National Debt: It’s Greek To Me

Watching American politics makes me wonder how the country can continue on its current path without serious and painful changes to government programs and layout.  Americans want many things from their government (military, roads, social security, health care, rapid & massive response to manmade and natural disasters) while simultaneously not wanting to pay the taxes needed to support the government.

“Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’ ” Mr. Greenstein, head of the Center on Budget and Policy Priorities, says. “But the bottom line is, there really is no avoiding the hard choices.”

David Leonhardt writing in The NEW YORK TIMES Economic Scene, In Greek Debt Crisis, Some See Parallels to U.S., describes the problem exactly.  Any politician who ever tells the American public hard news is likely to find an unsympathetic electorate (One can think of President Carter telling Americans something has to change in our oil consumption habits).  Leonhardt writes:

And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

I-80 Bridge

We can blame government and politicians, but our government is chosen by we the people, and we keep putting people in office who create what we’ve got.

As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt.

What kind of spending cuts or tax hikes are we talking about?  Current estimates say we need to come up with $1 Trillion in such changes today and in today’s dollars.  Leonhardt points out:

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.

So a plan is needed that would completely eliminate those departments and programs, or their equivalent!   This is where I think those who say they favor reducing the size of government need to start presenting the hard realities of what they would reduce to stop the out of control deficit increase.   Leonhardt’s proposal for coming up with $1 Trillion:

Pentagon

A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth.

 

In my estimation we need people to make concrete proposals with real numbers that total $1 Trillion, not just alarmist arguments for reducing the budget.  We the people have to give courage to our politicians to start now proposing the $1Trillion in budget changes.  If their ideas (spending cuts for example) don’t add up to $1 Trillion,then they are offering only pie in the sky and  we need to tell them, it isn’t good enough.

2 thoughts on “National Debt: It’s Greek To Me

  1. Darrell

    Attached is an essay on the euro; the person who wrote the essay has a website it is:
    http://www.emergingmarketsoutlook.com/

    It has been my position that the global economic system is a currency based system with the dollar, the euro, the Yen and a few other national currencies being used as global currency. Global currency is accepted as legal tender by central bankers and gives us the right to buy goods, services and/or assets in most countries.

    Without going into details of the mechanics of the currency system it is suffice to say that all we have to do is issue more dollars to buy what we need from whomever and wherever.

    The Greek problem is that they have to pay off their debt from tax revenues where we can pay off our debt by issuing more dollars.

    The following essay is a good read.

    Eurotrash: The Greek Bailout, the European Project, and the World’s Reserve Currency
    Posted: 12 May 2010 01:04 PM PDT
    Attentive and loyal readers of this blog will recall that I wrote, almost exactly a year ago, about China’s proposal to replace the dollar as the world’s reserve currency with the special drawing right (SDR), a unit of account used by the IMF, which is based on a weighted basket of currencies that includes the dollar, the euro, the yen, and the pound. I wrote then that this proposal had virtually no chance of being adopted, one reason being that the Europeans would be loath to abandon their new currency, which already accounted for a growing share of world reserves, in favor of a faceless accounting unit.

    The events of the past few days have confirmed this view and have, if anything, reinforced the position of the dollar as the reserve currency of choice. In agreeing to a €750 billion (more than $900 billion) package to save the Greeks from the consequences of their impecunious ways and to signal that the Spaniards and Portuguese would be similarly protected should the need arise, the stronger members of the eurozone sought above all to protect the Euro, which was always about politics, not economics. German Chancellor Angela Merkel on Monday night proclaimed, in a message certainly meant for the German people, that “for us in the federal government the most important thing is the stability of the currency.” This was not, it turned out, about rescuing the shiftless Southern

    Europeans but about preserving the union. It marked a possibly irrevocable turning point towards abolition of national sovereignty in the EU in favor of something we might start to call the United States of Europe. One can easily foresee a time, not far off, when France has about as much sovereignty within Europe as Vermont has within the United States, which is to say almost none.

    Henceforth, the EU will stand ready to make cash transfers to member countries whose fiscal imbalances threaten collapse and/or default on sovereign debt. France and Germany were quick to stress that it is not the EU per se but its member governments, who will make the transfers, but this seems little more than a fig leaf to hide the huge erosion of sovereignty this measure implies. It seems a foregone conclusion that what exists in practice will soon be enshrined in law or binding treaty, and that the sovereignty of EU member states in fiscal matters will be gone for good. As always, there will be winners and losers.

    The winners certainly include investors who were long in Greek 10 year government bonds, which less than a week or two ago were trading at a 9.65 percentage point risk premium to German government debt. In today’s European trading, the spread dropped to 4.37 percentage points with the receding probability of a Greek default. As the Euro fell to new lows, other winners may include eurozone exporters whose products will become cheaper in international markets.
    The other – and arguably, the biggest – winners are those who believe passionately in the European project. The bailout all but eliminated the chance that Greece would be forced to abandon the Euro, which would have threatened the survival of the currency itself, while also halting progress towards deeper European integration, which now seems an unstoppable juggernaut. The European Commission today issued a report calling for more unified fiscal and economic policies throughout the EU, while Dominique Strauss-Kahn, the Frenchman who heads the IMF and is a likely challenger to Nicolas Sarkozy in France’s next presidential election, suggested introduction of a new European system of cross-border budgetary coordination to avert the risk of a repeat of the Greek crisis.
    The losers? Britain, and citizens of other EU countries who stubbornly persist in their quaint belief in national sovereignty. At some point it will become next to impossible for a country to remain inside the EU without signing on to the euro as well. It will become similarly hard for countries like Britain and Ireland to cling to their “Anglo-Saxon” views on business regulation and taxation (yes, I know the Irish are Celts, not Anglo-Saxons). The new Conservative-Liberal Democrat coalition government in Britain could easily founder on the European question, just as the last Conservative government did. The EU is happy to let countries like Switzerland, Iceland, and Norway enjoy free access to their markets, but it is not clear that it would be so accommodating towards Britain, a much larger country which could soon have to make a stark choice between joining the euro and the whole EU project or being booted out entirely.

    As for the United States, it’s hard to tell whether we really have a dog in this fight. In the near term the dollar’s status as the world’s reserve currency appears even more firmly entrenched. Over the longer term, if I thought I knew what would happen I would be trying to figure out how to profit from it.

    1. Fr. Ted

      Thanks for posting this – really interesting.
      His last line, though written with a sense of humor, also speaks to the truth about investors – whatever chaos and collapse may occur in world markets, they are forever trying to figure out how to profit from them, which is also why they don’t worry about the morality of such events nor who is responsible.

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