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Friday, May 14, 2010

Paul Krugman: We’re Not Greece

Right now, scare stories about the national debt are "everywhere you look":

We’re Not Greece, by Paul Krugman, Commentary, NY Times: It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.
The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.
So, how do America and Greece compare? Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will... Why?
One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P. ... Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.
The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it’s ... showing up in revenues. ...Congressional Budget Office projections ... imply a sharp fall in the budget deficit over the next few years.
Greece, on the other hand, ... faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.
It’s worth noting ... that Britain — which is in worse fiscal shape than we are,... remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.
In short, we’re not Greece..., our fiscal outlook ... is vastly better.
That said, we do have a long-run budget problem. But what’s the root of that problem? ... Bear in mind that the drive to cut taxes largely benefited a small minority of Americans... And bear in mind, also, that taxes have lagged behind spending partly thanks to ... “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.
Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”
So here’s the reality: America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes. But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

    Posted by on Friday, May 14, 2010 at 12:39 AM in Economics, International Finance | Permalink  Comments (91)


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