Alexis Tsipras caved. He swapped bailout for more festering pain exacted externally, rather than suffer pain on Greece’s own terms. Bailout equals austerity. But the price is higher taxes and spending cuts that will benefit international creditors. These austerity measures will have very predictable effects on the Greek economy. Austerity is the new dominant macroeconomic zeitgeist, having supplanted Keynesian economics. Austerity has become the policy of choice anywhere when economies are in trouble. It is also the policy of choice in a segment of the U.S. polity.
This capitulation is a mind-blowing turn of event that spits in the face of the Greek voters who resoundingly voted “No” to austerity. Certainly, the “troika” was in a better negotiating …show more content…
But how will bailing out Greece turn the country around? It’s like a person down on his luck because he has lost his job and has a mortgage, who racked up a $20,000 balance on 10 percent credit card. He makes the minimum payment every month. Unless his circumstances change dramatically, he’ll never get from under that debt. Similarly, a bailout will only add to Greece’s problem. However, austerity is not a pro-growth strategy. How does higher taxes, and a cut in spending encourage growth? It doesn’t! One would have to assume that the turn-around in the government finances, in itself is sufficient to grow the Greek economy. It is not enough to restore confidence in the government, when Greeks lack the wherewithal (income) to buy business goods. Higher taxes reduce disposable income. When you raise taxes people have less money to spend on food, shelter, and clothing. So business profits fall. When the government cuts spending on a host of public goods, public workers are laid off. They lose their source of income, which they use to buy goods and services in the marketplace. So, again, business profits fall. A poor performing economy is one in which government revenues fall. Advocates of austerity might welcome this since it would force the government to institute further cuts in spending. This is a downward spiral that does not culminate in a good place for the country. When a country falls under the grips of recessionary forces, it is difficult to right itself—Japan suffered from anemic performance for a “lost decade.” (See BBC) Don’t be fooled by this, Japan is the third largest economy on the globe. In addition, remember how difficult it has been for the U.S. economy to come back from the 2008 Great Depression. Bad times can be stubborn, protracted, sometime insoluble for countries. For instance, developing countries find it difficult to lift themselves out of the grips of poverty.
This capitulation is a mind-blowing turn of event that spits in the face of the Greek voters who resoundingly voted “No” to austerity. Certainly, the “troika” was in a better negotiating …show more content…
But how will bailing out Greece turn the country around? It’s like a person down on his luck because he has lost his job and has a mortgage, who racked up a $20,000 balance on 10 percent credit card. He makes the minimum payment every month. Unless his circumstances change dramatically, he’ll never get from under that debt. Similarly, a bailout will only add to Greece’s problem. However, austerity is not a pro-growth strategy. How does higher taxes, and a cut in spending encourage growth? It doesn’t! One would have to assume that the turn-around in the government finances, in itself is sufficient to grow the Greek economy. It is not enough to restore confidence in the government, when Greeks lack the wherewithal (income) to buy business goods. Higher taxes reduce disposable income. When you raise taxes people have less money to spend on food, shelter, and clothing. So business profits fall. When the government cuts spending on a host of public goods, public workers are laid off. They lose their source of income, which they use to buy goods and services in the marketplace. So, again, business profits fall. A poor performing economy is one in which government revenues fall. Advocates of austerity might welcome this since it would force the government to institute further cuts in spending. This is a downward spiral that does not culminate in a good place for the country. When a country falls under the grips of recessionary forces, it is difficult to right itself—Japan suffered from anemic performance for a “lost decade.” (See BBC) Don’t be fooled by this, Japan is the third largest economy on the globe. In addition, remember how difficult it has been for the U.S. economy to come back from the 2008 Great Depression. Bad times can be stubborn, protracted, sometime insoluble for countries. For instance, developing countries find it difficult to lift themselves out of the grips of poverty.