Greece is broke, and so is democracy

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Appeared in the Globe and Mail
It is often the role of the economist to point at the impending doom with which reality confronts our fondest wishes. For that reason Thomas Carlisle referred to economics as the dismal science. It is made the more dismal for the economist when the fondest wishes are held and extolled by ones friends and those whom one admires. 

I find myself in this predicament with the pronunciations of two such people on the issue of the Greeks and their political reactions to the gifts borne to them by Germany in the guise of the European Union. In assessing the gift of monetary rescue wrapped in the sack-clothe of fiscal austerity, then-Greek Prime Minister Papandreou unexpectedly proposed that there should be a referendum. This gesture caused pandemonium in markets and after stern ultimatums from the EU, the Greeks found that they could accept the lifeline without waiting four months for a referendum.

Two Canadians of substance who have given us all reason to admire them, Mark Carnet, Bank of Canada Governor, and Preston Manning, founder of the Reform Party and Fraser Institute senior fellow, supported the notion of a referendum. Carney told the House of Commons Finance Committee that a referendum was a good idea because it is “imperative that there is widespread support” for the tax and spending reforms that would have to be adopted and maintained for a long time. Preston Manning, the most reliable and able democrat in the country, wrote in the Globe and Mail on November 8th to support Carney.

The problem with these assessments of the Greek tragedy is that they ignore the fact that in Greece and an increasing number of countries, democracy itself is in deficit. It is in deficit in the sense that a majority of the Greek electorate has been bribed with payments from government for which nobody in Greece is having to pay in taxes. Corrupted at its very foundation, Greek democracy no longer speaks for the public interest and cannot be relied upon to solve the problem. In effect, that is why the European Union is involved in the lives of Greeks in the first place.

Democracy rests on a delicate balance of economic interests. Citizens both pay taxes to, and receive benefits from, government which is controlled by the democratic process.  Rhetoric notwithstanding, the normal pattern in Western democracies is that lower income families are net beneficiaries and higher income families are net payers. The crucial balance point for democracy is where the crossover in the weight of the electorate occurs.

The normal circumstance is that fewer families are net overall beneficiaries than are net payers. The ongoing process of democracy is persuading those who pay more than they receive to support the social infrastructure because it does provide some benefit to them and to the society in general. Fiscal democracy works in this context as long as the attempt to spend more is met by resistance from those who must pay – resistance of a kind that it might take the creation of a Reform party to effect.

The problem with deficit financing, which unfortunately is being forgotten, is that it makes possible the delivery of current benefits to the population for which nobody pays – or at least nobody who is voting at the moment. Deficits shift the burden of spending forward onto the shoulders of children not yet old enough to vote and those not yet born.  And in the case of the Greeks, owing to the system of transfer payments imbedded in the European Union, at least part of the cost of their spending could be shifted to the voters not yet born in other countries of the union.

The demonstrations in the streets of Athens were not the manifestation of democracy at work. They were the vanguard of the clear majority of citizens who are disconsolate at the prospect of loosing their ability to continue to feast at the expense of their children.  As past Greek and other experience has demonstrated, the only way that democratic frenzy comes to a halt is when the country hits the wall and can no longer borrow the money to carry on. 

The fondest wish of the creators of the European Union was that the fiscal discipline which has historically eluded some European countries would somehow emerge from the great EU democratic coming together. Regrettably, that wish took no account of the delicate balance of interests which is the crucial underpinning of all successful democracies and which in the case of Greece, is simply broken.

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