Sometimes it’s easier to see the problems abroad than it is at home. And that may be true of the Euro zone. As we all know, there have been a series of agreements bailing out Greece on the condition that Greece make very large cuts in its own budget. And it hasn’t worked. Why not? Shouldn’t cutting back have rejuvenated the Greek economy?
People like to make the comparison to their own household income and expenses. If you’re in debt you have to cut back. But the government of a country is huge by comparison to anyone or anything in it. When an individual cuts back, it leaves very small ripples. When you take some money out of the bank, it gives you your money with a smile – no problem. Unless in a run on the bank all the creditors try to take their money out of the bank. That is not a withdrawal that the bank can stand. It’s too much. And the bank fails.
So is a government cutting back more like an individual balancing a checkbook or a mass run on a bank? The volume is large. Government cut backs affect everyone.
You might respond by saying American state governments have cut back and it didn’t bring our economy down. Notice though that while the states cut back, the federal government was struggling to expand the economy, spending on stimulus, supporting companies like GM that had budgets larger than many countries, and the Fed was doing its best to pump money into the economy – all against determined opposition to prevent the federal government from doing anything more. One shudders to think where we’d be if the federal government had joined the states in a run on the economy, withdrawing their money en masse like a run on the bank.
All economists will tell you that there are virtuous circles and vicious circles. If we get a raise or a new job and we spend more, many people benefit – the businesses we buy from and the suppliers they buy from and all the businesses that the owners and employees buy from. The multiplier is several times the additional funds that we spend. But if its just one of us, it doesn’t change things things much because it’s probably not large to start with, but also because if the economy is flat, our gain is probably matched by someone else’s decline in spending. If a lot of us are doing better, though, that begins to build.
Government spending is like a lot of us doing better – or worse – at once. And, unfortunately, vicious cycles work the same way. When there is a large cutback, the impact is a multiple of the cutback. That makes state cutbacks more like runs on the bank than individual budgetary adjustments.
So the difference between us and Europe is that our federal government has been trying to counteract state cutbacks in every way it could despite determined Republican opposition – it did as much stimulus spending as it could pass Congress, it helped restart the car industry and the fed kept money flowing as much as it could.
So our state governors are able to claim success in cutting back because they’ve had the power of the feds behind them. Greece couldn’t because the cutbacks led the Greek economy to implode. And other countries like Spain are experiencing depression-level unemployment, a quarter of workers with no jobs to do. Some people, unfortunately, aren’t willing to learn how economies work, or even look at the facts.
— This commentary was broadcast on WAMC Northeast Report, May 15, 2012.