Greece again serves as an example, if a poor one

Greece is a small country with an outsized influence on the world. With an area the size of Alabama and a population just over half the number of people in New York City’s metropolitan area, it has managed to bring the European economies to a crisis point.

Greece is correctly renowned as the “cradle of democracy” and we can trace much of our western civilization to its creative energy. The relatively short-lived democracy of ancient Athens was eventually snuffed out by its authoritarian neighbors and its own oligarchs, but it has lived on in the minds and hearts of history’s thinkers, dreamers and doers, including our own founding fathers.

Modern Greece is once again providing us with a history worth thinking about. Its present day clashes between politics and economics produce more than collateral damage, although there is plenty of that. They provide a look into the future for the many countries that will face equally difficult decisions the near future — for much the same reasons and root causes.

With all the bickering and quarreling that go with it, Greece is a democracy and has been for enough years to be responsible for, or at least party to, the decisions that led to today’s mess. Because of this we should be asking, “How could things go so wrong?”

Democracies, after all, are the countries that conquered hunger, no minor achievement in this world. As one report on world hunger pointed out, people don’t starve to death in democratic countries. And, compared with the other forms of government out there, democracies have provided exceptional economic growth and prosperity for their citizens.

By their nature democracies tend to be open and for the most part there is nothing secret about the decision history that placed Greece in its current predicament. It is all there for us to examine, and we should. It provides a lot of insight into the life cycle and development of government as an organizational entity interacting with its economic environment.

In their beginnings, democratic governments usually concentrate on such things as self-defense, domestic order and roads, accepting the economy for what it is and simply diverting a small portion of its proceeds to support necessary public services.

As a democratic government begins to mature as an organism it seeks to “promote the general welfare” by encouraging the growth of the economy through incentives and control. Eventually this process produces a government that is large enough to become a replica of the market system, making decisions on resource allocation that mimic the price system in a sort of karaoke economics.

It is those decisions, and how they are made, that bring the government organism into an unhappy confrontation with economics. Government’s karaoke economics breaks down at its weakest point — resource allocation.

The reason why resource allocation is the weakest point is that while the goal is economics, the decisions are political. Sometimes this makes little difference, but, over time, the politically driven decisions accumulate burdensome costs.

In the free market price system, resource allocation is a brutally judgmental process of sorting out the quick and the dead. It is unforgiving of mistakes, and the businesses that make them simply disappear.

Government’s imitation of the price system is less harsh and more tolerant of mistakes. It is more likely to increase the funding of mistakes than to abandon them, largely because the demand for the resources hasn’t gone away.

Government’s resource allocation decisions are made to satisfy constituencies which comprise, control or influence votes. Unlike a product that no one is willing to pay for, a government service doesn’t disappear because it was a mistake — because the constituency doesn’t disappear. In fact, the constituency may grow stronger because of the misallocation and demand even more resources.

Active constituencies are a big problem for karaoke economics because they only see their spending decision and care little or nothing about the overall economic picture.

The shortcomings of karaoke economics in Greece are virtually identical to the versions in place in the United States or in France, Italy and Spain. Our own spending decisions have come to haunt us with a debt that threatens to block out the sun.

Each country, though, including our own, has in its own way chosen to avoid a confrontation with the harsh reality of economics. Instead it has preferred a stew of platitudes and politics.

Somehow, politics has to reshape itself to fit with economics, and that will take innovation and leadership. It is possible, of course, that the economic predictions are wrong and Greece will inspire us once more by finding a way out of this. More likely, though, it is now our turn to show the way by solving the problem.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.