Beginning last May, the global financial crisis has moved from primarily an issue with the private sector to one of the public sector. Entire states and countries ability to service their debt is being called into question.
When it became clear that Greece would default without a bailout, Europe rushed to its rescue and inked out a massive ‘we will bailout each other’ plan. Some genuine austerity has taken place in European countries since then, so perhaps the bailout will hold. However, in many countries, citizen resistance to austerity is keeping the welfare state intact.
A great comparison is England and France. If England is able to axe 500,000 government workers and reform its welfare system, it may very well open the path towards genuine economic growth, not sclerotic sub 1% growth. By reducing the size of government, it may even (gasp) allow the country to lower taxes.
In contrast, France nearly melted down when it raised the retirement age from 60 to 62. While some change is better than no change for France, tiny changes like this will simply keep the current welfare state system alive on the respirator until the next crisis hits. While the country struggles, it will continue with a slow growth environment.
We have a similar situation in the United States too. Entire states are bankrupt, and it is just a matter of time until the default risks kick in. It is mainly the ridiculously high pension benefits paid to public workers that is the problem, and these will gradually get worse as more retire over the next decade. What will likely happen is these states will enact incremental austerity. They will raise taxes here and there, gain some small concessions from the unions, and try to stave themselves off from bankruptcy.
This is a recipe for continuing to kick the can down the road and achieving, at best, 1% long-term growth. Instead, I hope that some states and countries just continue being grossly profligate.
Let France keep its retirement age at 60. Let it continue to have ridiculous pensions. Let it go bankrupt. Hopefully, the world will see what happens and will learn a lesson. Since no one seems to have learned socialism doesn’t work with the failed experiments in Cuba and the USSR, we need to see socialism fail…again. Apparently, the low growth rates of Japan and Western Europe are not enough for people to think that entitlements don’t come without cost…we need to see a major country fail in dramatic fashion for people to learn a lesson.
Let California elect Jerry Brown as governor. While he is not a radical leftist, I really doubt he will force any concessions from the public unions over the next few years. Let California continue paying exorbitant pensions to the unions, and let it go bankrupt. We just hope there is the will in Washington to resist a bailout, or else we will just start a bigger problem.