Two developments during the past week enable me to return to topics dealt with previously in this series of essays. In a marathon session lasting several days, the countries of the European Union finally, after four years, recognized that the Greek disaster is a solvency problem, not a liquidity problem, and finally took some measures to confront the situation properly. Interest rates are to be lowered, terms are to be lengthened, and debt instruments are to be purchased by Greece itself at a discounted rate. So far so good. Commentators have been quick to point out that although the diagnosis is now correct, the prescription is inadequate. They also point out that the prognosis is off because the estimated figures for future growth are wildly optimistic.
All this is true. In addition, the Greek banks have already balked at offering the bonds they hold for the government to buy back at a discount, demanding a government guarantee of eventual payment on the new terms. Begging the question of whether a Greek government guarantee is worth anything, and admitting both that the forecasts are overly-optimistic and that the program is in and of itself inadequate, still this commentator is more optimistic than he has been for a very long time. The imminent default has been put off again, but this time not by adding to the debt but by subtracting from it. It should carry Greece past the German elections next year, at which time the EU can take further measures to restore Greece's solvency.
Most important, the EU countries can no longer ignore the fact that some of the other over-indebted countries, such as Portugal, are also insolvent and need the same kind of treatment. There is indeed, and finally, light at the end of the tunnel, as long as the tunnel is followed to its end--and that remains to be seen.
I can't resist at this point a brief comment on a development far away--the verdict of a New York court that Argentina finally must make good on its defaulted debts dating back to 2001, the largest default in history. If the New York Court of Appeals confirms the verdict, Argentina will have to pay face value plus interest on the bonds owned by holders who did not accept the unprecedented 70% "haircut" imposed on the majority of the bondholders, and will be unable to pay those that accepted the replacement bonds what they are owed, either. Argentina once again demonstrates that even a country with every natural advantage, once ranked among the "advanced" countries, cannot avoid the damage caused by incompetent and corrupt governments that make the same mistakes over and over again. There is nothing new here. In 1810, the governing "junta" of Buenos Aires, in the penumbra between colony and independent country, decreed "the confiscation of the huge fortunes held by a few individuals...leading to the ruin of civil society...this amount of 500 to 600 million pesos will indeed discomfort the 5,000 or 6,000 people who own it, but will be to the advantage of 100,000 workers." Plus ca change....
The other important event was the publication of the Taub Center report on the financial/economic situation of young and middle class families in Israel, which are suffering a precipitous fall in their relative income, which led to massive protests in the summer of 2011. All sectors of Israeli society, Jewish men and women, Arab men and women and haredi, have seen their standard of living fall precipitously since 1995, according to the work of Prof. Michael Shalev of Hebrew University. Only the recent immigrants from the former Soviet Union have seen a rise in real income. A college degree no longer guarantees a solid income base and entry into the middle class.
This phenomenon is world-wide. Among many other countries, it is replicated in the United States, where wages and salaries have stagnated, while the return to capital has soared. There is a very good reason for this phenomenon--the contribution of capital among the factors of production has in recent decades become much more important to the productive process than the contribution of labor. As a result, wealth flows to those who own capital assets, rather than to those who have only physical or mental labor to contribute. This is socially unsustainable and will, if it continues, lead to widespread social and political unrest and the rise of leftist and rightist populist movements dedicated to confiscating wealth from those who have it and distributing it to the rest of society. This, of course, is also unsustainable, since the incentives to create wealth will be negatively affected.
Only programs of expanded capital ownership, such as employee stock ownership plans and community investment trusts, hold promise of reversing this development. If not adopted soon, however, it will be too late. The public should demand that the politicians should concentrate on fundamental matters such as this, rather than bickering over minutiae.
Norman A. Bailey, Ph.D., is Adjunct Professor of Economic Statecraft at The Institute of World Politics, Washington, DC, and a lecturer at The Israeli National Defense College (MABAL), 2011-2012 session.
Published by Globes [online], Israel business news - www.globes-online.com - on December 4, 2012
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