No, We Won't End Up Like Greece: 5 Reasons Conservative Fear-Mongering Is Totally Wrong
There is a small group of Americans who would like to be rid of Social Security, Medicare and much of the rest of our social safety net on ideological grounds.
They have two problems: the first is that these programs are very popular. The second is that while they are, like every other item in the federal budget, not fully “paid for” over the next 75 years, they are pretty darn close. Forget what you read every day in the Washington Post or the New York Times: the 75-year “gap” for Social Security works out to six-tenths of one percent of our economic output over that period (according to the 2010 Trustees' report [PDF]). Even with the sky-high costs of American health care, Medicare's 75-year “gap” equals just four-tenths of one percent.
To put that last number in perspective: it amounts to about a quarter of what we'll spend on Iraq and Afghanistan as a share of our economic productivity. Or put it another way: right now we fork over 3.2 percentage points of our earnings less in taxes than we did under Ronald Reagan, and the long-term “shortfall” for both programs represents about a third of that difference. If we could afford to pay Ronald Reagan's tax rates, and fight the wars in Iraq and Afghanistan, then it goes without saying that we can afford to take care of our seniors after they finish busting their asses in the workforce for much of their lives.
Because of their popularity – or, if you prefer, because Americans don't want to see their elderly parents struggling to scratch out a poverty-level existence – deficit hawks can't simply say they oppose these programs outright. So, they've invented a deficit crisis and are pitching their preferred policies as some brave effort to rescue the Republic from ruin.
Above all, they don't want you to know that these two signature New Deal programs combined are “underfunded” by just one percent of our economic output over the next 75 years. So, we are treated to a barrage of arguments, some quite mendacious, and all designed to distract.
The latest in the genre are comparisons between the United States -- with a budget outlook that, while in a temporary slump, is fundamentally sound – and Greece, a basketcase on the brink of default. Calling for steep cuts on Fox News, Senator Tom Coburn, R-Oklahoma, said, “What most of America doesn't understand is if we don't put our house in order, we are going to look like Greece.” The conservative-leaning Boston Herald put it thusly: “If we follow the Democrats’ non-plan of increasing the debt ceiling, our nation will end up like Greece.” And a front-page story in the Washington Post this week quoted Peter Morici, an economist at the University of Maryland, arguing that if Congress raises the debt ceiling without a long-term plan for reducing the federal deficit, "They'll never solve the problem, and we'll end up like Greece."
I asked economist Dean Baker, who's written about 1,000 posts calling out reporters and pundits for drawing this parallel, what he thought about this, and his response was: “Greece's experience has as much to do with the U.S. as a corner lemonade stand does with Google.”
Why is this argument among the dumbest talking-points out there? Here are five reasons, all of which add up to this: the U.S. and Greece aren't apples and oranges, they're apples and armadillos.
1. Greece Has a Small Economy Loaded with Debt
The United States has the biggest national economy in the world. As of the end of 2010, the U.S. public debt equaled 61 percent of our annual economic output. (This figure doesn't include public debt held by the government itself, in public pension funds, for example.) That is far from the historic highs we hit during World War II and through the mid-1950s.
If Greece were an American state, it would rank 15th in size – just a bit larger than Maryland's. Through 2010, it was looking at a debt equal to 148 percent of its yearly economic activity – almost two and a half times the relative debt load of the U.S.
Also, the U.S. is a “low-public spending” country. This year, because of the recession, the federal government's spending will account for about 25 percent of our economic output. Greece's public sector equals around 40 percent of its output.
Apples and oranges.
2. Greece Doesn't Have its Own Currency
Greece is part of the euro zone, and its debt is therefore not in its own currency. That's the biggest difference between it and the United States.
There are two reasons this is important. First, in countries with their own currencies, central banks have some tools at their disposal for managing a lot of debt. They can, for example, target a modest increase in inflation that over time cuts deeply into a country's outstanding debt burden. Greece, tied to the euro, has none of these tools at its disposal.
3. The United States Can't Default (Unless it Chooses To)
In an email exchange, I asked University of Texas economist James Galbraith what he thought about this comparison. “It's simply a fact: a country cannot have a problem paying debt in a currency it controls,” he wrote. “Cannot. Except of course a self-inflicted problem of declining to make the payment.”
Because we control our own currency and the U.S. debt is held in dollars, we can always print more money to pay off our loans. That would come with a risk of inflation, of course, but it's a low risk given how much excess capacity – unemployed workers, unused plants – there is in the economy. Greece, locked into the euro zone, doesn't have that option.
4. Nobody's Foolish Enough to Buy Greek Debt
Greece can't sell government bonds in the private market. It's being forced to adopt severe “austerity” measures in order to receive a bailout from the EU to pay salaries and keep the government running.
Our own government, in contrast, has no problem finding buyers for its debt, at a cheap price, despite years of feverish deficit hysteria in Washington. As the Canadian Globe and Mail notes, “Investors – specifically, foreign creditors – won’t stop buying U.S. debt so long as the euro zone is undergoing its current woes, analysts say.”
“There are indications that a lot of foreign central banks are getting a little antsy, but you can’t see it in U.S. Treasury rates,” says Nariman Behravesh, the chief economist for information-services provider IHS. “The dollar is still the best-looking horse in the glue factory, in the sense that [it has] problems, but other countries have worse problems.”
5. Greece Doesn't Do a Good Job Collecting Taxes
No government collects every penny of taxes owed. The IRS estimates that the U.S. government gets stiffed to the tune of around 15 percent.
In the New Yorker, James Surowiecki notes that in Greece, “The gap between what Greek taxpayers owed last year and what they paid was about a third of total tax revenue,” and that is about what the Greek government's deficit adds up to.
Confusing Different Problems
The American financial system faces what's known as a “liquidity trap.” Economist Jared Bernstein explains it like this:
In a liquidity crunch, your banks are sitting on bad loans and are too undercapitalized to do much about it. Your credit markets freeze and your economy tanks. But your government and central bank are able to leap into the lurch and become the banking system for awhile, reflating the private system until it can run on its own again.
That's what happened with the Troubled Asset Relief Program (TARP).
Bernstein adds that in order to get out of a liquidity crunch, “Your government must be able to reliably borrow at favorable rates (and lenders must believe you can later pay them back), your banking system must be able to get back into borrowing and lending markets once their balance sheets recover, and if your currency can adjust to help boost external growth, that’s nice too.”
All of that is true of the United States. Greece, on the other hand, is simply insolvent – a small economy with a basketcase of a government, tied to a common currency and unable to raise money by selling bonds to investors. Apples and armadillos.