SATURDAY, JANUARY 22, 2011
The Road to Greece
America is on the road to recreating Greece's recent debt crisis. In just two years, the U.S. national debt has increased more than 50%, relative to the size of our economy.
If a country as small and removed as Greece could generate the tremors that it did in the past year, how much worse would a national debt crisis be in the world's largest economy?
Greece, the world's 27th-largest economy, is a minor player, even in the European Union. Yet a budget deficit of 13.6% of gross domestic product spiked its overall debt to 115% of GDP. Its debt fell to junk status, and it stood on the edge of bankruptcy. Only the massive May 2010 bailout by the European Union and the International Monetary Fund pulled it back from the brink. (In a road-show reprise, Ireland required a bailout in November 2010.) Not only did the Greek economy teeter, the world's economy seemed unstable as well. It still has not recovered fully. We now nervously eye Spain and Portugal to see if the Greek tragedy is being performed yet again.
WE NEED NOT LOOK TO OLD EUROPE for new crises. We have them right here at home. Last summer, the Congressional Budget Office released a report entitled "The Long-term Budget Outlook." If you think debt problems like Greece's can't happen here, think again.
The CBO did its estimates under two scenarios. One is based on current policy; the other, on current politics.
The first is an "extended-baseline scenario," which assumes current law is maintained. The second is an "alternative fiscal scenario," which assumes that legislative decisions that prevailed in the past will do so in the future.
Which is more realistic? The CBO included the "doc fix"–legislation sparing Medicare physicians from a statutory 21% cut in reimbursement rates–in its political alternative-politics budget scenario, but not in its current policy one. Last year, Congress passed, and the president signed, the "doc fix" on five separate occasions.
Just to be conservative, let's average the two projections. The result is at least ominous, and that's probably an understatement.
There has been a marked deterioration just since the Congressional Budget Office's 2009 report. That year, the agency had projected, under its alternative fiscal scenario, that Social Security, Medicare and Medicaid would consume all federal revenue by about 2060. Using 2010's statistics, that threshold comes sooner, around 2045.
U.S. Budget Projections
As percentage of GDP| 2010 | 2020 | 2035 | |
| Spending | 23.8% | 24.7% | 31.4% |
| Revenue | 14.9 | 20.0 | 21.3 |
| Deficit | 8.9 | 4.7 | 10.1 |
| Debt | 62.0 | 76.5 | 132.0 |
Using the average of the two projections, within 25 years U.S. debt will hit 132% of GDP–well above Greece's 115%. Government spending will consume almost one-third of everything America produces–a level only reached at the height of World War II. Even raising taxes to their greatest ratio to the economy in America's history wouldn't offset the automatic spending machine. America's greatest tax burden as a percentage of GDP was 20.9%, in 1944. In 2000, it hit 20.6%, its highest peacetime number.
The past two years have given us a jump-start on the Greek scenario. As percentages of GDP, the budget deficits were slightly less than those in the previous nine deficit years combined. During those eight years, the deficit averaged 2.4% of GDP. In comparison, the past two years' average deficit was 9.5%.
The only reason 2010's ratio—8.9%— wasn't the peacetime record, is because of 2009's 10% deficit. The next-highest GDP/deficit ratio was 7.2%, in 1946, still during America's wartime wind-down. And the only reason 2010's isn't higher than 2009's is the absence of bailout spending. Bailouts aside, the rest of federal spending ran 9% higher than 2009's pace.
THE SEEDS OF DEBT DYSFUNCTION were sown in entitlement spending's inception. Social Security was built on the illusory promise that a high ratio of active workers to retirees could cheaply provide benefits to the retirees out of the workers' earnings. Medicare and Medicaid were tacked on with similar presumptions.
Maintaining the system meant maintaining the demographic disparity as well. In practice, the finances of the U.S. required larger families than Americans were producing. Neither demographics nor politics cooperated with the fiscal presumption.
Populations aged, and politicians added more promises. Needing either more babies or more taxes, the government chose paternalistic spending and taxes to match. An increasing tax burden has fallen on a decreasing portion of the population.
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The CBO's long-term projections show the accumulated impact of rolling over inter-generational debt. Often likened to a Ponzi scheme, such comparisons insult the late Mr. Ponzi. His victims, and possibly Mr. Ponzi himself, didn't realize how impossible his scheme was. The unsustainability of federal retirement programs has always been known, even if not always admitted.
All welfare states show the trajectory that the CBO lays out; they just have different timelines for reaching bankruptcy. Greece was merely ahead of the curve.
Washington is on the road to Greece. Two generations ago, this would have been unthinkable. The "road movies" of the 1940s and 1950s starred Bob Hope and Bing Crosby, not spending and debt. They were comedies, not tragedies. They took America to exotic locations and hair-raising scrapes but with a joke and a song. And American ingenuity always won out.
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This time, the "road" script doesn't look so jolly. We are on the road to Greece, but maybe we're traveling without hope.
J.T. YOUNG, a former congressional staff member, served in the Treasury Department and the Office of Management and Budget from 2001 to 2004.
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