Greece and the Multiplier

Americans cheered for the Greeks as they fought for and won their independence in 1830. For most of the intervening years we’ve had issues nearer home to think about. And Greece is far away. But recently it has been having difficulties which threaten European economies and perhaps our own.

The obvious fact is that Greece is in debt and does not seem to have the wherewithal to pay its debts. So the remedy being forced on it is austerity. Cut, cut, cut expenditures. Cut pay, cut workers, cut benefits, cut programs, just cut, cut, cut.

The problem is, however, that the cuts will also cause trouble. All the people who are employed by the Greek government, who work on government projects, or depend on government programs will now have less to spend. And so too all the people they did business with, all their suppliers and the businesses they patronized will also have less.

This is known as the multiplier effect. If you or I stop buying from one place and turn our business elsewhere, it is a drop in the bucket of the national economy. But when we all pull in our belts at the same time we call that a depression. And the repercussions become a kind of black hole that pulls the economy increasingly downward. When a country contracts the impact can be very large. There is an enormous difference between the impact of individual decisions and the systemic impact of all of us doing the same thing at the same time. When a country collapses that is much more like what happens in a depression. Countries are just too big. Think for example what happened in Michigan when GM was near bankruptcy. Size matters. So what is Greece to do?

There is something else going on in Greece. It turns out that the rate at which Greeks pay their taxes is extremely low. 98% of Greeks denied owning some forms of taxable property. The black market is huge, largely representing refusal to pay taxes. And the size of the withheld taxes is close to the size of the Greek debt. That really limits Greek options.

Is there a lesson on this side of the Atlantic? New York and many other states are contracting their expenses. That will have very predictable multiplier effects as each state shrinks its own economy and those of its neighbors and trading partners. The result is likely to deepen the depression we have been in since 2007. The extent of the multiplier and its effect on taxes will mean that states will not get out of their hole. They’ll spend less. But they’ll collect less. And they still won’t be able to pay their debts. The world tried that solution in 1929. The result was worldwide disaster.

Turn away for a moment from the loudmouths yelling about cutting programs and taxes. Restoring some of the taxes unwisely cut by the Bush Administration actually puts money in circulation and what had been a vicious circle can become a virtuous circle in which we all gain because the taxes we pay aren’t the end of the story. The taxes we pay are an investment in the economy and we benefit from the general welfare, just as most of us lose, not benefit from the economic misfortunes of others.

Of course government funds can be spent wisely or foolishly. But government investment in infrastructure and in the services that underlie a strong economy and clean food, air and water keeps on growing the economy.

It’s time to toss the tea-party nonsense overboard and start making some level-headed good sense, both here and in Greece.

This commentary was broadcast on WAMC Northeast Report, May 18, 2010.

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