Lessons from Greece

The Star has a round-up of photos from the Greek riots:

A riot policeman falls after being hit with a molotov cocktail in Athens during a nationwide strike by civil servants protesting the announcement of draconian austeristy measures. May 5, 2010  (REUTERS/John Kolesidis)

A medic prepares to remove the body of a person who perished in a bank that was set on fire during demonstrations in Athens. Three people died in the fire. Greece faced a day of demonstrations during a nationwide strike by civil servants protesting the announcement of draconian austeristy measures. May 5, 2010.   (REUTERS/Pascal Rossignol) 

A riot policeman runs from angry protesters in the northern Greek port city of Thessaloniki. May 5, 2010. (AP Photo/Giorgos Nissiotis)

As credit default swaps on European banks bonds reached record levels today, surpassing the level triggered by the collapse of Leman Brothers, Nouriel Roubini, professor of economics at NYU who predicted the recent financial crisis, writes this warning in the Christian Science Monitor titled "Greece Debt Crisis is Only the Tip of the Iceberg":

Historically, we have seen a series of defaults and sovereign debt crises in both advanced and emerging market economies. If you are a country like the US, the UK, or Japan that can monetize its fiscal deficits, then you won’t have a sovereign debt event but high inflation that erodes the value of public debt. Inflation is therefore basically a capital transfer from creditors and savers to borrowers and dissavers, essentially from the private sector to the government.

While the markets these days are worrying about Greece, it is only the tip of the iceberg, or the canary in the coal mine of a much broader range of fiscal crises. Today it is Greece. Tomorrow it will be Spain, Portugal,Ireland, and Iceland. Sooner or later Japan and the US will be at the core of the problem, shaking the global economy.

We need to recognize that we are in the next stage of financial crisis. The coming issue is not private-sector liabilities, but pubic-sector liabilities.

Revived economic growth alone will not generate enough tax revenue to relieve this sovereign debt crisis. Fiscal deficits are huge and structural. They are not due solely to a cyclical downturn in growth but to long-term commitments such as pensions, Social Security and health care. To avoid default or high inflation, the advanced economies will require some combination of raising revenues through taxes and cutting government spending.

In Europe, where tax rates are already very high, the right adjustment is cutting spending instead of raising taxes further. In the US, the average tax burden as a share of GDP is much lower than in other advanced economies. The right adjustment for the US would be to phase in revenue increases gradually over time so that you don’t kill the recovery while controlling the growth of government spending.

 What worries me most is the political gridlock in Washington. While everyone agrees that $10 trillion deficits (by the Obama administration’s own estimates) for the next decade are not sustainable, there is no political will to act. The two parties are completely divided. Effectively, the Republicans are against any form of revenue increases. The Democrats are against spending cuts, especially of entitlements. [emphasis mine]

USA's oped puts the current crisis in perspective:

To be sure, there are huge differences between Greece and the United States. Here, the federal government represents about 20% of the U.S. economy, whereas the Greek government is about 40% of its economy. Washington's big spending is on benefit programs such as Medicare and Social Security, rather than on compensation for a massive and militant cadre of public employees. And, perhaps most important, the USA doesn't share a currency with other countries, giving the nation more flexibility to print money if needed.

Before Americans get too smug, however, they should note the obvious: Debt is debt. If too much Greek borrowing can send world financial markets into turmoil like that of the past couple of days, imagine the damage a U.S. debt crisis would inflict.

Washington's public debt is nearly $8.5 trillion, which comes to about 58% of the U.S. economy, compared with ratios exceeding 100% in places like Greece. But the U.S. debt is rising fast, and its true size is masked by the surplus run by the Social Security trust fund. Factoring that in, the total national debt is about $13 trillion, or 90% of the economy. Including unfunded liabilities for such programs as Social Security, Medicare and Medicaid, the federal government is looking at a long-term shortfall of about $62 trillion, or about $200,000 for every American, according to thePeter G. Peterson Foundation, a group devoted to promoting awareness about public borrowing.

These numbers should come as a shock. But in Washington, there appear to be two acceptable responses — denial and finger-pointing.

Greg Mankiw links to the CBO's projected US spending by 2020:

 

We certainly are not Greece as USA's oped points out--not just from a debt perspective, but cultural perspective as well.  However, it remains to be seen whether politicians from either party will be able to talk to American voters like they're adults or continue to infantilize them, telling them that yes, we can cut taxes (except for those greedy rich), and continue to keep our entitlements.  This recent poll indicates Americans aren't too keen on entitlement spending: 83% blame the government for increasing the deficit through spending, while only 18% of them are willing to raise taxes to lower the deficit. 58% believe the health care bill will raise the deficit and therefore, support its repeal.  Some other polls put the favor for repeal lower, and instead call for an "amend and modify" approach.  


Despite the opposition to increased spending, it's unlikely many Americans, particularly seniors, will want major changes or cuts to their entitlement programs. Talk about cognitive dissonance.  I don't think we're at the point of California yet--the state is practically ungovernable. But as boomers retire, the window of action for real reform of federal spending is narrowing.