Not a Fable, Unfortunately
By Arnold Kling
From The Telegraph:
On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008.
Of course, rumors are flying that Greece will restructure its debt. Many economists, particularly here in the U.S., have argued from the beginning of the Greek crisis that restructuring as inevitable.
Meanwhile, the Washington Post has an editorial praising the Maryland legislature for standing up to the public-sector unions and curbing pension costs. The kicker comes near the end:
the goal of covering 80 percent of the fund’s liabilities by 2023 depends on what may be an over-optimistic 7.75 percent annual return on the system’s investments.
Oh. So after this heroic effort, in another 10 years the pension might be just 20 percent under-funded…assuming a rate of return over three times the likely growth rate of the economy. (A standard result in growth theory is that the return on capital should on average be the same as the rate of economic growth.)
My fiscal fable was evidently too subtle for a number of readers, who thought I really was talking about a hypothetical private corporation. I was of course talking about over-extended governments. What we are seeing in Europe, Maryland, and the United States is the unraveling of a situation in which the governments have made promises that are impossible to keep. I don’t know how the economics will play out, but I can predict with some confidence that the politics will get really, really ugly. For example, Euro-populism comes across as even less libertarian than Euro-elitism.
Have a nice day.