Some economists overlook the modern idea that a country’s prosperity depends on innovation and entrepreneurship. They take the mechanistic view that prosperity is a matter of employment, and that employment is determined by “demand” — government spending, household consumption and investment demand.
Looking at Greece, these economists argue that a shift in fiscal policy to “austerity” — a smaller public sector — has brought an acute deficiency of demand and thus a depression. This claim misreads history and exaggerates the power of government spending.
Much of the decline in employment in Greece occurred prior to the sharp cuts in spending from 2012 to 2014 — owing, no doubt, to sinking confidence in the government. Greek government spending per quarter climbed to a plateau of about 13.5 billion euros (US$15.1 billion) from 2009 to 2012, before falling to roughly 9.6 billion euros last year. Yet, the number of job holders reached its peak of 4.5 million in 2006-2009, and had fallen to 3.6 million by 2012. By the time Greece began to cut its budget, the rate of unemployment — 9.6 percent of the labor force in 2009 — had already risen almost to its recent level of 25.5 percent.
These findings weigh heavily against the hypothesis that “austerity” has brought Greece to its present plight. They indicate that Greece’s turn away from the high spending of 2008-2013 is not to blame for today’s mass unemployment.
Another finding casts doubt on whether austerity actually was imposed on Greece. Government spending has certainly fallen — but only to where it used to be: 9.6 billion euros in the first quarter of this year is, in fact, higher than it was as recently as 2003.
So the premise of austerity appears to be wrong. Greece has not departed from past fiscal norms; it has returned to them. Rather than describing current government spending as “austere,” it would be more correct to view it as an end to years of fiscal profligacy, culminating in 2013, when the government’s budget deficit reached 12.3 percent of GDP and public debt climbed to 175 percent of GDP.
The “demand school” might respond that, regardless of whether there is fiscal austerity now, increased government spending (financed, of course, by debt) would impart a permanent boost to employment. However, Greece’s recent experience suggests otherwise. The huge rise in government spending from 2006 to the 2009-2013 period did produce employment gains, but they were not sustained.
The real sticking point is that the government would have to issue bonds to finance its extra spending. Assuming a limit to foreign investors’ willingness to buy these bonds, Greeks would have to buy them. In an economy unequipped for growth, household wealth relative to wages would soar and the labor supply would shrink, causing employment to contract.
So spending more is not the remedy for Greece’s plight, just as spending less was not the cause. What is the remedy, then? No amount of debt restructuring, even debt forgiveness, will suffice to achieve prosperity (in the form of low unemployment and high job satisfaction). Such measures would only help Greece to revive government spending. Then the economy’s stultifying corporatism — clientelism and cronyism in the public sector and vested interests and entrenched elites in the private sector — would gain a new lease on life. The European left might advocate that, but it would hardly be in Europe’s best interest.
The remedy must lie in adopting the right structural reforms. Whether or not the reforms sought by eurozone members raise the chances that their loans will be repaid, these creditors have a political and economic interest in the monetary union’s survival and development. They should also be ready to help Greece with the costs of making the necessary changes.
It is Greece itself that must take charge of its reforms. And there are encouraging signs that Greek Prime Minister Alexis Tsipras is willing to take up that cause.
However, he will need a sense of the required reforms. Greece must dismantle corporatist arrangements and practices that obstruct whatever innovation and entrepreneurship might emerge. Nurturing an abundance of imaginative innovators and vibrant entrepreneurs requires embracing a vision of venturesome lives of creativity and discovery.
Edmund Phelps, a 2006 Nobel laureate in economics, is director of the Center on Capitalism and Society at Columbia University.
Copyright: Project Syndicate
Saudi Arabian largesse is flooding Egypt’s cultural scene, but the reception is mixed. Some welcome new “cooperation” between two regional powerhouses, while others fear a hostile takeover by Riyadh. In Cairo, historically the cultural capital of the Arab world, Egyptian Minister of Culture Nevine al-Kilany recently hosted Saudi Arabian General Entertainment Authority chairman Turki al-Sheikh. The deep-pocketed al-Sheikh has emerged as a Medici-like patron for Egypt’s cultural elite, courted by Cairo’s top talent to produce a slew of forthcoming films. A new three-way agreement between al-Sheikh, Kilany and United Media Services — a multi-media conglomerate linked to state intelligence that owns much of
The US and other countries should take concrete steps to confront the threats from Beijing to avoid war, US Representative Mario Diaz-Balart said in an interview with Voice of America on March 13. The US should use “every diplomatic economic tool at our disposal to treat China as what it is... to avoid war,” Diaz-Balart said. Giving an example of what the US could do, he said that it has to be more aggressive in its military sales to Taiwan. Actions by cross-party US lawmakers in the past few years such as meeting with Taiwanese officials in Washington and Taipei, and
The Republic of China (ROC) on Taiwan has no official diplomatic allies in the EU. With the exception of the Vatican, it has no official allies in Europe at all. This does not prevent the ROC — Taiwan — from having close relations with EU member states and other European countries. The exact nature of the relationship does bear revisiting, if only to clarify what is a very complicated and sensitive idea, the details of which leave considerable room for misunderstanding, misrepresentation and disagreement. Only this week, President Tsai Ing-wen (蔡英文) received members of the European Parliament’s Delegation for Relations
Denmark’s “one China” policy more and more resembles Beijing’s “one China” principle. At least, this is how things appear. In recent interactions with the Danish state, such as applying for residency permits, a Taiwanese’s nationality would be listed as “China.” That designation occurs for a Taiwanese student coming to Denmark or a Danish citizen arriving in Denmark with, for example, their Taiwanese partner. Details of this were published on Sunday in an article in the Danish daily Berlingske written by Alexander Sjoberg and Tobias Reinwald. The pretext for this new practice is that Denmark does not recognize Taiwan as a state under