More lessons from Greece: The Importance of Basic Belief in Government

Greece’s current fiscal and financial crisis easily reminds us that governments can get too big to succeed, but its more important lesson may lie elsewhere – so obvious that it’s sometimes hard to see.  Greece should make us mindful of the two most important prerequisites for a good society.  They are the existence of both a legal system and citizens who believe in government enough to obey the law based more on faith than on fear.

One of the earliest and strongest signs that a country has lost faith in its government is tax fraud.  Nobody likes to pay taxes, but in the United States, pay we do.  The tax code and forms are too complicated for most of us, so we turn over our information to accountants and other tax specialists.  We could fail to disclose some of our income, but most of us don’t.  We have a sense of national community, and we support it.

GREECE

Things are different in Greece.  Tax evasion is rampant in this small country with its huge past.  Greece has a “shadow economy” that’s roughly a full 25% of its GDP.  This is a “cash under the table” sector that exists either to hide activities that are illegal or to avoid taxes on legally generated income.

Greece even has a special word for one popular form of tax evasion.  It’s “fakelaki”, Greek for “little envelope”.  Prices for many goods and services (including medical treatment) are significantly lower when customers stuff little payment envelopes with cash, no receipt given, no paper record of any transaction, any income.

Often times, those supposed to enforce the laws are also on the take. When fraud is uncovered, the typical solution is a three-way split: one third of the taxes owed goes to government, one third to the collector, and one third back to the pocket of the tax delinquent. Estimates indicate that some $30 billion in revenue a year is lost to tax evasion.

It’s hard to raise adequate revenue for federal governments when bribing and cheating are so widespread, and the magnitude of revenue lost through fraud at several levels explains a lot of Greece’s current and growing financial crisis.  $11.4 billion in Greek eurobonds mature on May 18.  With Greece’s poor prospects and credit ratings, it’s nearly impossible to get people in private sectors around the world to buy  $11.4 billion in new bonds at less than exorbitant yields.  But the problem is even worse.  Greece is running government deficits of almost 13% of its GDP, so it needs to issue new debt as well as replace old.   And over the next five years, many more bonds come due.

How did Greece get to this place? Hard to say. Some blame Greece’s troubled past, replete with invasion and foreign domination.  Greece was part of the Byzantine Empire from 1456 to 1929, and during these centuries under Turkish rule, Greeks developed a culture of seeing the government as the enemy “other”. They chuckle over avoiding taxes even as they worry about a new kind of foreign intervention: financial invasion.  A recent poll reveals that more than half of the populace says “aid” from the IMF makes countries worse, not better off.  But Greece is likely to have no better choice than gracefully accepting bailouts from the IMF as well as the EU this month.  Strings will assuredly be attached.

UNITED STATES

While Greece has been a modern democracy for less than a century, America is the oldest continuous democracy in the world, a “new” country with an “old” government.  Europeans settled in a land with a very low number of people per acre.  How they treated the population who got here first is lamentable.  But the vast preponderance of Americans either live in a country whose government their ancestors created or immigrated here by choice, in hopes of a better future because of a vibrant economy backed by significant rights and therefore opportunities supported by law.

As America’s population grows and diversifies, the sense of community is harder to support.  This development alone would lessen confidence in government and the willingness to pay its bills through taxes.  But people are also increasingly distrustful of politicians and not just the level of government spending but also its components.  They don’t like the way things are decided and done in Washington.

The Pew Research Center for People and the Press reports the findings of one of its recent surveys concisely and vividly as follows: “a perfect storm of conditions associated with distrust of government – a dismal economy, an unhappy public, bitter partisan-based backlash, and epic discontent with Congress and elected officials.”  Only 22% of those polled said they trust the federal government “almost always or most of the time.”  Only 19% say they are “basically content” with what goes on in D.C.

It’s hard to get people to accept their tax bills when they don’t like where the money is going. The “Tea Party” chose its name for its historical resonance: the rebellion in Boston over taxes imposed without representation.  It’s a growing movement based on discontent.  Who among us feel honestly represented by our own government now?

America already has a “shadow” or “underground” economy filled with individuals who break the law. Just as in Greece, some of the activities in the shadows are illegal transactions like the marijuana and heroin trade.  The rest is legal business hidden from the eyes of the IRS.  Examples include housekeeping, babysitting, tips for various services, lawn care,  and home care for the sick and elderly.  As in Greece, the employer may be offered two prices: one for documented and reported income and the other for cash under the table.

Our shadow economy is already estimated at 7.8% of GDP, though how we can accurately calculate the hidden beggars the imagination.  Bringing  it to light would broaden our revenue base and help reduce our deficits.  But whatever its real current level, expect it to grow as people lose their confidence in government, and with it, their sense of collective and national responsibility for people outside their immediate neighborhoods and family.

Washington appears to be responding to all this discontent with a legal form of bribery.  Its politicians vote to increase spending for the special interests that got them elected.  The result is deficit spending on course to make us another Greece – but one too big to bail out.

America’s most valuable asset is not our technology or our natural resources.  It is the combination of our legal system, our faith in it, and how the two shape our national character.  We have been a people who believe in the value of honest hard work because we believe in the future and the framework our government provides to help us get there safely, fairly, and somewhat predictably.

Greece’s problems teach us the perils of debts and deficits.  More importantly, they should teach us the perils of loss of trust in government as a whole and the disrespect for the law that inevitably follows.

Without law and law-abiding citizens, property rights are minimal or non-existent, and without strong property rights there are neither markets to organize people’s actions nor individual incentives to postpone today’s pleasures for tomorrow’s returns. Economic growth is the best way to solve our problems of deficits and debts while also supporting programs we believe in as a community. Growth requires saving and investing, and saving and investing require belief in a secure future.

Take note, Americans in and out of government.  Look around you and at the polls. We’re losing trust in government, and not just because of unbalanced budgets.  We no longer, as a majority, believe it represents us truly and fairly.  We come to think that the worst special interests are those of elected politicians with debts to their contributors. With growing mistrust of government, we also lose confidence in components of the private sector as well – particularly those big contributors to politicians who then bend policy to support their private ambitions at our expense.  We lose optimism about our own future, and even more in the futures of our children and grandchildren.

We need systematic reform now, while we still have the time to do it thoughtfully and well.  Pretty soon the average Joe and Jill are going to begin to think on these lines: “If people in government and business are all cheating, then why shouldn’t we cheat too?”  Then it will be too late.