I’m delighted to present the following commentary on economic crisis and social unrest by my friend Jason Crawford as a guest post here on NoodleFood.
One argument heard against pure laissez-faire capitalism is that it would lead to an increasing “gap” between rich and poor, and that without some sort of “safety net”, “living wage”, or other income or benefits guaranteed by the government, the poor would become angry, resulting in “social unrest.”
Is this concern supported by current events or the lessons of history? What causes social unrest? If we want to avoid it, what should we be wary of?
Well, we’re seeing it right now in Greece. They are rioting in the streets, and people are getting killed:
Greece’s 24-hour nationwide general strike brought much of the country to a standstill, closing government offices and halting flights, trains and ferries.
At the same time, tens of thousands of protesters marched through Athens in the largest and most violent protests since the country’s budget crisis began last fall. Angry youths rampaged through the center of Athens, torching several businesses and vehicles and smashing shop windows. Protesters and police clashed in front of parliament and fought running street battles around the city.
Witnesses said hooded protesters smashed the front window of Marfin Bank in central Athens and hurled a Molotov cocktail inside. The three victims died from asphyxiation from smoke inhalation, the Athens coroner’s office said. Four others were seriously injured there, fire department officials said.
(“Europe Crisis Deepens as Chaos Grips Greece”, WSJ, May 6.)
It’s not any kind of gap between rich and poor that they’re rioting over. It’s an economy that’s collapsing under crushing government debt. Specifically, people see their wages and benefits cut as the government tries to reform, and they don’t like it:
Artemis Batzak Panayou, a cleaning lady working for a local government, saw her €1,200 monthly salary, on which she supports three children, cut by €250 at the beginning of the year.
A CNN Q&A explains:
So what is Greece doing?
As already mentioned, the government has started slashing away at spending and has implemented austerity measures aimed at reducing the deficit by more than €10 billion ($13.7 billion). It has hiked taxes on fuel, tobacco and alcohol, raised the retirement age by two years, imposed public sector pay cuts and applied tough new tax evasion regulations.
Are people happy with this?
Predictably, quite the opposite and there have been warnings of resistance from various sectors of society. Workers nationwide have staged strikes closing airports, government offices, courts and schools. This industrial action is expected to continue.
What’s frightening is that America is arguably on the same course. In February, the Financial Times ran an editorial titled “A Greek crisis is coming to America”:
Even according to the White House’s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.
Around the same time, Slate had a piece titled “The Future is Greek”:
[A]side from our very large budget deficit—at the moment, 9.9 percent of GDP and climbing—we also have liabilities that are rarely acknowledged. The costs of Medicare and Medicaid are going up, as is the cost of veterans care. Markets assume that the vast debts of Fannie Mae and Freddie Mac are underwritten by the government, and someday the government might be called upon to pay them. No one is lying about these things, but no one is talking about them very much, either.
What’s the root cause?
The Greeks blame corruption. Many commentators blame fiscal irresponsibility. The Slate piece refers to “political deadlock”.
But corruption and fiscal irresponsibility are endemic to socialism, and political deadlock is inevitable when a government promises people benefits without working. Sooner or later the money runs out, but the moral premise that the system is built on prevents true reform. The Slate piece noted:
Try to carry out any social security reform in Greece—raise the pension age, stop early retirements—and watch what happens: Mass rioting followed the passage of a pension reform bill in 2008, and the government became so unpopular it lost the next election.
And Ray Niles, an investor and commentator, said this in an online discussion:
I’m wondering when the Greek disease will spread here, though. My prediction: Unless things are reversed, we will see similar riots here in 20 years, and for a similar reason. The riots will be by the majority entitlement-recipients demanding ever more, in defiance of reality.
That’s why, in terms of keeping peace and civil order, I’m worried, not about any kind of income “gap” or inequality, but about establishing any kind of moral entitlement to unearned benefits. There’s only one place that leads: to an entitlement mentality and eventually a crisis like this one.
Jason Crawford is a tech/business geek in San Francisco. He blogs about startups at http://jasoncrawford.org.