Greece Rejects Creditors’ Call for Pension Cuts

Greek prime minister Alexis Tsipras speaks at the World Economic Forum in Davos, Switzerland, January 21
Greek prime minister Alexis Tsipras speaks at the World Economic Forum in Davos, Switzerland, January 21 (WEF/Valeriano Di Domenico)

Pensions are at the center of Greece’s latest dispute with its creditors.

The Greek Kathimerini newspaper reports that the International Monetary Fund’s managing director, Christine Lagarde, stressed to Prime Minister Alexis Tsipras during a recent meeting at the World Economic Forum in Davos, Switzerland that his government’s proposal for pension reform was inadequate.

The IMF jointly administers Greece’s €86 billion bailout with the European Union.

But Tsipras has said Greece won’t succumb to “unreasonable and unfair demands” and reportedly told Lagarde “there is no way” he can cut pensions for current retirees.

“One pension is a whole household’s income in the present circumstances,” the far-left leader told parliament last month.

Plans

The creditors have proposed merging Greece’s various pension funds into one and making cutbacks to cover a projected €1.8 billion deficit this year.

Tsipras’ government wants to raise employer insurance contributions instead by 1 percent and employee contributions by .5 percent.

Other European countries and the IMF are skeptical that this would be enough to plug the whole.

They also fear such increases would either discourage companies from hiring altogether or convince them to hire personnel without paying social contributions.

Tsipras has floated a new tax on bank transactions as another way to meet a €600 million deficit-reduction target.

Protests

Neither the creditors’ nor the government’s plan is popular.

Thousands of farmers have used tractors to block border crossings and roads in protest.

Sailors stopped work for two days in a similar demonstration, suspending ferry services to Greek islands.

Unions have called a general strike for Thursday.

Broken promise

Tsipras’ radical Syriza party won the election last year on a promise to reintroduce a thirteenth month of pension payments that had been cut at the creditors’ insistence by previous governments.

But when the country once again teetered on the brink of default, Tsipras gave in to demands from other European leaders and the IMF to continue austerity.

In the years leading up to the start of Greece’s debt crisis in 2010, government spending on pensions rose from 12 to 17 percent of economic output, reaching the highest rate in the eurozone.

Without reform, Greece would not comply with the terms of what is its third international bailout.

Projections Underscore Need for Entitlement Reform

The United States Capitol dominates the skyline of Washington DC, November 22, 2013
The United States Capitol dominates the skyline of Washington DC, November 22, 2013 (IIP/Tim Brown)

Projections released by the Congressional Budget Office on Tuesday underscore the need for comprehensive reform of America’s biggest spending programs.

The CBO, an independent outfit, warns that the federal deficit will jump to $544 billion next year, or 2.9 percent of gross domestic product — the first time since 2009 that the shortfall is expanding relative to the size of the economy.

Over the next ten years, deficits would add up to $9.4 trillion unless significant policy changes are made.

The CBO sees the debt rising from $13.1 trillion last year, or 74 percent of GDP, to $23.8 trillion, or 86 percent, by 2026.

Warnings

The CBO has been warning for years that the long-term outlook will be grim if politicians do not rein in the country’s biggest spending programs: Medicaid, Medicare and Social Security, which jointly account for around half of total spending.

Yet reform is contentious.

Republicans have proposed to liberalize Medicare, which pays health care for seniors, and give states more power over Medicaid, the health care program for the poor.

Democrats reject both proposals as a weakening of the safety net. Some even deny that Social Security, the government pension program, is in any sort of trouble.

But as the population ages — if slower than is the case in most other developed nations — there will simply be fewer workers per retiree paying into the pension fund.

Running out of money

Republicans, for their part, want higher defense spending and lower taxes. America can ill afford either, let alone both at the same time.

Entitlements, including President Barack Obama’s new health law, are expected to claim almost 14 percent of gross domestic product by 2035.

As early as 2025, federal tax revenues could be sufficient to cover only these mandatory spending commitments, even excluding unemployment benefits, leaving nothing for defense, education and infrastructure.

Unfunded State Benefits: America’s Next Fiscal Crisis

The dome of the Texas State Capitol building in Austin, December 8, 2012
The dome of the Texas State Capitol building in Austin, December 8, 2012 (Flickr/Mike)

America’s fiscal crisis looks less pressing than only a few years ago. A combination of spending restraint and tax increases that has resulted from messy compromises between President Barack Obama, a Democrat, and the Republican Congress should help push the deficit down to a manageable 2.5 percent of economic output this year.

Longer term, the rising costs of health and pension programs still look worrisome. But before the problem reaches Washington DC, it could wreak havoc at the state and local-government level.

The health and pension benefits public-sector workers enjoy are often generous. Most city and state governments offer their workers defined-benefit pensions based on their years of service and final salary (on top of Social Security, the federal program). These plans are supposed to be covered by funds specifically set aside for them. But there’s not enough money in the pension pots. By the states’ own estimate, their retirement plans are only 73 percent funded.

That’s bad enough, but — as The Economist has reported — nearly all states apply an optimistic discount rate to their obligations, making the liabilities seem smaller than they are.

If a more sober one is applied, the true ratio is a terrifying 48 percent. And many states are much worse. The hole in Illinois’ pension pot is equivalent to 241 percent of its annual tax revenues: for Connecticut, the figure is 190 percent; for Kentucky, 141 percent; for New Jersey, 137 percent.

By one estimate, the total pension shortfall is $2.7 trillion, or 17 percent of America’s entire gross domestic product.

And that doesn’t even include the unfunded pension obligations of city governments, nor health care obligations of all sorts made by cities and states.

It’s no coincidence that places long run by Democrats tend to be worse off than those governed by more frugal Republicans. But both parties are to blame for not solving the problem.

On the one hand, Democrats are resistant to cutting benefits for fear of upsetting friendly public-sector workers and their unions. On the other, Republicans refuse to raise taxes to plug the hole.

There are a few states that have taken measures. Nebraska stopped offering final-salary pensions to new hires in 1967 and is now doing fine. Other states should follow its example.

States should also consider shifting to defined-contribution pension schemes, where workers get out what they put in. These are the norm in the private sector — and in the public sectors of many other wealthy nations.

Sadly, most state governments don’t feel the situation is urgent at all. It might have to get a lot worse before it gets better.

Between the Crazy, Serious Ideas in Republican Debate

Governor Chris Christie of New Jersey addresses the Republican National Convention in Tampa, Florida, August 28, 2012
Governor Chris Christie of New Jersey addresses the Republican National Convention in Tampa, Florida, August 28, 2012 (EPA)

Wednesday’s Republican presidential debate hosted by CNBC was easily the worst so far this year. The moderators seemed more interested in catching the candidates in hypocrisies and discrediting their looniest proposals than encouraging a substantive debate — but at the same time let some of the most outlandish claims go unchallenged.

Between the crazy, though, there were glimmers of a reform-minded conservative platform taking shape.

Focus on middle-class problems

Virtually all the candidates vying for the right’s 2016 presidential nomination recognized that growing income inequality is a problem. Virtually all of them argued that the point of conservative policies is to lift Americans out of poverty and make life a little easier for those tens of millions who identify as middle class.

This is a vast improvement over the last presidential election campaign in 2012 when the Republicans’ Mitt Romney infamously dismissed the “47 percent” of Americans who get government handouts.

The Atlantic Sentinel reported in April that Democrats are Republicans are now talking about the same problem and we argued in August that Republicans need to be the party of the middle class if they are going to win back the presidency next year. There was ample evidence on Wednesday night that the candidates realize as much.

Divisive social issues, like abortion and gay rights, went largely unmentioned; the sort of issues that can scare away centrist middle-class voters whose economic interests align more with Republicans than Democrats but who are culturally liberal.

Saving entitlements

Virtually all of the candidates who spoke about entitlements also recognized that the retirement age needs to go up and that Medicare, the social insurance program that pays health care for seniors, needs to be reformed if it is to stay affordable.

Chris Christie, the governor of New Jersey, was most radical, proposing to cut benefits for wealthy seniors.

Rand Paul, the libertarian senator from Kentucky, agreed, saying, “If you’re not willing to raise the age of retirement, you’re not serious about dealing with the issue.”

Health and pension programs already account for half of federal spending. Within ten years, they are projected to take up nearly two out of every three dollars spent in Washington.

John Kasich, the governor of Ohio, dismissed as “fantasy” the claims of those like property tycoon Donald Trump who say all that’s needed to keep entitlements affordable in the long term is higher economic growth. The problem isn’t a lack of growth; it’s demographics. America is aging (if slower than other developed nations) so it needs to change the way it finances support for seniors.

A more serious opponent of entitlement reform is former Arkansas governor Mike Huckabee who argued on Wednesday that the promises of Medicare and Social Security should be kept. “This is not a matter of math,” he said. “It is a matter of morality.”

He called instead for a national effort to cure Alzheimer’s, cancer, diabetes and heart disease which are together responsible for most health spending. “We don’t have a health care crisis,” he said. “We have a health crisis.” Which may be true but banking on a cure for all four major diseases to prevent the federal government’s health programs going bankrupt is more like wishful thinking than a plan.

Marco Rubio, the Florida senator, smartly praised his fellow contenders for debating the issue at all when Democrats simply deny entitlements are becoming unaffordable. He also preempted left-wing attacks by insisting that whatever changes a Republican administration would make will not affect Americans of his parents’ generation who are either in or close to retirement. “I’m against anything that’s bad for my mother,” he said.

Tax reform

On tax policy, the quality was more mixed.

America’s tax code is overly complicated and riddled with deductions and exemptions that make it nigh impossible for the ordinary worker or a small business to file their taxes without professional help.

But to reduce the entire code to three pages, as businesswoman Carly Fiorina suggested, is unrealistic. Megan McArdle explains why at Bloomberg View.

So is Texas senator Ted Cruz’ proposal to shrink tax returns to a postcard and abolish the Internal Revenue Service. “Where do we mail the postcards?” McArdle wonders. “Publishers Clearing House?”

But other candidates had the right ideas, even if they did not elaborate much on them (nor were they asked to): cutting taxes for the working poor and reducing taxes on investment to stir growth.

Wednesday’s debate may not have been an altogether serious affair. But it did show there is a serious debate going on inside the Republican Party about how to tackle the country’s biggest problems.

Democrats Resist Weakening Decades-Old Social Model

Workers demonstrate for higher minimum wages outside a McDonald's franchise in Milwaukee, Wisconsin, January 1, 2014
Workers demonstrate for higher minimum wages outside a McDonald’s franchise in Milwaukee, Wisconsin, January 1, 2014 (MTEA)

Democrats in the United States are deluding themselves and their voters if they vow to resist changes in the economy over which politicians have little control.

From their doubts about a transpacific trade pact to fights against flexible labor relations, Democrats are showing themselves to be uncomfortable with many of the tenets of globalization that have redefined the world economy since the 1980s.

They won a major victory on Thursday when the New Deal-era National Labor Relations Board — itself an outdated body — ruled that companies can be held responsible for labor violations committed by their contractors.

The ruling overturned decades of precedent and will mostly affect low-skilled workers. Fast food chains like Burger King and McDonald’s are expected to either assert more authority over local franchise owners or cut ties with them altogether.

The fast food industry has also been the target in another left-wing crusade: for a higher minimum wage. The state of New York wants fast food workers to be paid at least $15 dollar per hour, 70 percent above the current minimum wage.

New York’s Democratic mayor, Bill de Blasio, has also tried to crack down on Uber — a smartphone application that allows users to access rides for hire — in order to preserve the monopoly of the city’s Taxi and Limousine Commission.

The American Interest‘s Walter Russell Mead sees these various efforts as the desperate antics of a party that is trying to preserve what he calls the “blue” social model.

From the 1930s to the 1970s, Americans often had jobs for life, Mead explains; worked by the clock, not the task, were promoted and assigned on the basis of seniority, not performance, and employers had a kind of patriarchal responsibility to their employees.

The trade unions acted as mediators in this system, trying to raise wages and transform the patron-client aspects of the employment system into something that benefitted workers more. “This was the era of defined-benefit pension plans and employer-sponsored health plans.”

The system worked so long as the economy was dominated by large bureaucratic corporations that could absorb legal mandates for higher salaries and benefits.

“Unfortunately,” writes Mead, “the ever-rising costs imposed by this approach, however beneficial to workers, ran into the buzzsaw of economic transformation.”

The breakup of the stable oligopolies and monopolies that dominated the large American market without fear of competition, the globalization of manufacturing, the increased speed of technological change, the end of discrimination against women and minorities in the labor market — all these combined to make the costs of the full formal system increasingly uneconomic for all but the most profitable and secure firms.

When the blue model started unraveling in the 1970s, Republicans, under Ronald Reagan, championed a more laissez-faire form of capitalism, one with less regulation and control. Temporary work contracts proliferated as did the use of subcontractors and franchises.

In the last decade, the Internet gave rise to even more part-time work and opportunities for the self-employed.

Democrats see this as a rollback of the social progress they have made and blame corporate greed.

As fast as noble, public-spirited champions of the workers and middle class imposed new obligations on the greedy and unscrupulous capitalists, the same capitalists slithered out of their obligations by exploiting legal loopholes to transform their stable, jobs-for-life employees into hire-and fire-at-will contractors and subcontractors.

There is some truth to that. The liberalization of international finance in the 1980s introduced a stock market-driven obsession with short-term profit that coincided with the demise of the “blue” social model. Bosses’ paternalistic sense of responsibility toward their employees began to dissipate as many big companies were swept aside in a wave of technological innovation. Profits and incomes at the top rose while the average American worker was left little better off.

This trend has now come to a head with even Republicans admitting that life has got too hard for middle-income families.

This website has argued that the main political challenge in the years to come will be how to make life a little easier for those tens of millions of Americans who identify as middle class. The blue social model gave them security and a chance to rise above their station. What has come in its place seems to the many who are unable to keep up the very opposite.

But the answers cannot be found in the past. Democrats who insist on blue-model solutions for twenty-first century problems are either ignorant of the economic changes that are happening globally or deliberately deluding their supporters.

America’s is not the only economy undergoing this type of transformation. Some of Europe’s former welfare states, like Germany and those in Scandinavia, have already had to make significant adjustments. They are moving away from an industrial corporatism to an economy that is based more on services and policies that are tailored to individuals.

An example is shifting health insurance from employers to workers. Many Americans still get their insurance through their jobs. One good thing about President Barack Obama’s health reforms was that it broke this connection. Many Western European nations had already done the same.

Similar reforms are overdue in pensions and unemployment benefits. In many countries, only those in full-time work and on a permanent contract finance both through their employer or trade union. As jobs become more flexible, entitlement systems designed in the aftermath of World War II desperately need to be overhauled.

In America, it doesn’t look like Democrats are willing to. Mead laments that theirs is an impossible agenda because it is reactionary. “In the end it hurts everyone, especially the poor, whom, allegedly, the blue agenda is intended to protect.”

Imagine New York raised wages in the fast food industry to $15 per hour when parent companies, rather than local franchises, are suddenly responsible for respecting labor laws. Would McDonald’s and its competitors absorb the costs and give their workers good-paying jobs for life? Or would they either raise prices, narrowing the choices of food that poor people have, or speed up automation in their restaurants, further reducing the job opportunities available to the low-skilled?

If the latter is more likely, Mead predicts that Democrats would call for more food stamps and rent subsidies in turn to help the urban poor cope — paid for by higher taxes on those companies that are still profitable. Thus a cycle of government intervention would be triggered in which one failed policy necessary leads to another to remedy the shortcomings of the first.

Democrats need to learn to live with economic changes and design their policies for entitlements, salaries and labor relations accordingly, rather than seek to mold the economy in such a way that the “blue” model can possibly be saved. Republicans are prone to overlook the negative effects globalization and labor market flexibility have for low-skilled and low-wage workers. America needs a party that looks out for them. But it needs a party with sensible solutions, not one nostalgic for an era that isn’t coming back.

French Farmers’ Protests Divide Europe

A farm in the south of France, June 1, 2014
A farm in the south of France, June 1, 2014 (Harmish Khambhaita)

Protests by French farmers against low dairy and meat prices are diving Europe. While similar actions are expected in neighboring Belgium, Germany and the Netherlands are irked that the Paris government is enacting protectionist measures in an attempt to quell the unrest.

When French farmers blocked the roads in northwestern Brittany and Normandy last week, the Socialist administration of President François Hollande quickly gave into their demands, canceling around €100 million in taxes and allowing them to defer another €500 million for three to four months. The state also promised €500 million in support to help indebted farmers restructure their loans.

The concessions didn’t stop farmers in Alsace, in the northeast of France, from blocking German trucks carrying agricultural products into the country this weekend.

The French, who are Europe’s largest producers of agricultural products, say beef prices have fallen 13 percent in the last two years while pork producers have been hit by a Russian embargo imposed in retaliation for European sanctions.

Dairy is said to be 12 cents below its break-even price.

Europe liberalized its milk market in April, removing a quota system that had been in place for thirty years. While the reforms have benefited some, especially large agricultural companies, smaller and outdated farms are struggling to make end meets.

French officials estimate that one in ten farms are in financial difficulties while tens of thousands could face bankruptcy.

Belgian farmers have similar laments and are expected to throw up roadblocks of their own on Thursday.

Germany’s agriculture minister, Christian Schmidt, reminded the French government on Wednesday that it must “stick to the rules” of the single market and not stop products from his country being sold in France. “I don’t see French farmers hindering their exports, so imports should not be hindered either,” he said.

In an interview on German radio, Schmidt urged French farmers to consider instead why they had lost competitiveness relative to Germany and other European nations.

French agricultural exports have steadily declined since countries in Central and Eastern Europe joined the European Union. But other Western Europeans have managed to maintain their position.

Open Europe, a British-based think tank, points out that this is despite — “or possibly because of” — France being the single largest recipient of farm subsidies under Europe’s Common Agricultural Policy (CAP). The country is due to receive €62.8 billion in support under the current 2014-2020 budget.

The organization is skeptical of the policy’s effectiveness.

By providing income support irrespective of whether any meaningful economic activity takes place on a farm, direct CAP subsidies often act as an outright disincentive for farmers to modernize, in turn locking in unviable business models and hurting Europe’s competitiveness.

The Dutch, who are the biggest exporters of agricultural products in Europe and advocate reform the subsidies system, are unlikely to protest. But their farmers are disgruntled by the extra help their French competitors are getting.

Pork producers in the Netherlands said on Wednesday, “If Brussels approves the €600 million in support of French farmers, then there is room for our government to restructure pig farms as well.”

German dairy farmers similarly complained to the European Union about the extra support for French farms and a proposed “eat French” campaign. Spanish farmers warned they could retaliate with a boycott of French products.

France’s Hollande Unlikely to Risk More Reforms Until 2017

German chancellor Angela Merkel speaks with French president François Hollande at a G7 summit in Bavaria, June 11
German chancellor Angela Merkel speaks with French president François Hollande at a G7 summit in Bavaria, June 11 (Bundesregierung)

Elections in France this year and next could doom any chance of deeper economic reform even as the country seems incapable of bringing down unemployment.

Stuck at over 10 percent since he came to power in 2012, the high jobless rate has weighed down on President François Hollande’s popularity. With an approval rating under 20 percent, the incumbent seems unlikely to win reelection in 2017. But he is still running and should want to avoid dividing his Socialist Party on economic policy.

The next regional elections are due in December. Called after a reorganization that saw the number of regions cut from 22 to thirteen, the Socialists are gearing up for another defeat. They have lost all local elections since Hollande beat the conservatives’ Nicolas Sarkozy in 2012 with 51.6 percent of the votes.

Party unity has been tested by Hollande’s late conversion to liberalization.

Earlier this year, he allowed his centrist prime minister, Manuel Valls, to push reforms through parliament that shorten labor arbitration procedures, weaken protections of some professions, such as pharmacists and notaries, give coaches the right to compete with intercity trains and shops the freedom to open on more Sundays.

The left was unimpressed. Martine Aubry, one of Hollande’s opponents in the 2012 Socialist Party primaries and the architect of France’s 35-hour workweek, sneered, “Has the left now got nothing else to suggest for the organization of our lives than a Sunday walk in a shopping center?”

To avoid spitting his party, Valls made use of an arcane constitutional prerogative that let him force the reforms through without a vote, daring the opposition to introduce a motion of no-confidence that was predictably defeated.

He could use the same power to enact labor reforms that are bold by French standards but would do little to mend a divide between typically young workers with insecure jobs and older, unionized workers who are almost impossible to fire.

Valls wants to allow employers to renew short-term contracts twice, rather than once, and give them a €4,000 bonus when they hire their first worker.

The measures should help trim unemployment. Temporary work contracts now account for 80 percent of the jobs created in France.

But simplifying and shortening layoff procedures — something France has been urged to do for years by the European Commission and Organization for Economic Cooperation and Development, among others — would do far more to encourage hiring.

That is a bridge too far for Hollande. After giving businesses €40 billion in tax relief, his 2012 election promise to soak the rich already rings hallow. Touching long-term contracts and their generous benefits risks angering the trade unions, whose support he needs in 2017, and would see the Socialist Party split.

The Greens have already quit Hollande’s coalition. Other far-left parties refused to back him in the most recent local elections, allowing Sarkozy’s conservatives to take over control in 28 départements.

Valls insists there is no time to waste. Excessive regulations and high social security contributions from employers hinder labor mobility and add to France’s labor costs which, at €34 per hour, far exceed the European average of €23.

Relatively high productivity at least partially justifies the higher costs of French workers but that is no consolation to the millions who are out of work.

However, growth is finally picking up. The French economy is projected to expand 1.1 percent this year and 1.7 percent in 2016. Hollande may be betting that this will be enough to finally bring down unemployment and give him a fighting chance in what is likely to be a rematch of his 2012 contest with Sarkozy. Companies may have to wait another two years before they see another round of reforms.