Heritage Foundation, Economic Freedom, and Greece P

 

By: inoljt, http://mypolitikal.com/

(Note: I strongly encourage you to click the image links on this post when reading; they're essential to understanding what I'm saying.)

What country cut government spending the most in 2011?

Most people would generally agree that the answer is Greece. Smack in the middle of a debt crisis, Greece’s government has been forced to take an axe to government spending. Month after month has been marked by budget cut after budget cut.

The Heritage Foundation is a conservative think tank which publishes a ranking of economic freedom according to each country. These rankings are based on conservative economic values, such as low government spending. According to the Heritage Foundation, the less your government spends, the more economically free your country is.

So, after three years of cutting government spending to the bone, how’s Greece doing on the Heritage Foundation’s ranking of economic freedom?

Pretty Poorly.

In fact, the Heritage Foundation states that Greece has recorded the “largest score decline in the 2012 Index.” Why is this? Well:

Greece’s economic freedom score is 55.4, making its economy the 119th freest in the 2012 Index. Its score is 4.9 points lower than last year, reflecting declines in six of the 10 economic freedoms with particularly acute problems in labor freedom, monetary freedom, and the control of government spending.

This pattern is not only limited to Greece. The four other Eurozone countries in trouble (Ireland, Italy, Portugal, and Spain) have all been slashing their budgets to the bone. Austerity and cuts in government spending have been the main preoccupation of their governments and will continue to be for probably all of next year.

Unfortunately, all of these countries have also suffered corresponding declines in the Heritage Foundation’s rank of economic freedom. Here is Ireland:

Here is Ireland.

Italy.

Portugal.

And Spain.

Why has this happened?

Well, the answer is kind of ironic. Here’s what the Heritage Foundation says:

Ireland’s economic freedom score is 76.9, making its economy the 9th freest in the 2012 Index. Its score has decreased by 1.8 points from last year, reflecting poorer management of government spending and reduced monetary freedom.

Italy’s economic freedom score is 58.8, making its economy the 92nd freest in the 2012 Index. Its overall score is 1.5 points lower than last year, with significant declines in freedom from corruption and the control of government spending.

Portugal’s economic freedom score is 63.0, making its economy the 68th freest in the 2012 Index. Its score is 1.0 point worse than last year, mainly due to deterioration in the management of government spending, labor freedom, and fiscal freedom.

Spain’s economic freedom score is 69.1, making its economy the 36th freest in the 2012 Index. Its score is 1.1 points lower than last year, with a significant deterioration in the management of government spending overwhelming a modest gain in business freedom.

After cutting government spending by enormous amounts, the scores of these five European countries have gotten worse…because they can’t control government spending.

Indeed, the vast majority of the decline in economic freedom of Italy, Ireland, Portugal, and Spain occurs due to lower scores on government spending. Here’s a table that specifically shows how much worse their scores on government spending have gotten since 2011:

Score Changes Since 2011 Country Government Spending Greece -18.1 Ireland -16.7 Italy -9.2 Portugal -10.7 Spain -12.2

It’s pretty undeniable that these countries have been cutting government spending. And yet their scores on the control of government spending keep on getting worse. What gives?

Well, it has to do with the way that Heritage Foundation measures government spending. Specifically it uses government spending as a percentage of GDP; as a government spends more relative to GDP, its score gets exponentially worse.

What’s happening with these five European countries is that while they have indeed cut government spending, their economies have fallen into recession (coincidence?). So government spending, while numerically less, ends up composing a larger percentage of their GDP (which is declining even faster than spending).

Poor Greece. It cuts government spending to the bone for three years, falls into a depression that will be remembered for one hundred years, only to default on its debt anyways. And worst of all, its score on the conservative Heritage Foundation’s economic freedom ranking falls more than any other country because – wait for it – Greece has failed to control government spending adequately.

 

An Unmentioned Cause Behind America’s Economic Woes

America’s economy is in a bad way. The economic recovery has turned out to be disturbingly weak, and joblessness rates are still actually rising. Investment is down, Americans are depressed and angry, and there are even worries about a double-dip recession.

There has not been much analysis of the causes behind today’s economic stagnation. Most experts talk about how weak recoveries generally follow financial crises. Politically, Republicans blame Democrats, and Democrats are generally too busy trying to fix the problem than to think about what caused it.

Yet there is indeed something that did badly damage the recovery – an event very few nowadays link to America’s economic woes. This event was much like the 2008 financial crisis (indeed, it actually was another financial crisis). It dominated newspaper headlines, threatened to severely weaken several economically mighty countries, and in the end required international intervention to the tune of one trillion dollars.

On the surface, the European sovereign debt crisis – and more specifically, the bankruptcy of Greece – might have little to do with the United States. Greece, after all, is quite far away from America. Yet, as 2008 showed, the fall-out from a financial crisis goes wide and far; if Europe was hurt by America’s financial crisis, it stands to reason that America was hurt by Europe’s financial crisis.

Moreover, both crises had much in common. Panic hit the market and risk spread wildly, from the original contagion to even the safest strongholds. In the United States, banks went bankrupt; in Europe, countries went bankrupt. For both crises, the “fix” cost hundreds of billions of dollars.

There is another, more ominous analogy. The Great Depression, it is commonly held, started with the collapse of the American stock market. What really made it “Great,” however, was a series of bank failures that followed. These started in Austria. If the 2008 financial crisis was Black Tuesday, then the Greek crisis holds a disturbing parallel with the chain of bank failures that started in Europe.

Fortunately, the European Union was able to put a halt to the Greek crisis – unlike what happened during the Great Depression. Due to the lessons learned from that era, unemployment is less than half what it was during the Great Depression’s peak (which is, unfortunately, still quite high).

Nevertheless, the fact that the European debt crisis was halted probably did not it from inflicting the harm it had already done. Much as the 2008 financial crisis raised unemployment to jump to 10%, fall-out from the European financial crisis seems to be keeping it at that number. It is interesting that almost nobody, whether in politics or economics, seems to be publicizing this fact.

--Inoljt, http://mypolitikal.com/

 

 

How Bad Is It? Greece, Panic and the Crisis of Confidence

Cross-posted at River Twice Research.

The Greek debt crisis finally spilled over in full force to U.S. markets, aided and abetted by extreme statements emanating from such esteemed and prominent voices as Muhammed El-Erian of the large bond investor Pimco, who warned that Greece could be just the beginning of sovereign debt catastrophes. In the space of minutes, the major U.S. indices plunged more than 10%, fueled by the same programmatic electronic trades that were part of the battering in late 2008 into 2009. And then in the space of 15 minutes, they recovered, without – it’s fair to say – much human decision-making during that interval (and if an individual even tried trading during those 30 minutes, they would have found it difficult or impossible, as web sites such as schwab.com were completely overwhelmed with traffic).

 

There's more...

A First-World Crisis

The recent troubles faced by Greece bring to mind a fascinating way in which this financial crisis has been different from so many others. Namely, it has been the wealthy, Western countries that have been hit hardest and who have been made to look bad.

It was troubles in the United States, the world’s preeminent economic power, which first initiated the recession. Its sophisticated, modernized financial system self-destructed in a manner previously thought only possible in places like Indonesia or Argentina. For the first time since the Great Depression, First-World banks were in danger of falling; Great Britain even had an old-fashioned bank run.

And it was rich Westernized Iceland that was the first to collapse. Not some Latin American Argentina or Asian Indonesia – but Iceland. Today the country is still in financial chaos – an Icesave bill to restore stability has proven deeply unpopular, much like the bail-out bill for the banks. The bill is being put into a national referendum, where it will almost certainly lose.

Indeed, all of Europe has suddenly seemed vulnerable. In Eastern Europe, countries from Hungary to Estonia have been closely scrutinized, their finances built upon weak foundations. For a while Ireland appeared similarly weak, until its government enacted a set of bills to reduce debt. Now analysts are wondering about the Mediterranean PIGS (Portugal, Italy, Greece especially, and Spain). It looks like Germany will bail out Greece, to the fury of its citizens.

Meanwhile, the Third World has largely stayed above and out of the fray. China’s economic growth only briefly dipped from 13.0% to 9.0%, and practically no Third World countries have experienced financial crises of the type that roiled Iceland or the United States.

It seems that one legacy of the global recession may be to help close the gap between the rich and poor in the world. On the other hand, not all countries would benefit. Africa, for instance, is still plagued by the same problems that have beset it for generations. Finally -and quite unfortunately for the United States – more worldwide equality would probably lessen its relative power. What is good for the world is not always good for us, and vice versa.

--Inoljt, http://mypolitikal.com/

 

A First-World Crisis

The recent troubles faced by Greece bring to mind a fascinating way in which this financial crisis has been different from so many others. Namely, it has been the wealthy, Western countries that have been hit hardest and who have been made to look bad.

It was troubles in the United States, the world’s preeminent economic power, which first initiated the recession. Its sophisticated, modernized financial system self-destructed in a manner previously thought only possible in places like Indonesia or Argentina. For the first time since the Great Depression, First-World banks were in danger of falling; Great Britain even had an old-fashioned bank run.

And it was rich Westernized Iceland that was the first to collapse. Not some Latin American Argentina or Asian Indonesia – but Iceland. Today the country is still in financial chaos – an Icesave bill to restore stability has proven deeply unpopular, much like the bail-out bill for the banks. The bill is being put into a national referendum, where it will almost certainly lose.

Indeed, all of Europe has suddenly seemed vulnerable. In Eastern Europe, countries from Hungary to Estonia have been closely scrutinized, their finances built upon weak foundations. For a while Ireland appeared similarly weak, until its government enacted a set of bills to reduce debt. Now analysts are wondering about the Mediterranean PIGS (Portugal, Italy, Greece especially, and Spain). It looks like Germany will bail out Greece, to the fury of its citizens.

Meanwhile, the Third World has largely stayed above and out of the fray. China’s economic growth only briefly dipped from 13.0% to 9.0%, and practically no Third World countries have experienced financial crises of the type that roiled Iceland or the United States.

It seems that one legacy of the global recession may be to help close the gap between the rich and poor in the world. On the other hand, not all countries would benefit. Africa, for instance, is still plagued by the same problems that have beset it for generations. Finally -and quite unfortunately for the United States – more worldwide equality would probably lessen its relative power. What is good for the world is not always good for us, and vice versa.

--Inoljt, http://mypolitikal.com/

 

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