What Do Greece, Puerto Rico, Detroit and Baltimore Have In Common?

Consider four disparate government jurisdictions:  Greece, Puerto Rico, Detroit and Baltimore.  Mostly what you've read recently about these places is that they have high government spending and unsustainable debt, supposedly incurred in the effort of the government to achieve some combination of helping the people, growing the economy, and creating greater fairness.  What you've probably read much less of is how the overspending and run up of debt play out in the realm of real economic performance.  

When you look at the statistics, what stands out dramatically in case after case is the association of too much spending and debt with high levels of idleness and unemployment, particularly among younger people.  Is it cause and effect?  You be the judge!

Greece is of course the European champion of profligate spending and exploding debt.  According to statistics at Eurostat here, government spending in Greece exceeded 50% of GDP continuously from 2008, and even broke 60% in 2013.  Add in a tax system famous for extreme levels of avoidance, and you get extraordinary deficits.  According to Trading Economics here, Greece's government budget deficits averaged 7.19% of GDP from 1995 to 2014, with peaks of 15.7% of GDP in 2010 and 12.3% in 2014.  (Supposedly the Greek government budget is now in surplus.  Do you believe it?)

If you think that those huge levels of economic "stimulus" must have really put people to work in Greece, the statistics sure don't show it.  According to World Bank numbers here, the labor force participation rate in Greece is just 53%.   That compares to 63% in the U.S., 62% in the U.K., 60% in Germany, and 56% in France.  (Do you notice a correlation there with government spending levels?)  But unemployment, and even more so youth unemployment, are where it really gets ugly. The latest numbers from Eurostat give Greek unemployment at 25.6%, and youth unemployment (ages 15 - 24) at an extraordinary 49.7%.  (The comparable numbers for the U.S. are 5.5% and 12.2%.)  And don't get the idea that these low labor force participation and high unemployment rates are somehow a consequence of the recent "austerity."  Greek labor force participation was the same 53% back in 2000 and even lower at 51% in 1995, even as it engaged in the usual Keynesian deficit spending prescriptions.  According to statistics here from indexMundi, Greek youth unemployment has averaged over 25% since 1990, never below 22% and sometimes over 30%.

In Puerto Rico it's the same thing: high spending and extraordinary public debt accompanied by dramatic underutilization of the labor force.  Puerto Rico's public debt of about $72 billion hit the headlines a few days ago when its governor announced that the debt "is not payable."  The $72 billion, a little over $20,000 per capita, seems not that much worse than New York's (around $19,000 per capita), until you realize that median household income in New York is almost triple that in Puerto Rico.  But anyway, all that government spending in Puerto Rico must at least have put lots of people to work, right?  In fact, add to all the spending by Puerto Rico full access to U.S. welfare, food stamp, medicaid and other handout programs.  By standard Keynes/Krugman theory, its economy should be booming.  But actually, it's the opposite.  Puerto Rico has spectacularly low labor force participation rate of under 43%.  That's a full 10 points worse than Greece.  And even with 43% labor force participation, Puerto Rico still has 12.2% unemployment.  (If Puerto Rico had the same labor force participation, 63%, as the rest of the U.S., and the same level of employment, its unemployment rate would be close to 50%.)  Youth unemployment?  The latest figures I can find are World Bank figures from 2013, which give a rate of 27.3% for Puerto Rico; and again, that must be taken in context of the spectacularly low labor force participation.

And check out the usual suspects of "basket case" U.S. cities, and time and again you find the same thing: blowout spending and borrowing does not cause the economy to improve, but instead is accompanied by high levels of idleness.  In Detroit, a city that famously spent and borrowed its way into bankruptcy, the labor force participation rate for black males is 52.1% according to most recent BLS data (2011).  That's even worse than Greek levels.  Baltimore?  The overall BLS statistics for the Baltimore/Tyson metropolitan area do not seem at first blush to reflect the same levels of idleness.  For example, these BLS statistics for 2011 show black male labor force participation for that area as 65%.  But in the aftermath of the recent Baltimore riots, multiple sources have reported that in specific areas like the one where Freddy Gray lived, non-working rates for working age black males were in the range of 50%.  For example, see this op-ed in the New York Times by Michael Eric Dyson.   The areas with the lowest rates of working are the same area where so-called "anti-poverty" government spending is the highest.

So perhaps it is time to consider the hypothesis that the high spending and borrowing is actually the cause, or at least one of the causes, of the unemployment and idleness.  It's not just that the "anti-poverty" programs don't work.  It's also that the high spending and borrowing actively discourage business formations and relocations.  What entrepreneur wants to put his or her business in a place where massive public debt indicates a future of increasing taxes as far as the eye can see?