Debt Woes: Could America Go the Way of Greece?
By Fareed Zakaria
As Europe confronts another act in its Greek drama, many are watching and wondering, Is the U.S. next? Could our debt-ceiling debate be the beginning of a crisis that makes the world lose faith in American credit? Anything could happen, but it’s worth noting the big differences between Greece and the U.S.
Greece faces three problems. First, it has an uncompetitive economy that cannot generate growth. Its labor is too expensive, it exports few products, and its people are not rich enough to power an expansion. This is not a recent problem. Greece has never been an economic dynamo.
Greece also has a long history of borrowing too much and being unable to pay its debts. Over the past 179 years, it has been in default about 50% of the time. Its debts are huge and could not be paid under any plausible scenario. Finally, because it is part of the euro zone, Greece does not have control over its currency, which means it cannot make its goods cheaper on world markets. (See how the U.S. can avoid its own Greek tragedy.)
The U.S., by contrast, remains one of the world’s most competitive economies. It is home to the leading companies in the most advanced industries, houses the largest capital markets and continues to spawn new companies and, indeed, whole new industries. It exports everything from aircraft to entertainment to health care products around the world. Its demographics are strikingly healthy: it will be the only rich country in the world to actually increase its population over the next 30 years — which means more young workers, producers, entrepreneurs and taxpayers. It also has control over its currency. Finally, America’s credit history is impeccable. The U.S. has never defaulted on its debt.
Greece faces a set of terrible choices. In order to get more funds to pay its loans and bills, it needs to make draconian spending cuts and tax increases that will surely choke economic growth. The situation in the U.S. could not be more different. The solutions to America’s deficit problems are relatively straightforward, almost simple.
Take a few examples. If Congress were to enact the recommendations of the Simpson-Bowles commission, it would reduce the deficit by $3.8 trillion over 10 years. By 2015, the U.S. would have a deficit that was 2.2% of GDP, among the lowest of the world’s major economies. Were Congress to do nothing and let the Bush tax cuts expire and return rates to what they were during the Clinton era, that would generate an estimated $3.6 trillion in tax revenue over the next decade, largely solving the short-term deficit problem. (See “Our Greek Tragedy.”)
The great truth facing the U.S. is not that we lack solutions to our problems but that our political system seems unable to do anything. With a deficit as large as the one we face, it should be clear that we cannot sort things out through either spending cuts alone or tax increases alone. (Spending on Social Security, Medicare and Medicaid is set to rise from 10% of GDP now to 15% by 2030. That is simply unsustainable.) And yet the two parties seem stuck in adolescent fantasies, one ruling out tax increases, the other ruling out any serious cuts in entitlement spending. Sure, in a country of 312 million, people will disagree. But on the deficit, the disagreement is not a theological one. Debates over money are always amenable to compromise. You can split the difference!
The world has not lost faith in the U.S. economy. People lend America money more cheaply than they do any other country. Our stock markets remain strong. Our companies continue to thrive. But as you watch the dangerous game of chicken in Washington, it is easy to conclude that the U.S. has lost a serious governing class and has become a place where ideology and talk-radio rhetoric have replaced the business of governance. That Republicans would consider playing games with America’s creditworthiness is not simply terrible public policy but also, as Richard Stengel pointed out in the previous issue of TIME, almost certainly unconstitutional.
Right now, we could actually learn something from Greece. The current Greek government has faced up to its problems and initiated a series of spending cuts and tax increases and the sale of state-owned assets. What it has proposed dwarfs anything contemplated in the U.S. And the Greek government has made the case to its people patiently and persistently, not pandering to populist sentiment — despite mobs rioting in the streets. It has also set about enacting a longer-term program to make the economy more competitive.
In this respect, America is not like Greece at all, alas.