Monday, May 17, 2010

Two Sides of the Same Coin: Excessive Spending/Insufficient Revenue

The Center of American Progress has an interesting little bulletin documenting that Greece was not extraordinary in its spending but rather in its lack of revenues which were far below the average for Eurozone members. The bulletin then goes on to state that this notion of excessive spending being the cause of the Greece's demise is a myth. Their argument relies on two basic observations- Greece was close the median amongst Eurozone memers in terms of spending in relationship to GDP and Greece was at the bottom amongst Eurozone members in terms of revenues. I actually get their argument. They are making a technical argument that if Greece had a more efficient tax system they would have collected a similar ratio of revenues to GDP then in theory their fiscal deficit would be nowhere near what it is now.

In reality this argument is stupid. It would be like me saying: "The problem is not that my lifestyle outpaces my means, but rather I am not paid enough". Both statements in that sentence are saying the same thing but from different directions. Greece didn't have an efficient tax system like the median member of the Eurozone, which would lead to the obvious conclusion that it could not afford the median member of the Eurozone's spending habits. That it did spend thusly indicates that in fact, Greece's spending was excessive. There is no such thing as a spending problem that isn't a revenue problem or vice versa. In the end it is question of making tradeoffs which nobody can postpone indefinitely. That is the lesson I hope, but doubt, our lawmakers will take from Greece.

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