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Greece's Keynesian Experiment

Big Government Doesn't Work

Written by Geoffrey Pike
Posted July 3, 2015

We have lived in a Keynesian-dominated world since the 1930s. During the Great Depression, when the U.S. government was intervening in the economy like never before, the promoters of big government needed an excuse to expand government.

They used John Maynard Keynes as the supposed expert to convince the public that there was scientific and economic validity for the massive government expansion.

While there are several quotes attributed to Keynes, there are few who have actually read, let alone understood, his 1936 book, The General Theory of Employment, Interest and Money.

Some will blame Keynes for many of the economic ills we have today. But Keynes was really a convenience for the establishment in supporting their policies. If Keynes hadn’t existed, they would have found someone else.

Whenever the government needs to justify the expansion of some program today, it has no trouble finding so-called credentialed experts who are willing to support the expansion. We are supposed to ignore the fact that the experts are often funded and licensed by the government.

My favorite quote attributed to Keynes is the following: “In the long run, we are all dead.” Keynes may be dead now, but there are over 7 billion people on the planet who are living.

I can’t think of a better quote that epitomizes Keynesian economics. It is basically a repudiation of future orientation, saying you should forego saving because you could be dead tomorrow. You might as well consume today.

Keynesians believe an economy functions because of consumer demand, and sometimes the government needs to fuel this consumer demand. They basically ignore the productivity side, thinking productivity will just automatically happen if there is consumer demand.

You could call it the economic version of Field of Dreams: “If you build it, he will come.” If you consume it, there will be more.

Perhaps Keynes gets an unfair reputation today. While he was not a huge proponent of the free market, it seems many Keynesians today are bigger interventionists than Keynes himself ever was.

Keynes on Steroids

And this brings us to the hot topic in world news: Greece has defaulted on its debt obligations. There will be a referendum on Sunday for the Greeks to decide if they want to remain a part of the European Union.

But there is something that is not being widely admitted regarding Greece, and that is that it is really the ultimate Keynesian experiment. The policies of the Greek government are really Keynes on steroids.

There was no shortage of massive government intervention in the Greek economy. The debts were extremely high, as was the welfare spending. The taxes are not exactly low, which is perhaps something Keynes would have objected to in times of economic trouble. But the Keynesians of today generally favor higher taxes, particularly on the productive classes.

While Greece hasn’t had its own central bank to create money out of thin air since adopting the euro, there was no shortage of help from the European Central Bank (ECB). But this “help” really only delayed the inevitable.

Consider a family that is in over its head in credit card debt. It spends more than it earns and has accumulated $60,000 debt. A lender comes in and offers to help by extending the family’s line of credit by an additional $10,000. Now the family can pay its debts for a little while longer.

The problem is that the family owes even more now. It is further in the hole.

The ECB, the IMF, and all other parties to the Greek bailouts were throwing away good money. It kept the Greek government going for a little while longer. The so-called austerity measures were little Band-Aids to cover up the wounds. They did not put a stop to the accumulation of more debt.

Real major spending cuts will finally be imposed on the Greek government. It couldn’t be done by the ECB. It will be done through economic law. When there is nothing left to consume, you can’t consume any more.

Or as Margaret Thatcher put it, the problem with socialism is that you eventually run out of other people’s money.

Greek Poverty

I have been reading plenty of stories on the crisis situation in Greece. There are certainly plenty of technical articles dealing with unemployment rates, debts, and other statistics. There are political articles dealing with the ramifications of a Greek exit from the European Union.

But the articles that have fascinated me the most are the stories on the street. I have read about people going out at night scavenging for food. Some of these people used to be part of the middle class. They were working people with good jobs and decent homes, and now they are basically in poverty.

There are stories about business owners who are out of business or on the brink of bankruptcy. This week is particularly hard with the shutdown of Greek banks and the capital controls.

Anyone who had significant money in a Greek bank was not wise. There was plenty of warning, really for the last several years. It just shows that there is often plenty of warning, yet many people still fail to take action. You can consider this for your own life lessons.

There is a severe contraction in the division of labor in Greece. The country needs a good dose of free markets. It has essentially repudiated its official debts at this point, but that is not nearly enough. The pension and welfare system there is unsustainable, and many are now finally coming to grips with it.

If Greece can dramatically lower tax burdens and free up businesses from government regulations, then this will go a long way to improving things quickly.

The other important step is to adopt a somewhat stable currency. This may be the one really unfortunate thing about leaving the European Union. If Greece adopts its own currency, I am afraid its central bank will attempt to use massive monetary inflation (perhaps hyperinflation?) to continue funding the welfare state.

Plenty of Consumer Demand

When I discuss economics with people, I am sometimes met with a counterargument that, while discussing economics is fine, it does nothing to address the plight of the poor and those in need.

But this is exactly what economics does. I advocate free market economics from a moral standpoint, but also because it helps our standard of living. This includes virtually everyone (except perhaps the few who profit off of big government).

The millions of people in Greece who are now on the brink of poverty are there because of bad economic policies and really nothing else. It is the ultimate Keynesian experiment brought to its logical (or is that illogical?) conclusion.

For all of the unemployed people in Greece, I wish someone would start a blog there with pictures and stories of daily happenings on the streets to illustrate the degree of suffering.

There is no shortage of consumer demand in Greece right now. Unfortunately, there is high demand for basic needs, such as food, that are not being met.

Greece needs the anti-Keynesian solutions. It needs savings and investment. The government needs to drastically shrink in size and scope.

Government spending does not help the poor in the long run. Consumer demand obviously does not lead to a robust economy. You have to have production in order to consume, but you can only have production with savings and investment. Massive government pensions and welfare benefits are not production; they are forms of wealth redistribution, and they discourage production.

There are a lot of lessons to be learned from Greece. The people there should have already left if possible. They should not have had their money in Greek banks, as there were many warning signs. They should have had some cash for emergencies, and I’m sure some gold and silver wouldn’t have hurt either.

Most importantly, they should not have trusted their government, and they should not have become reliant on government handouts.

Greece is the ultimate Keynesian experiment, and it just went up in flames. How many times do we need to try this before we realize more government is not the solution to our problems?

Until next time,

Geoffrey Pike for Wealth Daily

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