This is truly an excellent article on distinguishing between various austerity and spending proposals. The austerity vs. spending debate has been distorted, in Europe and here in the US.
From the WSJ:
The best outcome would be for Greece to stay in the euro, reduce government spending, and ask Europe for a mix of loans and gifts as it downsizes its government.
Currency traders are cheering for Greece to exit the euro. That would create currency volatility and, if other countries exit, mega-profits for traders. The cost would be much lower living standards and even bigger government—including the power to print money—for those exiting the euro.
A disruption in the euro would also be bad for the United States. With North Africa still reeling from the Arab Spring, we have an immense self-interest in strong, growing, sound-money democracies on the Mediterranean’s northern shores. They are at risk in the confusion over austerity, growth and the euro.
The conflict between growth and austerity is artificial and framed to favor bigger government. Growth comes from economic freedom within a framework of sound money, property rights, and a rule of law that restrains government overreach. Businesses won’t invest or hire as much in an environment where governments dominate the economy. Thus, government austerity is absolutely necessary for economic growth in both the short and long run.
Economics has often ignored the critical distinction between austerity for the government and government-imposed austerity on the private sector. In the former, governments which are over-budget sell assets, restrain their hiring, and limit their mission to essentials. That’s growth-oriented austerity.
In the private-sector version of austerity, governments impose new taxes and mandates on the private sector while maintaining their own personnel, salaries and pensions. That’s the antigrowth version of austerity prevalent in Europe’s austerity programs.
Many economic models, including the U.S. Congress’s budget scoring system and Keynesian stimulus, ignore national debt levels and disregard whether spending decisions are made by the private sector or the government. This creates the absurd result that an economy in which the government spends and invests increasing amounts—even 100% of GDP—has the same projected growth rate as an economy where the government spends and taxes less.
Europe’s government-imposed austerity programs have required private sectors to pay for debt they didn’t incur so that governments can stay large. Italy’s government spending will rise to 50.7% of GDP in 2012 from 50% in 2011 per data from the International Monetary Fund, meaning more than half of Italy’s economy is still not seeking profit.
The Greek government has been practicing a particularly aggressive form of antigrowth austerity. While the private sector shrank in 2011, Greece’s government grew to 49.7% of GDP from 49.6% in 2010. To accomplish this bad outcome, Greece’s government increased its value-added tax to 23%—a hidden sales tax so high that no one should be asked to pay it or support it—and created a national property tax that transfers private-sector wealth to the government and through it to foreign creditors.
Meanwhile, Greece’s parliament kept full pay, full benefits, its fleet of BMWs, and a full staff. Greece maintained its sweetheart subsidies for businesses, banks, the army and those who choose not to work. Its sizeable delegations and facilities in Brussels, Vienna, Geneva and Washington are still large, as are the life-time pensions for politicians. Last week, Greek officials suspended work on the sale of government assets, one of the most pro-growth conditions in its IMF program.
The reality is that Greece’s government is imposing too much austerity on others and not enough on itself. The U.S. is making the same mistake. Yet the big-government branch of economics in France and the U.S. argues that the problem in Greece is too much austerity even though there hasn’t been much true austerity on the government.
The most pro-growth outcome would be for Greece to stay in the euro, reduce government spending, and ask Europe for a mix of loans and gifts as it downsizes its government. Germany and most of Europe would support this, and it would give Greece time to build a pro-growth environment for its private economy.
Exiting the euro would make the situation worse by giving a newly formed government the immense power to print money and decide its value. The only beneficiaries would be government and those in financial markets betting against Europe’s other weak economies. Government would decide the inflation-indexing scheme and would control it in favor of government workers, politicians and retirees at the expense of private living standards. Financial markets would profit from divvying up the losses.
Beyond the current fight over austerity, growth or the euro, Europe’s battle comes down to government-guaranteed wages and benefits versus labor flexibility. Europe’s failing governments simply won’t allow competition or give up power to achieve competitiveness.
As the U.S. struggles with tax reform, deficit reduction and the year-end fiscal cliff, it will be critical to distinguish between reforms that downsize the government and reforms that downsize the private sector and put the dollar at risk. One approach points to growth, the other to Greece.