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Krugman on the Greece comparison


Basically, the United States can expect economic recovery to bring the deficit down substantially; Greece, which has a larger structural deficit and also faces a grinding adjustment to overvaluation with the eurozone, can’t.

Yes, the United States needs fiscal adjustment — Auerbach and Gale say that we have a long-run fiscal imbalance of 6-plus percent of GDP, although much of that could be closed by reining in health costs. But we really don’t look much like Greece.

More here.

By Ezra Klein  |  May 12, 2010; 12:00 PM ET
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About time someone pointed this out. Greece is a small country with very limited ways to up GDP, while the US has all kinds of ways to balance the budget, including setting tax rates that are more comparable to other industrial democracies. I personally think a very modest wealth tax, similar to property tax that all land asset owners pay, but holders of other kinds of assets do not pay, is in order and would go a long way to closing the budget deficit. A financial transaction tax would do a lot as well to pay down the debt.

Posted by: srw3 | May 12, 2010 12:30 PM | Report abuse

government deficits and tax rate comparisons would be more important than the gdp/deficit ratio

this article was featured on the front page of USA Today

"Tax bills in 2009 at lowest level since 1950

Federal, state and local taxes — including income, property, sales and other taxes — consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis reports. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010."

(note: social security taxes were not included)

Posted by: jamesoneill | May 12, 2010 12:32 PM | Report abuse

Why does Krugman assume the US will (economically) grow out of its debt problem but Greece won't?

What is "structural debt" and how does the US and Greece specifically differ in this regard?

If Krugman's article provided those answers, I missed them.

Posted by: Lomillialor | May 12, 2010 1:05 PM | Report abuse

Uncle Sam has become the designated zoo keeper of the world, without him in charge there would be famine and pestilence. Greece is one of the animals in the zoo, and they have just been fed a trillion dollars. Welcome to the new world order, those that do not accept it can move into the jungles of Brazil or Africa, after a few years of hardship, they will beg to be one of the zoo keepers animals.

Posted by: melpol | May 12, 2010 1:07 PM | Report abuse

Lomillialor , the point is that the US is one of if not the wealthiest nation on the planet and has lots of ways to pay down the debt that greece doesn't have.

Remember, Clinton turned a deficit into a surplus over 8 years, without destroying the economy.

We control our own currency and can inflate away some of the debt (not a preferred choice but it beats default.)

The US pays less taxes per capita than most other industrial economies.

Just eliminating the cap on payroll taxes would go a long way toward debt reduction.

We have options that Greece just doesn't have.

Posted by: srw3 | May 12, 2010 1:41 PM | Report abuse

Hindsight is always 20-20. The threat of a Greek debt crisis leading to a regional contagion terrified the financial markets like the Thai debt crisis did in the '90's. The IMF imposed strict conditions on the Thais as well as the other Asian countries that received IMF bailouts. If history is any guide, the Greek government will face not only pressure from the EU but also from the IMF to reform its fiscal policies - which might turn out to be just enough of a big stick to keep the weaker members in line and the EU from fragmenting.

Posted by: tuber | May 12, 2010 1:49 PM | Report abuse


Clinton also started with a smaller budget deficit, political cover for restraining spending on the right, the baby boomers in their prime working years, the end of the Cold War, and a tailwind from lower and lower interest rates as the Fed's commitment to low inflation was absorbed by the bond market and a once in a generation economic boom driven by tech. Clinton did some things right and deserves credit for that, but he was a very very lucky guy.

Now we have a 10% budget deficit, an incoherent and beligerent right wing which attacks Obama/Democrats for cutting spending for political purposes (Medicare), the baby boomers entering retirement, a never ending war on terror which Obama has staked his Presidency on, most likely higher interest rates on debt, and it isn't obvious that we should count on the next once in a generation boom occuring in the next several years.

Budget estimates in future years are full of uncertainty, but that uncertainty goes both ways. The current projections include expectations for very rosy economic conditions. The Obama budget projects 3.3% average GDP growth over the 2010-2020 period - this compares to 3.2% from 1990-2000. Now unemployment is higher, so we have some catch up to do, but investment is down which reduces future productivity growth, and labor force growth is going to be far weaker than during the 1990s. The Obama projections assume no recessions out to 2020. They also assume low inflation and 10 year treasury rates topping out at 5.3%. During 1999, with an economic backdrop of low inflation and large government surpluses, 10yr yields got as high as 6.5%. And all of these rosy projections leave us with a 2020 budget deficit of 'just' 4.2% of GDP. Now this isn't an impossible goal - there's nothing to say that the nanotech revolution of 2017-2021 doesn't actually create a 2020 budget surplus. But it is more likely that the recession of 2018 and a stimulus package or two later has us staring at 7% of GDP budget deficits for 2020 - with another 30 million baby boomers still about to retire.

We are better off than Greece. We don't already have a VAT, and our tax rates are far lower. We have control over our money supply and exchange rate. On our current trajectory though, I think it is more likely than not we end up with a crisis similar to Greece's in which the bond market forces action, if we continue on our current path.

Posted by: justin84 | May 12, 2010 3:11 PM | Report abuse

@j84: We are better off than Greece

Greece isn't even in the same economic universe as the US. The Greek economy is about the size of the Dallas metroplex. The US economy's nominal GDP was estimated at $14.2 trillion in 2009. The Greek economy is about $343 Billion. That is about 3.5 orders of magnitude difference.

The US has a much more diversified economy.

The US controls its own currency and the dollar is the default world currency. Several other countries use dollars as their national economy (Equador and Panama for example).

The US has lots of natural resources.

In fact, there are far more differences in the two countries than there are similarities.

Posted by: srw3 | May 12, 2010 8:29 PM | Report abuse


Well sure, we are bigger than Greece, and that means we can run far bigger deficits and a larger debt, but when our problems become proportional to Greece's given our size, it isn't going to be any easier on us.

The US does issue its own currency and lots of people use it, but that doesn't mean we can keep running up debt forever. Just because the U.S. can print dollars to pay bills doesn't mean there isn't an economic cost to it. China has already made noises about replacing the dollar with a neutral reserve currency, and it could very well happen in the next decade or two. If our debts become so large that our creditors expect them to be paid with printed money, they're going to either charge a high risk premium or ask us to pay in another currency, either of which means the game is up.

Posted by: justin84 | May 13, 2010 1:46 PM | Report abuse

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