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The Honolulu Advertiser
Posted on: Sunday, May 16, 2010

Big government, big pensions, big trouble

Hawaii news photo - The Honolulu Advertiser

A demonstrator shouts outside the Greek parliament during an anti government rally in Athens. In a country of 11 million, 1 million people work for the government and qualify for the biggest pensions in Europe.

THANASSIS STAVRAKIS | Associated Press

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The following editorial appeared in the Miami Herald on May 11. While some of Greece's problems are unique, there a few troubling parallels between Greece and the United States ... and Hawai'i.

As Greece's economic woes mounted last week, stock markets around the world tumbled and retirement accounts of millions of U.S. households took a big hit. Welcome to the global economy.

The integration of European economies and the connections with U.S. credit markets mean that a threat to one is a threat to all. That's why Greece matters.

If Greece can't pay its bills, bondholders and lenders who finance public debt find themselves holding worthless paper. Therein lies the source of the deeper anxiety if investors don't want to buy bonds, other governments could go bust.

All this was far less important when Greece was just Greece. Now, as a member of the European Union using a multinational currency, it forms part of a mutually dependent group of countries.

Imagine that you are suddenly responsible for the reckless spending habits of your brother-in-law and you can see why the Germans, among others, are angry at Greece. They didn't cause the problem, but a refusal to help could spell economic and political chaos for themselves and the European family of nations.

The fallout from the Greek economic tragedy is not the only reason for Americans to care. Granted, the U.S. and Greek economies are not in the same ballpark, but Greece offers an object lesson in bad public policy.

In a country with a population of 11 million smaller than Florida's it has 1 million public employees. Nearly half of the remainder are retired or too young to work. Even with a relatively few wage earners in the private sector supporting everyone else, salaries and benefits for public workers are generous. Greece has the most generous pension system in Europe (11.6 percent of GDP).

This was accomplished by running up huge deficits that have become unsustainable. Now a day of reckoning is at hand.

The Greek government has promised severe belt-tightening an increase in the value-added tax to 23 percent from 21 percent and reductions in public sector salaries and benefits in order to win a rescue package. That's why Greek workers are rioting. The party is over.

The Greek economy's failings can occur wherever political leaders use the public treasury to reward favored voting blocs and whenever governments fail to live within their means. Thus, it has implications for our own economy, from Washington to Miami.

Although the U.S. deficit is not nearly as bad as Greece's, long-term budget imbalances created by Social Security and Medicare obligations could sink our economy. Now is the time for Congress and the Obama administration to find solutions. The longer lawmakers procrastinate, the greater the inevitable pain.

Local governments have to learn to live within their means, too. Budgets, including salaries and benefits for public employees, must be brought in line with revenue from taxpayers.

Don't think the problems of Greece can't happen here.