What Greece Needs to Prosper

by Edmund S. Phelps

Project Syndicate
August 6, 2015

Some economists overlook the modern idea that a country’s prosperity depends on innovation and entrepreneurship. They take the mechanistic view that prosperity is a matter of employment, and that employment is determined by “demand” – government spending, household consumption, and investment demand.

Looking at Greece, these economists argue that a shift in fiscal policy to “austerity” – a smaller public sector – has brought an acute deficiency of demand and thus a depression. But this claim misreads history and exaggerates the power of government spending.

Much of the decline in employment in Greece occurred prior to the sharp cuts in spending between 2012 and 2014 – owing, no doubt, to sinking confidence in the government. Greek government spending per quarter climbed to a plateau of around €13.5 billion ($14.8 billion) in 2009-2012, before falling to roughly €9.6 billion in 2014-2015. Yet the number of job holders reached its high of 4.5 million in 2006-2009, and had fallen to 3.6 million by 2012. By the time Greece began to cut its budget, the rate of unemployment – 9.6% of the labor force in 2009 – had already risen almost to its recent level of 25.5%.

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