When Greek voters elected a hard-Left politician who promised to reverse austerity, Paul Krugman celebrated wildly. In a column filled with economic cant, he explained that it was always a disaster for Greece to turn to austerity when its economy collapsed, instead of spending its way out of its financial woes:
To understand the political earthquake in Greece, it helps to look at Greece’s May 2010 “standby arrangement” with the International Monetary Fund, under which the so-called troika — the I.M.F., the European Central Bank and the European Commission — extended loans to the country in return for a combination of austerity and reform. It’s a remarkable document, in the worst way. The troika, while pretending to be hardheaded and realistic, was peddling an economic fantasy. And the Greek people have been paying the price for those elite delusions.
You see, the economic projections that accompanied the standby arrangement assumed that Greece could impose harsh austerity with little effect on growth and employment. Greece was already in recession when the deal was reached, but the projections assumed that this downturn would end soon — that there would be only a small contraction in 2011, and that by 2012 Greece would be recovering. Unemployment, the projections conceded, would rise substantially, from 9.4 percent in 2009 to almost 15 percent in 2012, but would then begin coming down fairly quickly.
What actually transpired was an economic and human nightmare. Far from ending in 2011, the Greek recession gathered momentum. Greece didn’t hit the bottom until 2014, and by that point it had experienced a full-fledged depression, with overall unemployment rising to 28 percent and youth unemployment rising to almost 60 percent. And the recovery now underway, such as it is, is barely visible, offering no prospect of returning to precrisis living standards for the foreseeable future.
Boiled down, Krugman said that the big bad banks closed the spigot on Greece’s socialized spending spree and Greeks suffered horribly. Krugman then went on to write several mind-numbing paragraphs about GDP and debt and the total failure of austerity. The remedy, said Krugman, is to return to a centralized economy with massive government spending:
If anything, the problem with Syriza’s plans may be that they’re not radical enough. Debt relief and an easing of austerity would reduce the economic pain, but it’s doubtful whether they are sufficient to produce a strong recovery. On the other hand, it’s not clear what more any Greek government can do unless it’s prepared to abandon the euro, and the Greek public isn’t ready for that.
Still, in calling for a major change, Mr. Tsipras is being far more realistic than officials who want the beatings to continue until morale improves. The rest of Europe should give him a chance to end his country’s nightmare.
Thus spake the economic guru at The New York Times.
Since I have a solid ego when it comes to my ability to read and analyze things, I don’t feel any shame in admitting that Krugman’s jargon-filled column made no sense to me. No amount of his babble could answer my central question: How in the world can a broke country fix its economic problems by spending money it doesn’t have on welfare programs it can’t afford?
Of course, there’s no doubt but that Greece’s efforts at austerity failed, which led me to another question: “How could austerity fail? If the problem is too much government spending sucking money out of the private sector, thereby leaving the private sector unable to generate wealth, how is it that reduced government spending didn’t start alleviating the worst effects of Greece’s recession?”
Brett Stephens provides the answer. It turns out that, while the Greek government cut spending, it did not cut the almost insurmountable barriers that hamper innovation and wealth creation:
Whenever I think of Greece and its economy, I can’t help but recall the stool-sample story.
Sorry to begin on a scatological note, but here’s a revealing tale about a country that, by electing the radical left-wing Syriza party over the weekend, just voted itself down the toilet. In 2011, Greek entrepreneur Fotis Antonopoulos and his partners decided to start OliveShop.com, an online store specializing in organic olive-oil products.
Before they could start their business, they first needed the right paperwork. As recounted in the Greek newspaper e-Kathimerini, authorizations were required from the government tax office, the local municipality, the fire department. Also the bank, which insisted that the entire website be in Greek—and only in Greek—despite Mr. Antonopoulos’s attempts to explain that he intended to market his products to foreign customers.
And then there was the health department, which informed Mr. Antonopoulos that company shareholders would be required to furnish chest X-rays and, yes, stool samples. Greece has standards, you know.
It took OliveShop.com 10 months to get all the right stamps, certificates and signoffs. The problem with the bank was resolved only when Mr. Antonopoulos opted for PayPal instead. Registering with the U.S. Food and Drug Administration, by contrast, took him all of 24 hours and one five-minute digital form.
The Greeks were like the kidnapped man who is finally removed from the sack in which he was carried away and is told that he can now escape — except that no one removes the shackles on his arms and legs, and the gag from his mouth. Removing government spending is meaningless if its not coupled with free market reforms. No wonder the Greeks were miserable. Typically for any European country, though, when things went from bad to worse, the Greeks, instead of opting to really free the people so that they can create wealth, the only solution the political class and the voters could come up with was to impose even more government control, this time using imaginary money.
The concern is that we all know what happens when a centralized government in a socialist economy can no longer cash those imaginary money checks. It would be nice if the economically ineffective centralized government would just go away. Instead, what invariably happens is that the socialist, centralized government gets out the guns and uses deadly coercion as its currency of choice, in lieu of the real wealth that a free-market economy, composed of a free people, could have created.
By the way, I don’t know if Bret Stephens had Krugman in mind when he wrote his column but I think he must have when he wrote his penultimate paragraph:
The most painful outcome, but perhaps also the best, would be a forced Greek exit from the eurozone that serves as a dramatic warning to the rest of Europe’s lackluster reformers about what happens to countries that take their economics lessons from the op-ed page of the New York Times.