Are We Like Greece?

By John Lumbard.

The fear that Europe will drag the U.S. into a recession is ebbing, and it’s about time.  It’s likely that Europe is already in a recession, but we’re not—and there’s little reason why we should be, because our exports to the continent are only worth about 4% of our GDP.

So perhaps it’s now safe to point out the parallels between our problems and theirs.  Our debt isn’t as large (as a % of GDP) as that of the most-indebted European nations or Japan, but it’s higher than that of the most-responsible members of the EU.  And we share their great future problem, which is that we’ve all promised larger welfare benefits (Medicare, Medicaid, Social Security, etc, etc, etc) than we will possibly be able to afford once the Baby Boomers have retired in numbers.

It’s not just that we’re going to have a LOT more retirees.  We’re also going to have fewer workers;  the ‘Boomers earn a huge part of the nation’s paycheck, and few of them (us) have saved enough to generate any real tax revenue for Uncle Sam.

Put it another way.  We can fix Social Security with just a few changes (to the retirement age, the cost-of-living adjustments, and/or revenue collected), but the only thing that keeps the Medicare program afloat is the fact that there have been so few retirees in the system.  It’s now half a trillion dollars a year and growing like topsy, and when you put it together with other federal health programs the total is easily the largest federal spending category—and it will top a trillion dollars a  year in just a year or two.  Total federal tax revenue in 2011 was only $2.3 trillion . . .

When the program was created in 1965 few American lived past the age of 65, and Lyndon Johnson was able to sell it on a dubious forecast that 25 years later it would only cost $10 billion a year.  In that year Part A cost $67 billion, and since then it has multiplied many times over.

For more than 18 months the financial markets have been closely watching Greece, Portugal, Spain, Italy, and Ireland, worrying that their excessive debt would scare investors—who would then become unwilling to buy the bonds of those nations unless they paid enough interest to offset the risk.  You yourself might willing to accept just 1% on the CD of an FDIC-guaranteed bank, but how would you feel about lending money to Greece at 10%?

Interest rates on Greek bonds soared far higher.  If we, the United States, had to pay 10% on our debt we’d find ourselves paying out more than a trillion dollars a year in interest!  [Our total debt is now over $15 trillion, but we only have to pay interest on a bit more than $10 trillion; the rest of the debt is held by the Social Security and Medicare trust funds, which don’t receive any actual cash interest.  It’s just a bookkeeping entry;  a few more IOUs thrown onto a pile of worthless paper.]

Would a trillion-dollar interest tab matter?  It sure would—we’re currently paying a bit more than $200 billion in annual interest on our debt, so we’d have to come up with an additional $800 billion a year.  Instead of a deficit of $1.1 trillion in 2012 we’d have a deficit of $1.9 trillion.  Instead of jumping to $16 trillion a year from now our debt would almost reach $17 trillion, and larger debt would mean a larger interest payment.  It’s a vicious spiral upward, and nobody would be able to bail us out.

The ugly truth is that we can’t balance our budget in 2012.  You can’t cut spending by more than a trillion dollars, in one fell swoop, without massive layoffs and a ripple effect that runs through the entire economy.  We need to move very slowly and steadily toward a balanced budget, moving with such a convincing sense of purpose that investors will continue to confidently buy US Treasury bonds at low interest rates.

The obvious way to create that convincing sense of purpose is a balanced-budget amendment to the Constitution.


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