Greece and us

The real danger is within

Wednesday, May 12, 2010

There is good news and bad news about the debt crisis in Greece. The good news is that, notwithstanding stock markets' breathtaking plunge and recovery of recent days, it doesn't seem likely to do much damage to the U.S. economy.

The bad news is that the U.S. economy will suffer a lot if this country keeps following the sort of fiscal policies that have created the crisis in Greece.

Greece's problem is that it has lived far beyond its means. Its government budget deficit is now nearly 14 percent of its gross domestic product, and its total debt is 115 percent of GDP. The Greek parliament has approved some painful cuts and tax increases, but recent strikes and riots raise doubts whether the government can make them stick.

The nearly $1 trillion bailout by the European Union and the International Monetary Fund has reassured investors, who had grown very skittish about getting repaid. Markets jittered and jived Tuesday, but that major rescue effort seems to have halted the panic and kept it from spreading, at least for now.

Though the Greek economy is small, its collapse could have dampened growth even on this side of the Atlantic, so the improvement is good news for Americans. Fortunately, the U.S. economy is showing signs of a durable recovery, with three consecutive quarters of growth and low inflation. Hiring is also picking up at last.

Banks have emerged from the downturn with stronger balance sheets. Robust growth in countries such as China and India is serving as a tonic for economies in the rest of the world.

But the hopeful short-term prospects here in the U.S. are no reason for complacency. The real problem for the American economy is that the federal government (and many states, insolvent Illinois included) is making the same fiscal mistakes that led Greece to the edge of the cliff.

The federal budget deficit is expected to top 10 percent of GDP this year, the highest since World War II, and next year won't be much better. Given current trends, the total debt will reach a scary 90 percent of GDP just a decade from now.

Much of the recent deficit spending in Washington stems from a defensible response to a severe economic crisis. But once that is past, spending will continue to rise, by nearly 60 percent over the next decade. Revenues will lag far behind.

Add in an unexpected economic downturn sometime in the next few years, and a bad situation could get much worse — a la what's happening in Greece. The U.S. has the advantage that the dollar enjoys a preferred place as the international reserve currency, giving our policymakers more latitude. But that status is not guaranteed for all time.

If Americans want to avoid the fate of today's Greece, they had better do what the Greeks failed to do: scale down what they demand from the government and accept the need to pay for what they get. Otherwise, our future will bear a grim resemblance to Greece's present.