Those Who Don't Learn from History

The first thing that I learned in business school is how to perform a case study analysis.  For those who have never read a case study, it is an example of a real life company that has been a smashing success or a colossal failure.  The student is then expected to analyze the case and document the best practices of the successful companies or look for lessons learned from the unsuccessful ones.  Harvard Business School has become famous for teaching via the case study analysis and it is now a staple of the business school and corporate worlds.

One place where this methodology is not applied is politics.  With elections coming up this year and politicians on both sides dusting off their ideology and rhetoric, I can’t help but wonder why no one is mentioning policies that have or have not worked in other countries.  More specifically, I wonder why no one is looking at Greece, which is in the midst of imploding economically, for lessons learned.

Since no one seems to be doing this, this post will serve as my own brief case study analysis of Greece’s current economic crisis.

Overview of Greece’s Economic Situation:

Greece just received its second bailout from the European Union (EU).  This bailout was required because Greece did not have enough funds to make the payments on its debt.  As of the writing of this post, Greece’s total public debt is approaching 175% of the size of its economy.  Long story short, Greece owes its creditors almost twice as much as its economy is worth.  This is an untenable situation and it is only a matter of time until the country goes bankrupt.

These economic problems are a direct result of two factors.  First, Greece’s debt load is growing.  This is happening because Greece routinely runs a budget deficit.  A budget deficit means that its government spends more than it earns.  Like any individual, household, or organization that spends more than it earns, Greece has had to offset its deficit with debt.  Over time this debt has grown into the monster that faces Greece today.

The second issue is that Greece’s economy is shrinking.  This is because Greece adds very little to the world economy in terms of value.  Its economic growth was dependent on increased government spending and consumption of imported goods, products, and services by its citizens.  Much of this consumption was financed with debt and, as the availability of debt dries up, the country is left with no more money to spend.  The key economic indicator of this issue is the massive trade deficit that Greece has.

Budget Deficit:
Budget deficits occur when a country spends more than it earns.  Greece’s budget deficit in 2011 was roughly $30B or 11% of the value of its economy.  There are two reasons for this budget deficit.

·         Greek citizens don’t pay their taxes:  It was estimated in 2005 that tax evasion amongst Greek citizens was close to 50%.  This statistic has improved slightly since then to about 40%, but the current Greek Finance Minister still estimates that the Greek citizens and companies owe the country close to $50B (€37B) in unpaid taxes.

·         Greece has one of the most elaborate welfare systems in the world:  Greece’s social welfare expenses accounted for close to 32% of its total expenditures in 2011.  This number doesn’t sound like much, most EU countries have about the same ratio, until you factor in that Greece only reports universal healthcare and pension costs.  Educational subsidies and other social program costs are not reported.  Also, the Greek retirement age of 57-58 is tied with Italy for the lowest in the world, so the government is providing those benefits for a higher proportion of its citizens’ lives.

When you combine the two points above, it is easy to see why Greece continually runs a budget deficit.  Its citizens have grown to expect the state to pay for a large amount of benefits without increasing (or even collecting) taxes to pay for them.  

Trade Deficit:

Similarly, Greece’s trade deficit issues stem from three main problems within the country.  These problems are:

·         Greece joined the EU:  By joining the EU, Greece joined a free trade zone.  This eliminated all trade barriers between the various European countries.  It also placed the Greek workforce in direct competition with work forces in other countries.  This became a problem for Greece and other EU countries because one of the world’s most efficient work forces is based in the EU: Germany.    

·         Greece joined the euro common currency:  By joining the euro, Greece became tied to a currency that was among the highest valued in the world.  This meant that it could no longer compete with other countries based on paying low wages like China does.  It had to either be more efficient than its competitors or go bust.

·        Peculiar Greek economic policies and regulations: Greece has some very usual policies that are aimed at protecting its industries and workforce.  Instead, they stifle growth and produce inefficiencies.  An example is: annual wage increases in Greece are not determined by the companies who pay them.  Instead, they are determined by negotiations between the state and trade unions.  The result is that Greek citizens have enjoyed close to a 10% raise every year for the past decade.

When combined, these three factors have made Greece incredibly uncompetitive from an economic perspective.  The result is that it is cheaper to buy goods produced in other countries than it is to buy domestic goods in Greece.  This means fewer jobs for the Greek citizens and has produced an unemployment rate over 20%.  It also means that the Greek economic decline will continue to mirror cuts in government spending since there is very little else in the country to drive growth.

Lessons Learned:

My big takeaway from this exercise is that all of the root causes of Greece’s economic meltdown are side-effects of running a modern democratic system.  This is because Greece politicians did all of the things that are politically popular in a democratic society.  They cut taxes, reduced the retirement age, increased government spending on social programs and pensions, and put in place numerous policies to protect the interest of trade unions and Greek workers.  Despite the popularity of these programs, Greece is failing.

The lesson learned from Greece is therefore that politicians in democratic governments have a responsibility to their citizens that is similar to the responsibility that parents have to their children.  They need to be the ones who tell the citizens "No", despite how unpopular that may make them.

You Might as Well Face It, You're Addicted to...

….war.  Well, maybe not you personally, but the modern day United States certainly is. 

Don’t believe me, surf the web for an hour or so.  You’re bound to come across articles calling for the US to intervene in Syria or forecasting a coming conflict with Iran.  You can also find stories about the recently completed war in Iraq or the ongoing war in Afghanistan.  Lastly, if you look hard enough, you can find a statistic like the following: the US accounts for 43% of total world military expenditure.  This is larger than the next 14 countries combined.

Prussian military strategist Carl von Clausewitz once stated that "War is the continuation of policy by other means" and no country in history has embraced this theory like the modern day United States.  This has naturally led to series of literature to be generated for and against the US’s aggressive foreign policy.

The “Against” Perspective:

The “Against” perspective can be represented by author and former US soldier Andrew Bacevich.  In his book “Washington Rules”, Bacevich argues that the US leadership in both parties has come to view war as its solution to every problem.  His chief point is that since the start of World War 2, the US has constantly been engaged in a global struggle against some sort of –ism: first Fascism, then Communism, and now Terrorism.  Bacevich presents multiple examples of how US leadership has used covert operations, threat of nuclear war, direct military intervention, and even trading policies to directly support ongoing wars against global enemies. 

Bacevich’s conclusion is that this policy has led to the US being universally feared and resented.  He also calls for the US to renounce its claims on bases like Ramstein in Germany and Okinawa in Japan and to return its troops home to protect sovereign US territory.  Doing this, he argues, will free up billions of dollars in government funds to address domestic issues, as well as improve the US’s standing in the global community.    

The “For” Perspective:

The alternate view to Bacevich is championed by George Friedman of Stratfor and the books “The Next 100 Years” and “The Next Decade”.  This view is that the US, as the dominant global power, has a great incentive to use war as a tool to disrupt potential competitors.

From this perspective, the US goes to war because it can.  It doesn’t have to win every war.  Instead, it just has to “mess up” the other side enough that they are no longer a challenge to the US.  In this light, the wars in Afghanistan and Iraq make perfect sense. 

The Taliban was responsible for the 9/11 attacks on the US and was seeking to use its attack to recreate the Islamic Caliphate.  A reborn Caliphate would have united the Middle East and presented a severe threat to the US’s oil interests in that part of the world.  The US intervened and, despite the war dragging on 10 years later with no end in sight, has prevented the creation of the Caliphate.  It has also disrupted the Taliban by eliminating most of its leadership.

The same story applies to Iraq.  Many of the operatives who participated in the 9/11 attacks came from Saudi Arabia and Iraq.  The US therefore invaded Iraq because it is the central hub of the Middle East.  From there, the US could attack Saudi Arabia, Jordan, Syria, Iran, or Kuwait.  This served a reminder to these countries of the consequences of crossing the US.  It also prevented them openly supporting the Taliban and its goal of creating a Caliphate.

My Take:

I hate to admit it, but I am torn on this issue.  My heart lies with Bacevich’s perspective while my head sides with Friedman.

I agree with Bacevich because war requires the sacrifice of US soldiers and can often result in their death.  It bothers me that US leadership can sacrifice their lives so easily.  I also dislike the fact that these wars syphon off billions of dollars that could be used to address problems on the domestic front.  Lastly, I dislike the fact that this warmongering has created a negative view of Americans abroad.

I agree with Friedman because his view is logical and appeals to the engineer in me.  The current global system works for the US.  These small wars are therefore a form of preventative maintenance on the global system.  They are aimed at isolating and correcting potential problems before they become too large and disrupt the overall system.  While painful and sometimes expensive, they are nothing compared to the pain and expense of a significant system failure.

Conflicted, with my heart fighting my head, I therefore turn to the creators of South Park for their wisdom.  Paraphrasing the message of the “I’m a Little Bit Country” episode, I believe that both sides are needed.  The Friedman’s of the world are needed to keep the global system working for the US and to prevent catastrophes like WW1’s and 2 from happening again.  The Bacevich’s of the world are needed to act as the country’s public conscience and prevent the country from abusing its power.  They also prevent the rest of the world from hating the US for being openly bloodthirsty and ruthless.

As South Park states, this allows the US to be ruthless in pursuing its goals while not seeming bloodthirsty.   This is called “having your cake and eating it too” and it’s the beauty of the American democratic system.       

The United Kingdom Goes Back in Time

Last week, I had lunch with a couple of European friends.  One friend is German and the other Greek, so they argued vociferously about the European Union’s (EU) current debt issues throughout most of the lunch.  The only topic that they seemed to agree on was the recent announcement from the EU leadership regarding changes in the Eurozone’s structure. 

A quick summary of this recent announcement is as follows: 25 of the 27 EU countries recently voted to ratify changes to the EU charter to allow for closer economic and national integration.  The two nations that did not vote to approve the changes were the Czech Republic and the United Kingdom (UK).   The Czech Republic is expected to eventually approve of the changes, while the UK flatly rejected the changes.

This news is important for two reasons:

1.       The United Kingdom has a history of disrupting mainland European attempts at integration.

2.       The attitude that the UK’s actions engender from the mainland.  As my two friends put it, “Damn Brits!  They’d rather be little Americans than real Europeans.” (I paraphrased because their adjectives were slightly more colorful than mine.)

Traditional Perspective:

Traditional historical literature places the UK in the role of the reluctant hero.  Since the start of the 19^th century time, the UK has played the role of protector of freedom in Europe.  It has entered numerous European wars to oppose aggressor nations seeking to dominate the continent and subdue smaller nations.  These wars in include the Napoleonic Wars against France, World Wars 1 and 2 against Germany, and the Cold War against the Soviet Union.  In each case, the British Isles remained unconquered and the UK acted as the lead partner in a coalition that eventually triumphed and liberated the European mainland.

Alternate Perspective:

“The Pity of War: Explaining World War 1” by Niall Ferguson offers up an alternative view on the UK’s role in World War 1.  I think this perspective applies just as easily to all of the wars mentioned above.  Viewed from Ferguson’s alternative, the UK is not the reluctant hero but the meddling outsider who continually prevents European integration and causes the cycle of conflict on the mainland to keep resetting.

From this perspective, 19^th century France, 20^th century Germany, and Soviet Russia were not aggressor nations that were led by megalomaniac emperors or dictators.  Instead, they were all mainland powers that were seeking to use military force to create a version of the current EU under French, German, or Russian leadership.

Modern Day:

This alternate perspective is important because Europe is attempting to integrate again.  This time, the mainland powers have changed their strategy.  France and Germany are cooperating rather than battling each other and Merkozy, German Chancellor Angela Merkel and French President Nicolas Sarkozy, are the unofficial leaders of the EU.  Russia, while not an EU member, is also cooperating with the Franco-German dominated EU.  It is participating in the EU economy by playing the role as energy and raw material provider, much like Canada does with NAFTA.

This cooperation between the three mainland powers is a new twist in Europe and has led to the greatest level of integration that the continent has ever seen.  It will be interesting to see if this integration can continue.  It will also be interesting to see if the European cycle of war gets reset and a new struggle breaks out for control of the continent.  After all, the UK just drew the first battle line by declaring itself not a part of Europe after all.