By Edward Zelinsky
Are Greece’s fiscal woes relevant to the United States? Responding to the simmering national debate on this issue, Paul Krugman, writing in the New York Times, answers with an emphatic “no.” “America isn’t Greece,” Professor Krugman confidently tells us. With equal assurance, Charles Krauthammer on Fox News comes to the opposite conclusion. Given current trends in U.S. public finance, Dr. Krauthammer contends, Greece is our “future.” In a similar vein, former Fed chairman Alan Greenspan approvingly cites the analogy between Greece and the U.S. as setting “the stage for a serious response” to the United States’ budgetary challenges.
The Greek experience is not inevitable, but it is instructive. There are seven lessons the United States should take from the Greek fiscal crisis:
1) Fiscal problems can imperil nations without warning. The Crash of 2008 demonstrated that fiscal crises can pummel financial firms seemingly without warning. Bear Stearns, Lehman Brothers – one day they appeared to be financial behemoths. In the proverbial blink of an eye, they were fiscal basket cases. A lesson from Greece is that nations and, by extension, states and cities can similarly be imperiled without warning. Four months ago, most of the world was blessedly oblivious to the finances of the Greek nation. Today the world is worried that Greece’s continuing fiscal problems will drag Europe and thus the world’s economy back into recession.
2) Fiscal problems can be contagious. The fiscal problems of firms and countries can be contagious. Greece’s inability to finance its national debt quickly threatened both nations like Spain and Portugal as well as the European banks which hold Greek bonds. The problems of these European banks in turn affected U.S. financial institutions and thus the U.S. economy. The benefits flowing from the worldwide integration of capital markets and financial firms are counterbalanced by the danger that weak players can drag down the entire system.
The United States is both more and less vulnerable to financial contagion than other nations. As long as the rest of the world accepts the dollar as a safe harbor of value, the United States can mitigate its problems by printing money. If, however, a major American state (e.g., Illinois, New York or California) defaults on its obligations or a major U.S. city (e.g., Los Angeles) files for bankruptcy, the problem is likely to cascade to other states and municipalities and perhaps to the federal fisc. In such a scenario, the federal printing presses may not suffice.
3) Taxes are indeed the price of civilization. Tax Analysts’ Martin A. Sullivan emphasizes that rampant tax evasion has exacerbated Greece’s national deficit. A society that wants public services and transfer payments must pay its bills. We are now inured to images of Tea Party participants who simultaneously denounce taxes as they resist changes to their Medicare and Social Security entitlements. This formula did not work for Greece. It will not work for us.
4) The demographic crunch is here. The much-anticipated demographic crunch is here. The elements of this crunch are today well-known: aging populations; longer life expectancies; underfunded defined benefit pension plans, particularly in the public sector; traditional and now unrealistic retirement ages, both for public employees and for government transfer programs such as Social Security and Medicare. These long-term challenges are long-term no more. The refusal of the Greek government to confront these challenges has resulted in a form of financial receivership for Greece, a receivership not necessarily destined for success. The same demographic problems confront all Western nations including the United States.
5) A VAT is not a magic bullet. Confronting the financial problems of the modern welfare state is politically difficult, requiring painful tax increases and spending cuts. So far, American politicians have resisted the balanced combination of income tax hikes and expenditure reductions necessary to reduce federal deficits. Instead, President Obama appears to be preparing the United States for a European-style value added tax (VAT). Buyer beware: A VAT did not solve Greece’s fiscal problems.
6) Political leadership (or its absence) matters. The tax cuts championed by President Bush in 2001 and 2003 as well as the refusal of Democrats and Republicans alike to confront entitlement spending are the fundamental causes of our current fiscal quandary. The Social Security system could have been reformed on a bi-partisan basis during the Clinton Administration, before the Baby Boomers started collecting Social Security checks. President Clinton and Speaker Gingrich had other priorities and consequently the necessary changes will now be more politically painful as Baby Boomers have begun to receive their Social Security payments. President Obama has unfortunately continued the pattern of bi-partisan fiscal irresponsibility, pledging to avoid broad income tax increases while increasing entitlement spending on health care without seriously reducing health care costs. His Republican opponents have behaved no better, claiming to be for smaller government, but unwilling to specify where they will reduce government spending.
Greece reminds us that, in the long run, political leadership (or its absence) matters. Which leads to the final lesson:
7) Manageable problems, when ignored, become intractable. Greece is a warning that no nation’s fiscal problems can be ignored indefinitely. The longer that entitlements stay in place the more difficult it becomes to reform them, whether such entitlements take the form of unrealistically low tax rates, obsolete early retirement ages, or overly-generous transfer payments. Had Greece’s political leaders acted with political courage earlier, Greece would have been spared a good portion of the pain it faces today – just as more enlightened fiscal behavior earlier would have left the United States with better options today. Ignoring manageable problems today makes them intractable tomorrow.
In the final analysis, America does not confront its own Greek tragedy, an unavoidable slide into national bankruptcy. However, America does face many fiscal challenges similar to those which have forced Greece into national receivership. Greece’s experience may not be inevitable but it is a warning which should be taken seriously.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America