Why the Greek Crisis Won’t Happen Here

May 7th, 2010 at 2:20 pm | 17 Comments |

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Greece, medical as anybody who has read the newspaper, check checked the internet, or watched television in the past few days has likely noted, faces a severe financial crisis. An EU wide bailout package, at best, will stabilize things temporarily. Greece will have to raise taxes and cut services. As a result, it’s become a popular meme, particularly on the right, to say that the United States will turn into Greece if current patterns continue. This simply won’t happen. Another major financial crisis for the United States is quite possible but, if a such a crisis does erupt, it’s not likely to look much like the one in Greece for at least five reasons:

1. The U.S. has much stronger economic fundamentals than Greece.

The United States’ economy has plenty of weaknesses—debt, labor costs, so-so primary and secondary education—but also plenty of strengths. The United States has almost always come in first or second in the World Economic Forum’s Global Competitiveness rankings (second in 2010, first in 2009), has the highest GDP per capita adjusted for purchasing power parity of any large economy, has the most productive overall workforce, defines the world’s culture, and leads in nearly every field of scientific discovery. Greece, on the other hand, came in at number 71 in the most recent World Economic Forum Rankings behind countries like Egypt, Columbia, and Botswana.

2. Americans work harder than almost everyone.

Americans work longer weeks and, even though work force participation rates have declined during the recession, still go to work at higher rates than their peers in almost all other well-off countries. Greeks were near the bottom by both measures. As a result, America can afford much more debt than Greece.

3. At least for now, America doesn’t have nearly as much debt as Greece and, countries with similar amounts of debt don’t necessarily collapse.

The United States Public Debt, the kind of debt that taxpayers really pay net interest on, is at a worrisome 67 percent of GDP and, if current projections hold (which they probably won’t) is only expected to hit about 75 percent in the next few years. Greece ran into trouble and saw credit downgrades when debt hit 125 percent of GDP.   Even if the United States did run up a public debt like this—and that’s certainly within the realm of possibility—it won’t necessarily mean an immediate call for Greek-style austerity measures or a need for a rescue package.  Japan, which, like the United States has many fundamental economic strengths, has a public-debt-to-GDP ratio approaching 200 percent and, although mired in a two-decade long stagnation, has seen little in the way of massive austerity  (although that might have helped things) or civil unrest. Canada’s Debt-GDP ratio, in the early 1990s, also flirted with Greek-type levels and that country didn’t collapse either. Italy, as of mid-2009 (the last period for which there are comparable numbers) actually had more per-capita debt than Greece and still hasn’t faced a major crisis as a result. Debt levels like this lead to all sorts of problems. But they don’t necessarily lead to massive unrest or even permanent crisis. Similar debt crises in all of these countries would likely precede one in the United States and, quite possibly, lead to public consensus on measures to pull the country back from the brink.

4. The Fed can print money. (Although that isn’t necessarily a good thing.)

The United States economy isn’t at the mercy of outside forces. The European Central Bank isn’t going to further relax Europe’s already loose policy in order to help Greece alone. Although long-term interest rates near zero leave the U.S. with a paucity of tools, the Federal Reserve Board has at least some monetary tools it could use to try to ease a crisis. This could well result in very significant 1970s-style inflation that the European Union has so far avoided. While it might delay a crisis, indeed, this could make the ultimate collapse even worse than the one in Greece.

5. The U.S. government has more legitimacy

Greece has a continuous tradition of democratic rule that dates back only to 1974. Greeks over fifty have clear memories of press censorship, military coups, and the like. Although Greece holds free elections and has a free press, the current system isn’t very representational. The current Greek Government of Prime Minister George Papandréou received only 43 percent of the vote but has an absolute majority of seats in parliament and thus, can pass any law. The current electoral law, furthermore, almost guarantees a majority to the party that gets a mere plurality of the vote. Until last year, furthermore, laws weren’t even published online before they actually took effect. Although votes of “no confidence” could bring down the government, no prime minister has actually been brought down by one since the current constitution went into effect. A typical Greek thus has many more reasons to hit the streets than a typical American.

An economic crisis in the United States certainly isn’t out of the question. Debt could play a role in sparking it. Civil unrest is possible. But if an economic crisis comes, it won’t look much like the one in Greece.

Recent Posts by Eli Lehrer

17 Comments so far ↓

  • Rob_654

    Regarding the crisies itself – the Far Right is once again showing its complete lack of understanding of economics and how the United States really works.

    Now, regarding the violence in Greece – I can see that happening here very easily particularly if the Tea Party doesn’t get want they “say” they want – large reductions in Federal Spending.

    If there really is very large cuts in Federal Spending – watch out – when people see SS cut, Medicare cut, Defense cut (and jobs are lost), Farm Subsidizes slashed, Education cuts made, et al…

    I don’t think Americans will take that lying down.

    I we’ll see the Tea Bag Hats get traded in for Pro Big Government T-Shirts quicker than you can throw a brick through a window.

  • buddyglass

    “Americans work harder than almost everyone.”

    This could be considered a negative, actually, from a “vulnerability” point of view. Other countries may be more able to “pick up the slack” by working longer hours. Americans are already working in overdrive mode, relative to the rest of the world.

    It might also be worth adjusting down metrics of American productivity to account for the fact that we work longer hours. For instance, I’m curious how our “GDP per capita per weekly work hours” would compare to the rest of the world. Are we only more “productive” because we’re content to mortgage away a larger percentage of our free time?

  • rbottoms

    Obama. Nigeria. Waaa.

  • Claude

    I don’t think that defining the world’s culture or a continuous tradition of democratic rule can be turned into cash when creditors start calling. If we have these huge deficits now, when the baby boomers are in their peak earning years, what’s it going to be like when they’re all on social security and Medicare? Moreover, avoiding an outright crisis is hardly the only reason to limit deficit spending. The Chinese have figured out that financing our deficits also significantly reduces complaints about human rights abuses.

  • TerryJayFoster

    You didn’t even try to answer the concerns of fiscal conservatives. You merely said, don’t worry, keep working hard and print more money if you need it (even though it would be disastrous). We’re not as bad as those other guys. We’re a credible government, the USA would never see financial difficulties like Greece because we’ve been around longer and have a better government.

    I’m too dense to gather a lick of logic in this post.

  • sinz54

    Lehrer: The Fed can print money. (Although that isn’t necessarily a good thing.)

    Speaking as the liberals’ favorite economist, Krugman said that it’s a pity that Greece is tied to the euro, because if they only had their own currency, they could simply inflate their way out of their problems.

    Dean Baker, a “progressive” economist, went further and said that the U.S. should deliberately double its inflation rate to revive its economy.

    But both of these men ignore the structural problems contributing to the slowing U.S. economy: Foreign competition for the same jobs from China and India; the steady decline in manufacturing employment caused by automation and robotics; and the steady aging of the native-born U.S. population. The result of reflation without dealing with these structural problems will be stagflation–a sluggish economy with accelerating inflation.

    Liberals gave us stagflation in the 1970s. (And yes, on domestic policy, Nixon was definitely liberal by today’s standards.) Evidently they loved it, because they want to shove it down our throats again.

    Those of us old enough to have lived through those years as adults learned the hard way that inflation is NOT a solution to anything. It’s just a whole new problem added on to your existing ones.

  • Jose

    The net interest of 67% of GDP is at a ridiculously low interest rate. If the rate doubles to what would still be ridiculously low, we would be at 134% of GDP.

    If the interest rate went to anything ‘normal’ we would be right there with Greece. Who wants to work for worthless paper?

  • uriel81

    David, you seem to be in the minority of opinions I’ve heard around the TV for the last days… Oooo, that sounds bad. How about when the rest of the world figures out that our only industry, the banks, are screwing all their clients with 10,000 trades/second? …an actual number showing that they hold no genuine financial positions other than massively leveraged ones. That they are using the Feds funny money, an institution that refuses to show they bought junk from Goldman and AIG that they continue value highly and print an enormous amount of paper money.

    I think the crisis could spread to the UK where the pound is falling now, and from there to here. Of course, I continue to hope you are right.

  • mickster99

    Pardon me while I indulge in broad generalizations and ad hominem attacks. Most anything and everything from the right these days will have the unmistakable rightwing appeal to unhinged hysteria and paranoia. And it’s always dependable success in generating obscene cash flows for it’s most obvious and successful performers all readily verifiable 24/7. So why not grab on to anything in the news, real or imagined, preferably the later, that will cause irrational frothing at the mouth angst amongst the large cadre of tea-bag ready idiots?

  • uriel81

    Japan is a manufacturing powerhouse while the US makes munitions, scrap metal and synthetic derivatives, so I don’t really think that gets us off at 67% debt-to-GDP vs. their 200%.

  • uriel81

    The reason we can print money is because the dollar is the accepted currency of exchange for the world. If oil ever moves to the Chinese yuan we’re screwed.

  • JonF

    Re: about when the rest of the world figures out that our only industry, the banks, are screwing all their clients with 10,000 trades/second?

    Are you talking about America or Iceland? Because America has plenty of other industries and businesses than finance.

    Re: Japan is a manufacturing powerhouse

    I don’t have current figures but before the recession the US was responsible for 23% of the world’s manufacturing output– a good deal more than Japan or even China.
    Why are so many people so incredibly misinformed these days? Are they just lazy and do not bother to learn the facts, or is some propaganda organ, one which would have Comrade Stalin drooling with envy, delibeately barinwashing them with gargantuan lies?

    Re: If oil ever moves to the Chinese yuan we’re screwed.

    The Chinese absolutely do not want their curency to become the reserve currency. They would rather the world employ soggy leaves than lose their freedom they now have to shamelessly manipulate their currency to their own advantage.

  • ottovbvs

    …….These speculations which are based malign or ill informed scaremongering from the right intended to energize their not very well informed base, are so completely wrongheaded as to be humorous…….there isn’t the faintest equivalence between the Greek situation and the US one……..not an iota…..it’s not worth wasting any more time on it

  • Jose

    Most of Japan’s debt is held internally by Japanese. America’s debt is held largely by foreign interests.

    And the debt is mathematically impossible to ever pay. There is insufficient money in existence to pay the debt.

    We are in a downward spiral.

    How can we not end up like Greece?

  • Jose

    Here is what we could do:

    1. Abolish the Federal Reserve.

    2. Nullify the debt.

    3. Use our 5000 nukes to obliterate any nation that protests.

    4. Actually achieve energy independence.

  • aDude

    There are a lot of differences between the U.S. and Greece. The most important difference is that the Greek crisis is right now, and the real crisis for the U.S. won’t happen for several years.

    In one respect, the Euro crisis is good the the U.S. It reinforces the view of the dollar as the one stable currency. That will increase the world appetite for U.S. debt. It gives us a bit more cushion while we get our own economic house in order.

    Long term, the fiscal problem is based on the increasing percentage of the population that will be eligible to receive retirement benefits, particularly Medicare. Raising the retirement age to 70 or 73 would solve the problem without massive tax hikes. We already did this once in the early 80′s. My own age group has its retirement age set at 67. To achieve long term economic stability I’d be willing to see that raised to 73.

    There are two benefits to such a solution. First, obviously, we don’t rack up as much debt and we don’t end up with massive tax hikes. Second, we keep a larger percentage of the population in productive jobs, thereby adding to economic growth. That growth, in turn, helps to pay down the debt in the first place.

  • Jose


    It only takes a few hours for what is happening in Greece to happen in the U.S. Your statement that it would take several years for it to happen in the U.S. is pure speculation or wishful thinking.

    There is no solution without restructuring the debt and as you said reducing entitlements.