Over the last few weeks it has been all but impossible to avoid news reports regarding the negotiations between Greece and the Eurozone over a bailout for the Greek economy. It is a crisis for the Greeks for sure. The situation for Greece has been characterized as a choice between a bad option and a worse option. I don’t think anyone knows for such which option is which. The latest news is that Greece has until Sunday July 12 to submit a plan acceptable to its Eurozone creditors. The prominence of the Greek crisis makes it a tempting “object lesson”.
On the Washington Post blog site, ‘Posteverything’ Daniel W. Drezner in “The only lesson the United States should draw from Greece” reminds us that for the last five years, pretty much as long as the Greek crisis has been muddling along, some in this country have predicted that the United States would soon succumb to maladies suffered by Greece. Drezner, by the way, is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University. He notes dire predictions of five years ago by many, including some economic luminaries, (notably former Federal Reserve chairman Alan Greenspan in the Wall Street Journal and historian Niall Ferguson in the Financial Times). “They — and others — made kindred arguments about exploding levels of U.S. debt that would lead to spectacular increases in debt-to-GDP ratios, interest rates, inflation, and — eventually — a global rejection of the dollar.” None of this has happened. Drezener says, “In fact, in a relative sense, the U.S. economy is looking in much better shape now compared to every other major economy than it did five years ago.”
You wouldn’t know this if you listened to July 4 speeches by GOP presidential candidates. Drezner points to a July 5, 2015 post in Politico by Ben Schreckinger—“Mourn of the 4th of July”. The top of the post says “As New Hampshire partied through Independence Day, GOP presidential hopefuls saw only the death of the American Dream.” Bobby Jindal in particular brought up Greece. The Politico post quotes Jindal: “If we’re not careful we could become just what is happening in Greece…”
Drezner fears the resurrection of the theme that the United States is a Greece waiting to happen. According to the candidates that spoke at the July 4th event, we just don’t know how grim our life has really become here in the United States. It is difficult for me to say how much fear the GOP candidates will stoke. After all, it is hard to imagine a GOP candidate expecting to be elected by pronouncing that things are currently just great. So this is the silly season and we have a record number of candidates vying to out-silly each other and proclaim how bleak a future America faces right now. And right now Greece is a good example. Little is direr than the economic and financial collapse that the people of Greece now face.
The risk is that we in the US can draw the wrong lessons and consequently propose wrong solutions. There are problems. But they are global. Robert J Samuelson, economics columnist for the Washington Post, titled his July 5 column “Greece and Global Debt”. He sees Greece as an “elementary tutorial for what ails the world economy”—namely too much debt and too little growth. For Greece this is a true dilemma. The country is beset by high unemployment and low or no growth. It does not seem to be able to grow without increasing government spending or lowering taxes. This of course makes the debt worse. Meanwhile, European creditors demand debt reduction through spending cuts and increased taxes. This is the opposite of what is needed for growth.
Samuelson sees relatively high debt levels accompanied by low growth on a global basis. He says “What we have is a global debt trap”. The potential problem is that “If all the countries with high debts simultaneously tried to reduce them through sizable spending cuts and tax increases, the collective effect would be a calamity because worldwide consumer purchasing power would plunge.”
We should keep this in mind. The United States is the biggest economy in the world. Austerity here would put dangerous downward pressure on the global economy and accelerate reduced purchasing power around the world. One lesson we should learn is that we need policies that promote growth and investment.