Bankrupt Economics

They are called PIIGS – Portugal, Italy, Ireland, Greece, and Spain – for running deficits and high sovereign debts. Plus likening entire countries to swine is just plain fun. The group has clearly been consuming too much, overstuffing itself, making a muddy mess of an economic system that would otherwise just produce more and more prosperity.

Years ago at Columbia, a pre-tenured economics professor laid out the rudiments of international trade theory to my class of would-be public policymakers: Trade made everyone better off, so long as the trading partners specialized in the production of goods in which each had the competitive advantage. A country held the competitive advantage if it produced some product more efficiently than its trading partner. The theory, the professor lectured, a version of which Adam Smith first articulated in Wealth of Nations (1776), has been refined and complicated since then, but the idea of specialization and the benefit of trade have long been unimpeachable facts of the global economy. (There is a quick overview of international trade theories here.)

The case of Greece, and perhaps soon those of the others in the pigpen, suggests that the economic model, like the PIIGS themselves, is bankrupt. The country has failed to find enough of a competitive advantage to make it without borrowing. Last year, the value of imported goods ($64.27B) was three times as high as the value of exports ($21.37B). Perhaps Greeks should have lived within their means, but that seems an impossible proposition when so many political and commercial forces equate consumption with well-being, and when lenders are willing to lend. Or perhaps the country’s economy should have been more competitive, code for saying workers get paid too much and that they enjoy too much job security. The International Monetary Fund’s conditions for bailing Greece out are predicated on this argument, and so wages are about to be cut and workers are going to be laid off.

Attempts at economic specialization, too, have been disastrous for the society and the environment. Tourism, for example, has put money in Greek pockets, but at the cost of transforming local societies and of unsightly and environmentally destructive development. Next time you’re visiting one of the Aegean islands, consider that your drinking water is likely shipped by boat, that your waste water is probably going untreated into the sea, and that your solid waste is incinerated out in the open, but out of view. After you leave, many of the locals you saw will head to Athens for the winter, or they will stay with little work to do, mostly just waiting for you to return and reaffirm their competitive advantage.

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