Can the current austerity measures in Greece be compared to the US government actions of early 1920’s? If so, should we expect a robust Greek recovery just as in the US in 1921-22? Can we use Greek situation to test the Austrian school? I understand one major difference is that in Greece, the taxes are going up unlike the US in 1921. The comparison is not complete but the government is cutting down.
What’s their monetary policy like? The FED 1920-1921 raised the interest rate to 7%.
1920’s America was a very free economy with little taxes or inflation. Greece does not fit this bill in the slightest.
There are a number of substantial differences.
For one, budget cuts in 1920 US were implemented together with tax cuts. In short the whole government machine was being reduced in size. In Greece budget cuts are accompanied by tax increases. Not only Greek citizens will pay more taxes, but will actually receive less from the government. In short this is a two-fold tax increase.
Second: the Federal Reserve was controlled by national interests. The ECB is controlled by forces external to Greece. That means the Greek government cannot manipulate monetary policy (for example increasing interest rates) to suit its needs. It has to depend on an external central bank on whose politics it has little saying.
Third: less taxes and higher interest rates in the US favored capital accumulation which in turn could be employed to make workers more productive. In Greece capital is being depleted by a combination of factors: low interest rates by the ECB, increased taxation, monetary inflation by the ECB and people sending money abroad at an accelerating pace. Again Greece cannot stop her own citizens from sending money to another EU country (usually Germany, The Netherlands or Luxembourg) because she signed and implemented the Schengen Treaty which allows for free circulation of capital inside the EU.
And finally: people in 1920 US didn’t have the same entitlement mentality as they do in modern day Europe. Modern people think they have a “right” to the various entitlement programs put in place to buy votes and keep “social peace”. They will fight for entitlement much more ferociously than they will for liberty. “You can take my freedom but you cannot get my pork” is the battlecry of a whole generation.
Point #1 - Yes, they will receive less from the government. But isn’t govt spending ultimately tax as Dr. Paul correctly pointed out in the last debate? Well then isn’t ‘receiving less’ from the government actually a tax relief?
Point #2 - Doesn’t the inability to print Euro put Greece on a ‘pseudo gold standard’? As I remember, in 1921, although FED existed, we were on gold standard and FED followed a hands off approach, essentially relying on the market to adjust according to the economy.
Point #3 - Doesn’t ‘receiving less’ from the government as in point #1 force people to fend off for themselves ultimately forcing them to expect less? I think the way for people to start expecting less from the government is for the govt to actually give less in handouts.
I am 100% Austrian and absolutely do not believe in Keynesianism. I am just trying to understand why this austerity will not work from Austrian perspective. I understand there are several differences but cut in Govt is still a cut.
A few cuts will not cause a “robust Greek recovery.” Government involvement today is much higher than it was in 1920 (it seems to me).