America’s Unfolding Greek Tragedy

May 13th, 2010 at 7:17 am | 76 Comments |

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I should point out first the agreements between Eli Lehrer and me in this debate. Obviously there are big quantitative and qualitative differences between the American and the Greek economy. Let me also concede that even if these differences were minimal, seek even a slight variation in time of occurrence of a debt crisis and other factors could result in an important differentiation of outcomes.

So if and when the U.S. has to face a debt crisis the circumstances of the moment will determine a lot. I think Eli Lehrer like many others believes in an American economic exceptionalism.  That certainly has been true in the past and continues to be so up to a degree even now.  The U.S. has indeed been slower than Western Europe in expanding the welfare and regulatory state. But here we must note that the emphasis is on slower.

American conservatives may be reluctant to admit that the U.S. has already a welfare state. Lehrer mentions the COBRA subsidy but what about Social Security, physician Medicare and Medicaid? Those are the big government programs, which if they are not reformed will generate debt in the trillions of dollars.

America may be exceptional in many things except its welfare state. The American welfare state in many ways functions like a European one. It’s expensive, redistributive, provides the wrong incentives to too many people, and has strong political support.  Watching the debate over Obamacare, it wasn’t surprising to see Republicans oppose it because it would cut Medicare and Democrats support it because it would be as ‘good’ as Medicare.

David Leonhardt of the Times estimates that in order to avoid serious debt problems “the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs). Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.”

Of course, we will not increase taxes or cut spending by a trillion now or even later. The most likely scenario is that we will be increasing our debt as much as possible while avoiding tax increases and spending cuts. At certain points and depending on the political winds we will have some spending cuts and/or tax increases. In the long run we will have reductions in the rate of growth of the welfare state accompanied by rising tax rates and debt levels.

It is this combination of events that makes a crisis like the one that Greece faces now possible for the U.S. America is indeed a very productive country but it’s becoming less so. One has only to look at the current account deficit.  That’s an important similarity between Greece and the US. Another one is the percentage of consumption as part of GDP. In both cases consumption and economic growth has been recently financed by debt.

Up to now it has been very difficult for the American political class to reform the entitlements in order to make them economically viable. If the Republican party does not find a way to articulate a convincing political narrative out of this mess, the future will be one of slow growth, high taxes and loads of debt.

At some point bond investors will take another look at the U.S. balance sheet and they will realize the unsustainability of the whole enterprise. Interest rates will start to rise and pretty soon we might find ourselves in a very Greek predicament.

All the certainties that for so long we have held sacrosanct will be quickly transformed to the peculiar superstitions of yesteryear. All of a sudden, we will be wiser but at a very high price.

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76 Comments so far ↓

  • WillyP

    rabiner/sgath,
    If I am wrong, and if Jeffry is wrong, why is it that Europe is imploding? How is it that decades of socialized healthcare and gov’t subsidy haven’t led to paradise? Why are their native populations being outbred by immigrants of distinctively different ethnicities/religions? These are the pre-eminent welfare states, and they’re collectively sinking.

    Why is it that 2 years after the collapse of Bear Stearns, after unprecedented (“shock and awe”) interventionist policies, unemployment sits at 10%? Underemployment closer to 20%? Why is it that 50% of the youth of America is unemployed?

    If you’re so into empiricism, why don’t you go ahead and explain the worst economy in the last 80 years despite filling and then re-filling the Keynesian prescription?

    Honestly, I find no intellectual stimulation in speaking economics with people who have no coherent understanding of monetary theory. All of your comments are ad hoc and disjointed. If you were to take the time to integrate your own theories, you’d realize they are self-contradictory and ultimately expressions of partisanship rather than economics.

    I could perhaps make an exception for people who have studied the Great Depression in detail, because they would make the connection to then and now. Hint: We are repeating the Great Depression, except this time it’s going to involve Asia, specifically China, too. Present day America and Europe are in very similar economic positions as they were in 1932.

  • WillyP

    slide,
    We are getting more and more gov’t regulation, and have been since the Democrat takeover of Congress in ’06. It’s working out well so far, isn’t it?

    -Spunky

  • Geprodis

    sgath – yes it is fairly obvious to anyone paying attention that Canada is in a good position as of 2010. And with global warming (smile) and advanced technology to fully exploit the tar sands, Canada is on the road to becoming a super power. Maybe when that day comes Canadians will stop chiding America for protecting her (and yes Canada’s too) interests.

    Canada has enjoyed the fruits of America’s world dominance and yet remains diplomatically untarnished. How nice for them.

    sgath – Canada would not profit at all from estranging itself form the United States so what are you babbling about?

  • Jeffry1

    “Well Jeffrey, you are wrong I would not be on the winning side if tax rates went up. But so what I’m not greedy. I want to live in a country that has good infrastructure, and a healthy middle class, a country where people don’t die for lack of healthcare.”

    First of all it is not greed to believe that you are the best arbiter or your welath rather than a faceless bureaucrat in Washington who will waste it. It is not greedy to deny your children more allowance $$ after they have proven they are in capable of intelligently spending the money you have already given them. I a call it common sense. And as for the utopia you describe, it assumes an efficient spending of tax moneys which does not happen: “psst. you wanna buy a manually powered fastener driving impact device from a defense contractor? Only $250.” (That is called a hammer at Home Depot – if you spent your money for it rather than generously turn it over to a government aparatchnik).

    And the rest of your vision flies in the face of mathematics. Sorry. Wish I may wish I might social theory.

    “What affects my neighbor, my city and my country affects me too. That’s what civilization is. That top tax rate kept salaries at a reasonable level.”

    Who decides what is a “reasonable level”? You? Napolean the pig? (google it)

    “But there is no limit to high executive salaries and they have skyrocketed. We need to limit the uber rich from becoming the only ones with money, and that is the trajectory we are on.”

    You think things are better or worse for the vast majority of Americans than 100 years ago when it comes to wealth accumulation?

  • sgath

    Personally, I’m actually a moderate, WillyP. I see the value of Conservative thought. I also see the value of Reform Liberal thought. It’s the lack of ideology I think that lets someone see reality for what it is, instead of just an interpretation of one’s pre-ordained philosophy.

    Any realistic interpretation of the Great Depression can see that one of the central problems of the collapse was not an over extended welfare state, but a debilitating distribution of wealth that destroyed the consumer economy.

  • sgath

    @Geprodis: I agree with you. I was not suggesting that America’s dominance was bad for Canada. I just think it’s a vast over simplification to just casually say that the U.S. ‘defends’ everyone and they’re unable to defend themselves from attack. Economically I agree that the U.S. is largely responsible for the wealth of the Western World as it stands today. Unfortunately of course that is now in crisis.

  • Jeffry1

    See Slide. Your default position is to see racism where it doesn’t exist. Who is the true racist then? Me who wasn’t even thinking of Mebutu as a Black man but rather just a thug…while feeling empathy for his victims–who were decidely Black themselves?

    Or the man who automatically leaps to the racial conclusion when there is none. One of us sees the world through colored glasses. It ain’t me.

    And trust me, based on the absolute devastation to the Black inner city and core family that the wlefare state helped visit upon those it was trying to help while flying in the face of common ssense and even a most basic understanding of human nature, Blacks need more racists like m on their side and less “friends” like you white guilted liberals whose condescension has ruined a people.

  • Rabiner

    WillyP:

    I love how you believe all of Europe is imploding. The problems going on with some countries in Europe (Greece, Portugal, Spain) are due to the fact they are all under the same currency and unable to enact monetary policy to devalue their currently and over time their debt. A devaluation of their currency is normally what countries in their positions would do to make their exports more competitive, imports more expensive, and to spurn domestic production and economic activity. But these countries have, by using the Euro, abdicated this power to a centralized European authority. This is the exact problem with the Euro and was mentioned many times when the Euro was developed and expanded into other countries. However other European counties are not having this same problem, especially Germany which is doing pretty well considering the global economic situation.

    Also considering that this recession was unlike any other one since WW2 it is no wonder than its taking over 2 years to fully recover. But as you’ve seen in the last two months of job reports and last few quarters of GDP growth you can see we’re definitely in recovery.

    Its also disingenuous to say that socialized medicine hasn’t led to ‘paradise’ since nothing will. Utopia is never going to happen so the sooner you realize that then sooner you’ll stop making the argument that since they aren’t Utopia then they have failed.

  • Slide

    oh jeffry get off your high horse…… we saw the concern your side had for inner city blacks during Katrina.

  • WillyP

    sgath,
    I’m happy to hear you are the proselytizer for a “realistic” theory of the Great Depression.

    No, the Great Depression (as distinct from the stock market crash of 29) was caused by an interventionist, busy body government, first from Hoover, and then from FDR. Coercion and regulation characterized the gov’t's response to the stock market crash. Industry cartels, unionization, laws that RAISED wages instead of allowing them to fall, crony capitalism, higher gov’t spending as a percentage of GNP, public/private partnerships, alleged “modernization” plans, more labor laws, a policy is very loose money… etc etc etc

    What caused the stock market run and then boom was credit expansion, facilitated by the Federal Reserve system. So yes, in a very serious way, one of capitalism’s “major problems” is the cartel of money creation by the Federal Reserve. Fiat money begat by special interests – gov’t, who cannot control spending, and banks, who wish to socialize losses. This is mundane to someone who has studied fundamental economics.

    Sure it’s a little more complicated, but that’s why people write books:
    http://mises.org/rothbard/agd/contents.asp

  • samgilbert

    1 year ago we were going the way of Japan, which apparently wasn’t scary enough. Now we are going the way of Greece – want to bet the next crisis country will be the one America is going the way of? First of all, our budget shortfalls are scarily bad, but only if you add projected shortfalls for 75 years into the future. Our immediate – and the only likely – shortfalls are not bad: (4- 6% of GDP). That compared to Greece is very low. Our 75 year projected shortfalls are unsustainable, and so by definition they can’t happen, get this straight: there is a 100% chance they won’t happen. They are as meaningless as they are “scary” and simply a tool used by whichever party is not in power to make moving commercials about the plight of our poor children and grandchildren.

  • Rabiner

    WillyP”:

    I disagree with your analysis on a few fronts.

    1) the tariff policies of the US restricted international trade significantly after the stock market crash and precipitated the Great Depression.

    2) the gold standard made it difficult to do the correct thing and increase the money supply to reverse the deflation that was occurring.

    3) runs of the banks due to an erosion of confidence’

    I’d say those were far more reflective of the causes of the Great Depression than government intervention.

  • WillyP

    rabiner, on your points:

    1) agreed, I left out this important piece. still, it is worth noting that this was/is viewed as “protectionism” and not terribly far from what we do when we refuse to sign free trade agreements with other nations

    2) frankly, you are illiterate when it comes to money. we inflated in the run up to the stock market crash, and we continued inflating throughout the depression. “deflation” is nothing more than a correction caused by inflation, which is always a result of a) fraudulent fractional reserve banking b) gov’t money printing. deflation lowers prices, helping ease the pain associated with depression. this was the prescription for all depressions prior and it worked, just fine. within a year or so the worst was over, and things were looking up again. the depression years – the first time the federal gov’t worked actively to stave off depression and make “profits fall rather than wages,” happens to coincide with the worst depression in our history. am i calling for an abolition of the federal reserve? yes

    3) banks runs are caused by the inevitable effects of fractional reserve banking. banks runs do not cause crises of confidence. this is putting the cart before the ox. crises of confidence are caused by banks loaning out deposit money at multiples, which leads to the business cycle, the boom/bust cycle. when things go bust, people run to the banks to reclaim what’s left of their savings.

    instead of outlawing the real culprit, fraudulent banking practices, we’ve created the FDIC which merely functions, in conjunction with the federal reserve, to socialize losses. the loop is complete, the public put in the cross hairs of unscrupulous loan practices.

    so please, don’t tell me gov’t intervention did not causes the depression. it’s abundantly clear to anyone who isn’t enamored with liberal politics.

  • WillyP

    WillyP // May 13, 2010 at 2:21 pm
    2) frankly, you are illiterate when it comes to money.

    I don’t really mean that as rude, so much as true. It’s very frustrating to try to talk sense with people who think that inflation is the key to prosperity.

  • Slide

    WillyP // May 13, 2010 at 2:01 pm Sure it’s a little more complicated, but that’s why people write books: http://mises.org/rothbard/agd/contents.asp

    So, curious as to where WillyP is getting his silly little ideas, I clicked on the link supplied which brings you to a book written by Murray N. Rothbard. Now, everyone please take a look at who WillyP is using as his source material:

    http://en.wikipedia.org/wiki/Murray_Rothbard

    Some of Mr. Rothbards’ beliefs:

    labeling the State as nothing but a “gang of thieves writ large”—the locus of the most immoral, grasping and unscrupulous individuals in any society

    He viewed many regulations and laws ostensibly promulgated for the “public interest” as self-interested power grabs by scheming government bureaucrats engaging in dangerously unfettered self-aggrandizement, as they were not subject to market disciplines which would quickly eliminate such parasitic inefficiencies if they were to occur in the competitive private sector

    He argued that taxation represents coercive theft on a grand scale, and “a compulsory monopoly of force” prohibiting the more efficient voluntary procurement of defense and judicial services from competing suppliers

    Rothbard criticized as terrorism the actions of the United States, Israel, and any nation that “retaliates” against innocents because they cannot pinpoint actual perpetrators.

    In “War Guilt in the Middle East” Rothbard details Israel’s “aggression against Middle East Arabs,” confiscatory policies and its “refusal to let these refugees return and reclaim the property taken from them.”[55] Rothbard also criticized the “organized Anti-Anti-Semitism” that critics of the state of Israel have to suffer

    He also holds children have the right to “run away” from parents and seek new guardians as soon as they are able to choose to do so.

    He suggested parents have the right to put a child out for adoption or even sell the rights to the child in a voluntary contract,

  • WillyP

    Slide,
    I am not referencing Rothbard’s foreign policy ideas. I am referencing his economics. On this he was quite mainstream, in line with Hayek and Mises.

    As for the “gang of thieves writ large” comment, I he was paraphrasing Cicero.

    “Chuang Tzu, moreover, was perhaps the first theorist to see the state as a brigand writ large: “A petty thief is put in jail. A great brigand becomes a ruler of a State.” Thus, the only difference between state rulers and out-and-out robber chieftains is the size of their depredations. This theme of ruler-as-robber was to be repeated, as we have seen, by Cicero, and later by Christian thinkers in the Middle Ages, though of course these were arrived at independently.”

    http://www.chinaexpat.com/blog/ernie/2010/04/22/ancient-chinese-libertarians.html

  • ottovbvs

    WillyP // May 13, 2010 at 1:35 pm

    rabiner/sgath,
    “If I am wrong, and if Jeffry is wrong, why is it that Europe is imploding?”

    …….Well that would be because Europe isn’t imploding (dearly though you and other nihilists would like it to)

  • ottovbvs

    WillyP // May 13, 2010 at 2:21 pm
    2) frankly, you are illiterate when it comes to money.

    ………too funny

  • ottovbvs

    WillyP // May 13, 2010 at 4:26 pm

    “Slide,
    I am not referencing Rothbard’s foreign policy ideas. I am referencing his economics. On this he was quite mainstream, in line with Hayek and Mises.”

    …..slide……..Willy reserves the right to be selective about which ideas he takes from obvious loonies.

  • Slide

    WillyP // May 13, 2010 at 4:26 pm “Slide, I am not referencing Rothbard’s foreign policy ideas. I am referencing his economics. On this he was quite mainstream, in line with Hayek and Mises.”

    Sorry WillyP but that doesn’t cut it with me. His views on a number of things are WAY out of the mainstream, not only on foreign policy but on economic policy (i.e. taxation is coercive theft on a grand scale; gov’t regulations are power grabs by scheming government bureaucrats engaging in dangerously unfettered self-aggrandizement). That’s pretty freakin wacky ain’t it?

    His rather bizarre and arguably insane viewpoints are, I am sure, reflected in his “understanding” of the depression and it’s causes as well, but if you want to put your faith in him who am I to tell you otherwise right? It just means that I’ll take what you say with the proverbial “grain of salt”.

  • WillyP

    slide,

    “Sorry WillyP but that doesn’t cut it with me. His views on a number of things are WAY out of the mainstream, not only on foreign policy but on economic policy (i.e. taxation is coercive theft on a grand scale; gov’t regulations are power grabs by scheming government bureaucrats engaging in dangerously unfettered self-aggrandizement). That’s pretty freakin wacky ain’t it?”

    Actually, these views have a long intellectual tradition, reaching back several millenia. If they strike you as “pretty freakin wacky” it is because you’re unfamiliar with anything but Time Magazine, Newsweek, CNN, and the like.

  • Rabiner

    WillyP:

    So what taxes aren’t ‘a coercive theft on a grand scale’? What regulations aren’t ‘power grabs by a scheming government bureaucrats’?

    Those are extreme absolutes. Something I fail to recognize as intelligent thought.

  • WillyP

    Rabiner,
    This is why we have a Constitution – to limit the functions of government. Once officials overstep their limited functions and collect taxes in order to start their pet projects and social engineering, gov’t is fundamentally no different than the mob.

    If government does not adhere to its social contract with the public, it becomes tyrannical rather quickly. No?

  • Rabiner

    WillyP:

    You still didn’t get a specific. But please continue talking in generalities since that will allow your argument to remain remotely viable.

    “If government does not adhere to its social contract with the public, it becomes tyrannical rather quickly. No?”

    So where did you get from taxes to ‘not adhering to its social contract with the public’?

  • WillyP

    Rabiner,
    How much more specific can one get than the Constitution of the United States? Article I, Section 8.

    Government has legitimate functions. They are rather limited in scope, however. With this understanding, a group of men, over 200 years ago, wrote a Constitution that was meant to LIMIT THE SCOPE OF GOVERNMENT.

    What’s the connection between limited government and taxes? Ugh… someone should pay me for this. Believe it or not, government needs money to fund its programs. Hence, the more government expands, the more it must tax its citizens. This is so basic I feel silly saying it.

    All of that is to say, that if government expands beyond its legitimate scope, it is acting ILLEGALLY (by definition) and the taxes it is collecting are just as legitimate as the mob taking a piece off the top.

    I don’t know what your background is, but you sound and speak like a political/economic neophyte.

  • Rabiner

    WillyP:

    I’m just not a strict constitutionalist like you are. That’s why you think that. I don’t see what government is doing today as illegitimate and beyond the original Constitution’s intent.