Sunday, February 26, 2012

There Are Two Kinds Of Austerity. Which Will Greeks Choose?

Published in The Tennessean and Forbes,
Sunday, February 26, 2012

by Richard J. Grant

The radio announcer asked, “But will the Greek people tolerate another year of recession?” Left unasked was the question, “If they won't, so what? What are they going to do about it?” Some of their compatriots have responded with riots and arson to any suggestion of government austerity.

Such unproductive catharsis and destruction of property seems, however, to compound the austerity rather than mitigate it. Worse, it illustrates just how widespread is the confusion between government austerity and private austerity. Historically, those nations that have run relatively austere and less-interventionist governments have been those in which citizens have most prospered. It is in other countries where government has spent excessively and intervened heavily in the economy that citizens have felt true austerity.

In Greece, as in America, we see in their results the shortcomings of the conventional economic thinking that still reigns in Washington and other capitals. Many still believe that government spending, even beyond basic functions, is a source of economic growth rather than an inhibitor. Certainly those areas that are favored by government spending do tend to grow, at least for a while. But those sectors that are net taxpayers, or are burdened by regulations, are deprived of resources and opportunity and thereby prevented from attaining their full potential.

As government involvement in our lives grows beyond the minimum necessary to maintain the rule of law, especially when it ventures into schemes to redistribute wealth, consumption patterns are increasingly separated from production. As a growing proportion of the population learns that, through the power of the state, it can consume more than it produces, then the productive potential of that nation declines. Those who receive have less incentive to produce, and those who continue to produce must do so with less.

Nations that move in that direction find that they are less able to export manufactured goods and are more likely to export people. As long as there are other lands where people are freer and better able to build their own prosperity, we can predict the direction of migration.

The motive to migrate might not necessarily be a “yearning to be free” so much as a simple yearning to be more prosperous. It is not a prerequisite that the migrant understand the source of his new prosperity; he need bring only a willingness to work and to obey the law. But there is also a danger that the migrant could bring the same old voting habits that collectively created the incentive to emigrate.

The future of Greece depends on Greeks allowing their government to implement the structural reforms required as part of the €130 billion bailout package agreed by its European neighbors. Many will complain that the terms of the deal are too strict. They will not understand that such reforms would be in their best interest even without the bailout money. The path they have followed to this point is not sustainable.

Those who call for more government spending must understand that they are also calling for a commensurately higher level of taxation – either now or in the future. Greeks have tried to get something for nothing by pushing their tax burden onto future generations. Their government debt has ballooned to 145 percent of GDP. Those who stay will have to pay.

If they won't tolerate reform, then they will have to tolerate recession.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012