The Journal Sentinel is wrong-the U.S. is not Greece

In a recent editorial the MJS editors implied that America’s deficit problems were caused by the same “out-of-control spending on government programs for aging populations”as Greece's. Social Security, Medicare and Medicaid were specifically cited. “Take heed” warned the state’s largest daily as it called for “new austerity” measures, presumably including cutting Social Security, Medicaid and Medicare.

Before we begin slashing our senior citizens' hard earned benefits we ought to take a closer look at the facts. As Noble Prize winning economist Paul Krugman wrote:

The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.

So, how do America and Greece compare?

Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?

One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P. True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war. But we still entered the crisis in much better shape than the Greeks.

Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues. Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.

Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation. But since it doesn’t, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.

In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.

That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading.

First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.

And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy, that of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.

Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”

So here’s the reality: America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes. But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

US debt a phantom menace

Yesterday the New York Times reported that the United States is borrowing trillions of dollars under terms that seem "too good to be true" just as a "spending explosion" on benefits programs like Medicare and Social Security is set to begin.

In a series titled "Payback Time: Debt Bomb," the Times details the magnitude of our nation's borrowing and warns of an impending and monumental reality check:

"The government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government's tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically."

Replete with charts and stupefying figures (Americans must pay off more than $1.6 trillion in debt by March 31, 2010), the piece states that there is "little doubt that the United States' long-term budget crisis is becoming too big to postpone."

Au contraire, says Times columnist and Nobel Prize-winning economist Paul Krugman, who warned about the very fear mongering about the deficit that the Times was engaged in:

"Most economists I talk to believe that the big risk to recovery comes from the inadequacy of government efforts: the stimulus was too small, and it will fade out next year, while high unemployment is undermining both consumer and business confidence."

Krugman cites a recent interview during which President Obama warned that "if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."

Krugman's response: "What? Huh?"

"The concerns Mr. Obama expressed become comprehensible if you suppose that he's getting his views, directly or indirectly, from Wall Street.

Ever since the Great Recession began economic analysts at some (not all) major Wall Street firms have warned that efforts to fight the slump will produce even worse economic evils. In particular, they say, never mind the current ability of the U.S. government to borrow long term at remarkably low interest rates -- any day now, budget deficits will lead to a collapse in investor confidence, and rates will soar...

A better model [for our current economic plight], I'd argue, is Japan in the 1990s, which ran persistent large budget deficits, but also had a persistently depressed economy -- and saw long-term interest rates fall almost steadily. There's a good chance that officials are being terrorized by a phantom menace -- a threat that exists only in their minds.

Read Krugman's full piece here.

Likewise, economist Dean Baker, who was one of the first to recognize the housing bubble years before it burst, scoffs at the Times's over-hyped debt reporting. Baker's post -- titled, "In Just a Decade the U.S. Interest Burden Could Be as High as It Was in 1992!!!!!!!" -- notes that there is "no evidence presented in this article that the rise in interest rates will place the U.S. government in a situation where it will be unable to pay its bills and no one cited in this article makes such a claim."

Incidentally, today's Wall Street Journal features more evidence that the Obama administration is rejecting Krugman's advice. "The White House is lukewarm about proposals by congressional Democrats to introduce broad legislation to create jobs, instead favoring targeted measures that would be less likely to inflate the deficit," the Journal reports, citing administration officials.

All I got for X-mas was a stocking full of debt!

One present none of us want to open this X-mas morning is the one left by President George Bush, Grover Norquist and their neocon friends-the growing national debt.

Federal borrowing from the public has mushroomed since 2001, by 53 percent, to $5.1 trillion. The single biggest cause of this spiraling debt has been the President's gifts to the very wealthiest Americans who double as his campaign financiers-high end tax cuts totaling $1.8 trillion.

From 2002 to 2011, forgone revenue from the cuts will account for 37 percent of the federal budget’s descent into the red, according to the Congressional Budget Office. The neocons war of choice in Iraq and defense spending come next, producing 30 percent of the deterioration, followed by domestic spending at 11 percent.

President Bush has been one of this nation's most fiscally irresponsible Presidents.

This holiday season the richest Americans, including hedge fund and private equity managers who pay a lower tax rate on their million and sometimes billion dollar incomes than most working American pay on theirs, have much to celebrate.

But most American taxpayers, their children and grandchildren will be left with little more than a stocking full of debt, $144,434 per family.

We will have to repay this borrowed money with interest, which means fewer federal dollars to spend on everything else for decades to come, including health care, infrastructure repair, emergency response, chemical plant security and alternative energy.

The New York Times recently ran an excellent editorial on President Bush' fiscally reckless tenure and his recent political posturing. It's worth the read.