The Grecian Formula for Economic Decline
Amy PayneJune 18, 2012 at 9:04 am(11)
The President and his team have been blaming “European headwinds” for some of the U.S. economy’s woes. But the truth is that the policies pursued by Washington and Athens are frighteningly similar—and the outcomes are not good for either country. Both countries are in need of comprehensive fiscal reforms, yet their leaders have avoided the tough decisions in favor of bailouts and political posturing.
In yesterday’s election, political parties supporting Greece’s bailout secured a narrow victory, causing Europe and world markets to breathe a temporary sigh of relief. The parties must now form a coalition government, despite continued protests from the radical party that sought to throw out the terms of the bailout assistance—which could have led Greece out of the euro currency. At 22 percent unemployment, Greek voters expressed disappointment with their limited options.
The Greek crisis was foreshadowed in this year’s Heritage Foundation/Wall Street Journal Index of Economic Freedom, with Greece registering the largest decline in economic freedom of any country in the world. Its economy is rated “mostly unfree,” and it has the fifth-lowest economic freedom score in Europe, beating only Russia and three former Soviet republics.
Why is it in such a state? The authors of the Index point to “decades of overspending, a lack of structural reform progress, and endemic corruption,” noting that Greece’s “lack of competitiveness and fading business confidence are serious impediments to economic revival. Adjustments in market conditions have been stifled or delayed by public unions.”
Sound familiar?
It should, because the similarities between the U.S. and Greece are alarming. Two years ago, Heritage’s J.D. Foster said that “We’re not Greece…yet.” Since he wrote that in May 2010, however, U.S. debt has nearly doubled as a share of the economy. Greece’s public debt, at 165 percent of gross domestic product (GDP), doesn’t seem that unreal any more.
A few other points of comparison: The U.S. corporate tax rate is higher than Greece’s. The Index of Economic Freedom pegged America’s overall tax burden at 24 percent of total domestic income, while Greece’s overall tax burden was 30 percent of GDP. Government spending inAmerica—42 percent of GDP—approaches Greece’s government spending level, which exceeds 50 percent of its GDP.
Both countries have structural economic deficiencies—like tax rates and labor regulations—that are causing deeply rooted problems. And both countries have tried to solve their fiscal problems through bailouts, to no avail.
Though it goes back to the adoption of the euro in 1999, the European crisis first broke into the open some 10 years later. In April 2009, the European Union told France, Spain, Ireland, and Greece to reduce their budget deficits in the wake of the credit crisis. Since the crisis began, Europe has substantially weakened its banking system, which is propped up only by central bank cash and shaky bailouts.
Now, defaulting on loans is a real possibility for Greece and other European nations. They have too long dismissed the need for economic growth in favor of government intervention.
Going into the G20 summit today and tomorrow in Mexico, President Obama “has called on European leaders to recapitalize weak banks and to focus on economic growth and not just budget austerity,” reports Reuters. Basically, he has been urging European governments to spend more now, even as their borrowing costs and debt far exceed sustainable levels. One wonders how countries that have limited or no access to credit markets because of their dire fiscal situations are supposed to borrow the money for all this additional spending. There is only one substantive difference between Obama’s policies for Europe and his domestic policy, where he has urged expanding government jobs as a solution to U.S. unemployment: The U.S. government can still borrow to finance its deficits, because we’re only partway down the road the Greeks have already traveled.
The overspending, overtaxing, over-borrowing and over-regulating approach does not work for Europe any more than it works for America.
To deal with any European financial fallout that might affect the U.S., we have to stop embracing the same policies. Congress and the President should rein in federal spending immediately by choice rather than being eventually forced to do so, as countries across Europe have been. They should declare a regulatory cease-fire and disarm the Taxmageddon threat.
America is responsible for its own economic problems, regardless of the winds sweeping across the Atlantic
