Posted by WARREN MOSLER on May 17th, 2010
By Paul Krugman
It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.
True. I just finished a week in dc fighting back against the bipartisan move to cut social security.
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.
That has nothing to do with it. Japan’s debt is near triple ours, and their 10 year rates are about 1.3% for example.
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.
Not true. With us govt spending not operational revenue constrained the way greece is, we are always able to spend (or cut taxes) however much we want to. It’s a political decision without external constraints.
But we still entered the crisis in much better shape than the Greeks.
Yes, because we are the issuer of the dollar and greece is not the issuer of the euro. Greece is like a us state in that regard.
Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.
For the same reason. We can manage our aggregate demand because our fiscal policy is not operationally constrained by revenue the way Greece is.
The U.S. economy has been growing since last summer, thanks to fiscal stimulus
Yes, mostly the automatic stabilizers with some help from the proactive measures congress has taken, however misguided.
and expansionary policies by the Federal Reserve.
I don’t agree with this but that’s another story.
I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues.
True, however the output gap is finally stable at best as it remains tragically wide.
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.
Yes, with our only hope for lower unemployment being an increase in private sector debt that exceeds that. Not my first choice in mending what ails us.
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.
Should have been said this way-
‘If Greece had its own currency and was running its deficits in local currency market forces would have caused the currency to depreciate.’
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.
True. And worse. The proactive cuts and tax hikes can slow the economy to the point the deficit doesn’t come down, and might even increase, making matters even worse.
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.
It is all the difference.
Hard to see why that isn’t obvious. US, UK, Japan, etc. Etc. With one’s own non convertible currency and floating exchange rates, interest rates are necessarily set by the central bank, not by markets.
And govt securities function to support interest rates and not to fund expenditures
And note the uk economy is on the mend. Even housing has found a bid, with the main risk being a govt that doesn’t get it and tries to balance the budget.
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.
Wrong reason- we are the issuer of our own currency, the dollar, while Greece is the user of the euro and not the issuer.
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.
Wasn’t my first choice of which tax to cut to support the private sector. I’d have cut fica taxes and i continue to propose that.
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.
And liberals have artificially constrained themselves with the misguided notion that spending is operationally constrained by revenues, and fail to understand the ‘right sized’ deficit is the one that coincides with full employment and desired price stability.
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:
An understanding of national income account and monetary operations shows deficits are driven by ‘savings desires’ and any proactive attempt to increase deficits beyond savings desires results in inflation.
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!”
Wrong causation. What he calls our ‘fiscal future’ is the size of future deficits and they will always reflect future ‘savings desires.’ if we proactively get them smaller than that the evidence will always be unemployment.
So while cutting health care costs may be a ‘good thing,’ when the time comes, future deficits need to reflect future savings desires to keep us fully employed.
So here’s the reality:
The mistaken, political reality.
America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem,
Unfortunately, this kind of talk makes him part of the problem, not part of the answer.
which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes.
Wonderful, with screaming shortfall in aggregate demand as evidenced by tragic levels of unemployment, the celebrity voice from the left is calling for spending cuts and tax hikes not to cool an over heating economy, but to reduce non govt savings of financial assets.
(govt deficit = non govt savings of financial assets to the penny as a matter of national income accounting, etc)
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.
This is one of the current iteration of the ‘deficit dove’ position.
It does not cut it.
It is part of the problem, not part of the answer.
Doing the best i can to get the word out.
Please distribute to the max!