Financial discipline goes beyond businesses and households. I have commented in the past on government spending and the dangers of governments that are not committed to balancing budgets.
The issue is now coming to the forefront in Europe, where Greece has become the poster child for fiscal excess. The Greek government has overspent for years, with its public debt now equaling about 140% of its gross domestic product (GDP).
To make matters worse, a large part of the resources from this debt have not been earmarked to finance productive projects.
Instead, the money has been used to beef up bureaucratic payrolls, where government employees get better-than-average pay and benefits, often with an eye on patronage. Paul Collier writes that these relationships are typical of dysfunctional democracies.
Such spending doesn’t generate the value needed to pay future debt. Quite the contrary, many of these new bureaucrats do everything possible to justify their privileges, including creating new regulations that far from encouraging the creation of wealth, inhibit it.
This is the seed of disaster. When an economy loses its ability to generate wealth, the government can only maintain its revenue levels by increasing taxes, which further inhibits investment and the creation of wealth, creating a vicious circle that is difficult to escape. This applies to the example of Greece as well as any other economy – as we Mexicans know all too well.
Today, the Greek government is forced to implement deep cuts in spending and investment and other painful measures, such as laying off thousands of government employees, while at the same time increasing taxes. But these very actions are accelerating the economic collapse.
While the adjustment is necessary, the human costs associated with it are enormous.
So the story goes that badly invested public spending creates a temporary state of prosperity, an illusion that is increasingly difficult to maintain. Sooner or later the population has to pay for the excesses of populist leaders with painful adjustments that may take decades to overcome.
At the same time, when people get used to a standard of living and lose it, the risk of a social explosion increases. That is precisely what is happening in Greece, Spain, Ireland, and perhaps soon in Italy.
The role of government in the economy is to create and maintain stable conditions that generate productive investment, as shown in Germany.
This country is the antithesis of what has occurred in Greece, with sound public finances and a strong private sector, it has become the engine of the European economy. It is worth recalling that Germany undertook deep-going structural reforms to increase its competitiveness before the eruption of the global crisis in 2008.
It is estimated that this year, Germany’s GDP will grow 2.5%, after increasing 3.5% in 2010. In contrast, the Greek economy will have experienced its third year of negative performance at the end of 2011, with the forecast of a more than 3.0% drop in GDP this year.
Public debt is beneficial to society only when used responsibly to invest in profitable public infrastructure projects such as schools, hospitals, transportation systems, roads, bridges, etc. But there is a latent temptation by authorities to incur in excesses.
Recent history teaches us that populism and irresponsibility can occur in left as well as right-wing governments. The population must be vigilant and denounce politicians who promise us a fleeting, comfortable life in exchange for mortgaging our future. Greek or not, this lesson has become a classic.