…in excessive national debt and bailouts.  Greece is an open laboratory that is demonstrating in real time the fallacy of borrowing ad lib. and then going the bailout route, coupled with pure austerity measures that ignore the mechanisms of growth.

After a number of rounds of austerity measures involving public spending cuts and tax increases, rewarded by the EU’s “lending” of billions of euros to help Greece pay off its debt by borrowing more, we have the following outcomes.

The Bank of Greece has revised downward its economic forecast for the Greeks: contraction of 5.0% for 2012, compared with a previous estimate of 4.5%, and compared with a 6.9% decline last year.  This makes the fifth straight year of recession for the country.  The cause of this steady contraction?  All that borrowing to cure an excessive debt problem (feed the addict methadone to “help” him with his heroin addiction.  As with the new lender, the methadone does nothing for the addiction, it’s just a supposedly easier means of maintaining it).  On top of the transfer of addiction from one pusher to another, retirees, public-sector workers, and most households have suffered deep cuts in their disposable income as the government cut spending and raised taxes.  Moreover, the government continued to fail to privatize nationalized enterprises or to sell off nationalized assets—€50 billion ($66 billion) of real estate and other assets such as the government’s stake in Thessaloniki’s port and water utility, the Piraeus port and the Hellenic Postbank, for instance.

The parallels of the United States’ economic policies these last three and more years, together with our own continued economic straits, is striking.

Faced with a similar economic threat some short years ago, Estonia took a different path: government thinned its bureaucracy and reduced healthcare and social services.  Businesses reduced wages by up to 40 percent, with the promise these would be increased as soon as the economy improved.  Most importantly, the government did not pump borrowed funds into the economic cycle.  These are not austerity measures—they’re a return of individual responsibility to the individual.  And the individuals and businesses cut deals to help each other survive the dislocation.  Today, Estonia has little public debt, a budget surplus for the first half of 2011, and an economy growing at an annualized 8% over that same half.

The once sick man of Europe, Germany, did much the same thing in much the same straits.  The Germans, in answer to high debt, high public spending, high taxes, and slow growth, cut welfare benefits and gave employers more flexibility in reaching agreement with their employees on hours and pay.  They also cut federal corporate income taxes to 15% from 1998’s 45%.  With state and local taxes added to the mix, and the effective corporate rate today is close to 30%, down from 50%+ in the 1990s. Today, Germany has an unemployment rate currently at 5.7%, and who’s propping up the EU in today’s debt crisis on the continent?

Government must achieve two things, and then a third, for a sound, free economy within which truly free men have an opportunity to show the best that there is in them.  Government must obtain a net positive income—that is, it must maintain its spending below its revenue intake (especially where the national debt has gotten excessive), and it must do so without raising tax rates.  The second thing it must do is commit that budget surplus to paying down the national debt until that value is at a properly low level.

After that, the surplus must be reduced by reducing the taxes yet further—after all, it isn’t the government’s money.  Money must be left in the hands of those who know best what to do with it—those who’ve earned it.