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Greek Austerity

by JEFFREY SOMMERS and YANIS VAROUFAKIS

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 everyone stands 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
globalmino 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 generating 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.”

Jeffrey Sommers is Associate Professor of Political Economy & Public Policy in, and Senior Fellow at the Institute of World Affairs at the University of Wisconsin-Milwaukee. He is also Visiting Faculty at the Stockholm School of Economics in Riga. He is co-editor & contributing author to The Contradictions of Austerity: the Socio-Economic Costs of the Neoliberal Baltic Model.

Yanis Varoufakis is Visiting Professor at the Lyndon B. Johnson School of Public Affairs of the University of Texas at Austin.  He is also Professor of Economic Theory at the University of Athens.  He is the author of the Global Minotaur and of A Modest Proposal for Resolving the Euro Crisis with James Galbraith and Stuart Holland.

 

 

 

 

 

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