How the United States Is Like, and Unlike, Greece—Posner

The economic situations of the United States and Greece are more alike than one might think. In both countries, the government is insolvent, in the sense that its taxing power, constrained by politics, is insufficient to finance the government’s liabilities, which include not only bonds but also entitlements (such as social security and medicare) and essential public services (such as defense). (See my post, “Is the Federal Government Broke?,” Aug. 29, 2010, regarding our government’s insolvency under standard principles of bankruptcy.) In both countries, government is cutting spending when (from an economic standpoint) it should be increasing it, to take up the slack in private investment and stimulate employment and in turn consumer spending (which drives business spending, which increases the demand for labor). In both countries a major cause of the current economic problems was cheap interest rates that encouraged the governments to finance public services by borrowing rather than taxing—taxing would have generated opposition to the extravagant level of those services. And in both countries another major cause of the current problems was the opacity of key financial data, a result in part of regulatory laxity and in part of the complexity and scale of modern financial instruments and operations. And finally, both countries have dysfunctional governments, made more so by the depression triggered by the financial collapse of September 2008. 

There is another, slightly less obvious, parallel between the United States and Greece: neither country can stimulate its economy by devaluing its currency. Devaluation is a traditional response to depression, because it reduces the price of exports while increasing the price of imports. This has a dual effect: exports expand, and since they are (by definition) domestically produced, the domestic demand for labor rises; and imports decline, which increases the domestic demand for domestic over imported products (unless imports are a substantial input into exported products), further stimulating the domestic demand for labor. (According to Keynes, the high rate of English unemployment in the 1920s, which is to say even before the 1930s depression, was due to the fact that the British pound was overvalued.) Greece cannot devalue its currency because it doesn’t have its own currency; in that respect it’s like a U.S. state. The U.S. has the capability of devaluing its currency simply by selling dollars abroad, but would be reluctant to devalue substantially because the dollar is the major international reserve currency (the currency used in international transactions between companies that don’t trust their local currencies), which creates a large demand by foreign central banks for U.S. dollars even when those dollars don’t buy U.S. goods, and so is a source of wealth for the United States, in part because dollars cost nothing to produce. Its status as the major international reserve currency would be imperiled if its value fluctuated as much as local currencies in many countries do. 

And still another parallel between the two countries: Greece spends a much larger percentage of its budget on defense than any other member of the European Union. Greece and the United States are two of the very few countries in the world in which defense expenditures exceed 4 percent of GDP. 

Among the major differences in the economic situations of the two countries, the United States can still borrow at very low rates, because there is confidence that even if it defaulted, it would not default on its bond obligations (and certainly not on its bond obligations to foreigners) but instead would default on its entitlements obligations. Greece, however, having much greater debt relative to its income, is teetering on the brink of defaulting on its bonds. It is trying to negotiate a “voluntary” halving of its debt to its foreign bondholders; the hope in getting this de facto default to be accepted as being “voluntary” is that financial institutions that have insured the bondholders’ debt through credit-default swaps and other exotic means will not be entitled to the insurance proceeds because there will be no formal default, the usual event triggering liability of an insurer of credit. Very little is known about the scope of the market in bond insurance, and so there is fear of a domino effect if the insurers of Greek debt are forced to bail out the bondholders who are being asked to take a “haircut.” 

Apparently even if Greece cuts its bond indebtedness in half, this will merely postpone default. The Greek government will either have to continue borrowing, but presumably at very high rates that will maintain its debt service at a high level despite the reduction in the principal that it owes, or have to slash public expenditures to a degree that the populace simply will not accept; or both. But another odd aspect of the comparison between the two countries is that because the Greek government’s management of the economy is even more inept than our government’s, it is, in principle, easier for Greece to reform: the government can fire a large fraction of its public employees not only with no loss in efficiency but with a gain as soon as they find private jobs; it can begin to collect taxes in a serious fashion; it can sell off a variety of public assets acquired by its socialistic predecessors (it is beginning to do this); it can, correlatively with firing its employee parasites, cut the red tape that impedes the formation of new and the operation of existing businesses; it can reduce pensions and other entitlements. But that is in principle, not in reality, because of public opposition; Greece is a democracy. Moreover, although what I have outlined are measures that could be instituted immediately, their effect would be delayed, creating the following dilemmas: while the surplus public employees are seeking jobs, they will have to be supported; collecting taxes and slashing pensions and other entitlements will reduce household income and thus reduce consumption and in turn production; and uncertainty about the nation’s economic future will discourage business formation and expansion even if licenses become freely available. 

There is waste in our federal government (and in state and local government as well), but proportionately much less waste than in Greece—so much less than few productive economies can be achieved without cutting entitlements, in particular the huge and rapidly growing Medicare program. But apart from the well-organized political opposition of the medical profession and the elderly to any cuts in Medicare funding, reducing public funding of medical care is more likely to shift than to reduce costs. Costs can be reduced only by heavy copays and deductibles, which would reduce demand for medical care, or by withholding treatment. These measures are unacceptable to the public. 

Tax reform can go some distance toward increasing revenues without increasing tax rates—can even reduce the misallocative effects of taxation—but is immensely complex and contentious. Raising tax rates on just the wealthy will not increase revenues greatly, and raising it on the “middle class” as well (as the nonwealthy are misleadingly referred to) seems to be politically impossible. 

Also off the table is further stimulus in Keynes’s sense—which is to say, borrowing by the government to finance projects that employ people. We have learned that our government is entangled in red tape (like the Greek government, thought less so), precluding prompt execution of a Keynesian program, and we are reaching our borrowing limits. In addition the $800-odd billion stimulus enacted in February 2009 is widely regarded as a failure, though most neutral observers believe that it saved several hundred thousand jobs and by doing so may have helped to arrest the downward spiral in the economy, which in the first quarter of 2009 seemed on track to match the downward spiral during the Great Depression. It is regarded as a failure because the incoming Administration foolishly predicted that without a stimulus the unemployment rate would reach 8 percent and with it would fall to 6 percent, and because the unemployment rate rose to 10 percent and has come down only to 9 percent, the stimulus has been discredited—what should have been discredited was economists’ confidence in their economic forecasts. 

So, for neither country, is a solution for insolvency in sight. Fortunately, because the future is unforeseeable, despair would be premature.

Comments

[Mitchell K.]

Posner claims that "most neutral observers believe that [the $800 billion stimulus] saved several hundred thousand jobs and... may have helped to arrest the downward spiral of the economy" and possibly prevented a more severe depression. Who are these neutral observers? Does Posner consider himself one of them?

Unemployment and the economic contraction leveled off before even a fraction of the stimulus money was even spent. Yet, the Obama administration's economists like Christina Romer triumphantly proclaimed that they had saved the economy and took credit for the marginal economic growth in 2010. Their boasts defy reality.

Much of the stimulus money was in the form of "bailouts" to states and construction projects, but this stimulative spending was largely offset by state governments that reduced their own spending to shrink their budget deficits. This essentially transferred debt at the state and local level to the federal level and meant that the net effect of stimulative spending was largely attenuated.

Of course, there is also the usual criticism of Keynesian-style stimulative spending. Construction projects take time to plan and organize and not having enough "shovel-ready" projects means that either much stimulus money will not be spent until after the contraction has abated or that money will not be well spent (which is a net loss for society). The most "shovel-ready" aspect of the stimulus package was the self-congratulatory rhetoric from some of its advocates.

[Thompson]

It seems the essence of the economic problems is populaces unwilling to make sacrifices. With regard to Americans, we have allowed the prospect and availability of grandiose government "entitlements" to enamor us. We are head over heels in love with our "entitlements", so much so that we are blinded to the reality to what is required is a reduction in "entitlements", not any increase. Yes, a quality of life "devaluation", if you prefer.

We are all on the USS Titanic and very few of us are making haste to the life boats...

[PADRAEG]

Interesting blog, pity so little interest, given the stakes. Amazing Posner does not address this comment above: "Much of the stimulus money was in the form of "bailouts" to states and construction projects, but this stimulative spending was largely offset by state governments that reduced their own spending to shrink their budget deficits. This essentially transferred debt at the state and local level to the federal level and meant that the net effect of stimulative spending was largely attenuated."

Posner is left of Becker, it seems to me, tho still insightful; this could be refreshing as has become truly horrible to have Paul Krugman cited to defend so much garbage.

I love this also from above: "The most 'shovel-ready' aspect of the stimulus package was the self-congratulatory rhetoric from some of its advocates."

[Jack]

"Greece spends a much larger percentage of its budget on defense than any other member of the European Union."

............ Why? Is the large budget individually justified or should the defense of the EU be spread more or less evenly among them all?

"In particular the huge and rapidly growing Medicare program."

....... the "problem" of Medicare is essentially THE problem of US H/C in general.......... it simply costs too much..... and I'd love to study hospital cost shifting, ie from money losing ER's with the losses being made up by feeding on the "late in life" costs guaranteed by Medicare and Medicaid.

"But apart from the well-organized political opposition of the medical profession and the elderly to any cuts in Medicare funding, reducing public funding of medical care is more likely to shift than to reduce costs. Costs can be reduced only by heavy copays and deductibles, which would reduce demand for medical care, or by withholding treatment. These measures are unacceptable to the public."

........... Well, of course they are. With so many of our older folk squeaking by on SS or disability and much of the rest of the nation being impoverished by the stagnating wages of the last 30 years, how are they to stand "heavy copay and deductibles?" UNLESS there are significant changes in income (and even if there are) the prescription for the US is that of wringing out waste and costly overhead.

Increased copays and deductibles would be the immoral choice of triage by wallet; of course it's unacceptable and unless something changes dramatically would only add to the burdens of the ER practicing the most costly first aid on the face of the earth.

In terms of "job creation" competition why does the "right" not see this is another onerous tax? and one that bears heavily on the industries most apt to export their goods?

And:
"Also off the table is further stimulus in Keynes’s sense—which is to say, borrowing by the government to finance projects that employ people."

........... after considerable thought I'd have to disagree. While the huge debt left to us is burdensome, so to is our deteriorating infrastructure; in some cases, deadly, in others a matter of national security and in most cases a further drag on our economy. Over two trillion worth of delayed maintenance and needed upgrades.

While still in an environment of nearly zero interest and with construction people making up a high percentage of our LONG unemployed, does it make sense to be pecked to death by paying out unemployment, "retraining" (if such is at all feasible) and a host of other subsidies and transfer programs only to wake up a decade from now with the two trillion having grown to five trillion and our having nothing to show but a pile of unemployment checks and welfare payment receipts.

Today the average unemployment recipient has been jobless for a year with many seeing the end of their 99 week extensions. What next? Extend again? or have them roaming the streets?

America and the UK won WWII with a can do spirit and not by curling up like a sowbug and saying "We can't afford good tanks, ships and planes".

The President is asking for a, too small to even discuss, $60 billion that should be $250 billion, and ramp up to $300 billion in the next year and begin to taper off as unemployment begins to respond.

Thompson, Ha! and you'll recall that the Titanic was short of lifeboats.

It's a shame though that there weren't more skilled in SMALL boatsmanship, as on those calm waters had they tied the lifeboats in threesomes or more like a raft, they could have overloaded them to the gunnels and handled most of the passengers for the short time before the rescuers arrived.

[an observer]

and we are reaching our borrowing limits

horse hockey

read a few words of a real economist. We are in a liquidity trap (its all about velocity). Like Japan we can borrow at 0% forever, with 20% unemployment

Brad Delong

Hoisted from the Archives: How I Learned to Stop Neoclassicizing and Love the Liquidity Trap: Peccavi Nimis et Mea Maxima Culpa Department

http://delong.typepad.com/sdj/2011/11/the-sorrow-and-pity-of-the-liquidity-trap.html

[Thomas Rekdal]

Judge Posner's wonderful concluding sentence is both the funniest and most acute observation I have seen in some time. Despair is indeed premature because no one can predict the future. All policy options seem to be either economically unworkable or politically impossible because the country has yet to accept two fairly simple ideas: that we cannot spend more money than we have, and that we must be prepared to pay for the benefits we really want. These are not intellectually difficult concepts to grasp. Who knows? A politically significant portion of the population may actually come to accept them before it is too late.

[Jack]

Observer: Interesting, particularly these points:

"Safeguarding Wealth

But something else happens on the path to equilibrium. The decline in interest rates and the rise in savings are accompanied by an increased desire among businesses and households to safeguard more of their wealth in cash. As a result, the speed with which cash turns over in the economy, the velocity of money, falls. And as the velocity of money falls, total spending falls, workers are fired, and their savings evaporate with their incomes.

Thus the equilibrium turns negative, with high unemployment and low capacity utilization."

............. Assuming this is pivotal, given limited resources, we'd want to deploy them for the maximum effect on reversing the downward spiral.

A. Continue to fund tax breaks for the wealthier income groups and hope? they spend in a stimulative manner? (This is obviously not a time in which we'd be concerned about the wealthier saver/investor sector funding plant and equipment expansion as in yester-decades)

B. Immediately sprinkle at least some demand increasing dollars out to those of the highest propensity to spend as in the President's payroll tax break.

C. Prioritize needed cuts from areas least stimulative to those that are most stimulative, and where we have something for the asset side later on.

Less spending on 750 military bases around the world comes quickly to mind as does the worst of the deadwood pork spent in the US on bases that should have been closed per BRAC long ago. Pork-laden hardware is trickier as those cuts take someone's job and likely produces unemployed people of narrowly focused skills unlikely to be in high demand.

Funding some of the over two trillion in LONG delayed infrastructure maintenance and needed upgrades seems the most obvious "no-brainer" available.

What, after all is the alternative? to hide the maintenance deficit on the back pages somewhere like a corporation or banker trying to favorably cook their books and pretend it will get better by virtue of neglect? While we spiral downwards with difficult to retrain mid-life construction sector folk including contractors, planners, equipment builders sitting on the sidelines running out the clock on 99 weeks, or more? of unemployment?

"Special Case

I had read Hicks. I even knew Hicks. But I thought that his era, the Great Depression, had passed. Sitting in my first graduate economics class in 1980, I listened to Marty Feldstein and Olivier Blanchard -- two of the smartest humans I am ever likely to see -- assure me that Hicks’s liquidity trap was a very special case, into which the economy was unlikely to wedge itself again. Yet it did."

Yes........ things neither he nor the geniuses or myself would have foreseen in 1980:

1. The failure of the rising tide of productivity to spread its wealth over the populace in roughly the same incomes disparity curve of that year, instead, a similar consolidation of wealth in the hands of the very few as in the "unlikely" case of 1928.

2. The disappearance of "old fogey" conservatives who strongly favored chipping away at the post WWII/Korea/Vietnam debt with the "deficits don't matter" sort taking the field and then not even investing the borrowed funds in the infrastructure so crucial to our economic success. Would the "fogeys" have applauded and continued the tax policies hammered out during the Clinton era and thus have avoided being broke and requiring stimulative spending at the same time?

3. Health care costs skyrocketing out of control with no rational policies to constrain them being adopted.

4. Despite having just been beaten around the head and shoulders by the oil crisis of the 70's our heavily oil dependent nation going from 30% dependency on cheap foreign and domestic oil to being 70% dependent on very costly imported and domestic oil.

...... Yes, "unlikely to wedge itself in" but we did make all the wrong turns and here we are, again.

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[Evan]

The post says "the government is insolvent, in the sense that its taxing power...is insufficient to finance the government's liabilities..." but also says "government is cutting spending...when it should be increasing it." You guys are much smarter than I am, but do you not see the contradiction here? I understand that fiscal stimulus should (according to the graphs we produced in Econ 101)increase employment, etc. But there is a basic problem here. There is a mismatch between fiscal obligations and tax revenue, and increasing spending will not provide confidence among entreprenuers and the business community that this can be reversed. Government spending is rarely productive - it's not government's fault, it is a fact of human nature. As a nation, our economic welfare will only increase in the long run if we are productive. Go back to the origins of currency - we must collectively produce things (including services and entertainment) that have value to our fellow US citizens as well as foreignors, in order to receive something (wealth) in return. This basic concept has been lost.

[TANSTAAFL]

It's great to see Becker and Posner blogging again. In their absence the leftist echo chamber grew tiresome. Their comments about Greece are spot on.

[Dandraka]

@Jack :
> "Greece spends a much larger percentage of its budget
> on defense than any other member of the European Union."
> ............ Why? Is the large budget individually
> justified or should the defense of the EU be spread
> more or less evenly among them all?

For the most part, the large defence budget is due to continuing real and perceived problems with Turkey. There have been voices (at least in Greece and in Brussels) that call for an EU "security umbrella" over all of its members; that would enable Greece to lower its military budget and the huge current account deficit.

But up till now nothing has been said, much less done. And at least one way to look at this absent of action -not the only one, to be sure- is that it runs against German and French interests.

[Jack]

Evan yep! a seeming conundrum of foot on the gas and on the brake? Well, there's a reason Congress has gone to dealing in ten year budgets though you couldn't tell by the rhetoric we hear.

You've a lot of goodstuff here, simply put:

"As a nation, our economic welfare will only increase in the long run if we are productive."

........ Yes, so in the short run, and series of short runs we'd want to bend over backwards to try to include all of our work force in productive labor. If you came in as CEO of a company that could not lay off any of its employees (the case of any nation) surely you'd want to find something for the idled or grossly underemployed to do than sit around playing checkers on a minimum dole, and especially so if you were counting on them to purchase your wares.

" There is a mismatch between fiscal obligations and tax revenue, and increasing spending will not provide confidence among entreprenuers and the business community that this can be reversed."

............ much easier said than done. Remembering back to the dusty old texbook, surely it is ONLY a clear signal of strong D E M A N D that entices investment and "job creation".

"Go back to the origins of currency - we must collectively produce things (including services and entertainment) that have value to our fellow US citizens as well as foreignors, in order to receive something (wealth) in return. This basic concept has been lost."

......... That's my take. Perhaps company founders as Gates, Buffet and Jobs are worth what they earn in stock appreciation from their innovations but surely those just managing an insurance or banking scheme are hardly worthy of the soaring salaries they've been skimming off for the last quarter century.

If we did not have money, but only barter, would anyone barter 400 years of their production for someone to "lead them?" Willingly?

We "say" that teaching, caring for the elderly and the infants are high callings but pay them poorly while our WS thieves, banksters and other hustlers reward themselves like the Lord's we thought we'd escaped and use their dollar power to carve off special tax breaks to boot. Not sustainable.

[Jack]

Tans! Good to see your mini-post reaffirming a position from which everything appears to be to the left. Have you selected one of the candidates with the best? or most likely to be sold? version of the All for the Rich agenda now fully outed?

I'd apologize for interrupting your peaceful complacency with news of the gears grinding and machinery not working, but! I'm virtually certain that being irked by observations and questions about the collapsing of our once fine economy, replete with balanced budgets and full employment is a lot better for you than the repetitious chants emanating from Heritage org and Clear Channel's 1,000 plus propaganda stations.

[Jack]

Dandraka for the informative explanation... I don't know much about Euro issues. That's a problem of still splintered EU as compared to the US where all expect to pay for the defense of all or one.

[meizitang]

US where all expect to pay for the defense of all or one.

[Dean Plassaras]

Apart from the size and diversity of the two economies (US is a $15 Trillion GDP economy vs. $350 Bil. for Greece), the main two differences are credit rating and currency type.

USA's virtually guaranteed AAA rating (or close to it if we are to take seriously recent threats of possible downgrades) allows access to reasonable inexpressive cost of capital. Also the US dollar being the global currency of choice allows the US virtually unlimited credit access.

If hypothetically the USA were to subject itself to (a) higher credit costs and (b) a brutal austerity a la Greece (or Berlin, if you wish), then the US economy would have collapsed by now in a more pronounced manner that the two trick pony (merchant marine, tourism) economy of Greece.

We are flattered that the US upholds the Athenian democracy ideal and occasionally checks on her follies by way of Greek comparison, but when it comes to economics please keep US powder dry for more fruitful pursuits.

[NEH]

"What should have been descredited was economists confidence in their economic forecasts" Yep, the crystal ball is broken and confidence and credibility is gone in econometric models and forecasts. Not only in business, industry, but also by the consumer. So where do we go from here? As has been oft times said before, "The occasion is piled high with difficulties, and we must rise with the occasion.As our case is new, so we must think anew and act anew. We must disenthrall ourselves and then we shall save our country" and possibly the World as well.

[Josh]

Mitchell K writes the following paragraph to dismiss stimulus:

Much of the stimulus money was in the form of "bailouts" to states and construction projects, but this stimulative spending was largely offset by state governments that reduced their own spending to shrink their budget deficits. This essentially transferred debt at the state and local level to the federal level and meant that the net effect of stimulative spending was largely attenuated.

In reality, the the fact that states were

Much of the stimulus money was in the form of "bailouts" to states and construction projects, but this stimulative spending was largely offset by state governments that reduced their own spending to shrink their budget deficits. This essentially transferred debt at the state and local level to the federal level and meant that the net effect of stimulative spending was largely attenuated.

But the fact that states were cutting their own budgets at the same time doesn't prove that stimulus had no impact. It's obvious to see: If a state had a budget deficit of $10 billion, but the federal government provided $6 billion in funding, then the state only had to cut $4 billion in spending, rather than the full $10 billion that would otherwise have been spent.

So, actually, Mitchell disproves his own point. $6 billion of spending is $6 billion of spending, whether or not the state is in deficit or not. The problem is that we didn't really have a stimulus, we had something to stop the bleeding. The purpose of stimulus is to temporarily spend more than before. If we were spending more than before, we would have given the state (in our example) more than $10 billion. Instead, we only filled a portion of their deficits. We kept the recession from getting worse, but we didn't do what was necessary to improve the economy.

[Jack]

Joh, Yep! There were many voices, including former President Clinton who called for a much large stimulus. Obviously it's a tough one when we've been left with such a pile of DEBT, ha! from 20 years of "Keynesian spurring" thinly camouflaged as "supply side yadda" or simply charming movie actors decreeing "deficits don't matter".

Ha! like starting an old Harley a kick start not powerful enough results in only a put-put and a fizzle.

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[Back Taxes]

Greece has defaulted twice in the last 50 or so years. People seem to think default is some kind of armageddon and it simply is not.

[Jerry]

Very informative article. I just hope we learn from observing Europe so that we don't make the same mistakes here. Better we take our medicine now and gain control of our spending rather than wait and suffer even more pain in the future. Right now many cuts we have to make would hardly be noticable. We absolutely have to find a way of growing our economy. Taking some of the needless restraints on our natural reasources would be a help. We may not need to suffer any pain at all, maybe just political pain but too bad! For a limited time, the Relationship Capital Co. is offering free job search training for your unemployed readers at: http://RelationshipCapital.CO/JobNetworkingPrimer/?utm_source=bl&utm_medium=sm&utm_content=d

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