Do not think about, write about or deal with human behavior without determining the effects of incentives. It’s not their money, of course they’ll waste it.
While Greece was well into getting into its untenable condition, Greek politicians would have said what the man who jumped from the 100th floor of the building said when he passed the 50th floor, “So far, so good.” Halfway down the road to doom, the destination doesn’t look like it does when you arrive.
Greece’s problem and Ireland’s solution to theirs, are textbook examples of what libertarians would and would not do. A libertarian, of course, would never get into the mess of government over-spending and over-hiring.
Greece Should Learn from Ireland
By Benjamin W. Powell
Greece missed its $1.8 billion loan repayment to the International Monetary Fund on June 30, and voters rejected the austerity measures creditors are demanding as the price of another bailout on last Sunday’s referendum.
Greece has other choices if it can find the political will. The Greeks, as steeped in history as they are, could follow the path Ireland took nearly 30 years ago after years of fiscal mismanagement created similar circumstances. Instead of balking at change, Ireland took control of its destiny with far-reaching market reforms that cured its debt problems and triggered rapid economic growth.
Greece’s creditors—the IMF, European Union and European Central Bank—have demanded “austerity” reforms before. But the required budget cuts and tax increases have not promoted economic growth, merely belt-tightening, not true pro-market reform.
Capitalism, according to North American academics is the problem, not the solution.
Greece would be better served by learning from Ireland, which experienced similar problems in the mid 1980s. Greece’s debt to GDP ratio today stands at 180 percent of GDP. Ireland’s debt to GDP ratio in 1986, when things were coming to a head, stood at 116 percent. Similarly, government spending today accounts for 52 percent of the Greek economy. In 1986 Ireland, it accounted for 55 percent of the economy.
Both countries created their debt problems by letting government spending grow out of control.
In 1987, Ireland slashed spending across many categories—health spending by 6 percent, education by 7 percent, and agricultural spending by 18 percent. Entire government agencies, bureaus and boards were abolished.
Entire agencies, bureaus and boards abolished. Sounds good.
The economy started growing again, modestly at first. By 1990, government spending (excluding interest) had declined to 41 percent of GDP and the debt ratio had fallen below 100 percent of GDP again.
Ireland continued its reforms with multiple rounds of tax cuts throughout the 1990s. And by 1999, tax revenue had fallen as a percent of GDP to 31 percent of the economy, without piling up additional debt.
These reforms, coupled with Ireland’s existing, relatively-free trade policies, not overly-burdensome regulatory environment, and strong protection of contract and property rights produced spectacular results.
Ireland’s courageous reforms and the economic growth that accompanied them fundamentally transformed the economy by significantly reducing the burden of government. Greece could make a similar transformation if it had the political will to do it.
Socialist policies got Greece into this problem. Now a socialist is in charge of resolving it. Hmm.
Reducing regulations is a good place to start, but they’re socialists, so they’ll pass more.
Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Days of Songs and Mirrors: A Jacobite in the ‘45.”
Cui Bono–Cherchez les Contingencies