America Can Save Itself Through Spending Cuts, Here's the Proof

“Austerity doesn’t work.”

Whenever there are talks of spending reform in Washington, or budget reductions in future levels of federal spending, I get the same three words from progressives who view cutting a single dollar of public sector spending (outside of defense) as a cardinal sin.

Naturally, they point to Greece as the poster child of what happens when you “gut government, investment, infrastructure” and the like.

However, as the Wall Street Journal recently pointed out, “Greece’s fiscal discipline efforts appear to be paying off, according to budget data released Monday that showed the country turning last year’s steep deficit into a surplus, potentially bolstering its case for further debt relief from international creditors. … The Greek Finance Ministry reported a primary surplus … for the first seven months of the year. The surplus reached €2.6 billion ($3.5 billion) against a deficit of €3.1 billion a year earlier.”

Progressives who try to point to Greece’s austerity measures post-2008 as the cause of all its problems are not only wrong, they’re misleading. There are several factors that were responsible for why Greece ended up at the mercy of their foreign creditors (none of it having to do with austerity), and although the fiscal discipline needed to get its debt under control was costly and caused severe social instability, their economy indeed will emerge stronger and healthier for having done it.

Greece is a textbook illustration of what happens when the public sector expands at a rapid, non-stop rate. As Greek economist John Sfakianakis illustrated when writing for the New York Times, “For generations, political power in Greece has been based in large part on providing public sector jobs in exchange for votes. To protect workers from being thrown out when a rival party came to power, virtually iron-clad job protections for government workers were enshrined in the constitution. Though it was very rare for a government worker to be dismissed, this did not stop politicians from continuing to hire supporters – feeding a bloated, inefficient and expensive public sector that was accountable to no one.”

He goes on to explain, “The expansion of Greece’s huge government sector took decades to create, but its growth in recent years has been particularly striking. Public employment grew by fivefold from 1970 through 2009 – at an annual growth rate of 4%, according to a recent academic study by Zafiris Tzannatos and Iannis Monogios. Over the same four decades, employment in the private sector increased by only 27% – an annual rate of less than 1%.

“Wages in the public sector were on average almost one and half times higher than in the private sector. Government spending on public employees’ salaries and social benefits rose by around 6.5 percentage points of GDP from 2000 to 2009, while revenue declined by 5 percentage points during the same period. The solution was to borrow more. Continuous over-consumption in the public sector has contributed to productivity losses and trade imbalances. In a report last year, the World Economic Forum ranked Greece’s public institutions No. 84 in the world. Germany was 13.”

Decades of cradle to grave entitlements also contributed to Greece’s economic woes. Workers were routinely retiring in their mid-50s (the retirement age there is still 58) in a country where average life expectancy is 81 (the U.S. retirement age is 65 and average life expectancy is 79, by comparison).

It was only a matter of time before Greece’s debt-to-GDP ratio exceeded 180% (the United States' is 105% by comparison). But the toll that excessive public sector expansion and reckless spending really took on the country what the slow erosion of its private sector strength and wealth (primarily rooted in tourism, shipping, agriculture, and oil refining/mining). With few businesses inside the country strong or wealthy enough to take on the debt to manage core services, finding domestic buyers to privatize public infrastructure with was nearly impossible.

So with a public sector having grown bloated with bureaucracy and unsustainable benefits coupled with a private sector that withered away in strength and wealth, Greece had nowhere to go but to beg its biggest foreign creditor – Germany – for a bailout. Germany had an interest in bailing out troubled euro zone economies such as Greece (as well as others like Spain, Portugal and Ireland) to maintain a strong consumer base for its export-oriented economy (much like China’s trade relationship with the U.S.). Greece had an interest to stay in the euro zone given the fact that all its properties, investments and government bonds are now tied to the euro (and all their values would plummet if Greece converted back to the drachma, which would be worth pennies on the dollar), even though the masses didn’t necessarily understand the costs that entailed.

But as most of us who’ve taken Economics 101 know, there’s no such thing as “free money.” Desperate for cash to feed its unsustainable government spending, Greece was forced to implement the strings attached to the bailout cash – namely the fiscal disciplinary measures to stop the bleeding of red ink – or “austerity” as progressives love to call it.

The social consequences could obviously not be ignored. The pain needed to rectify Greece’s economy was enormous. Every country is prepared to accept a high degree of economic inefficiency to avoid, or at least postpone, the reckoning. The reckoning always comes, but for most of us, later is better than sooner. Economic rationality usually takes a back seat to social stability and political common sense, but the more pain imposed, the healthier countries will emerge economically. In Greece’s case, the social instability produced riots, destruction, and fringe movements that countries in crisis often do, such as the far right neo-Nazi Golden Dawn and far left radicals like SYRIZA and the communist KKE.

But Greece’s recent surplus illustrates that it has now turned the corner on its way back to economic growth, despite the austerity naysayers. It’s certainly not there yet, but as it took decades to get Greece as deep in the hole as it did by 2009, digging it out won’t happen overnight. And as a good friend of mine recently asked, “What exactly is the [progressive] counter point to austerity in Greece? More of the same since it seemed to work so well?”

As far as what America can learn from all this, many progressives are still quick to dismiss Greece as a glimpse into America’s future if it doesn’t switch course from the same road we’re going down (despite the fact that our debt-to-GDP ratio continues to catch up with Greece’s).

“We’re not the same. It’ll never happen. Not even close.”

While the there are certainly different factors to consider between the countries, such as the strength and wealth of our private sector and well as where our industries and resources are rooted in, that still doesn’t make us immune to the laws of sound economics. I never took any warnings of excessive public sector spending and debt seriously either, until I saw how gargantuan our foreign debt has grown in recent years.

We’re nearly at the tipping point, and as I said earlier, the reckoning always comes. When the pain needed to rectify our excessive public sector spending becomes reality, and we see the same social instability here as a result, how long will it take before we finally start producing surpluses again? More importantly, how big of a toll with the destruction take on our assets? That’s why I’d rather implement the fiscal discipline desperately needed now before we even get to that point.