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