The world economy in crisis. Europe in shock. Riots, mass unemployment, extreme parties on the march. It was not supposed to be this way. After the war, the European Union was built to secure cooperation, prosperity, and peace in Europe. And later, a common currency was introduced, the Euro. It resulted in a long boom, but it ended in a spectacular bust. Where did Europe go wrong? And is the United States right now repeating the same mistakes? Hello, I’m Johan Norberg. And this is Malmo…Sweden, my hometown. If we had been standing here in the Middle Ages, we’d be looking at the busy piers of the waterfront. It would be lined with ships right here. In the 14th century those ships could carry more than 30,000 barrels of herring, carried to different European ports in a single year. At that time, Malmo was part of the Hanseatic League, an economic union of cities not unlike today’s European Union. By the 16th century, Malmo was known throughout northern Europe as a city of savvy business energy, and of a commitment to commerce. No one better represented the entrepreneurial spirit of Malmo than Jorgen Kock. In the 16th century, he was a very successful banker and trader…and the mayor of Malmo. This building was Jorgen Kock’s home, and the center of his vast business operations. He even had his bank there up on the second floor. Now it’s a restaurant and a conference center. This place…and this city represents the entrepreneurship and the international trade that once made Europe prosperous. So, it makes it an ideal place to hold a conference on the crisis that is now shaking the world. Don Boudreaux, an economist from the United States and I have invited some of the world’s leading young thinkers. They’re here for a couple days discussing the reasons for the crisis that is now affecting Europe; the potential for that crisis to affect the United States, and how it might affect the day-to-day lives of all of us. The whole debt crisis started in Greece. Is there more involved than financial stability? Well, there’s no connection between the people of Greece and the politicians. Every rule has been broken, every rule has been broken. We’ve all seen the stories, or read the newspaper reports. Are the conclusions we draw from them universal? Now, you gentlemen have discussed the economic and financial aspects of the debt crisis. I wanted to touch upon another subject, namely the consequences for freedom and democracy, essentially those values that the EU is supposed to safeguard. I mean, and now we see that with the fiscal compact, and the moves towards even deeper political integration that the powers of national parliaments- and ultimately citizens to influence the EU is diminished, and I think that will create a backlash that will make it difficult to manage the situation. Would it be better like to have measures take now, rather than postponing it? Particularly in Southern Europe, you will lose political support for the measures that need to go through. And I think what you are going to see is the rise of nationalist movements, of the left and the right. You see that in Greece now. You see Greece might become the norm; first for Italy, for Spain, for Portugal. I mean…even in Austria, for example. Levels of hostility to the European Union are now running at close to 50 percent. So those values of freedom of democracy are not as old everywhere in Europe as we’d like to think, and should not be taken for granted. Also, I think that the concept of liberty in the European Union has been skewed from a focus on basic freedoms towards a much more expansive concept of freedom. If you look at the Charter of Fundamental Rights, for instance – it does not only protect freedom of expression, and these values…it also protects consumer protection, social security, and all these things and you see that European courts are now starting to make decisions that could result in austerity measures being declared a violation of human rights. The whole debt crisis started in Greece…the canary in the coal mine… if you will. I went there to see what might be in store for the rest of us. The Greek government falsified the public account to make it into the Euro. And as a Euro member, they had access to the European credit card- so they could borrow even more. They even lied about the budget deficits to their own people! But at the same time, it made it possible for them to buy votes by increasing wages; by increasing public spending. When these lies were exposed, the lenders didn’t want to lend more to Greece and the politicians had to tell the voters that, “We are out of money.” At this point- people reacted and protested, but not against spending, but against paying for it. So instead, they’ve started supporting extremist parties; providing simple solutions and blaming the usual scapegoats. It’s always nice to be able to have your cake and eat it, too- and send the bill to somebody else. Diomidus Spinellis is a computer engineer whom the government turned to- to reform the tax system. I was very optimistic… because all I could see around me was low-hanging fruits; things I could see that you just have to lift your hand and pick them and you can make a change. Many of those low-hanging fruits are still here after two and a half years… and this makes me sad. Revolt in order to find something better…from the annual policy in Greece. Have you lost faith in the politicians? Yes…yes. There’s no connection between the people of Greece and the politicians. We feel completely that no one…no one respects our wishes. The prices are going up… the salaries are going down…yeah…people have to cope …with the situation. When I had my exams to get into the university, I was thinking that, “Wow! I’m going to become a pharmacist, I’m going to have a good job; I’m going to have a drugstore; I’m going to have a good life.” And now…I just…I hope I get 30 Euros in 8 hours by becoming…by being a waitress. And I don’t know what I will do. It’s about 20 % of the people in…of the population lost their job during the last 5 years. 20 % is unemployment. And that’s why many people leave Greece…in order to find…to have a better future. Do you see young, talented people leaving Greece? I see it every day. People…colleagues here from my department have left for universities abroad- we’re more likely to draw many high-quality people with very good qualifications here. And of course, those were easily hirable abroad. Stergios Sifnios runs an orphanage in Athens. The situation right now in Greece…it’s very, very bad because the social services…the state social services are not working well. It must have been… gone very far… a parent says that, “I’m so worried about my future; I can’t keep my child in the family.” Can you tell us about such an example? What motivates them? What do they say sometimes? You must understand that…a parent to come to ask us help, especially in Greece, where the ties in the family is…or was very strong, it is very strong… So you can imagine if a parent come to us, to ask for us help- it means that you really…the problem is very deep. I’m frustrated and most extremely worried by the turn things are taking, by the rise of population; by the rise of French parties who are promising empty words. Gabriel Sakellaridis is one of the leading economists of the new popular leftist party: Syriza. Right now we have a situation that is impossible, in my point of view, to have all this debt burden repaid. But you don’t object to the bailout money going to Greece; you object to the conditions that you get those loans on? Yes. I mean for us…what we want to say is that right now- the money that we receive only go in order to repay our debt. I think Euro zone is going to break up under these policies, because they are not only implemented to Greece- they are implemented to other countries as well, such as Portugal, Italy, Spain, Ireland. And you see the situation in this country after some months of the implementation of these policies. The situation is getting worse and worse. Are you worried? I am extremely worried. But I want to believe that if I work hard… things are going better. I think that Greece shows that when you… ignore economic realities, and you build a… political project on basically sand, there are huge dangers to those ideals that you want to safeguard. And that affects the average Greek, whose future is being eroded. The problem in Greece is that Greece was allowed to be a free rider, so it came in on an illegitimate basis. But people thought that… Then that’s a political decision! Well…it is and it isn’t, in the sense that it’s a political decision not just made by the Greeks, but made by everybody else as well. Yes, exactly, at the European level. The word austerity is now giving the creeps to pretty much all of Europe, but notably in Greece, because nobody wants to see that their standard of living forcedly going down because of the government, because of the mistakes that the government made. Do you think that this is a way out? It is! I mean…living beyond your means you know… stops at some point; you can’t do it forever. Also you can’t spend other people’s money forever, and politicians have been doing that, and I understand that Greeks have been living beyond their means for a long time, but they will have to change that, especially people in the public sector. They will have to take the responsibility of…you know… dealing with the situation. People of the public sector, you said? Yes! Yes. Now, say you take an average worker of this public sector in Greece… a teacher, for example. How is she, or he held responsible for what’s going on in the country? When government runs out of money, then it’s obvious that you will lose your job. So I don’t, ..see any reason of these people saying, “Oh, we have these jobs… we need to keep them. We haven’t done anything wrong.” Now…if If I had to pinpoint one responsible for what’s going on, in Greece, in Europe just in general, it would be the financial sector. It would be the urge, the greed- that’s driving people to look for more profits. That’s why so much money has been invested in bonds… in Greek bonds, for example, because they were promising a higher yield. Everyone is self-interested. It’s not just banking sector, it’s you and I. We have…we are self-interested; so we act based on self-interest. So…banking sector is not an exception. Second thing related to that…no one is too big to fail, even banks. You know…if they make mistakes they should take responsibility for that. And I think it is government that is saying, “Oh we have to save this bank, or we have to save this company, we have to save these people just because it’s going to have you know, domino effect the rest of the economy. I think that’s a mistake. Brussels is responsible for gathering together many different countries of different level, of different GDP size, for example. Greece just accounts for 6% of the EU’s GDP. But altogether, it’s their fault basically that this union was founded with a common currency which is tying it up so closely together. But with a different budget, with non-coordinated non- harmonized budget and fiscal policies, and that appears to be a way out. I mean, if the EU had a balanced fiscal policy, as in the taxes would be pretty much the same level everywhere, that would create a homogenous labor market, for example, in the EU. Well, I agree that, you know, that would be a solution to have more stable Europe. But I don’t think that’s good for the economies of Europe. I think it’s better to have the position among them in terms of the currencies they have, in terms of their fiscal policies, in terms of the taxation. So I would actually argue that we should go back and abolish the Euro or have even like, you know, various Euro areas. But you know, you have to remember that Europe has not been the same every 5, 10 years. I started living there when it was only 12 countries. I left it when it was 15 countries… now it’s 27 in the EU. And they had political goal, disregarding the economics. And that is haunting them, and the sooner they face the truth, the sooner we will be able to get out of the crisis. So really…the only certain thing about this situation is its complete uncertainty, wouldn’t you say? Yeah. I would agree. Hey, you mentioned political leadership, and that’s exactly what we looked at with the film crew in Brussels; the fact that they knew that they were going to have problems with debts, with deficits and easy money. So they built these rules and institutions to deal with it, but the problem was that in the end, no one cared about them. It’s a sorry tale, it’s a sorry tale. It could have been done so much better with a little bit of courage a civile, or “civil courage,” if you like. When the sovereign debt crisis exploded, the people of Europe looked to Brussels, the home of the political elite. This was their opportunity to show what they are made of. In 2002, the EU said it had strict rules on debts and deficits. In 2003, they broke those rules. But there was one thing it would never do…bail out a country that had borrowed too much. In 2010 they did. But there was one thing that they would never do: They would never buy government bonds from countries that had borrowed too much. Just the next week they did. Now they say they have new strict rules on debts and deficits. The question is: Will they stand by their words this time? This is Fritz Bolkestein. As a former member of the European Commission, he has experience from the top level of European politics. Why does this happen again and again? They said that we had the Stability Pact and then they broke the rules and nothing happened, they said that they wouldn’t bail out any particular country, but then they bailed out Greece. Every rule has been broken, every rule has been broken; every remedy that now is proposed…infringes the original treaty. What was the discussion like in the Commission when the rules were broken? Very little, very little, very little. Is it fair to say that a lot of people in influential positions knew that there were problems? Yeah. Early on? Yeah. But they didn’t really have the guts to do something about it. That is true, I afraid that is true…because the situation in Greece, and also in Italy was known- but not acted upon. I think the European Union is a marvelous thing, if only because it’s kept the peace. I was born in 1933, so I know what I’m talking about. And that is now the normal situation. It has never been the case, now it is the case. So I am a supporter of the European Union, but what we needed was a little bit more common sense, and a little bit more of guts. Then I think we would not be in the pickle that we are now in. Isn’t there a lack of credibility right now for the Commission? It began with a fiscal pact on debts and deficits, and just one year later several countries broke those rules. But at least you would never bail out countries that broke the rules. And in 2010 you did- but at least you wouldn’t buy their sovereign government bonds, but then you did. And now we have this new fiscal pact, and you have new targets for Spain’s deficit and you have already renegotiated that… that deficit rule. So the question is: Why should we take your word for granted this time? It’s very important to differentiate very clearly, the political decisions which are based on statistics, and statistics itself. And I think that in cases which you mentioned statistics was published correctly, of course with that problem was Greek deficit figures for 2009, and actually our experts helped to solve these problems. By letting Italy in when it was not satisfying the criteria, they could later not very well refuse Greece. That is the true reason why Greece was let in- not because they falsified their statistics, which they did of course, but because the European Council- which is the heads of states and governments, thought that they could not refuse Greece what they had allowed Italy, so there you have the curse of the evil deed. So, it means that statistics already produces a good quality basis for sound decision making, but what we wanted to do to go further and to ensure that never in the future we will have, you know, any political interference into statistics- and this is what we proposed was our regulation. This lack of guts among politicians…what’s the reason for this? What part of human nature explains this? Well, (laughter) that’s a big question. I’m not really used to talking about human nature. But what I do know is that not many people like standing alone… most go with the herd… although people who stand alone are not necessarily incorrect. What do you think is the underlying cause of the crisis? I gather you think it’s something more than just purely financial matters. The origins of this crisis lie, in my view, in the development of a kind of a win-lose capitalism. Too few people win, everybody else loses. And I think this is most obvious in the world of ordinary people, most people rely on wages. Wages have been falling relative to GDP growth since 1968, so people think labor has been earning less and less. And they’ve made up the difference with debt. I think you’re partly correct, but I’m not quite as pessimistic as you. In fact, in the U.S. wages have not declined… that’s a myth. What’s happened in the last ten years is the Federal Reserve has increased the money supply too much. Government officials have tried to increase artificially the supply of home ownership. I think it’s these more economic factors that drove this bubble and then that bubble was inevitably destined to burst, and it did. We agree that you know that the culture should be improved. I’m in favor of less crony capitalism, less influence to special interest groups. We both agree that those matter; but I don’t think that the culture of capitalism has become so decrepit, and so bad that fundamental change on that front is required. I think the real problem lies with the state, lies with the state’s efforts to prop up its cronies. Actually, just to put it very simply, successful capitalists hate capitalism. And what they do is they conspire often with each other. And this is what all legal cases in competition are about. They’re not about the government, they’re about cartels forming, oligopolies forming, that essentially say to small businesses to people who want to break in – no you can’t, we’re gonna buy you out, we’re gonna stop you, we’re gonna create barriers to market entry. If you were a real free marketer I’d suggest yes have that critique of the state, agree with it… but for goodness sake- look at the history, look at the reality. Let’s also have a critique of the private sector. I have looked at the reality. I’ve actually researched this in great detail. And in the U.S. the history is monopolies are almost always a product of the government and the anti-trust laws, it’s called in the U.S., is used mostly to suppress competition, not to promote competition. Name me one private sector monopoly that has lasted on its own consumers- that did not have any support from the state. Well, I think you can look at what’s happened in food retail. I think you can look at what’s happened in finance and auditing and almost any large business sector, what you see over time is a conspiracy against competition by the dominant players in that market. Reality of the situation is if you want to start a business, if you want to become independent, if you want to innovate now in both my county, United Kingdom and United States- economic power concentrates, they own too much and they won’t let you in. How can you say that? Google just started in 1998; it’s one of the most powerful companies in the world. The thing didn’t even exist 15 years ago! But that’s because it’s a new technological development, in a new market area. But, that’s… And now many people are worried about Google’s monopoly power. And I would… And that exactly makes my point! And I would…no, no, no. I would bet them. Google is free. Google is free! How is anyone hurt by Google? It’s expanded our horizons, our opportunities…as consumers and businessmen. Because you cannot as a small player, as a small business starter – you cannot – the Internet you know, the ideologues of the Internet used to say it’s a great space where the small can come and compete together with the big, but the reality is the opposite. Look at how… …But that’s because Google is efficient! No, it’s not just because of market efficiency. I’m a great fan of Apple. I’m a great fan of Google. These are all good companies who do great things. But what they actually also do- is to create barriers to market entry, is create shut-outs, is to create forms that are, in effect, a form of monopoly power. Now what I find that is really disturbing is- that the modern right can’t see this…it’s blind to this. It’s says, oh it’s just a successful company, and there’s no problem with a successful company. But nobody has thought this in economic thought for hundreds of years until Milton Friedman per versed at the teachings of Hayek. And I think what Friedman did, if I may go on, which I think is so worrying, is he said we are going to have competition law based just on consumer welfare. And consumer welfare, which kind of sounds weird, what does that mean? It means low prices. The only model that we need is low prices, because if we have low prices as the model for competition, monopolies can’t deliver you low prices and they will break. I disagree with you. I think Friedman was right. If you look at the history when government has stayed out, yes you have the large firms. It’s very difficult for inefficient firms to compete with their larger rivals- but consumers benefit. The history of capitalism in America and in Europe tells me that competition is very dynamic. The only way it can be suppressed for any length of time is when it gets government privileges. I think I fear this is ideology speaking, not truth. If you look at… I think it’s facts speaking. I recently went to Greece and I’ve never seen that depth of fear for the future and hopelessness among people, combined with a rejection of the old political class…the sense of that they’ve been betrayed by politicians who promised them everything, and now we see the results of that. And my fear is that this is just the beginning- that this might happen to other European countries as well. I’m coming from France Paris, and I observe some similar symptoms. I mean, public finances, the way of conducting public policy. And French are very afraid of what happens with Greece. My question when I look at France and other countries is that: we always seem to get new politicians to say that, “Look we have an easier way of fixing the problems. We can somehow find the money, or the kind of ways of raising new loans that will make the transition easier.” You are exactly right. I think French always consider that they have been betrayed since maybe fifteen years about. They don’t believe in politicians anymore…really, really…really. This question of betrayal is very important, because we had such an increase of extreme party in France like in Europe, but in France we had the National French gaining 20% in the election. This is the first time it’s so high and this is I think the very, very, the first symptom of this crisis. We have France- which is not believing in Europe anymore, in globalization. They want to protect again, and go back to France and protect itself…and Europe is seen as danger. Before it was Asia, it was China…and now it’s Europe, it’s Europe. And this is such a horrible irony, because the whole European project was supposed to build international understanding and an end to nationalist sentiment and so on. It is a bit paradoxical and sad because people, French people, were very proud belonging to Europe, and now it seems that they are rejecting Europe because of economy position. And people are afraid to see that everything is decided in Brussels for economic items. We have elected a French president, of course, but it seems that Brussels decides for everything. And the French people don’t want that. And they vote against… if we had a referendum in France, I’m sure people rejected Europe. The greatest risk is that there is no trust anymore in any kind of political institution. And when that happens at the same time that we see mass unemployment, people – they don’t get a job. It might even be that they lose savings if we have bank collapses or hyperinflation. Then we’ve seen that historically; that’s how a society completely breaks down. I’d like to know what happens exactly now in the United States? I think that America might be in worse shape than it looks. Partly because they have not really dealt with the last financial crisis and the banks were heavily loaded with unsustainable debts. They didn’t disappear; they were just in a way sort of transferred to… to the government. If you look at the average rate of debt, it’s even worse in America than it is in the Euro system. It’s just that we have a couple of outliers like Greece, like Italy and so on. But America’s future is completely dependent on getting more growth and get down that debt to sustainable levels. If they don’t, they might be the next Greece. If California were a separate country, it would have the world’s 9th largest economy. It’s the home of Apple, Silicon Valley, a lot of agriculture, wine, Hollywood, and yet it has the lowest bond rating of any of the 50 states in America. The people in that building here in Sacramento cannot balance the government’s budget. Why is that? The problem is caused by the politicians making the promises, but then not funding those promises This is David Crane. Although a life-long democrat, he served as a special advisor to Governor Arnold Schwarzenegger. Now he’s heading Govern For California, an initiative to get a few good people elected to the state legislature. I found that even though I had spent all of my life interested in politics and I had backed candidates and I considered myself knowledgeable about political issues, that I knew nothing about what really took place politically in California. The best example I can come up with is in 1999, when it was a dot com boom in the United States and stock markets were doing really well, and the California State Legislature voted overwhelmingly including Republicans. Overwhelmingly, to grant a retro-active pension increase to government employees that amounted to probably two, the issuance of two hundred billion dollars’ worth of debt. And the math that they were employing at that time indicated that the stock market that they anticipated would grow ten times faster in the 21st century than it grew in the 20th century. And I think very few of the politicians actually understood the math. So I think a lot of it is financial illiteracy, and that can only be solved by electing better people to the state legislature. This is Stockton, California located about 2 hours by car from San Francisco. Good Evening. Welcome to a special Stockton City Council meeting… 10 years ago it was booming…filling with Americans and immigrants alike, dreaming of greater prosperity. Now those dreams have died… only the buildings are left. This bankruptcy will ruin our property taxes, which will ruin our schools which ruins our future. …and as our financial people said in the meeting we just came out of, it looks like we’re going to be in difficult circumstances for 10 years. 10 years, and so that seems an endless amount of time to a mayor who hopefully will be here another 4 years…but 10 years to deal with these kinds of decisions and budget cuts and restructuring is really a mountain that we have to climb. What’s the root cause of these fiscal challenges to Stockton? We’ve had some very poor decisions made in the past. There is some agreements made with employee groups that we can’t afford any longer. And there was also a debt that we got into for facilities that were built in Stockton and we can no longer afford. We have millions of dollars in debt that we have to pay off that we simply don’t have the revenues for. The problems that cities like Stockton, California are facing or San Jose, California; the State of California are all problems that were foreseeable many years ago. The leaders at that time spent a lot of money. They, they bonded a number of infrastructure projects that they – because they felt that the money would continue to come in. I think the key is to find a few good people. You know, the bad news is that you have a state legislature, which is governed by people or run by people that are not financially that literate and have these short-term horizons. But the good news is: is that it doesn’t take a change of very many of those legislators to transform California governance. At our organization, Govern for California, we require the following of the people that we were interested in supporting: One: High levels of basic intelligence – which is lacking- seriously lacking among state legislators Two: Financial literacy – which is lacking more than anything else among state legislators. Three: Diligence – I know state legislators who don’t even read their own bills, the bills that they themselves introduced, they don’t read their own bills. Four: Electability – People that will be liked by their fellow citizens so they have a chance of getting elected And Five: And the most important is Courage – and we define courage as the willingness to stand for something greater than themselves. California famously is a trendsetter; where Californians go…much of the world seeks to follow. But where California is going now is not so appealing: unsustainable government debt and looming municipal bankruptcies. Is California moving toward a dangerous edge? Is the rest of the U.S. and the world following it? From what I can tell, my generation is the un-greatest generation perhaps that’s ever lived in the United States. We cut our taxes, we issue debt, we make promises that we don’t fund and we leave it all for the next generation to handle. Tanja, you’ve been living in the United States for, for quite a while, right? Yes, 7 years. 7 years? I mean- you can judge, do you think the U.S. is heading in the same direction as the EU? I think so. Unfortunately, it is… especially with the government spending that is going out of proportions. It’s not just, you know, the current president, also the previous president, even though he was calling for economic freedom and saying that he will do anything in order to make the country freer, he did just the opposite. So, yes…America is on the path to collapse as well, on many levels. I think a lot of Americans are not in synched with the reality, but if you look at our past, there have been countries that prospered, and then they collapsed because of their mistakes. I think no one is untouchable, and America is behaving like it’s untouchable. So I think America is losing the grip, and actually the competitiveness in the world. Let’s take California for example, what’s going on over there? A very bankrupt economy. Exactly! It’s suffering a huge budget deficit and you have cities filing for bankruptcy. Businesses are moving out of California to the nearby states. And the other states are taking advantage of that, which is… I mean a normal process. I think what we are forgetting here right now and what the world has been forgetting the past decade or so is that there are always good times, and there’s alway bad times because of business cycles or economic cycles. That’s why so many people were misled into thinking that the market will only continue growing. That’s why so much money was pumped into the Greek economy. That’s why so many people did not see this crisis coming in the first place. I think it’s known as we all know… on a globalized world like as the subprime mortgage crisis that started in the United States and moved into Europe. I think that in all likely chances that the current Euro crisis may spread out- not to all, into the Atlantic but also into the developing countries…in my view, it’s like a real prospect. But what I think the real crisis for the U.S. is- is that the level of economic shock to the world. If Europe goes down, we’ll push the U.S. recovery back down even in to double-dipping back into recession. And what that means is then it’s very difficult then for the U.S. to recover, because we have jobless recoveries. And if the U.S. can’t start people again into jobs…it won’t solve its debt crisis; it won’t start being productive again. Phillip, I want to get to the point where I think that we agreed that the crisis we are facing- it’s also primarily a productive crisis. From that point- and I think that’s not part of the solution, for this crisis- should also be solving the productivity crisis. What we saw happening was exactly the opposite. The fact that most of the solutions…the portrayed solution was more on the consumer side of the balance. So like…we add the problem like the sub-prime mortgages, and there were needs. And we tried to solve those needs by artificially responding to the demands- rather than answering the main causes. I think that’s completely right…and I think that’s what’s happened is the short-tem electoral cycle that we have prevents long-term solutions. It seems like there’s quite a bit of corruption involved. It’s all about what they personally want. I think my generation is pretty angry about the amount of debt that we’re going to be shouldering. They’re trying to make sure that they’re making the popular choices, rather than necessarily making the hard correct choice. …a culture of borrowing. There’s been a lot of focus on the European debt crisis where countries like Greece are on the brink of bankruptcy. But what about the United States- home of the dollar, the world’s reserve currency? I’m in Washington, D.C. to find out. Today, the U. S. Government is spending over a $1.40 for every $1 that it takes in in revenue. Today, the federal government has accumulated liabilities and unfunded obligations of over $550,000 per household… and growing rapidly. This is David Walker. As long-time head of the U. S. General Accounting Office, few people know U.S. Government finances better than he does. For the past few years, he’s been on a fiscal tour all across America talking about the financial state of the union. The United States is not Greece but then again, Greece is the cradle of democracy; it was once the greatest civilization on earth. It once controlled most of the known world, and Greece is now a mere shadow of itself- because it strayed from the principles and values that made it great. And Greece has got somebody to bail it out – the United States does not. Financial literacy is a particular problem in the United States- and it’s even a bigger problem in the congress of the United States. There’s no way that an American family or an American corporation could run its finances like the U.S. government. Too many of our elected officials, no matter how well- intended, are career politicians; they’re human beings. They don’t want to lose their job. A lot of them think that the people can’t handle the truth, and so they don’t tell them the truth. A lot of them don’t have answers to these problems or, if they do have answers, they involve tough choices. Public pressure is critical because ultimately a vast majority of current elected officials are career politicians, and they want to keep their job. And if the public pressures them to act and holds them accountable for failing to act, then they will ultimately change…because many of their top priorities is to keep their job. There are a number of common denominators between countries, and some of the challenges that exist at the federal, state and local level here in the United States. In many cases, governments have grown too big, promised too much, and waited too long to restructure. I think we just don’t know how to use money. I know that people my age never expect to get Social Security benefits. Hopeful, but I wouldn’t say very optimistic. A lot of people claim that the problem is still the slack capacity, unused workers. Why not just increase demand, employ all those workers; put those factories back to work … Well, it’s important to look at the cases that actually have been working. For example, take Sweden. We have decreased taxes, we have deregulated, and we have cut down on government spending and in 2011 we made a budget surplus of 10 billion dollars. A single data point, right? Look at these other countries: Greece, Spain, Italy – they’re all depressed. The problem is slack capacity… excess capacity….too many workers unemployed. Let’s put ’em back to work. How do you get workers back into the employment ranks? You gotta increase demand for what they do. The only way to increase demand for what they do is for government to spend more, because the private sector isn’t doing it. Well, this is the things that Keynesians always say: Just pump more money into the economy. But it’s important for us to look at all those times we have implemented these kinds of theories and the results have always been devastating. Japan in the 90s, the U.S. in ’01 and ’08. What we do need is free man, free markets and productivity. We as persons are good, we can create things. But we can’t do it when we are…buried under a burden of government regulations. Look, all that’s fine. But when we have massive unemployment, massive excess capacity, none of that’s going to work unless demand is increased- and government’s the only agency that can get demand throughout the entire economy. Well, is there any limit on exactly how much debt we will put on our children and our grandchildren before we realize that this way of thought is not working? Is there any hope the situation, we will not, we will all be Greece in 15, 10, 5 years? During the last two months, I have met more immigrants from Ireland, Greece, Spain, in Stockholm, in Sweden… than I have during my entire life before. Is this witness of a well-functioning idea, of a good solution to a very big problem? Maybe Ireland is not spending enough money. Maybe they… the money supply…should increase in Ireland. Maybe fiscal deficits in Ireland should rise. Let me ask you about a more specific problem though. So you know, we have these problems with banks here, and in the U. S. Surely, the only way we can save the banks, are, is through, more… government support for the banks. Well, once again, we can look to a very recent example. The European Central Bank has issued one trillion Euros, in the liquidity means to the European banks. And what happened was that Spanish bonds went down for about one month, and then it went right up again because this is not a sustainable way of solv…solving the solvency issue in Europe. Isn’t the problem though austerity? Austerity is sweeping across Europe, and austerity is what’s keeping the economies from growing, it’s what’s keeping the banks in trouble. We just have to open the spigots, all this austerity stuff, this is old-fashioned economics. We’ve learned, since Keynes, that we need new stuff, spending. Well…there’s been a lot of talking about austerity in Europe, in Spain and other countries, but if we really look, what kind of measures have been implemented? I haven’t seen much austerity, not really. America’s still in pretty bad straights; the unemployment rate remains stubbornly high. Shouldn’t we spend more in America? Isn’t the Keynesian remedy appropriate for the United States at least? Well, however we twist and turn this…we has to reach the conclusion that this is a crisis of productivity. It’s a crisis of living over our means. If the United States wants to go down the European path, I would suggest…stimulants, and I would suggest the Keynesian way of doing it. But if you actually want to have a brighter future for your children, I suggest some more saving and some more working. Seems we’re in a dilemma here….that austerity, at least to me, seems inevitable in most parts of Europe. On the other hand, you have people in the streets, also in many countries protesting against this, and it’s also understandable. How do we solve that? It’s a huge democratic problem, I think. Tocqueville supposedly said that democracy can only exist until the voters discover that they can vote for themselves, not just from the public treasury. And I think we see that that has created the addiction to public benefits…entitlements that we see in Europe. So now in Denmark, we have the tax authorities who are able to access your phone records… Really? …without a court warrant, without reasonable suspicion. If you are a pensioner, you have to report it to your municipality. If you leave your country for long periods…most municipalities have websites, hotlines, where you can call your, you know, and report your neighbor if you suspect them of receiving entitlements that they don’t have the right to. It seems like the financial big brother is watching all over you. Yes, and you know, there’s no uproar, there’s no revolt about this because the system that we have created…creates this perverse incentive for the citizens to care about what their neighbors are doing. Not out of compassion- but out of, you know, self-interest that you don’t want someone else to abuse the system. So in many ways we have created this Byzantine Kafkaesque… system of laws and regulations that in some ways subject the average Danish citizens to measures that we know, that we knew in the old Eastern Germany. Hopefully one day we will be out of this crisis situation. Brussels will need to think very hard as to how to prevent these crises from happening over and over again. And to me, as an economist, it seems that the only way out is to have, actually further integration in Europe, is to have a unified fiscal and budget policy- because the imbalances between these countries are so big. The European Union, the Commission, its institutions, do not have legitimacy in the European populations, and also, you know, if you live in Ohio and Pennsylvania you feel American, but if you live in Greece and Denmark- you don’t feel…you don’t have that same bond. I think that it was a mistake to build a massive political union upon basically the internal market. The internal market has worked wonderfully in creating wealth, and democracy… securing that in a continent with a very bloody history. But we simply do not have that shared history and culture that is necessary for a centralized political union, and therefore I think it’s a huge mistake, and it undermines the very purpose of the EU. So you’re suggesting not a step forward in integration, but maybe even a step backwards towards sustaining the four freedoms between these nations? Yes. I would…I would advocate a more simple model that was based largely on the four freedoms- and not for the political integration, and not necessarily a common currency. What we’re seeing with Europe and the U.S. is trillions of currency units created, and yet growth is stalling. So basically, instead of getting back to growth by production and reform and competitiveness- we’re just printing new money, creating money out of thin air. And that creates these bubbles, because money ends up somewhere. It creates the financial bubbles which become very destructive and destabilizing. But all these other things that we’re talking about in terms of overspending, over-indebtedness… So what do you think happens then, when we’re in a crisis and we’re trying to solve it by inflating the bubbles again, just creating new…more money? Ultimately, it just makes matters worse. It’s understandable that it happens-but it’s a kind of desperation. It would be something like giving steroids to an arthritic patient. It’s a miracle drug to begin with-but if it’s over-used, it becomes worse than the problem. But it’s incredibly scary, because if we build the recovery…not with reform and competitiveness and real production, but just in printing more money, we create even more unsustainable bubbles. Where would that end in the future…in the long run? Absolutely…well, the worst part is likely to come in terms of the social instability. What we’re seeing for the public in the U.S.- it will be a difficult time for a long time. I know that people my age never expect to get Social Security benefits. This bankruptcy will ruin our property taxes, which will ruin our schools- which ruins our future. It’s about 20 percent of the people…of the population lost their job during the last five years. It could have been done so much better with a little bit of courage a civile, of civil courage…if you like. When I had my exams to get into the university, I was thinking that, “Wow! I’m going to become a pharmacist, I’m going to have a good job; I’m going to have a drugstore; I’m going to have a good life.” And now…I just…I hope I get 30 Euros in 8 hours by becoming…by being a waitress. And I don’t know what I will do …if we had referendum in France, I’m sure people rejected Europe. …just to put it very simply, successful capitalists hate capitalism. The word austerity is now giving the creeps to pretty much all of Europe… But if you actually want to have a brighter future for your children, I suggest some more saving and some more working. A lot of people are scared about the future…especially young people. But you know…unfortunately, politicians don’t get the story. They don’t want to realize the severity of the problem; they don’t want to do anything. They don’t have the courage. Europe is today one of the richest continents in the world. And my hope…my dream is that Africa, and indeed my country, Mozambique, one day will become also wealthy. And we need to understand the deep causes of today’s crisis, so that Africa and Mozambique can avoid the same mistakes that Europe is making today. In a way, it’s not all gloomy. We’ve had 10 bad years of crisis, but at the same time we’ve probably created something like a quarter of all the wealth that mankind has ever created over those 10 years. Absolutely…and we have to be careful not to destroy that, because the market is the only source of widespread prosperity. You know…we’re not talking about numbers when we’re talking about this. It’s really about people- it’s about their dreams. It all comes down to that young woman I met in Greece. She wanted to own a drugstore, and now she’s content just being a waitress. And our way of dealing with this crisis will decide the fate of her and millions like her.