Tuesday, November 1, 2011

Lessons From Greece

The lesson to be learned here is that once some point is reached, it becomes very difficult to reduce the debt/GDP ratio especially if the government's contribution to GDP is very high as it is with Greece. An economy dependent upon the government will experience a slowdown in growth or even negative growth until the economy can adjust which takes time. In the short term, things will not change and might become worse. The trick is to take pain and reduce government spending before the crisis point is reached.

In Greece, government spending makes up nearly 50% of GDP. What's interesting is that we hear about "austerity" measures, but no actual cuts in government employment have been made, only some changes to wages and pensions. That's because the Greek Constitution guarantees lifetime employment for public sector workers, they cannot be fired or laid off. Now there is talk about moving government workers into a "jobs banks" where they would be paid 60% of their salaries to do nothing. Link below.


Greece's economy is so screwed up and so dependent upon the government sector that there is simply no way to avoid massive pain and a huge depression.

Why don't they just default? In the long run this might be better, but a default would mean that they would have to make even bigger cuts in the short term. That's right, Greece is still running around a -7% deficit despite all the "austerity" measures and a default would force them to balance the books. The Greek economy needs to restructure itself away from the government sector, but it's too late now to avoid huge pain. With so many people dependent upon the government gravy train, it's no wonder that there is social unrest. Once again, the lesson is for us not to get to the point where we are Greece. Our debt/GDP ratio is at 100% now and fast approaching Greece's.

For the people and economists who decry these Greek "austerity" measures, I can only shake my head and wonder what world they are living in. GREECE HAS NO CHOICE, THERE IS NO MORE MONEY TO SPEND, INVESTORS REFUSE TO LEND GREECE MORE MONEY. Time for a reality check.

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