I Am Greece… I Am Greece… I Am Greece

Heather Horn at The Atlantic has a lot of this at a round-up

David Leonhardt at NYT:

It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can.

Yet in the back of your mind comes a nagging question: how different, really, is the United States?

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

Ryan Avent at Free Exchange at The Economist:

The people are, he says, because they prefer a high level of services and low taxes. Indeed, America’s primary deficit is clear evidence that they prefer this; otherwise, they’d vote tax increases and service cuts until the budget balanced. They haven’t, just as the Greeks didn’t, and so the trajectories appear similar.

But slow down a moment. Degree is important here. America’s trend growth rate is higher than Greece’s. Its political system is less dysfunctional. Its economy is overwhelmingly on the books and taxed. Its labour markets are more flexible, its public sector is smaller, and its unions are less powerful. Its currency floats, and its monetary policy is its own.

The bottom line is that it’s not clear that there is any set of policies Greece can adopt which will prevent default. Debt costs are too high and growth is too slow. There are many different ways that America could close its budget gap; it’s merely having an intense political debate over which way is the best way. This could potentially be a problem, but it’s a different problem from the one in Greece. The Greeks have a massive current primary deficit that markets no longer want to fund. The Americans have a political debate over how to rein in the growth of health costs over the next three decades. Ultimately, casting the American fiscal situation in a Greek light obscures more than it illuminates.

Paul Krugman:

I would really question this comparison:

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

Um, that’s comparing a (highly uncertain) projection of debt 20 years from now — a projection that’s based on the assumption of unchanged policy — with actual debt now. Actual US federal debt is only about half that high now. And it’s worth pointing out that Greek debt is projected to rise to 149 percent of GDP over the next few years — and that’s with the austerity measures agreed with the IMF.

Here’s a more or less apples-to-apples comparison of the medium-term outlook. I’ve taken the Auerbach-Gale projections for the US budget deficit as a percentage of GDP outlook under Obama policies, and compared them with the IMF projections for Greece, subtracting out “measures” — that is, the austerity measures agreed in return for official loans. Here’s what it looks like:


Basically, the United States can expect economic recovery to bring the deficit down substantially; Greece, which has a larger structural deficit and also faces a grinding adjustment to overvaluation with the eurozone, can’t.

Derek Thompson at The Atlantic:

Now, that’s short-term. Before you interpret those shrinking red bars as evidence that we’re in the clear by 2012, remember that the United States’ projected pain is slated to begin later in the decade, when health care inflation hitches a ride on the retirement of tens of millions of baby boomers, sending the government’s Medicare responsibilities soaring into the 2020s.

We’re not Greece for a lot of reasons: we control our own currency, we’re more productive, we have a much stronger economy and while we suffer from tax avoidance like many countries, Greece faces epic shortfalls.

But we are like Greece in the simple respect that we’ve conditioned the electorate to expect more services and fewer taxes ad infinitum. And We the People consistently elect politicians who promise to preserve that imbalance. I’ve been asked a few times to produce something like a dream budget for America 2020. Here’s a start:

1) Institute a revenue-neutral VAT with off-sets to employer payroll taxes to make it slightly progressive, but grow the VAT to 8 or 10 percent over the next five to ten years. (I’d also entertain arguments for a carbon tax, but I’m less sold on Pegouvian taxes as dependable money machines and we’ll need a dependable money machine before we “solve” the medical inflation conundrum.) Eliminate the mortgage interest deduction. Broaden the corporate income tax base by eliminating loopholes especially on repatriated income, but lower the rate.

2) Raise the retirement age for Social Security, indexed to longevity. It’s important to do something with Social Security before Medicare because it’s easier to move the full retirement age than to put a straitjacket around medical inflation. Tweaking this entitlement would be an important signal to international investors that we can be serious about our deficit drivers. (We should be open to other SS adjustments, like raising the taxable income ceiling.)

3) Put a freeze on discretionary spending — not on each department, but the whole thing, to allow for flexibility. Keep PAYGO. Convene a commission on defense spending to find costly weapons programs to cut, bases to sell, and other savings.

Stephen Spruiell at The Corner:

Ok, let’s start with what we know. As things stand in 2010, the U.S. and Greece are in the same boat, deficit-to-GDP-wise (with a number of obvious differences: The U.S. can print its own currency, has better prospects for growth, etc.). After that, one has to rely on projections. Here’s where Krugman manages something remarkable: On the one hand, he criticizes colleague David Leonhardt (who has a piece up today comparing the U.S. and Greece) for relying on projections “based on the assumption of unchanged policy.” Krugman corrects the error in his own analysis by using projections that assume most of Obama’s policies will be implemented going forward.

But for Greece, he commits the same error for which he faults Leonhardt. He uses the IMF’s projections for Greece’s future debt-to-GDP, but subtracts out the effects of the austerity measures Greece agreed to in exchange for its bailout. In other words, Krugman has matched the worst-case scenario for Greece with a more optimistic scenario for us. It’s not surprising that the resulting comparison looks so lopsided.

Now, I’m not naive enough to think that Greece will do everything asked of it to shrink the size of its deficit — the challenge is just too daunting, and the moral hazard left in the wake of the bailout leaves Greece with little incentive to enact the most painful reforms. But it’s also unrealistic to pretend there will be no changes, and it’s downright tendentious to compare an unchanged fiscal picture of Greece to a picture of the U.S. in which Obama has defied political reality and gotten his way on everything, with all of his policies —including tax hikes and regulations — having static and predictable effects on the deficit.

Let’s re-run the numbers. For Greece, we’ll only subtract out half of the projected effects of the austerity measures, and for the U.S. we’ll use the Auerbach-Gale “extended policy baseline” — which assumes that Congress will act like Congress and thwart the administration’s deficit-reduction plans in key areas. Greece is still worse off, but the differences suddenly aren’t so stark:


Krugman obviously has a point, which is that the U.S. is in better shape than Greece and isn’t going to spontaneously generate serious doubts about its ability to service its debt. But we are walking a finer line than he lets on. The more credible concern is that an external event, such as a wave of sovereign defaults, leads investors to think twice about the safety of all sovereign debt, including ours.

David Leonhardt responds to Krugman:

Neal Conan at Talk of the Nation, the public-radio show, just asked me about today’s New York Times debate over the deficit. I compared Greece’s fiscal problems to the long-term ones facing this country. Paul Krugman thinks the comparison is overblown.

I certainly agree that the two situations are not equivalent. Greece’s fiscal problems are worse than ours, and both our underlying economy and our political institutions are stronger than theirs. But the last statistic Mr. Krugman cites highlights why I think the comparison is relevant: “we have a long-run fiscal imbalance of 6-plus percent of G.D.P.” So to get our budget in order, we would need to come up with revenue equal to more than 6 percent of gross domestic product, either through tax increases or spending cuts. (That number comes from this paper, by the economists Alan Auerbach and William Gale.)

That’s an enormous amount of money. Military spending, for instance, is now less than 5 percent of gross domestic product. Medicare’s budget is now about 3 percent of G.D.P. Coming up with the necessary cuts and tax increases — even over many decades, the relevant time frame — will not be easy.

In essence, the country needs to figure out how to pay for the government that its citizens want. It’s a version — albeit a less extreme one — of the problem facing Greece right now.

Ryan Avent responds:

On the face of things, the problems are similar: revenues minus spending equals a negative number in both America and Greece. And Mr Leonhardt seems stuck on that similarity.

But the differences are crucial. Greece needs to come up with that 6% right now, in the space of a couple of years, in an environment of negative economic growth, because markets are close to refusing to lend Greece any additional money. America needs to close that 6% gap over the space of several decades, during which time it is likely to grow at a real annual rate of about 2.5%.

Do you see how these situations are different? Greece needs to make massive, immediate budget cuts all without plunging its economy into a recession so deep that the cuts generate a larger deficit as revenues tumble. It’s quite possible that there is no way to make this happen without massive external assistance. America, by contrast, simply needs to slow the rate of growth of government spending. That’s it. An increase in revenues would help, too, but what we’re basically talking about is slowing spending growth by enough that economic growth can generate the revenues to fund the government’s budget.

Now, slowing spending growth is no piece of cake. There are big demographic headwinds, huge challenges where health cost controls are concerned, and sharp ideological differences over the proper size of government. If fixing the mess were easy it wouldn’t be a mess. But America really is different from Greece, in a fundamental way.

More Krugman:

The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.

So, how do America and Greece compare?

Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?

One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P. True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war. But we still entered the crisis in much better shape than the Greeks.

Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues. Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.

Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation. But since it doesn’t, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.

In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.

J.D. Foster at Heritage:

So, no, we are not Greece. Our political system is no beauty, but it tends to work. Our society is under the inevitable strains of a big country with a heterogeneous population, yet we press on. Our economy should recovery smartly if Washington can stop throwing monkey wrenches into the operation. But then there’s the matter of the federal government’s finances (and state finances, but that’s for another day).

We’ve long know that the long-run fiscal outlook is unsustainable because spending on Social Security and Medicare in particular are set to soar. Yes, Paul, it is the spending. Krugman appears to be the only person in America who does not understand this. Certainly the leftish folks in think tanks such as the Brookings Institution, the Urban Institute, the Progressive Policy Institute and others don’t dispute this fact.

But now, under the dual pressures of time passing and Obama spending, the long-run isn’t so long any more. Many will explain away the current Grecian formula budget deficits as the obvious and temporary outcome of recession. Fine to a point, but in between the supposed long-run and the short-run is the medium run, and in this medium run (say the period from 2012 to 2010, America’s debt-to-GDP ratio is projected by the Congressional Budget Office (CBO) to reach a very French-like 90 percent under Obama’s policies. And, of course these numbers don’t reflect the budget busting Obamacare or all the other emergency, important, or just plain excessive spending Obama and friends will be working on over the next couple of years.

Krugman seeks to dismiss those on the right and the left who see trouble ahead. But he cannot dismiss the growing wariness in credit markets toward all countries with fiscally irresponsible governments. What Greece faces today fiscally is a window on our future if we continue down the debt-laden road. We’re not Greece, yet. But we will be if we don’t find an exit. Fortunately, there are many exits, and they all involve a turn to the right at a spending stop.

If the Grecian crisis does befall the United States, and all the journalists and pundits are then screaming, “How did this happen and who’s to blame?” A big finger of the blame will go to the likes of Krugman and his fellow apologists for the “progressive”, read socialist vision. My bet is America will come to its senses first, however, so Krugmanism will quietly join its fellow doctrines in the trash heap of history.


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Filed under Economics, Foreign Affairs, The Crisis

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