The Nation, August 10, 2011
“What’s the difference between the United States and Greece?” should be the setup line for a joke. Unfortunately, it’s a question that seems to be stumping many of the people involved in Washington policy debates. Now that Standard & Poor’s has downgraded the U.S. government’s credit rating (along with that of government-controlled mortgage behemoths Fannie Mae and Freddie Mac, and other entities), the policy-wonk community is likely to find this question even trickier.
The problems faced by the Greek economy—and now, through contagion, perhaps the entire eurozone—are nothing like the problems facing the U.S. economy. However, people with a clear political agenda are doing their best to confuse the public and claim that a crisis created by the collapse of the housing bubble is really a crisis of excessive government spending. Their goal is to gut Social Security, Medicare and Medicaid, and they are prepared to use their money and their influence over the media to achieve it.
The analogy to Greece is a farce from the word go. Greece had chronic deficits even in the good years. Its debt-to-GDP ratio was rising in the years before the crash, when its economy was experiencing strong growth. It now has a debt-to-GDP ratio approaching 150 percent. By contrast, in the United States, even with the Bush tax cuts, the wars in Iraq and Afghanistan, and the Medicare prescription drug benefit, the debt-to-GDP ratio was stable during the housing bubble years. It is now just above 60 percent.
The second key difference between Greece and the United States is that we borrow in our own currency. At the end of the day, if we cannot tax or borrow the money needed to pay our bills, we can print it. That may not be pretty (it could lead to inflation), but as long as our debt is denominated in dollars we will never have the IMF dictating terms to us.
However, the most important difference is that the United States is a huge, diversified economy. If we ever saw the flight from the dollar that the deficit hawks threaten, it would be terrifying—to our trading partners. Suppose the dollar fell so that there were $2 to a euro, or it took $1.50 to buy a Canadian dollar. The U.S. market for imports of European and Canadian goods would collapse, and our exports (we still export more than $1 trillion a year) would be hyper-competitive in Europe and Canada, seizing large chunks of their domestic markets.
This would be an intolerable situation that Europe and Canada would not allow. They would have no choice but to support the dollar and prevent a collapse. What’s the comparable story with Greece—more people taking vacations in the Aegean islands? The people who use the Greek analogy—like former Comptroller General David Walker and former Senator Alan Simpson—deserve to have their arguments ridiculed, not treated as pearls of wisdom in serious debates.
The S&P downgrades, with perhaps similar downgrades to follow from Moody’s and Fitch, are similar in nature to the Greek joke. Remember, this is a credit rating agency that, like the other two, gave investment-grade ratings to hundreds of billions of dollars in subprime mortgage-backed securities. It also gave Lehman Brothers and AIG A-level ratings right up until their demise. Of course, S&P was paid millions for these ratings, leaving open the question of whether the problem is corruption or incompetence.
It is likely both. The Treasury Department officials working with S&P discovered a $2 trillion error in its calculations. Correcting this error meant that the deficit reduction package was actually larger than the $4 trillion figure (measured against the wrong baseline) that S&P had wanted. It didn’t matter; the agency downgraded the debt anyhow. Like the Iraq War, the downgrade decision was made independent of the evidence.
The deficit-hawk crew were crowing that the August 8 market panic vindicated their scare stories and S&P’s judgment.Wrong! The market’s response to S&P’s downgrade actually underscored the creditworthiness of U.S. government bonds: their prices soared that day, as interest rates on U.S. Treasuries fell to the lowest levels since the peak of the financial crisis.
The obvious explanation for both the rise in bond prices and the fall in the stock market is the fear of a euro meltdown. If the eurozone were to break up, it would lead to a world financial freeze-up that could be even worse than the post-Lehman panic. Desperate investors are fleeing to the safety of U.S. Treasuries, a move that is 180 degrees at odds with the downgrade story.
The real problem in the U.S. economy is a lack of demand resulting from the fact that 28 million people are unemployed, underemployed or out of the workforce. Policy debates should be focused on getting these people back to work. Unfortunately, the people who control the national agenda care little about the devastation they have wreaked with their greed and incompetence. Their philosophy of government is that a dollar that goes to the middle class and the poor is a dollar that should be going to the wealthy. This means that as long as Social Security, Medicare and Medicaid are still providing income and security to ordinary Americans, they will be pushing to pare these entitlements back. And they are prepared to use everything in their power to accomplish their goals.