Greece provides an object lesson in how bad government can ravage an economy and consequently, a country. Over the last 20 years governments have steered the Greek economy 180º away from the direction that increases growth and productivity, and they have stifled entrepreneurs. U.S. leaders are making similar moves to a disturbing extent. This is food for thought on the eve of our nation's birthday.
My partner Thanasis Delistathis posted The Story Of The Greek Debt Crisis In 20 Charts on the NAV.VC blog. He tells the story of Greece's economic crisis succinctly with data. Thanasis was born in Greece and lived there until he came to the U.S. for university. Thanasis' family remains in Greece and he visits frequently.
From an entrepreneur's perspective, here are the main points:
The fundamental weakness of the Greek economy is miserable labor productivity: about $35/hour-worked versus $67 for the U.S. and a Euro-zone average of $57 (Chart 3 in Thanasis' post). Greeks work hard, but they are not productive. The big drivers of labor productivity are capital investment, technology development, and innovation. Entrepreneurs are major contributors to the last two.
Greece has created an "entitlement society". The percentage of government jobs has soared, corruption levels are very high (i.e., government workers exploit their power for personal gain), trade unions are the most aggressive in the EU, and people retire very early (Charts 4-7). Greeks get ahead by finding a sinecure and defending it. This typically damages economic productivity.
Greek businesses prosper by staying below the government's radar. Small and medium-size enterprises play a very large role in the Greek economy: 72% of value-add and 86% of employees, versus 58% of value-add and 67% of employees for the EU as a whole (Charts 9 & 10). But, tax rates are high and increasing (Chart 12), and the rate of tax collection is low: the shadow economy in Greece is the biggest in the EU as a percent of GDP (Chart 9). There is disincentive for small businesses to scale up.
Small businesses drive job growth in the U.S. — when they are created and when they scale up. But Greece does not enjoy this benefit: the number of Greek SMEs is declining (Chart 11). Greece is widely considered a very difficult place to do business, due to a lack of economic freedom (over-regulation) and other reasons (Charts 13 & 14).
Thanasis concludes that successive Greek governments, and the voters that elected them, have chosen to please voters [or interest groups] by adding government jobs and benefits and loads of regulations, and by allowing unions heavy sway. The result is an economy in very serious trouble, and a highly uncertain future.
The situation in the U.S. is different, right? Not entirely. The U.S. exhibits rising levels or regulation; government debt as a percent of GDP is exceeded only by Japan, Greece, Portugal, Italy, and Ireland; unfunded retirement obligations of state and local governments amount to 28% of GDP; and rising levels of taxation on entrepreneurs and other high earners plus a business-bashing media culture weaken incentives for entrepreneurial success.
We're clearly not at the point where Greece finds itself, and there are many positive factors in the mix, but we are taking steps in a dangerous direction. The Greek crisis should constantly remind us what happens when societies take the politically expedient path and ignore what makes the economy work.
