By Jeffrey Sommers, Associate Professor of Political Economy & Public Policy in, and Senior Fellow at the Institute of World Affairs at the University of Wisconsin-Milwaukee, and Yanis Varoufakis, Visiting Professor at the Lyndon B. Johnson School of Public Affairs of the University of Texas at Austin. Originally published at Yanis Varoufakis’s blog.
Britain’s iconic Tory Prime Minister Winston Churchill once intoned, “The United States always does the right thing [long pause] ….after exhausting all other options.” It seems this past truth still resonates today.
The US and Europe passed through the greatest economic storm since 1929 and have not yet fully exited from the turbulence. Both the US and Europe addressed the crisis with belt-tightening austerity, with the US having tightened its belt a bit, and Europe a lot more. Several years later, we have the results: the US economy, while not in the best of health, is better off than much of Europe’s.
If all government budgets are gutted, the result is akin to one’s view at a concert if everybody stands to improve their view. When everyonestands nobody sees better. In short, what works for one person can fail if applied to all. Nowhere has this been more evident than in Europe. European governments responded to the crisis by tightening their belts all at once. The result, ironically, was increasing government debts and sluggish economic growth.
In the United States, many governors practiced European-style draconian budget cuts. But, because the US has a true federal government (unlike the EU), its budget cutting states have continued receiving federal payments in the form of Social Security, Medicare, Student Loans, etc. Ironically, the very New Deal legacy that austerians work to euthanize in the US, is the chief thing that prevented the US economy from completely crashing. The EU does not have these federal transfers to its budget cutting member states, and thus, have faired worse.
Politicians in this country frequently warn their opponents’ policies threaten the United States with a fate worse than Greece’s. Americans have a curious view of democracy’s birthplace. They seem to think Greeks have been overtaxed. In fact, the opposite is true. Unlike the United States where only some of the rich evade taxes (as Warren Buffet has mentioned), Greece is more democratic in that nearly everyone evades them. Tax evasion contributed to Greece’s original fiscal mess. Budget cutting then deepened it. Greece tried remedying this by raising taxes at the peak of the crisis, but a crisis is no time to raise taxes. Greece also radically cut budgets and tried another policy supported by some in this country: cutting wages. The result? So far, following the budget and wage cuts national income fell by a massive 25 percent.
While one worker can find employment more easily if she is willing to work for less, when many workers are paid less, there is simply not enough demand for the goods and services they produce to keep them employed. In Greece, job creation stalled under austerity. The clear lesson from Greece is that private and public sector employment are linked. Cutting one hurts the other.
Fortunately, America is not in danger of becoming Greece. For one, a few, but growing number of, conservatives (such as Silicon Valley millionaire, former publisher of the American Conservative, and past GOP California gubernatorial primary candidate Roy Unz) are recognizing that increasing the minimum wage has two merits. First, it can help cut public spending as it reduces the number of Americans on benefits. Second, that low-wage workers spend most of their disposable income on local goods and services, thus g enerating business and profits. By contrast, cutting taxes for the wealthy in the United States typically results in them taking another vacation with their money to my (Varoufakis) country, Greece: good for us, bad for you.
Reflecting back to Churchill’s observation on America exhausting its austerity options, the US could do the “right thing[s].” Americans invest more on research & development (this being done primarily at US universities) than Europe and they will profit if they invest even more. Despite attempts to kill them, the US has preserved “entitlement” spending as a cushion against economic crises. It also seems there is an emerging recognition that higher wages are in fact good for business and for cutting government deficits. The only thing halting this potential prosperity are the austerians.
Thus, the message from Greece on austerity is the phrase I have seen on many American adventure television programs: “don’t try this at home.”
“don’t try this at home.”
Well, as you are no doubt aware, there are always yahoos who do try this at home.
This looks like a case of magical thinking at work:
1) America is special! (We did win that big war two generations ago, etc.)
2) America, thusly, can do no wrong! (How could we become the only remaining Superpower if we did anything wrong?)
3) America can do things that lesser polities can not! (We’re special! Look at our [pre 1949] track record.)
4) Three (above) leads inexorably to One (also above.)
5) “As above, so below!” (We are the New Alchemists.)
6) Being the New Alchemists, we can turn Lead, (Austerity,) into Gold (the Neo Liberal Paradise.)
Unemployment has gotten so high in Greece that a majority of Greeks now oppose fiscal austerity.
Doesn’t seem to matter much what the Greeks oppose or don’t oppose. Seems to matter much more what the Germans want…
using greece as an example of anything is a complete waste of time and ridiculous dystopian diversion in trying to explain problems with europe or anywhere else.
Greece is a banana republic with a Napoleonic legal system that works so really well for the former french colonies in africa and works equally well in greece. There is a purposefully dysfunctional property records system designed to insure that big projects can only be completed by the 500 families that manipulate the greek state who can arrange for “waivers” of facts and rules.
There is ZERO financial competition in greece, as it has/had one 20th the number of financial institutions per capita as germany or the UK
Sexual harassment is such that it seems like every tv show in greece is a repeat of Don Franciso and his big boobed babes on univisions sabado gigante and every woman does not bother to complain when a male associate or boss decides to let their hands slip a little. Even if you are a law professor…as the employment system in greece has never been robust and it is confusing how the “traikia” has decided that greece needed further changes to its employment system. Even before the crash, greece already had in place microsoft type permanent “temp” employee laws that were being over used and abused.
The average greek has no clue what a bloomberg screen is, and if you waste your time trying to figure out the tax system in greece, congrats, it is nowhere to be found. Not one publisher produces anything for anyone to read on what the greek tax system is. When I was living in athens with a law professor and became frustrated with the lack of information, I was able to find out the revenue officers were just as frustrated and set up their own publishing operation in their union to produce books on the tax code as the government did not bother to provide them with information either and they were kind enough to remind me that in greece, as a union, they “had” to let me buy the same books they used…lucky for me…
What is worse is that the average greek family unit is technically much stronger financially than their counterparts to the north, but the dysfunction and lack of available access to what most westerners have come to assume in respects to finance are what keep the country down.
The problems in greece are easy to fix, but inconvenient for those who have profited from this mess.
As to the great “traikia” myth that greeks don’t pay taxes…wow…
so that value added tax on everything you touch and do in greece…that’s not a tax right ?
The greek income tax system is incomplete and dangerous for anyone who dared push too hard, as that Lawyer I mentioned above had a father who was a “tax man”, but in the 1970’s he ended up having a problem with keeping his life support systems functioning as he was doing an audit of the tobacco companies who did not seem to be paying their fair share of taxes. They first offered to bribe him, then offered to get him a different “better” job so he wouldn’t be around to be able to keep auditing them, then when the physical threats to himself and his family did not work, he was poisoned and died of a rare illness. His good friend, a doctor who ran a small clinic, complained a little too loudly and too much about why no one was investigating the death and the good doctor then also suddenly developed a rare african illness and quickly followed his friend to the other side…
Its easy to complain or be a hero when its just a tv screen…I feel extremely sad for greece as it is led by clowns who are only concerned about their egos or keeping the pockets of their friends and supporters full and to hell with the future. And that includes that game show host, Alexis, who seems to not have a clue that the banking system is not backed by gold or silver anymore…or the other alex, the gladio chick, I mean the head of the communist party…sorry it slipped…who probably at one point had about 25% of the vote capacity in the middle of the crisis but had no interest in “helping”…and let us not forget the golden yawn, as they were doing their best to catch up with the fact someone was actually paying attention to that little elmer fudd…burping up nonsense in broken greek that was hard to comprehend as his greek is almost as bad as that of georgiaki…
Which as far as I am concerned, feeds the needs of Germany which is desperate to keep the euro down and is quite happy with the economic “tragedies” of southern europe allowing them to end up with “currency magic” and helping their major exporters keep their market share…
Greece is a unique country where the politicians allowed themselves to be bribed ? lulled into ? confused into believing ? that short term borrowings were the thing to do…almost all this “bailout” is just a rolling over of debt…period…there has been no “investment” of 200 billion dollars by the “traikia”…it was just a refusal of creditors to allow a rolling over of debt, not much different than the auction rate security mess of February 2008 here in the USA…
Lambert, let’s see some evidence that there has actually been austerity. Give us some numbers for the “draconian budget cuts” which you refer to.
Here’s some evidence.
No. Give us actual budget numbers showing that there has been austerity in Europe. A government spending more than it brings in in tax receipts is not austerity.
Austerity is bunk. I rather admire German systems. It would be good to know how they achieved them with the apparent handicap of losing two world wars. Even they are stuck with the need to keep their currency ‘competitive’. I rather like the southern Europeans as they know how to laze in the sun.
Democracy was not born in Athens and they were pretty bad at it. Greece is a disaster zone, but has been subject to all kinds of interference from perfidious Albion after WW2, fascist colonels and now the Euro.
My guess is there are deep biological problems we don’t address in economics and we need to escape these as we have (at least partially) racism, sexism and so on. We could all be more secure and have things much easier, but are stuck in mad ideologies. Plato wrote seven books on how to get rid of corruption before giving up to its inevitability.
Greece might just be a model to learn from on corruption. We have surveillance means now that Plato couldn’t imagine that could be economic game-changers. Our mechanised world has no need of the slaves who did the hard work of Greek thought, so why do we keep so many in this condition? What makes the rich steal from everyone else and how do their fantasies that this is fair and moral transmit to the rest of us?
What struck me working in Greece and other parts of the middle east were various tragedies of fakilaki, wasta, kafala and rotten employee relations. I no longer need to leave the white cliffs of Dover behind to witness any of this. I would remind Lambert that Saul Bellow’s Dean found as much corruption in Chicago as Bucharest. America may be more Greek than he thinks.
Stating there is no EU equivalent to the US Fed transferring money like SS, etc…. to the states is not entirely correct. Krugman started this very bad misinformation campaign.
Each EU member state has always had a federal budget that pays out to the nanny state, even during the Great Recession. Grandmothers, teachers, public works, etc received their central government issued cheques on time throughout the downturn.
What did happen is many EU states cut back drastically on pensions, healthcare, raised taxes, and reduced services.
“In fact, the U.S. and Europe are engaged in a competitive race on who will give more to large corporations and banks. This explains the recent statement by the U.S. Secretary of Treasury, speaking about growth through consumption, criticizing indirectly the austerity policies in Europe, and the expected reaction of Schaeuble, as the U.S. rely heavily on consuming power, and they do not want for the moment to cut wages and labor rights in extent. They see that Europe is moving rapidly to the degradation of welfare state and dissolution of labor rights, which means that it will quickly become more “attractive”, even for big companies based in their territory.”