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  • Greece: Austerity Doesn’t Involve Public-Sector Layoffs

    imago stock&people/Newscom

    imago stock&people/Newscom

    Slate’s Matthew Yglesias might be attacked as an “austerity denier” now that he has joined Heritage’s Salim Furth in pointing out that there is a lot of policy diversity under the broad label of “austerity.”

    Yglesias explained last week why a small but sudden layoff of government employees might bring down the Greek coalition government:

    So far [political] awkwardness has been avoided by having zero public-sector layoffs. All that sky-high Greek unemployment you’ve read about has come from people losing jobs in the private sector. That’s clearly not a sustainable dynamic, and including public sector job losses in the package is a necessary part of the program. But in a patronage politics system, nothing is so simple.

    Greece is the apotheosis of austerity, with sharp spending cuts and brutal tax increases since international lenders realized in 2010 that the country had no path to fiscal balance. But even in Greece, austerity has its peculiarities.

    Greece has promised to lay off public employees before. In early 2012, Greece committed to dismissing 15,000 public servants by the end of the year. It did not happen. Despite the lack of government layoffs, the unemployment rate rocketed to 25 percent.

    Even with pension and wage cuts, inflation, and non-replacement of retirees, Greek public-sector compensation of employees has only fallen back to its 2003 level, which is $4 billion below the 2007 level (in real 2005 PPP U.S. dollars). Most of the cuts merely rolled back the $7 billion jump in the government’s employee compensation that constituted part of a failed stimulus in 2008 and 2009.

    Cutting the wages of overpaid employees is a good start, and Greece cannot afford to maintain sinecures for thousands of extra managers. But with government unions so strong that surgical cuts seem politically impossible, the Greek government tried to make a little headway by completely closing down the public broadcasting service, which had been used as a goodie-box of political favors for decades. The New York Times reports, “Before the financial crisis hit in 2009, it had about 100 on-air presenters earning around $650,000 a year.”

    While the public broadcasters fiddle, the Greek private sector has burned. In order to maintain “20 advisers in the C.E.O.’s office,” Greeks have paid more taxes on everything. Income taxes keep rising, and the value-added tax climbed from 19 percent to 23 percent, making the tax significantly more detrimental to economic activity.

    Austerity is not prix fixe. Only three European countries, including Greece, have both cut spending and raised taxes on net since 2007. Only two European countries have a cyclically adjusted budget surplus, while half have increased their cyclically adjusted budget deficits since 2007.

    It is naïve to lump all of Europe together and declare that “austerity” is harmful because the European economy is weak. A more nuanced approach recognizes policy diversity and maintains that some public-sector spending can be cut without harming the economy. As long as Greece’s civil servants are the masters of the government, it has ample room for expansionary “austerity.”

    Jaeho Lee is an Asan Fellow at The Heritage Foundation.

    Posted in Economics [slideshow_deploy]

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