Let’s be clear: the United States is not Greece and we should not pretend otherwise. The former remains the world’s largest economy by far, its currency still the world’s main means of financial transaction. The markets will give the United States the slack to address its fiscal problems that no other nation will enjoy. America’s economic health is something for which the whole world will root, if only because – as we’ve seen with the recent recession and financial crisis – an America with an economic head cold could threaten the entire world with economic pneumonia.
Having said that, debt is debt. No nation – no matter how big, how powerful, and how central to the global economic system – can escape the rules of fiscal gravity. No nation can avoid the reality that investors cannot buy unlimited amounts of debt. Nor will investors always buy whatever the United States is selling – at least at modest interest rates – if they grow fearful that America’s continued fiscal profligacy will threaten the value of the dollar and, thus, their investments.
The rules of fiscal gravity are no secret. Economic and budget experts of the right and left agree that, when it comes to America’s federal debt, "Stein’s law" applies. In the words of the late economist Herb Stein: "anything that can’t go on forever will stop." What’s less clear is how Americans will react if, by continuing to let its long-term deficit grow, Washington eventually needs to take dramatic action to address it.
That’s where the lessons of Greece may come in.
As the Greek parliament has taken a series of steps to bring the nation’s huge deficit under control, the most recent of which include cuts in civil service entitlements and increases in sales and other taxes to reduce the deficit from last year’s 12.7 percent of gross domestic product to 8.7 percent this year, Greeks have taken to the streets to protest. Strikes have hit schools, hospitals, and public transportation, while police have used tear gas and arrested demonstrators to restore public calm. The Greek people have grown accustomed to the benefits they receive and the taxes they pay to support them, and many are angry to hear that they must accept fewer of the former and pay more of the latter to avoid a catastrophic default.
Americans display a similar reluctance to confront fiscal reality. They oppose cuts in the main entitlement programs – Social Security, Medicare and Medicaid – that will drive long-term budget deficits to unsustainable levels, and they express little support for the kind of broad-based taxes that will help restore fiscal sanity.
With federal policymakers choosing not to confront those long-term deficits for now, Americans have avoided the plight of their counterparts in Greece – at least with regard to federal spending and taxes. But that’s not true at the state level, where policymakers face legal requirements to balance their budgets on an annual basis. And that’s, perhaps, where in America we see the Greek experience beginning to play out.
In California, tens of thousands of students and teachers recently took to the streets to protest tuition increases and other measures to help close the state’s enormous budget shortfall. Those who benefit from what may be the nation’s most generous system of state-funded public education seem no more willing to help their state balance its books than anyone else.
As for our spiraling federal deficit, policymakers face no particular deadline for action. Indeed, they probably have a few years before the markets declare that enough is enough. They have the time to phase in relatively modest benefit cuts and tax increases whose savings will accrue over time. That will not only reassure investors, it also will ensure that benefit cuts or tax increases need not be excessive.
But if federal policymakers wait until the crisis hits, they’ll have to act quickly and brutally. The cuts will be deep, the taxes high, and their impact immediate. Americans, like their Greek counterparts, may be in no mood to absorb them. What occurred on the streets of Athens, and across California, may spread across the United States. It will be a time of turmoil and unrest, perhaps even violence.
That’s the lesson of Greece that we would be wise to learn.
Lawrence J. Haas is former Communications Director to Vice President Gore and, before that, to the White House Office of Management and Budget. Hes now a public affairs consultant who writes widely about foreign and domestic affairs, including fiscal policy.