their government. This fact is manifested in their tax-evasive behavior. A population that does not trust a body they themselves elected, implies that something is broken in the greek political system. That needs to be fixed.

Once the political system starts fixing itself, tax reforms need to be undertaken. It is my guess that most of tax evasion stems from tax confusion and subsequent concessions (wrongfully targeted). A simplification of taxes will improve the collection.

The problems with political system may also indicate problems with legal system (including law and order). Usually that translates as "corrupt people are set free in the courts". This needs to change. The people who have defrauded the nation should be brought to justice. As we start seeing these changes, the political climate will improve and system may begin to correct itself.

In sum
The political problem is worse of the lot. Fixing it may be more complicated - indeed a Herculean task. The whole, financing elections and bargaining power of those financiers may be threatened. Such problems are present in almost all democracies of the world. If a greek revolution takes place it will change the political future of the world. Greece, that once gave us democracy, may give us the next solution.

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.