The world economy dodged a bullet today. Parliamentarians in Greece voted in favour of a painful package of austerity measures aimed at reducing the government’s yawning budget deficit, controlling its ballooning debt and convincing the rest of the euro zone to continue to support the country with rescue funds. The vote paves the way for a second EU-led bailout and probably holds off a default, at least for now. It probably also will quiet fears that Greece’s debt crisis would spread turmoil throughout global financial markets (though perhaps not for very long).
The tragedy unfolding in Greece means even more than that. With much of the developed world – including the U.K., Japan, and yes, the U.S. – facing heavy state debt burdens, the events taking place in Greece are a glimpse into the future for many of the global economy’s most important nations. As politicians in Washington wrangle over the debt ceiling, budget cuts and taxes, we have to ask the question: Is the U.S. heading in the same direction as Greece?
Secondly, don’t rush to the exits. Financial markets are telling us that the investor community does not see the U.S. debt problem as urgent. Otherwise, yields on Treasuries would reflect more concern. So Washington enjoys a luxury the Greeks don’t have – time. That credible plan to fix the nation’s finances should be a long-term one. The U.S. can afford to stretch out budget-cutting over the next decade, maybe even further.
And if we cut too deep, too quickly? That could tank an economy already reeling. Unemployment is still obscenely high, the housing market is far from repaired and there’s even talk of a double dip. In other words, the private sector is not ready to step into any hole left by reduced government spending. Until it is, Washington’s politicians have to be extremely careful when closing the deficit. Not only would reduced expenditures cause a direct hit to economic growth, there will also be a knock-on effect that would dampen other spending. Say, for example, Medicare is restructured so that Americans in the future won’t enjoy the same level of benefits. That would force families to save more now to cover expected medical expenses tomorrow, reducing their spending power today, and dampening growth prospects. The best way to fix American finances is through growth. More growth means higher tax revenues and smaller deficits. Slower growth would make closing the budget gap that much harder. The U.S. would end up like a dog chasing its tail.
Third, cut smart. The government has to think about fixing the budget while supporting U.S. competitiveness. For example, education might need even more funding if the U.S. is to compete with a rising China. Maybe we should buy fewer fighter jets and keep schools open? The U.S. also has to cut in ways that lessens the pain of austerity for the greatest number of people. In other words, Washington has to cut fairly. That’s my biggest worry right now. The Republican approach to budget cutting seems to be turning the U.S. government into a perquisite machine for the privileged and connected. The GOP apparently has no problem with the deficit when it comes to tax breaks for the richest Americans, but the party has a big problem with the deficit when it comes to extending benefits to the unemployed or providing healthcare to the poor. That is not only morally repugnant, it is bad economics. The U.S. economy is built not on the bankers of Wall Street but the folks on Main Street. It’s the hard-working middle class that needs to be kept employed and spending if the U.S. economy is to repair its national finances without destroying growth. That doesn’t mean programs like Medicare and Medicaid don’t require reform – they do – but it does mean the interests of the majority of the population can’t be sacrificed for the interests of a few. The biggest danger I see in the American budget cutting process is that it will be based on the power of special interests and ideological idiocy, not pragmatism and fairness.
So is the U.S. facing a Greek future? Only if Americans choose to.