Cuts will only lead to more cuts.

The right wing today likes to argue that we just need to cut $900 billion of spending (though many seriously believe the deficit is still $1.5 trillion, a sort of Earth is round Earth is flat pissing contest, pardon my language) and that this will solve our budget woes. This is forgetting that Economists have said our deficit is not our biggest woe, and Paul Krugman has made some excellent points on this which I don't need to repeat, and that the economists that are arguing about the "unsustainability of our deficit" are routinely wrong on their major claims. Let's just look at the promised reductions to Greece's debt following austerity which just simply isn't happening and is undebateable. The deficit is 0, but unemployment has gone from 8% to 27.9% and their GDP growth went from positive to negative territory after austerity began. Even though austerians claim to care so much about inflation, austerity hasn't helped with that either. Clearly, austerity has not helped the Europeans. If the laissez-faire school of thought was correct none of this would have happened. It is similar to other times their plan has been tried, such as in the US and Germany simultaneously between 1929 and 1933 which didn't work either. When someone has been so very wrong about so very much so frequently there comes a point where the point of view needs to be treated like arguing for a flat Earth. Historically speaking, cutting government spending doesn't simply lead to a lower deficit, economics is more complex than that. There is no data to support it.

The next popular thing is saying the Republicans are fiscally responsible. Correct me if I'm wrong but in 2001 we had a Republican government which started with a surplus for the government which is good following the beliefs of Ronald Reagan. The deficit went from a surplus to a $400 billion deficit overnight upon George W. Bush signing the budget. I don't believe the Republicans when they say they want a balanced budget, because historically they have stopped caring as soon as they get into office. I also don't believe their policies will create economic growth because the Bush tax cuts went mostly to the rich and were succeeded by a stock market crash and mild recession.

All of this right-wing rhetoric has to do with one thing and one thing only, tearing apart the welfare state and going back to the Guilded Age of cheap labor and less opportunity. The major part of this plan was in 1981 and 2001 turning surpluses into large deficits and then blaming Medicare. If you look at the estimates from the GAO entitlement spending will rise to 60% of GDP by 2080, but when you look at the pieces you find that half of this is not going to the entitlements at all but interest on government bonds to cover entitlement spending today with such low taxes and actual entitlement spending won't even hit 20% of GDP 70 years down the line. By raising these massive deficits and saying they come from the DHHS and other social programs (but not from our $600 billion military budget, larger than the next 10 largest military budgets combined, and the 9th largest as percent of GDP) they claim the deficits from the Bush tax cuts belong to social programs and they put these two unrelated numbers together. To be completely honest, our military budget is not limited to the Department of Defense and is actually closer to a trillion dollar when you look at all departments, which adds up to a quarter of all government spending, but that's an issue for another post. This interest is from the government budgets and by borrowing money to cover their debts and having compound interest working against the government in perpetuity. Given how President Clinton went from a roughly $300 billion deficit he inherited from George HW Bush and ended up with a $128 billion surplus when he left which George W Bush promptly signed into a $157 billion deficit within 12 months, it is hard for me to give the Republicans credit at being what they would call fiscally responsible on the evening pundit shows. History does not support their claim.

If we cut our way out of debt we could end up like Greece today or the USA in 1932 eventually with a less vibrant economy and repeat the same mistakes that were made in the early 1930s. This would be from the massive reduction in spending the government and employees bring as we are seeing with this government shutdown.

The solution then is to look at our tax code and make it a progressive tax rate again because as long as we tax capital gains separately at a low rate (20% on potentially a billion dollars of income? Seems regressive to me) we will find that we will have to keep borrowing money or see seniors starve and go without health care unless if their families give up on spending money for their children's education and the future of their family. If we change our tax code by taxing capital gains as regular income we can close the budget deficit and we will find that the big red bars on the GAO graph will not happen because we will have compound interest working in our favour by investing for the future instead of spending interest on people who are already dead from the weapons we ship abroad. If we do this and make our population more productive and enginuitive we will have a more vibrant economy, which will create a higher GDP. By having a higher GDP and a more efficient economy the percent of government spending as percent of GDP will drop or stay the same in the long run which means that this whole scenario doesn't have to happen. But this will only happen if we choose to make our country great. If we choose the easy path of being small we won't keep up with other nations and will mimic the failed policies of Merkel in Europe which has literally destroyed the economies of Southern Europe, which will take decades to fully recover from at this point. I choose growth and opportunity.

Source for budgets and deficits: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/hist01z1.xls

The Real Social Security Crisis

I just figured out why Social Security is in a crisis. There is a crisis, but it is not a governmental crisis, a senior crisis, or any of the other things that would concern the average American. Whether there is a crisis depends on your point of view. The crisis is that Social Security reduces the interest rate that the US Government pays on bonds.

When you look at who owns the national debt, Social Security is the second largest owner at just over $2.7 trillion, or about 1/8 of all debt the government owes. The second largest holder is the Federal Reserve at $1.66 trillion currently. Social Security has run a surplus for over 30 years now, and that surplus is reinvested in government bonds which over a long time has added up to a large surplus.

By providing the government easy money to cover the deficit we have run since the Bush tax cuts in 2001 (before which we had 4 years of a growing surplus) it diminishes the interest rate. Here is a chart I made demonstrating a constant demand rate, but a diminished supply, the simplest of economics graphs:

Basically, by having social security run a surplus year after year, which I have already blogged about, the US government pays less on the debt which means that we have easy access to a large amount of credit annually. This is good for the tax-paying American.

However, there are some people who don't benefit from such an arrangement, which is every Amrican who borrows more in bonds than he/she pays in taxes. Mostly finance people who work at banks who get easy money from the US government by selling bonds, at almost no risk. The money that they get from the government comes from taxes and future bonds. If the government was to run a surplus the government would not need to sell bonds and the interest rate would collapse because the supply would be 0, which would force banks to invest in other ways. Since the government routinely runs a deficit, there is always a need for bonds to be sold in order to cover expenses, so bonds will pay people money so the government can continue providing services that Americans rely on. If the government was to balance the budget or run a surplus this easy money would be gone.

By eliminating social security, as some Republicans want to do, or by reducing the tax rate and payments little by little until nothing is left, the government will lose this revenue that diminishes interest rates and income taxes beyond the level they would be otherwise. If Social Security was eliminated we would see that the interest rate the government pays on bonds would rise because they would need to sell more bonds to the private market in order to raise enough revenue, and the banks that buy large amounts of bonds will make more easy money.

If we eliminated the Federal Reserve as some Libertarians want to do, the government would lose the other major holder of American debt which further decreases interest rates. A lot of Tea Party Republicans claim how it is "monetizing the debt" which they say is a bad thing. While I agree that debt shouldn't be used in all times I recognize as a Keynesian that during recessions it is worth taking on debt to get the demand curve up to where it was to end the recession. But I do understand that if too much money is printed beyond the demand for it you could create runaway inflation which looking at a number of countries where inflation is out of hand is clearly bad for the economy. The people who would have the most to gain out of eliminating the Federal Reserve would be the people who would benefit from controlling monetary policy directly. I don't usually read CNBC, but they wrote a really good article on how creating a central bank under the executive or legislative branches would create endless problems of politics here that I don't feel like I need to duplicate. The system we have now is the best we are going to have in terms of monetary policy. Their leaders are appointed by Congress and are able to make quick decisions without needing constant political debate within their mandate. In other words, between the money it provides to reduce interest rates on American bonds and stabilization, ending the Federal Reserve would be a very bad idea.

Source on who owns the debt: http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-National-Debt.htm

Social Security Surplus by Year

(Yet) another way to cut the deficit

I was reading about Russ Feingold yesterday and saw that he opposed Medicare Part D. I was interested, why would he oppose a social program? As I read the Wikipedia article for how it works, there is a very important difference between how it works and the DVA, and that is they are not allowed to negotiate for lower drug prices. In Joseph E. Stiglitz's book "The Price of Inequality he quotes Dean Baker that we could save over $50 billion dollars a year, potentially as much as $100 billion per year on health care if they were allowed to negotiate with drug companies on prices.

As I ask with many of my posts, who wins when these decisions are made? The average American who pays taxes and lives an ordinary life loses, but the people who win are the drug companies. As I have said in many blog posts here, there is a clear conflict of interest involved from our politicians in how this decision has been made. By keeping the cost of Medicare high by forbidding it to negotiate with the drug companies to get a better deal we are wasting billions of dollars a year, and this must stop.

The little deficit that couldn't

Paul Krugman recently posted about how people have been moving away from the deficit as an argument tactic.

I feel like I have already said this.

This is a filler post because I wasn't sure what else to write about today, and it is Sunday, and I just like pointing out when the data points toward what I said a month ago, before Krugman caught on. A little bragging never hurts!

Living within our means along with running government like a business

I just finished the Khan Academy course on finance which covered the basics of how companies are run. I highly recommend it for anyone who invests, which should be everyone. While it is called "stocks and bonds" which everyone should understand and isn't that difficult it includes the background of how businesses work and how they start which is very important.

Today I was reading a news article about Washington State's new budget where the Republican Senator who drafted the budget announced that we were "living within our means" which made me immediately think of their claim to want to "run government like a business" which immediately made me think after watching those educational videos "what a bunch of liars".

When people start a business they usually won't have the capital required start a business, so they will take a loan to get their business running to the point where they are self-sustaining. While taking this course and writing notes I looked at companies' balance sheets to get practice and basically every company I looked at had some sort of liability in the form of debt. Beyond that, the reason companies initially go public is to get cash in return for selling part of the company to continue to grow with the promise to pay back the stock if someone sells it back.

The root of the message is, the government can choose to do one of two things, run like a business by making an initial investment that will then pay off, (as we did in the 1930s) or live within their means and only investing what they already have in hand with a religious fervor against taxes which usually means cutting social spending. (which Greece is doing right now) One cannot do both. One would think that Mitt Romney would have understood this given how he was in Bain Capital all these years, but he apparently decided to campaign to the lowest common denominator who doesn't understand how to run a business because they think it is "boring" or "too complicated". But the root of it is, all the Republicans who preach both policies are liars or fools (by talking about something they clearly don't understand) and should be removed from office.

Given a choice, I would much rather see a government with a willingness to invest in its people than a government with a religious belief that they need to cut taxes, which is usually followed by cutting funds to schools and health care which is usually followed by a recession.

Another way to cut the deficit

This is one of the best graphs I have ever seen, and I used to have it on my wall in my room as motivation to get the best education possible.

This graph has a few political implications, and if we assume our goal is to decrease the deficit it tells us to invest in education so that the median wage and tax revenue can increase. If our goal is to decrease unemployment it tells us the same message, invest in education so more people can be working. If our goal is to have the most advanced economy in the world and be the most ingenuitive,  than making it possible for people to specialize and understand their fields at a deep level where they can contribute is the best possible plan.

Basically the right course of action is the exact opposite of what Republicans, and now Democrats, are proposing to do. Regardless of the deficit.

The Eight Countries, what we can learn from Japan

The following pieces of common wisdom that I hear in today's political debate bother me:

1. Debt kills economies. I can understand how a deficit that is really high could be a real drain on tax revenue eventually through the marvel of compound interest, but no country is to that point yet, there are other factors at play in Greece.
2. To have a developed nation you will have a high debt.
3. The Euro is a doomsday machine, countries need to maintain their own currencies to be viable, to merge countries in one currency is a terrible idea.

I have chosen seven different countries in very different and some very similar economic situations very deliberately to examine this point. When I have extended certain comparisons here I have found that the examples below are not anecdotes. The information here is mostly from the CIA, IMF, and World Bank via Wikipedia:

1. Australia is one of the most developed nations in the world, ranks second on the human development index, has the 17th highest GDP in the world (top 9%), has universal health care, a debt that is 20% of their GDP, and is currently increasing their domestic investment in mass transit. Their currency is one of the most traded in the world. Their Ease of Doing Business Ranking is 9th. They are a net importer of oil.
2. Japan is one of the most developed nations in the world, ranks 12th on the human development index (top 6%), has the third highest GDP in the world, has universal health care, a debt worth over 200% of their GDP, unemployment under 5%, and is currently increasing their domestic investment in mass transit. Their GDP Growth rate is -0.7%, and their population growth rate is -0.4%. Their currency is one of the most traded in the world. Their Ease of Doing Business Ranking is 13th. 70% of their energy is from fossil fuels, and are a net importer of oil.
3. Greece is one of the most developed nations in the world, ranks 29th on the human development index (top 15%), has universal health care, a debt worth 160% of their GDP, unemployment over 20%, and is currently divesting their domestic investment in mass transit. their GDP Growth rate is about -6%. Their Ease of Doing Business Ranking is 78th. They are a net importer of oil.
4. Germany is one of the most developed nations in the world, ranks 9th on the human development index (top 5%), has universal health care, a debt worth 81% of their GDP, unemployment around 5%, and they have one of the world's best transportation systems. Their GDP Growth rate is between 0% and 1%. Their Ease of Doing Business Ranking is 20th. They are a net importer of oil.
5. Brazil is one of the fastest growing economies in the world, ranks 85th on the human development index (top 45%), has a mixed health care system, a debt worth 54% of their GDP, unemployment around 5%, and are currently growing their transportation system. Their currency is growing in importance. Their GDP Growth rate is over 2%. Their Ease of Doing Business Ranking is 127th. They are a net exporter of oil.
6. Equatorial Guinea is one of the fastest growing economies in the world after the discovery of oil, ranks 136th on the human development index (bottom 27%), their health care system is undeveloped, a debt worth 3% of their GDP, and their transportation is aged. Their GDP Growth rate is 18.6%. Their Ease of Doing Business Ranking is 155th. They are a net exporter of oil. They use the CFA Franc with 5 other countries.
7. Chad is one of the most undeveloped countries in the world, rank 183rd on the Human Development Index (bottom 3%), their health care system is non-existant except for international aid, a debt worth 9% of their GDP, and their transportation is decrepit. Their GDP growth rate is 1.6%. Their Ease of Doing Business Ranking is 184/185. They are a net exporter of oil. They use the CFA Franc with 5 other countries.
8. Mauritania is another one of the most undeveloped countries in the world, rank 159th on the Human Development Index (bottom 15%), a debt worth over 90% of their GDP, and their transportation network is decrepit. Their GDP Growth rate is 1.5%. Their ease of doing business ranking is 159th. They are a net exporter of oil. They have their own currency.

What can we learn from the standings of these seven countries? First of all, the common beliefs about debt do not hold up to these samples, or any large collection of countries. Rich countries have high debt and poor countries have high debt. Rich countries have low debt and poor countries have low debt. Rich countries spend significant money on education and health care and poor countries don't. The belief that sharing a currency between different nations will harm countries holds no water. 

The trend between these different countries shows that investment from a government can make or break an economy. Chad has almost no economy to speak of after years of war and bad government. Japan has the #1 highest debt in the world measured relative to GDP yet still is seen as a good investment. It is easy to do business in Germany, Japan, and Australia, and they have three of the most vibrant economies in the world and are quick to recover. Australia didn't even have a measurable effect from the recession that occurred outside of Australia. Greece, Chad, and many other African nations have had bad government for a long time, and their economies are suffering. This correlation is very strong. The correlation with debt is non-existent, no matter how large the sample is.

Then why is Japan in so much debt and seeing their economy decrease? First of all, their economy for the majority of the last decade has grown, they have been slower to pull out of this current recession but are on the upward slope at this point, in two or three years the Japanese economy will probably be growing again with or without government intervention, alongside a population that will inevitably continue to shrink. Japan also has one of the lowest tax rates in the world as opposed to Australia which taxes Capital Gains at a very progressive rate. The Japanese stock index fell 50% in 2008, and the people who withdrew those funds have seen very low taxes, which means there is no short-term incentive for keeping your money invested during the hard times because you won't have to pay a lot of taxes, compared to Australia where withdrawing all of your funds in one calendar year will mean you will pay a very high rate of taxation. This means that over the past 4 years Japanese companies have not had the financial resources they need to grow and hire more people, which has caused their economy to slow down, as opposed to Australia's which is still growing. Every other major factor is equal in this situation.

The difference between Germany and Japan is that the German stock index has not plummeted nearly as much as the Japanese stock index, and had a shorter distance to grow back after the collapse. German companies still have capital to grow with, while Japanese companies are strapped for cash. The American market is more like the German market, because the stock markets here in America have rebounded already since 2008 while Japan has yet to finish their recovery.

The root of the matter between the Japanese, Greek, Australian, and German government debts is linked very closely to taxation. All of these countries have very solid safety nets, and the countries whose economies are struggling have very low taxes for capital gains. Risky and dangerous group mentality in these two countries have left businesses with little cash. In Australia, the higher taxes for large withdrawals within a single calendar year have made a very stable stock market where no one would even consider withdrawing their entire stock accounts because of the taxes that would come into place. German banks still have a lot of confidence in them and have capital to work with which means that Germany hasn't collapsed. If there was a panic in the Frankfurt stock exchange like the Tokyo stock exchange (which we haven't seen yet) it would be disastrous to the German economy. That hasn't happened yet which is why German companies are still growing and the German GDP is still rising.

There are a few major points I want to make that follow this data:

1. Good government matters! Having a good government with responsible policies is good for the economy and makes a tremendous difference.
2. If you have a debt, the answer is really simple, you are spending more than you take in, and you need to either cut spending or raise revenue. The answer will usually include raising revenue since most government services go to things that must be done and are public goods in developed countries. This means taxes might rise, but on who will always be a matter of contention between greed and economic efficiency.
3. Progressive capital gains taxes make a huge difference in the way people act in the stock market.
4. Most economic collapses are due mainly to CONFIDENCE which is why Germany hasn't gone to the dogs but Greece has.
5. Low barriers of entry to the market are important, as can be seen in this selection (and once again, any large selection) where countries with high barriers to small businesses forming have routinely depressed economies, as opposed to developed countries. When Georgia moved from high barriers of entry to low barriers their economy boomed, and have been seeing GDP growth around 10%.

Paul Krugman alluded to this in one of his posts last month, and didn't have as much data as I have done... it seems the house of cards that is laissez-faire/Reaganomics/austerity is falling down in data. He also reported that austerity apparantly hurts the economy. It feels good to be validated.

Update on 13 December 2013: I claimed Australia is one of the few countries that taxes capital gains as regular income and their economy didn't collapse, but on closer examination while their economy didn't see a recession, their stock market did collapse, making me doubt the accuracy of my previous statement, so it has been retracted. Apologies.

The Future Economy

What would a stable economy look like? What would the goals be, and how would we get there? There are a few ideas that I think will make a big difference. Most are based heavily off of Keynesian economics.

1. The government will make a business-friendly environment. Businesses will be easy to start and small businesses will be common. Countries with low barriers to entry for businesses to start tend to be more developed and vice verse. EG This is why Indonesia is not seeing rapid economic growth yet Georgia is.
2. There will be high wages to drive consumer demand. It doesn't matter how many things you make, if people can't make ends you won't be able to make any money by being an entrepreneur. People will have disposable income in the ideal economy. People had this in America in the 1950s when our economy grew the fastest, unemployment was low, public investment at an all-time high (my grandparents paid a low sticker price for college compared to me and my parents with inflation), and the growth was larger and shared by all.
3. The government will insure that all of their citizens have access to high-quality health care and high-quality education. It doesn't matter how many jobs as programmers are available if no one knows how to do it. If another country is training people to be the best the jobs will go there. That's the current world. Its not going to change. Don't fight it, work with it.
4. The government will run low debt year to year during the good times. Running a large debt means that tax dollars will go to paying interest to investors instead of growing the infrastructure countries require to be successful which is a waste of money. If times get bad the government will run a deficit to make the economy get better as quick as possible. It is the lesser evil to watching the economy go in freefall like from 1929 to 1933 when the debt was prioritized higher than jobs and growth.
5. To fulfill these job-growing strategies there has to be a cost, and that means a progressive income tax. It will be very progressive, meaning people who make the most money will pay the most in taxes (and, as my previous post showed, they will keep the most as well). This will create an economy where people with enough drive can go from rags to riches.
6. Most of the economy will be a free market, except for health care and education which are requirements and tend to form oligopolies, the military, and printing of money which the government must do. There will probably be subsistence housing for the homeless. Mass transit and maintaining roads and railways are required. Managing air traffic is a necessary duty. Reasonable regulations on health and safety are needed.  I am being deliberately thorough. Everything else will be on the free market.

Some people say keeping debt low and having a high quality of living is not possible. This however is misguided. Here are a few case examples of highly developed countries with world-class health care and world-class education with high median ages and low debt. There are a few rich oil nations that have low debts, but I will ignore them to show you don't need to have high exports to have a high quality of living, low debt, and economic growth. (data from the IMF which I have found to be closest to raw data sources www.imf.org/debt)

1. Switzerland has one of the best standards of living in the world, and a GDP per capita over $40,000. Their debt is worth 19% of their GDP. Hardly unsustainable with what would be deemed a welfare state by many here in the United States.
2. Luxembourg has a GDP per Capita, debt percent of GDP, and welfare system comparable to Switzerland, and a debt worth 21% of their economy. Also, despite the constant criticism of how the Euro is bad for Europe that is the currency Luxembourg uses. Most countries that use the Euro have Debts worth less than their GDPs. Hardly a cause for alarm. Other factors are at play in Greece as I have already blogged about. Get off the stupid currency high horse global media, it doesn't reflect reality.
3. So, these two previous examples are small countries and are heavy with the banking, but what about Australia? Finance doesn't make nearly as much of the economy of Australia as Switzerland and Luxembourg, they also have world-class education and health care systems, the 2nd highest quality of living in the world by HDI (behind Norway, but not by much) and their debt is worth less than 23% of their GDP. It is not known as a tax haven. It is not a net exporter of oil. Most of the country's land is practically economically useless. It is not particularly small in population or area. Why does Australia have such a low debt and such a high amount of investment? Their lowest tax bracket is 0%, their highest is 45%. They make enough revenue every year to balance the budget, and there are also some extraordinarily rich Australians. That is how you have a sustainable high quality of life and a low public debt while not being a tax haven and not being a net oil exporter. This system I described at the beginning of this post is in place in Australia, the only major economy to avoid the late 2000s recession. Also, Capital gains are taxed as regular income, which is another proposal I have made in a previous post. It works for them, why not us?
4. Another example, if Australia wasn't enough, the country most right-wing Americans will claim has one of the most out of control bureaucracies and welfare states is Sweden. Their education and health care are fully paid for by taxes, and from all the griping you would expect a huge debt. Well, the opposite of what laissez-faire advocates claim is reality once again. Sweden has a debt worth 37% of their GDP. Like Australia, Sweden is not a major oil exporter neither are they considered a tax haven, and they have a lower debt than their often referred to as wise counterpart Norway. Unlike Norway, Sweden is in the EU (although they don't use the Euro) and unlike Norway Sweden does not have massive reserves of oil, yet Sweden has a low debt compared to most other countries. You see the same type of tax system as Australia has, very progressive without treating Capital Gains like the holy grail of the economy. Government is entrusted to provide education and health care, they have a high quality of living, stable economy, low barriers of entry to business, and low debt.
5. Other examples of debts below 50% and a GDP per Capita above $20,000 are Taiwan, Czech Republic (a Eurozone member), Denmark (with a government system very similar to Sweden and a member of the EU), Slovenia, Finland (yet another Eurozone member), Norway (which has a larger debt than Finland, and doesn't use the Euro and unlike Finland is a net exporter of oil and like all of these nations above has a strong welfare system and low debt).

Basically, to say that there is a choice between prosperity and low debt is a fallacious argument on several major counts. Only 12 nations on Earth owe over 100% of their GDP in public debt, and 3 of them have GDP per capitas under $10,000. Low standard of living, poor education, poor health care, and high debt. What are the real variables at play here? It clearly doesn't work to say that high quality of living and high government services = high debt, with 8 of the most developed nation, several of which are not net exporters of oil, are not tax havens, positive economic growth in most of them even today, all of which have aging populations, and some of which use the Euro, there are other factors at play than are usually blamed. I would try to find the root cause, what is so similar between Australia, Sweden, Taiwan, Finland, and Norway that is so different from Japan, Greece, Italy, Portugal, Ireland, and the United States?

The following are similar: They are all rich nations. They all have high qualities of living, and all are democracies. They all have social safety nets of varying degrees, and one could successfully argue that the nations with the lower debt have the larger social safety nets which is like so many facts is contrary to popular belief. They all have aging populations as measured by median age relative to the rest of the world. What is so different between these nations to make such a striking difference in their debts?

The following are different:

1. The governments of the United States and Japan in particular are under conservative governments frequently, while the most conservative governments of Australia, Sweden, Finland, and Norway are in power far less frequently. One must wonder whether these "conservatives" are truly "fiscally conservative" given their massive deficit spending that doesn't exist in these "welfare state" governments which have far lower debts and higher standards of living when ranked fairly. Which matters more, a government that is out of people's pockets with high deficits or a high quality of living with low deficits? I choose a high quality of living and frankly couldn't care less about the size of government, that is the wrong question to ask. We need to ask whether the government works for the people, not whether it is "too big" or "too small" both of which are relative and impossible to fairly gauge.
2. Their tax structures couldn't be more different. The tax structure of the United States for all intensive purposes has the shape of a bell curve. While people who make next to nothing will pay no taxes thanks to standard deductions, the people who pay the most are people who make most of their money from wages and don't invest in the stock market. People who make the most money pay a middle-class rate, which has been raised to 20% as opposed to 15% recently, but still is far lower than the 39.6% if that same massive amount money (think hundreds of millions of dollars) had been made through wages. That means the government loses out on billions of dollars of revenue every single year. Australia on the other hand doesn't see a difference between capital gains and wages in terms of taxes and taxes both equally for the same amount. They also outrank the United States on a variety of quality of life measurements year after year, have more government services for the things that matter, and have a lower deficit relative to GDP year after year. They also outrank Japan on most factors. That is the only clear difference I can find to explain the difference in debts. Taxes.

There is not a choice to be made between good economics and a high quality of life, in fact, after reading the statistics one might argue the opposite that good economics will tie in with a high quality of life.

Greece, the majority's story and the real story

I was reading the news and saw this article: http://blogs.aljazeera.com/blog/europe/why-greeks-voted-way-they-did

The part that stuck out to me was "Greeks don't like being told what to do." which gives the false impression that Germany is forcing the post-Lisbon Treaty rules down Greece's throat like some sort of new Roman Empire, only now based in Brussels. Nothing could be further from the truth. First, for something like the Lisbon Treaty to come into effect, every member nation needs to affirm it through a national referendum. Greece did this with an overwhelming majority affirming their support to the European Union and a system closer to the Nationalist US Constitution than the pitifully Federalist Articles of Confederation which failed in our own history. That is myth number 1.

So, there is absolutely no doubt in any intelligent person's mind that Greece's economy is collapsing. Here is a report I wrote for myself based on real-world statistics to cover the scope of this problem, and the rest of my conclusions based on the evidence.

The “Debt Crisis”

Statistical overview

Part 1
The Statistics
Current claims of Greece that are widespread on global media are “Their debt is killing their economy”, “The Euro is killing Greece”, among others. The same is being said about Ireland, Spain, Portugal, and Italy. Let’s see if the facts fit this theory.

Statistic 1
The highest indebted nations in the world, Public debt as a percent of GDP are the following: (IMF, 2011 via Google data) (all countries with >100% GDP in debt plus one)

• Japan (229.77%)
• Greece (160.81%)
• Saint Kitts and Nevis (153.41%)
• Jamaica (138.98%)
• Lebanon (136.22%)
• Eritrea (133.82%)
• Italy (120.11%)
• Barbados (117.25%)
• Portugal (106.79%)
• Ireland (104.95%)
• United States (102.94%)
• Singapore (100.79%)
• Iceland (99.79%)

For comparison, Libya has no debt.
Statistic 2
The real GDP growth of the preceding 13 countries. (CIA, World Factbook 2011)

• Eritrea 8.2% (#11)
• Singapore 5.3% (#62)
• Iceland 2.4% (#127)
• Barbados 1.8% (#142)
• Saint Kitts and Nevis 1.5% (#151)
• Jamaica 1.5% (#151)
• Lebanon 1.5% (#151)
• United States 1.5% (#151)
• Ireland 1.1% (#162)
• Italy 0.6% (#172)
• Japan -0.5%
• Portugal -2.2% (#182)
• Greece -6%

Libya has a GDP growth rate of 10.6%. (International Monetary Fund, 2010) Not far ahead of Eritrea.

The 10 fastest growing economies in the world (CIA, World Factbook 2011)

1. Qatar
2. Ghana
3. Mongolia
4. Turkmenistan
5. Iraq
6. China
7. Papua New Guinea
8. Argentina
9. Turkey
10. Sri Lanka

Libya is not included in this, but would be ahead of Sri Lanka in 2010, in 2011 its growth shrunk considerably. ( http://www.bbc.co.uk/news/business-12523038 )

Statistic 3
Unemployment of the 13 most indebted nations if available, along with their trend. (IMF and Eurostat 2012, from Google data)

1. Spain (24.3%)
2. Greece (19.37%) at the peak, expected to decrease
3. Ireland (14.45%) at the peak, expected to decrease
4. Portugal (14.43%) at the peak, expected to decrease
5. Jamaica (13%) steady
6. Barbados (11%) just past the peak, expected to decrease
7. Italy (9.5%) Expected to peak in 2014 at 9.82%, then decrease
8. United States (8.16%) peaked in 2010, decreasing
9. Iceland (6.3%) Peaked in 2010, decreasing
10. Japan (4.5%) steady
11. Singapore (2.14%) steady

Libya had an unemployment rate of 30% in 2004, along with an extremely tiny debt by any measure. (CIA World Factbook)

Statistic 4
European nations by size of surplus or deficit (CIA, 2011, USD) Euro nations underlined, EU members italicized.

1. United Kingdom (-$202 billion)
2. France (-$149 billion)
3. Spain (-$130 billion)
4. Italy (-$97 billion)
5. Netherlands (-$39.1 billion)
6. Germany (-$37 billion)
7. Greece (-$30 billion)
8. Belgium (-$22.3 billion)
9. Ireland (-$22 billion)
10. Austria (-$14 billion)
11. Turkey (-10.4 billion)
12. Poland (-$8.3 billion)
13. Czech Republic (-$8.1 billion)
14. Romania (-$7.8 billion)
15. Ukraine (-$6.4 billion)
16. Slovakia (-$5.8 billion)
17. Slovenia (-$2.2 billion)
18. Lithuania (-$2.11 billion)
19. Serbia (-$2 billion)
20. Cyprus (-$1.62 billion)
21. Latvia (-$1.1 billion)
22. Finland (-$800 million)
23. Georgia (-$660 million)
24. Albania (-$465 million)
25. Kosovo (-$320 million) unofficial user
26. Montenegro (-$200 million) unofficial user
27. San Marino (-$58.3 million)
28. Luxembourg (-$39 million)
29. Monaco (-$3 milllion)
30. Vatican City ($13 million)
31. Andorra ($14 million)
32. Moldova ($24 million)
33. Liechtenstein ($83 million)
34. Bosnia and Herzegovina ($549 million)
35. Belarus ($1 billion)
36. Croatia ($2.4 billion)
37. Switzerland ($3.4 billion)
38. Russia ($6.6 billion)
39. Norway ($71 billion)

Libya ($0) (IMF via Google Data)

Statistic 5
Populations and deficit per capita. (Wikipedia which is from each nation’s census data)

• Ireland $4794.85
• United States $4,350
• United Kingdom $3,244.35
• Spain $2754.79
• Greece $2,727.27
• Netherlands $2320.89
• France $2,280.03
• San Marino $1828.33
• Austria $1663.77
• Italy $1598.51
• Cyprus $1473.61
• Slovenia $1073.07
• Slovakia $1065.13
• Czech Republic $766.88
• Lithuania $662.30
• Latvia $496.15
• Germany $451.22
• Romania $409.60
• Montenegro $319.86
• Serbia $280.87
• Poland $217.35
• Kosovo $184.56
• Albania $164.21
• Finland $147.87
• Georgia $147.68
• Ukraine $139.47
• Turkey $139.18
• Monaco $83.37
• Luxembourg $76.61

Libya $0 (IMF via Google Data)

Remarks

This shows a striking difference from what we will see in the media. Greece is always talked about having such a large deficit, yet they have 1/20th that of the prosperous United Kingdom. This is undisputed among reliable sources. How then does Greece have such a large debt? My hypothesis the marvel of compound interest. If Greece borrows $30 billion a year over fifteen years, and owe 10% on those accounts, then it adds up to $495 billion, and their GDP is about $300 billion, which fits. 160% of $300 billion is $480 billion. The UK on the other hand, has a debt worth 82.5% of their GDP, with a $2.5 trillion GDP is a $2.06 trillion dollar debt, 4.3 times the size of Greece’s debt.

Perhaps all the European Union needs to do is change their rules on the maximum size of public debt and further distress can be diverted. It is in the hands of Merkel and Sarkozy.

It is also hypocrytical for them to talk about Greece when in reality, being such a small country compared to the countries in Europe, their deficit is far smaller than those other nations. The amount the average Greek would add to their taxes to balance the budget is ⅔ that of what every Briton would have to add to their taxes to balance their own budget, but people don’t talk about it. The media doesn’t mention it. Their debt burden is far below Japan, which is really not much higher than it was before the earthquake, the debt burden then was 160% of their GDP, what Greece is now, and their economy despite having a deficit over twice the value of their economy is still relatively strong. Other factors are at play.

If you look at Greece what you see is consumer confidence with Greek banks is in the toilet, while they are not with Germany. This mindset has gone viral across the world, and we are currently seeing a bank run. More than this, it is from people abroad, in other words, divestment. With little to no equity and the government running out of funds due to the bank run, there is no one to bail out these banks and give them equity so that their depositors can continue to receive their interest and lending can continue from the banks. With no equity, this becomes impossible, and this has happened before in the United States. This is the same reason why people looking for a solution to the Israeli-Palestinian conflict speak of divesting from Israel, because that strategy in Greece is killing their economy. With less lending power, small businesses are unable to begin (which are one of the major drivers of economic growth in every economy) due to lack of credit, and unemployment rises to almost 20% due to lack of jobs due to lack of credit due to the bank run.

This has happened before in the United States. The bank runs of the pre-Federal Reserve era when the American government contracted the printing of currency to banks saw many bank runs as people were (rightfully) never confident in banks and our domestic economy was weak for over 30 years from the end of Reconstruction to the beginning of the Federal Reserve. If we (America) wanted to see our number one trading partner in terms of gross value of goods stay up, we would use our influence to work with brokering a solution between the Europeans and find an answer. If Europe goes, the rest of the world goes. If the European Union were a nation they would have the largest GDP in the world, and have trade with practically (if not literally) every nation in the world. They must not fall.

The solution needs to include breaking a deal that Europe will reanalyze their banking system and merge their banking deposit insurance mechanisms on a union level to prevent future problems. The Greeks need to pay slightly more in taxes, to decrease the amount they will soon need to pay to the people who bought Greek bonds around the world, and then they can spend more on education and health care, or pay less in taxes. Nevertheless, confidence in Greece must be restored. There is no option in this.

The current path they are following is austerity, to put as many government employees as they can on unemployment insurance (how much money will this really save?) and cut back on services. Through this policy of unemploying people Greece is seeing an unemployment of over 20% and growing. Before austerity began in 2009 their unemployment was on par with the average of the European Union. In fact, before austerity, Greece’s unemployment had been below Germany for four years! (Google Data) Austerity changed all that by firing government workers. Once the government workers are all fired, they don’t have as much purchasing power and the private sector loses revenue. The current neoconservatives in Europe and the United States use the same policy with deficits. Here is the question to show why this policy has never worked (The recession in the beginning of the Reagan years was due to skyrocketing oil prices that shocked the economy):

1. You are running a business and are running a deficit. What do you do?
1. Cut revenue.
2. Find ways to increase revenue.
3. Cut spending.
4. Find better marketing strategies.
2. You are running a government and are running a deficit due to a bad economy. What do you do?
1. Cut revenue.
2. Find ways to increase revenue.
3. Cut spending.
4. Use your power to increase the amount of money in the economy to prevent a bank run. Increase employment by hiring temporary government workers to upgrade aging infrastructure.

The answers to the questions:

1. You are running a business and are running a deficit. What do you do?
1. By cutting revenue your net profit will continue to shrink. You will need to close store fronts and you will lose potential revenue when your market is in better days, at that point you will be beaten by the competition.
2. You will get more money and bring your business afloat.
3. Your business will shrink. By closing store fronts you will lose potential revenue for when your market turns around.
4. By marketing better more people will know about your business and you can get more customers.
2. You are running a government and are running a deficit. What do you do?
1. By cutting revenue your deficit will expand. You will owe whatever you don’t make now (+ interest) later and need to make extra revenue anywhere from 6 months to 30 years from now.
2. By increasing revenue your deficit will shrink.
3. By cutting spending you will probably fire a lot of employees who will then move on to unemployment which as the government you will have to pay. Their loss of purchasing power will expand to the private sector through less revenue for businesses. See: Great Depression.
4. By decreasing unemployment more people will keep their houses, have purchasing power, and be able to continue to live their lives regularly. With the money continuing to flowing steady, you have the definition of a healthy economy. Businesses will not shrink and employees will have the means to start their own business if they wish. By hedging the bank’s equity they will continue to have money to pay their depositers interest which will mean that the chance of a bank run is diminished greatly.

Notice the similarity of these two questions, they are the same question, all I changed was which sector is getting less workers. Every good businessman will have the same answer to question 1, (there are two correct answers which together can bring a company to the Fortune 500 list) increase revenue or improve marketing, however, while Democrats will continue those answers in Question 2, b and d, Republicans will answer with a and c which are the wrong answers to the first question. Since the questions are practically the same, the answers shouldn’t change. If we look at Greece we see this is the case. Austerity in business and austerity in Government have the same reaction. Higher unemployment, more uncertainty, and collapsing profits for businesses. Just like how the Great Depression began.

If Merkel really wanted to improve the situation in Europe she would convene an emergency session of parliament to discuss solutions with the other nations of the European Union and be bold and fix these current issues. She will do the strategy a businessman would do, to increase revenue and stop laying off workers. It has never worked before, and it isn’t working now. They would switch to a Keynesian model to increase employment to increase government revenue to cover the deficits, increase confidence in investors, rein in the deficit, and keep their economies running. (I wrote this in May, a month before she started moving, basically, I was right.)

The only difference in the root cause of the crisis between Greece and Germany is the level of austerity. That is what the statistics tell us.