Greece’s Mythical Government Austerity: Big Government Stifles Economic Recovery
Progressive commentators like the New York Times’ Paul Krugman wrongly blame Greece’s economic troubles on governmental “austerity.” But even in the aftermath of Greece’s economic collapse, its government has been anything but austere, spending at levels much higher than in most of Greece’s post-war history. And Greece’s overbearing bureaucracy continues to extend its tentacles deep into the economic life of its citizens, suffocating job creation and small business start-ups.
Greece’s Prime Minister tried to cut government spending, but courts blocked many of the cuts, making a mockery of the country’s efforts to achieve fiscal responsibility. As the New York Times itself notes, Greece’s Prime Minister tried to make:
“painful cuts to salaries, pensions and jobs for public workers over the last four years, saying they were needed to satisfy the demands of the international creditors that bailed the country out. But the Greeks hurt by those steps, and the nation’s courts, have a different idea.
“Steadily, citizens groups — including police officers, university professors, cleaning workers and judges themselves — have challenged the cuts as illegal or unconstitutional. And in case after case, Greek courts have agreed, presenting a nearly existential question for the government: Can it actually shrink the state?
“The mounting pile of judgments has now become a serious obstacle to the austerity drive of Prime Minister Antonis Samaras, with the International Monetary Fund warning this week that the “adverse court rulings” threaten to undo the country’s reforms, which its creditors are scheduled to begin reviewing in July.
“Coming just as an embattled Mr. Samaras tries to convince citizens and investors that Greece is finally turning a corner, the rulings threaten to punch a gaping hole in the finances of the government. . . Greece could be obliged to scramble for one billion euros, about $1.35 billion, in back pay.”
Greece’s bureaucracy and high business taxes recently strangled a woman’s dream of a baking business before she could even launch it, noted the Cato Institute’s Walter Olson, linking to Despina Antypa’s sad column in the New York Times:
“…as happens so often in Greece, the bureaucrats had other plans. In a country where you are viewed favorably when you spend money but are considered a criminal when you make it, starting a business is a nightmare. The demands are outrageous, and include a requirement that the business pay taxes in advance equal to 50 percent of estimated profit in the first two years. And the taxes are collected even if the business suffers a loss. I needed only 20 square meters for my baking business, but inspectors told me they could not give me permission for less than 150 square meters. I was obliged to have a separate toilet for customers even though I would not have any customers visit. The fire department wanted a security exit in the same place where the municipality demanded a wall be built. … I, like thousands of others trying to start businesses, learned that I would be at the mercy of public employees who interpreted the laws so they could profit themselves.”
Liberal commentators are wrong to decry “austerity” in Europe, since as the Richmond Times-Dispatch noted in 2012, such “austerity” has been largely mythical:
“European nations have not slashed spending. To the contrary, only a couple have even so much as nicked it.
“According to the European Union, “National budgets are not decreasing their spending, they are increasing it.” In 2011, 23 of the EU’s 27 nations raised spending levels. This year 24 of them will.
“In the past decade, aggregate spending by EU governments rose 62 percent, according to Investor’s Business Daily.”
By contrast, during some past periods, the United States actually did practice austerity, cutting government spending, as a graph at The American illustrates (see this link). The result was economic growth.
As AEI’s James Pethokoukis noted, “From 1944 to 1948, Uncle Sam cut spending by a whopping 75% as World War II came to end. Spending as a share of GDP plunged to 9% in 1948 from 44% in 1944.” “Despite cuts which dwarfed those” that “Republicans are calling for” today, “the U.S. economy thrived. There was no mass unemployment despite rapid demobilization of the armed forces.” Similarly, the economy grew in the 1990s, when federal spending was much lower than it is today: “After the Cold War ended, overall federal spending fell to 18% of GDP in 2000 from 22% in 1991. But again the economy boomed. Real U.S. GDP grew by 40% with an average annual growth rate of 3.8%.”
Government spending generally does not prevent or cure recessions. Herbert Hoover increased government spending in the Great Depression, both in real terms and as a percentage of the economy, but the economy failed to revive. As Megan McArdle of The Atlantic also noted, government spending more than doubled as a percentage of the economy from 1929 to 1933. Although the economy temporarily revived under Roosevelt, it then went back into a nasty recession in 1937-38, the so-called Roosevelt Recession (a recession aggravated by 5-to-4 Supreme Court ruling strengthening unions and thus sparking a wave of costly strikes).
A sustained recovery from the Depression finally occurred only after a coalition of conservative Democrats and Republicans effectively took control of Congress in 1938 and blocked (or in one case, repealed) various anti-business measures that had been stalling a natural recovery by discouraging investment through the looming specter of their adoption.