For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should -- by spending more to offset falling private demand -- but with fiscal austerity, slashing spending in an effort to balance their budgets.According to Wikipedia, the term austerity is defined as an economic term referring to a policy of deficit cutting by lowering spending; often via a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency to creditors.
NEW YORK ( TheStreet) - In an old Saturday Night Live skit, the Greek gods assemble to discuss the problems of modern Greece. Zeus calls in a consultant, a German god, Klaus, who vows to impose austerity, withholding any further money. The Greek gods retort: "Sorry Klaus. Either you give us the money or we take all of Europe down with us. We started democracy, we can end it." It is amazing in how life can imitate late night television.
The Syriza Party, the very left-of-center political party is currently leading in all opinion polls in Greece. Syriza is led by Alexis Tsipras, a 37-year-old who is doing his best Hugo Chavez impersonation on the national stage. Syriza is opposing all austerity measures. It is against the liberalization of the Greek labor market that places Greece according to the World Bank's Ease of Doing Business index at 100 out of 183 countries. The party opposes any type of reform from doing away with tax collection fraud, educational fixes including teacher's evaluations to reducing the size of the gargantuan Greek bureaucracy. The party's remedy to all Greek structural and economic problems reads like a Paul Krugman/Keynesian fantasy. The country should refuse to pay its debt, increase pensions and government spending, tax the rich, and hire an additional 150,000 new government employees. The groups support comes from the same base that support the Democratic Party here in the U.S., civil servants, lawyers, teachers, journalists and the easily swayed disenfranchised youth. Like the Saturday Night Live skit, Alexis Tsipras and Syriza are playing a Hellenic version of "chicken," where they reject any commitments and conditions made with their partner nations in the European Union. They are betting their European partners will never hold them to those commitments as that would force them to leave the European Union. A fear of an economic contagion striking Portugal, Spain, Ireland and Italy will hold the European partners at bay. Liberal economist and Keynesian advocate Paul Krugman wrote in his New York Times column, " Death of a Fairy Tale":
Obviously Professor Krugman is operating under a different definition. Maybe the term is Greek to him? According to data provided by the European Union's own statistician Eurostat, following years of huge spending increases, troubled countries such as Greece, Spain, and Italy have barely reduced spending at all since 2008. They all are spending more than they were pre-recession. In fact, most European nations put forth stimulus packages. Interestingly enough, just like in the U.S., the stimulus failed. Average spending by European nations today stands at 49.2% of GDP vs. 44.8% in 2000. What these countries have also done as of late is to implement large tax increases. Veronique de Rugy of National Review makes the astute observation that European policies sound awful similar to President Barack Obama's and the Democrat's "balanced approach." According to Krugman, doing the same thing over and over (spending money you do not have) and expecting a different result is a sign of brilliance. Albert Einstein would beg to differ. Whether it is Greece, Italy, Spain or even the U.S., the act of cutting spending using baseline accounting -- where only the rate of pre-programmed spending increases is reduced -- will not solve the problem. You are still spending more today and tomorrow than you were yesterday! Nothing has been done away with, nothing has been cut! True structural reform involves completely doing away with (obliterating) wasteful government spending which does nothing but suck money out of the private sector. Structural reforms that make the economy more competitive will attract new capital and inevitably stir the animal spirits of the entrepreneur, which will in turn grow the economic pie. Borrowing or printing money is not the answer; it is in my opinion cowardice, a lack of will to deal with the reality of a nation's self-inflicted situation.
Besides, how are you going to spend your way out of a problem, as is the case of Greece, where nobody is willing to lend you money? Economist Brian Westbury points out that there are three different types of austerity. Good, bad and ugly. He writes that, "Good austerity is the kind that puts the pain on the government sector. Bad austerity is the kind that tries to spread the pain across the public and private sectors. Ugly austerity is the kind that tries to put all the pain on the private sector." I find it amusing that many of the chattering class that frequent so many cable news programs are still unable to grasp the reasons why GDP growth and jobs growth is so anemic in the U.S. Do they not see the ugly austerity excrement storm heading our way? I was recently doing one of my regular radio appearances on WSBA in York, PA and was asked by the host, "What was the opposite of austerity?" I searched for an answer when all of a sudden it hit me... "Hope and Change."