Lessons from Greek financial crisis are being ignored

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Greece covers an area slightly smaller than Alabama. Nonetheless, this small nation bordering on the Aegean, Ionian and Mediterranean seas has had and continues to have a big impact.

The Greeks gave us the Olympics; the foundations of philosophy through Socrates, Plato and Aristotle; and the beginnings of democracy. For good measure, the New Testament was originally penned in Greek. That’s impressive.

But these days Greece is known for its governmental budget mess. While the Greeks of the past provided valuable lessons about government, philosophy and religion, today’s Greece offers lessons in what not to do when it comes to government.

Unfortunately, President Barack Obama and leaders in Congress have chosen to follow Greece into the depths of fiscal and economic irresponsibility.

In April, Greece lost its access to capital markets. Why? Bloated government caught up to the Greeks.

Greece originally predicted that its budget deficit for fiscal year 2009 would be 3.7 percent of GDP — still above the European Union limit of 3 percent. The actual deficit registered 13.6 percent. Total public debt outstanding equaled 115 percent of GDP last year; is expected to hit 123 percent this year; and could reach 150 percent by 2013.

Of course, these debt woes are merely a symptom of the real disease: runaway government spending. Greek government spending tops 50 percent of GDP. And the International Monetary Fund reports that “wages and social benefits constitute 75 percent of total (non-interest) public spending.”

It’s not surprising then that efforts to reduce spending were met with protests from those working for or receiving assorted handouts from the government.

What’s the European Union’s answer? Naturally, it’s time for a bailout worth nearly $1 trillion for Greece and other nations that might get themselves in budget trouble. And President Obama, according to The Wall Street Journal, was on the phone urging the bailout, and Fed Chairman Ben Bernanke was extending loans to the European Central Bank. Add in the IMF pledge to fund part of the bailout, and guess what? The U.S. taxpayers are on the hook again. Meanwhile, bailouts simply add to and encourage irresponsible government spending.

But American taxpayers have even bigger worries considering that U.S. budget policy is following the example of a big, fat Greek government.

The U.S. federal budget deficit hit $1.4 trillion in fiscal year 2009, or 9.9 percent of GDP.

Just through the first seven months of the current fiscal year, the deficit topped $800 billion, and the CBO projects that the President’s budget would put the year-end deficit at $1.5 trillion, or 10.3 percent of GDP.

Over the coming decade, based on the President’s plan, budget deficits would persist at unprecedented levels.

For good measure, federal debt held by the public would climb from 53 percent of GDP last year to 90 percent in 2020.

While the big spending mess clearly was a problem with the Bush administration, President Obama has perpetuated and vastly expanded it.

Keep in mind that federal spending stood at $2.7 trillion in 2007. That was bad enough. But in 2009, it registered $3.5 trillion, and is projected to top $4 trillion in 2014. As a share of GDP, annual federal outlays during the post-World War II to pre-Obama period averaged 19.5 percent. Over the coming decade under the Obama budget agenda, it would average 24 percent.

By the way, Greece imposes an income tax with a top rate of 40 percent, as well as a value-added tax of 21 percent. These lofty taxes have not brought about fiscal responsibility. Instead, they merely have fed ever-bigger government.

The Obama agenda would push the U.S. top federal income tax rate above 40 percent, while the imposition of a value-added tax is under consideration by the President’s tax and budget commissions.

For good measure, concerns now spread about the political independence of the European Central Bank given its role in the Europe’s big bailout. The same concerns plague the Federal Reserve given its roll in the U.S. and now European bailouts.

It’s hard to see how the agenda being pushed by the President and congressional leaders differs in any substantive way from the policies that sank Greece.

In the end, the ancient Greek philosopher Aristotle identified the root cause of these budget woes. He wrote: “What belongs in common to the most people is accorded the least care: they take thought for their own things above all, and less about things common, or only so much as falls to each individually.”

What does that mean in terms of government today? When spending other people’s money, the political class has few, if any, incentives to be frugal or spend wisely.

Keating is chief economist for the Small Business & Entrepreneurship Council. He can be reached at rkeating@sbecouncil.org.