It’s gotta get worse before it can get better

The unemployment rate in Greece is on the rise in the face of “austerity cuts” they’ve been forced to make in order to keep the bailout money flowing from their more economically viable EU partners.

ATHENS: Greeceā€™s jobless rate climbed to a new record in May, underlining how austerity prescribed to slash deficits and keep bailout funds flowing is hitting the economy on which recovery depends.

This, on its face, seems to undermine the argument that cutting government spending will increase economic activity in the private sector. The problem is, you have to break even before you can get ahead.

As part of the “austerity” measures, Greece has been required to INCREASE taxes, as well as cut government jobs.

So, at the same time, they are reducing the amount of money available to the private sector to hire new employees, and are adding more people to the rolls of those who need jobs.

OF COURSE the “austerity” measures aren’t helping the economy.

The problem in an economy that runs a deficit (like ours as well) is that, until the deficit is eliminated, government spending cuts by themselves canNOT result in a corresponding increase in private sector activity.

Look at it this way: Let’s say your income is $1000 per month, but you spend $1500 per month on bills, luxuries (gotta have the 1500 channel cable package and unlimited data for your smartphone right?) and interest on your already heavy debt. The result is, your debt is increasing at a rate of $500 a month.

So, you cut spending by, say, 20%. Now you’re only spending $1200 per month. Do you have any more available cash to invest or save?

No…you’ve only reduced the amount of additional debt to $200 per month. You still don’t have any “extra” cash on hand to invest.

Greece is running up against that right now. They spend way too much on social programs and salaries and benefits for the huge number of government employees they support. Because they haven’t cut enough to eliminate the deficit, they are only cutting into the amount they owe at the end of every year, they haven’t cut deep enough to add anything to the private economy yet (and are, in fact, cutting deeper into the private economy by raising taxes), so the economy continues to decline.

We are headed along this same path. The government could cut taxes to stimulate private sector growth, which would probably increase tax revenues to a certain extent, but unless and until the deficit is addressed, there is really nothing the government can do to prevent the whole house of cards from falling down sooner or later.

Most of our politicians seem to be content to kick the can down the road and hope that the crash doesn’t happen until they’re dead and buried. Personally, I’d rather not pass my mistakes on to my kids and grandkids. I’d rather we cowboy up, tighten the belt now, and endure the hardships to get things back on track so that our kids and grandkids are better positioned to enjoy the fruits of their labors, rather than live under the continued threat of a total economic collapse that is inevitable if something isn’t done to get things under control.

Unfortunately, there aren’t any politicians out there brave enough to run on a platform of “lets bite the bullet so our kids don’t have to”.

1 thought on “It’s gotta get worse before it can get better

  1. Pingback: Political Saviors | Captain of a Crew of One

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