Greek Austerity Has an Undeniable Upside
NEW YORK ( Real Money ) -- While we are bombarded with images of turmoil in Greece there is an argument that the Greek government should avoid the austerity measures it has put in place in return for outside funding. But we should embrace, rather than fear, Greek austerity. A true default would ultimately bring with it very positive economic tidings.
Governments have no resources that they haven't first taken from the private sector, and this means they can only spend insofar as they borrow from or tax the citizenry. Every dollar, euro or yen governments spend is something they've extracted from the private sector first.
Looked at in terms of Greece's troubles, a real, uncushioned default by its politicians would certainly be a disaster -- for its politicians. Assuming Greece's government is forced to stiff its creditors without any help from the U.S., the EU or the IMF, it will be a long time before its government will ever again be able to fund its spending habits through accession of global markets for debt.
So this would be hard on Greece's political class, but it would be great for Greece's economy overall. Reduced spending on what is frequently government waste would be reoriented to more useful and economically beneficial pursuits in the private sector. Less government spending means more capital made available to productive ideas.
Some will point out that many of Greece's citizens are employed by the government, which means austerity would put them out of work. That is true, and it's something that would very definitely accrue to Greece's economy.
For one segment of Greece's population to work for the government means another must pay for their employment. Assuming a reduced governmental workforce in Greece we can also assume a lower tax burden on the broader population in Greece.
As for those put out of work, recessions tend to focus our minds and wanting to maintain their lifestyles, necessity would force out-of-work government workers in Greece to find private sector jobs. By leaving the government to work in the private sector, these former government workers will almost certainly be forced to labor in more economy-enhancing ways. This on its own would revive, rather than weaken Greece's, economy.
Reduced government spending would free up a lot of capital that private sector businesses could access. With Greece's government vacuuming up less in the way of euros, private businesses will have greater access to cheaper credit on the way to more expansion and more hiring. Even better, a true Greek default would force investors to rethink all investment in government debt, which means the positive impact of Greece not paying its creditors would be felt globally.