Most Americans look at the rerun of the Greek euro crisis with something between smug amusement and condescending disapproval. When will those profligate Greeks get their economic house in order and stop looking to others to bail them out?
But, should people living in glass economic houses really throw stones?
After all, just like Greece, the United States government has been living beyond its means, running up an enormous debt that will eventually need to be repaid.
True, our budget deficit this year will be lower than it has been, just $486 billion compared to $1.4 trillion as recently as 2009. But this is just a temporary respite. Within the next couple of years the deficit will start to rise again. By 2025, we will again face trillion-dollar shortfalls.
And even a $486 billion deficit adds to our ever growing debt. Our national debt currently approaches $18.2 trillion, roughly 101% of GDP. That’s right. We owe more than the value of all the goods and services produced in this country every year. It is as if your credit-card bills exceeded your entire pay check.
The danger for the United States is that spending on entitlements will surge in the coming decades.
That’s not quite as bad as Greece, of course, whose debt exceeds 177% of their GDP. But it is worse than countries like France or Spain.
And give us time! Like Greece, the driving force behind our debt is the growing cost of entitlement programs for health care and retirement. If one includes future unfunded liabilities for Social Security and Medicare, our real debt exceeds $90 trillion. That’s more than five times our GDP. Greece is still in worse shape — their unfunded liabilities top 875% of GDP — but we’re gaining.
At the heart of Greece’s problems lies a government grown too big, too intrusive, and too expensive. The Greek government spent nearly half of the country’s GDP last year (49.3%), and that actually represents a decline from the 51.8% it averaged since 2006. The Greek’s may complain about austerity, but they’ve hardly practiced it.
Our government is far smaller than Greece’s today. Federal spending is just 20.5% of GDP. But, according to the Congressional Budget Office’s alternative fiscal scenario, that could rise to almost 34% by mid-century. Factoring in state and local government spending, which already accounts for roughly 14.4% of GDP, total government expenditure in the US could reach 48% to 50% in 2050, roughly Greek levels.
As government grows, the private sector contracts. Greece has one of the most inhospitable business climates in Europe, ranking 84th in the world in the most recent Economic Freedom of the World Index. Meanwhile, as the United States continues to increase taxes and regulations, we have fallen from the second highest economic freedom ranking just 15 years ago to 12th place.
Of course, the United States has some advantages that the Greeks lack. Greece owes a significant share of its debt to foreign governments, while the majority of American debt is domestically held. The United States also faces low borrowing rates, while Greece has been effectively shut out of capital markets. The US debt may be bad, but in many ways we are the fastest horse in the glue factory. As long as the euro remains in crisis, we will continue to be able to borrow money at absurdly low interest rates.
The United States also controls its own currency and monetary policy, while Greece is hostage to the European Central Bank, which must balance its interest against those of other countries in the monetary union, many of which are in far different economic positions.
The danger for the United States is that spending on entitlements will surge in the coming decades, which means that, absent reform, they take over the economy. Investors would respond to the weaker economic outlook by demanding higher returns in order to continue investing in US bonds, which would further drive up interest costs, making our problems even worse. And, of course, unlike Greece, there aren’t other countries or organizations available to bail us out.
Margaret Thatcher reputedly said that the problem with the modern welfare state is “eventually they run out of other people’s money.” “Eventually” has become “now” for Greece.
The United States, on the other hand, still has time. If we act now to reduce federal spending and reform entitlements, we can avoid the crisis to come. If not…Greece beckons.