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U.S. . . . Another Greece? Never!

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Headlined to None 10/16/13

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Some of the blather out of the mouth of some politicians has no semblance to reality. Have you heard this one recently: "We don't want to become another Greece." This was uttered in the heat of debate funding the government in fiscal year 2014--and absent a government budget--the hold on a continuing resolution (CR) to fund the government was made contingent initially on a demand by Speaker Boehner to defund ACA. 

If you follow political discourse these supercharged statements are not intended to be factual. Sen. Jon Kyle's office tried to walk back a misstatement he made about Planned Parenthood by say, "his remark was not intended to be factual, . . ." 

That's true, the statements made by politicians are hyperbolic utterances for the benefit of true believers. No rational thinking person believes him when Ted Cruz says, "Why is President Obama threatening to shut down the federal government?" This has to be a bit of projection by Mr. Cruz. But he did threaten not to "fund one penny of Obamacare."  One has to assume that not even Ted Cruz believes this--he is a smart man. And when smart men make transparently faux statements one has to kindly give them the benefit of the doubt--they are just behaving like politicians--and hyperbole is their path to the place the yearn to be and where they want to take us along. For if they believed the things they say, there is really no hope for us going forward. And for politicians, messaging is everything--bearing false witness is part of the political realm. There is nothing in the constitution that forbids anyone from maligning his opponent. The stricture against lying is biblical, not political.

The U.S. is a staggeringly large economy. It has not been bested by any other developed economy in terms of sheer economy performance. While other economies boast impressive economic performance--mainly in terms of economic growth such as China 10 percent, Ethiopia 8 percent, it is the ability of the U.S. economy to generate consistently enormous output of goods and services that goes unmatched and unchallenged, with the caveat that China may surpass the U.S. by 2050. U.S. output of goods and services hovers around $16 trillion a year. The national debt, which on October 17, 2013, will become a bargaining issue for further downsizing the government, is also $16 trillion. 

Debt is an obligation that must be honored; to do otherwise will force the U.S. to a position where it has to manage the opprobrium of lenders, because the rating agencies will ding the AA+ rating of U.S. debt, and put in question the country's trustworthiness. The Constitution of the U.S. States mandates honoring debt. Section 4 of the Constitution reads in part, "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." There is no hint of a quid pro quo here--like we will extend the debt ceiling if the president gives up something such as cuts in Medicare benefits; or maintaining sequester levels of spending, or adopting chained CPI, or defunding ACA: it could come to that if the stalemate on funding the government in exchange for defunding the ACA butts up against extending the debt ceiling. 

It is hard to see anything good coming from a capitulation to this fiscal blackmail that would inevitably establish an undesirable precedent that would make the results of elections, Supreme Court rulings, and the rule of law irrelevant--not just now but forever. Every president going forward would have to contend with pressures from Congress to give up something as inducement or bribe for Congress to do its job. 

The motivation for the present shutdown is not clear--the hope of defunding or repealing Obamacare is always galaxy far far away. Then the pride thing came up, the Republicans having lost the CR battle led U.S. Representative Marlin Stutzman to reputedly declare, "We're not going to be disrespec ted ... We have to get something out of this [shutdown]. And I don't know what that even is." (See Time Swampland. ) If anything can lead us to a path to Greece it is this kind misplaced commitment to ideology and pride--not funding the government and its bills. We become Greece when we rush to privatize our public-sector activities because we fail to realize that there is a difference between the quest for profit and the quest for the public welfare. USPS will go where UPS dares not. For example, in the private sector a fire department will let your house burn to the ground if you can't pay them for putting out the fire; the public-sector fire department would not. You can go private for profit and tell homeowners they don't have to pay for fire protection--then everyone would become a free rider.

You become Greece when the focus is shifted from growing and economy to reducing the debt. The national debt as percent of income is a measure of the country's debt burden, or if you will its health. In business parlance this is leverage, which is a measure of how a business chooses to finance its operations or a measure of its ability to meet its financial obligations. The debt-to-income ration (Debt/GDP) equals the burden of the nation's debt. That burden can be reduced by reducing the debt through lower interest rates and reducing government spending and/or by raising taxes. 

Imagine this scenario, Greece has a high debt-to-income ratio. The EU-governing body in Brussels tells the Greek government to reduce their debt ratio by cutting government spending. The Greek government obliges. They lay off public workers, stop subsidizing education, and they sell off some government-owned assets. But guess what, the debt ratio rose--why? Because income fell. So Brussels is unhappy and instructs the Greek government to double down on austerity. The government complains, "If we sell our assets our debt ratio will rise." Then the representative from the EU says, "I know." And walks away with a my-way-or-the highway gait.

The equation for the debt-to-income ratio can be written like this: (1) d = D/Y, where D is the national debt and Y is GDP. This relationship can be manipulated quite easily. For example, you may know that the derivative of a logarithm is a rate. This little bit of information allows us to write  (1) as (2) g(d) = g(D) -- g(Y), where g(d) is the growth in d (the debt ratio), g(D) denotes the growth in the debt, and g(Y) is the growth in income, i.e. GDP. Now it is clearly obvious, what happens when income grows Y faster than debt D--the debt ratio falls. But equation (2) tells the more insidious story that steep cuts in spending will reduce the growth rate of the deficit possibly without contributing anything to economic growth, and might in fact slow economic growth.

Data used to illustrate equation (2) are easy to obtain from the government. I took the liberty of reproducing data for the gross federal debt, and the  debt-to-GDP ratio in Table 1 below.


by whitehouse.gov

While Greece defaults and gets austerity, the U.S. ca n get out of this with a quiver of tools that can target various solutions. On the other hand, the solution to the Greek economic problem is not an easy one. And I will not be so arrogant as to propose I know the answer. 

But the U.S. is not comparable to Greece. For one thing the U.S. is a superpower and Greece is not. The U.S. is also rich--GDP is $16 trillion and Greece is not--GDP is $249.1 billion. The Greece debt-to-GDP ratio in 2012 was 170.1 compared with 103.1 for the U.S. Per-capita GDP is about $50,000 for Americans and $30,000 (2008) and $22,000 (2012) for Greece.  The 2008 recession hit Greece harder than the U.S. And at the same time the EU imposes austerity on the country. Apart from some Tea Party republicans who have managed to put the brakes on the recovery with sequestration, and deficits and debt fights--with the assistance of state governors from the same party--the U.S. economy is showing remarkable resilience.

The U.S.'s problem is different from Greece's in other way, too. The U.S. debt started to growth precipitously in the 1980s, perhaps due to reduction in the top marginal tax rate from about 74 percent to 28 percent. More recently--a costly prescription drug, two wars (Iraq and Afghanistan), and a major recession in 2008 (caused by Wall Street deregulation with the repeal of Glass-Steagall, banks issuing mortgage-backed securities (securitized instruments, credit-default swaps) added to the debt.  The credit-default swap operates in an unregulated market and it allows many speculators to buy the same mortgage security. When the underlying mortgage defaulted the sellers could not hold up their end of the arrangement.  The sellers defaulted and taxpayers had to bail them out. 

The way out of the debt problem is economic growth, not austerity. The solution then to the U.S. debt problem is to raise marginal tax rates, reregulate Wall Streets and banks--Dodd-Frank is a step in the right direction; and give businesses incentives to come back to the U.S. through tax breaks and perhaps even a modicum of protection from foreign governments who devalue their money (China) or make it difficult for American goods to compete in their markets because of "unfair" trade practices.

 

Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 
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Crisis after crisis is becoming th... by Seymour Patterson on Wednesday, Oct 16, 2013 at 7:22:47 PM
The article is a mixed bag. Dodd-Frank is not a "s... by Hersch on Thursday, Oct 17, 2013 at 10:28:57 AM
The United States is unlike Greece in one most imp... by Scott Baker on Thursday, Oct 17, 2013 at 3:22:26 PM
I don't think that Patterson intended "had to bail... by Charles Roll on Thursday, Oct 17, 2013 at 11:10:41 PM