Greece is a fiscal mess, and now likely to receive its third bailout in the span of five years. It’s also a cautionary tale for irresponsible governments, which raises the question of whether there is a relevant warning in Greece for the United States. Can what happened to Greece happen here? To answer that question, it’s first necessary to understand how Greece got where it is.
The simple explanation is that Greece tried socialism and it predictably failed, as socialism is wont to do. But we need to dig deeper to determine how susceptible the US is to the same fate based on its current fiscal trajectory.
More specifically, Greece has saddled its economy and its people with heavy taxes to fund a corrupt government weighed down by excessive pensions for their bloated workforce. A byzantine and oppressive regulatory system further stifles growth and prevents the economy from keeping up.
To put some numbers on the problem, Greek debt exceeds 177 percent of its GDP. That means Greeks would have to work almost two years to produce an equivalent amount of goods and services. It’s unfunded future liabilities, which includes generous pensions, tops 875 percent of GDP! Its yearly spending on pensions alone accounts for a whopping 16 percent of Greece’s GDP, and overall the government spends upwards of 50 percent.
If all this proves that Greece is suicidal, it was its entrance into the European Union that gave it the rope needed to hang itself. When it joined the EU, Greece suddenly had access to levels of credit it never had before thanks to the implicit backing of stronger EU economies like Germany. Creditors determined – correctly, apparently – that if Greece couldn’t pay its debt then they would be bailed out by the larger economies. And like a kid that got his hands on his parent’s credit card for the first time, Greece went nuts. In economic terms that’s called a moral hazard, and the latest bailout has only reinforced it.
Greece is entirely responsible for its current mess, but you wouldn’t know it from the actions and rhetoric of Greek citizens and leaders. Their complaints that the European Bank and the IMF are somehow infringing upon their democratic sovereignty by not offering money without strings is laughable. Creditors have every right to put conditions on their loans. If they aren’t acceptable to the borrower than they shouldn’t take them. That Greece was so irresponsible as to be stuck with nothing but bad options doesn’t change that equation.
But this doesn’t mean the EU and the IMF are strictly right. They can and should put conditions on their latest loans – assuming they don’t let Greece go into bankruptcy like they really ought to do – but some of their demands are counter productive. Sure, raising Greece’s retirement age and bringing the pension system into sustainability are absolutely necessary. But other demands, like an insistence that Greece raise taxes, will perpetuate the cycle of big government, when what they should be doing is cutting spending and moving to a freer market.
Although it seems intuitive to raise taxes at a time when the government is struggling to meet its financial obligations, overwhelming historical evidence shows that lasting fiscal reform is more likely when deficits are reduced only through spending cuts. Mixing them with tax increases saps politicians of the fiscal discipline needed to make significant and long-lasting reforms, and leads to relapse.
So how does all this compare to the United States? While it isn’t approaching Greek-level absurdity, the US regulatory state continues to grow and takes a heavy toll on the economy. And like Greece, the US has significant debts.
The national debt approaches $18.2 trillion, though that’s only about 101 percent of GDP compared to Greece’s 177 percent. The US also has exorbitant unfunded liabilities thanks to Social Security (about $25 trillion) and Medicare (about $47.6 trillion by current estimates, but it varies more widely given the fluctuating rate of healthcare inflation). Nevertheless, Social Security’s current consumption of roughly 5 percent of economic output per year is less than a third that of Greece’s generous retirement system, and while its financial burden is projected to grow considerably and quickly out of control in the coming decades, there is still time for reform.
Some crazies like Senator Elizabeth Warren want to double down and expand Social Security and move it even quicker toward insolvency, but most everyone else not of the hard left sees the train wreck coming and ought to be able to act in time to stop it.
Although the circumstances are a bit different, the United States also has access to relatively easy credit. There is no outside guarantee behind US debt, implicit or otherwise, since no one else could possibly afford it, but there is no shortage of creditors either and borrowing comes easy. In this case it’s the lack of alternatives that keeps the loans coming. The United States is not in a good fiscal position, in other words, but there’s no nation with a reasonably comparable economy doing any better. So politicians can still borrow on the relative cheap, and that doesn’t exactly motivate them for reform.
If there’s one stark difference it is likely culture. Although it’s eroded in recent years, Americans still possess an atypically individualist strain. Despite the effort of certain politicians to foster a greater sense of entitlement and dependence on government among the American public, we work longer and harder than most. But for how long will pride keep enough Americans off the dole to sustain our own growing government and dependent class?
There’s no bright line threshold to determine when it all falls apart. Perhaps our debt-to-GDP ratio can exceed that of Greece without alarming creditors. Maybe 200 percent won’t do it, or even 250 percent. One thing is certain, however: There is a point of no (easy) return, where the only viable option will be to let it fall apart and pick up the pieces.
Greece has passed that point even if they still don’t fully grasp it yet. The EU can shovel some more money into their hands, and even demand they make a few changes, but unless they are taking a hatchet to the government then all it will do is kick the can down the road. They’ll come back again in a few years with their hands out, and they’ll keep doing it until they are allowed to fail. Some, like the Greeks, apparently just have to learn the hard way that socialism doesn’t work. Eventually you simply run out of other people’s money.
Brian Garst is an advocate for economic and individual liberty. He works as Director of Policy and Communications at the Center for Freedom & Prosperity, a free market think-tank dedicated to preserving tax competition. His writings have been published in major domestic and international papers, and he is a regular contributor for Cayman Financial Review. He also blogs at BrianGarst.com and you can find him on Twitter @BrianGarst.
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