The U.S. Is Not (Yet) Greece.

By :: May 18th, 2010

I can’t resist jumping into the ongoing debate between New York Times economic columnists David Leonhardt and Paul Krugman. David worries that there are troubling similarities between the current Greek debt crisis and huge ongoing deficits in the U.S. “Nonsense,” replies Paul, who argues that the two nations have about as much in common as souvlaki and cheeseburgers.  

My take: The U.S. is not Greece. But this does not mean we cannot learn lessons from a nation that is marked by both great beauty and regular bouts of fiscal madness.

First: Why we are not Greece:

To state the obvious, we are far bigger. U.S. Gross Domestic Product is more than $14 trillion. Greek GDP is about $200 billion. It is an unfortunate rule of life: Big guys get away with stuff little guys can’t.

Similarly, for all our problems, the dollar remains the world’s reserve currency. The Greeks don’t even have their own currency. Unless they decouple from the Euro, they can’t inflate their way out of their mess (I’m not saying they should, but they don’t have the option). As new Tax Policy Center director Donald Marron noted on his own blog, Greece will have to cut spending and/or raise taxes by about 2.5 percent of its GDP for each of the next five years to get back on track. To do the math, that would be equal to the U.S. having to slash its budget by $350 billion annually, or nearly $2 trillion over five years.  

And keep in mind the nature of their fiscal problem is very different from ours. In Greece, public employee wages are a major budget issue, accounting for as much as one-quarter of federal spending. As a result, the latest austerity program would cut government salaries by about 10 percent.  By comparison, the U.S. spends about $115 billion on wages for federal civilian employees—a tiny fraction of our $3.6 trillion budget. A 10 percent reduction in federal pay would reduce our $1.4 trillion deficit by barely $10 billion—loose change in the fiscal sofa cushion.   

Much of the U.S. fiscal problem is inextricably linked to high medical spending. Remarkably, public health care spending per capita in the U.S. is twice that of Greece. Thus, we face significantly different challenges on the spending side: It is not hard to figure out how to cut public employee wages. We are not so certain about how to reduce health costs.    

Still, there is much for the U.S. to learn from Greece's awful fiscal mess.

The most important lesson may be, as Len Burman noted here yesterday, that markets are not always rational, at least in the short-term. The run on Greece did not occur because of any fundamental change in the Greek economy. It happened because investors suddenly came to believe that Greece was at risk of default. And as we might have learned from recent financial crises (Long-Term Capital Management, the Asian debt crisis, and the subprime mortgage mess to name just a few examples) it doesn’t take much to kick off an investor panic. And when a bond issuer is as highly leveraged as Greece (and us), once fear takes hold, investors will trample one another to get out the door while there is still money left to pay them.

Don’t think it can’t happen here. Hubris, after all, is the Greek for overbearing pride or presumption. 


  1. Anonymous  ::  8:57 pm on May 18th, 2010:

    The most interesting question is what the trigger would be for shifting investor perceptions. I continue to believe (disgreeing with Len Burman and Martin Feldstein) that the most likely trigger will be the extension of the Bush tax cuts on the wealthy for any length of time at all. The bond markets will simply tank if we do something so irresponsible, since it will show that Obama and Reid have no spine.
    Hopefully it won't come to that

  2. Anonymous  ::  12:00 am on May 19th, 2010:

    >the dollar remains the world’s reserve currency
    I doubt that we can rely on that to continue if we keep running these huge deficits. At some point the markets will move to a different store of value. Necessity is the mother of invention, and high inflation will make a switch from the dollar necessary. This will happen later in the story for the USA than it did for Argentina, but it will happen at some point.
    >We are not so certain about how to reduce health costs.
    Sure we are: Just add 30 million more people into third-party payment. Regulate rate increases and wait a few years for the insurance companies to collapse. Then enact Medicare for all, which was the original objective. Finally, with the private care alternatives eliminated for everyone except the rich and well-connected, impose rationing. This is not a fantasy; it's the actual unspoken plan.
    Everyone knows that rationing is the only answer. Health savings accounts could have promoted a high degree of self-rationing, greatly improving efficiency, but progressives hate the idea that people would ever have a choice between health care and other uses of the money. That rationing choice is inhumane, so it should be the government's alone, one size fits all.

  3. Anonymous  ::  9:04 pm on May 19th, 2010:

    Neither of your reasons are the real difference. The real difference is that the U.S. is a currency issuer, and as such cannot run out of it's own money, and Greece is not. Why otherwise intelligent people don't understand this is truly beyond me.

  4. Anonymous  ::  9:12 pm on May 19th, 2010:

    This is why I am for single payer catastrophic with HSAs and Flexible Spending (for disallowed items like accupuncture and abortion).

  5. Anonymous  ::  1:22 am on May 20th, 2010:

    > Much of the U.S. fiscal problem is inextricably linked to high medical spending.
    Sorry, but you're going to have to support that with some data. What percentage of our government spending is allocated toward medical spending? 19%. If we eliminated medicaid and medicare spending ENTIRELY, the government would still have a deficit! I'm not making this up for my own agenda, it's simple addition and subtraction. 2009 FY deficit: $1.4 trillion, 2009 Medicare+Medicaid: $750billion. We spend about the same amount on our military as we do our healthcare.
    The government has run at a deficit for countless years– reaching well back into the 1800s, was healthcare spending the problem back then too? Even though there was no medicare or medicaid?
    The average American spends more of his disposable income on transportation than healthcare– three times as much! Check the bureau of labor statistics, again I don't make this up. We bail out our automakers, and as a people we effectively own “our” auto companies.. It's entirely acceptable to borrow $30k to buy a new SUV, but there is NO reason someone should borrow money to pay for healthcare…
    Feel free to post the part where you show that the U.S. fiscal problem is healthcare costs, rather than budgeting.

  6. Anonymous  ::  5:56 pm on May 20th, 2010:

    People are buying these $30K battle wagons because their taxes are too low. You are right that the problem is budgeting, especially on the revenue side.