The US is NOT Greece

So I guess my first real post is going to be about economics.  Mostly because I like discussion of ideas, and I don't like when people running our country say really dumb things and are taken seriously.  So Senate Minority Leader Mitch McConnell said the US "looks a lot like Greece" today.  According to Sen. McConnell, we're heading toward insolvency and default, Greek style.  Sen. McConnell::

Sen. McConnell says dumb things

Now, Sen. McConnell is either being deliberately disingenuous, or he's stupid.  Neither is a good look for one of the most powerful people in the most powerful government in the world.  So here, in a few steps, is what Sen. McConnell would know if he'd taken Intermediate Macro with Mark Kuperberg (whatup, Prof. Kuperberg).  Or if he'd bothered to have a 10-minute conversation with Ben Bernanke.

Greece is, to use a technical term, screwed.  Their economy isn't growing, no one will lend to them in the global markets, and they can't service their debt.  The EU and IMF are feeding them loans.  Which, without passing go or collecting $200, are going to pay off their creditors, while their government is cutting costs.  Which has the interesting side effect of depressing demand and destroying what jobs they do have (oops).  Now, there are three factors that explain both how Greece got into this mess and why they can't get out.

1. Greece had a big, bloated, overpaid public sector- Mitch McConnell and Co. are right about this one. As Michael Lewis pointed out in Vanity Fair last year, Greece's public rail system is so inefficient that it would be cheaper for every single passenger to get a government-financed cab to their destination.  Their government workers are paid significantly more than their private workers, which stifles innovation.  In a normal country, you go to work for the government for the job security and the short hours.  And that's fine.  In Greece, you went to work for the government to get paid.  And for the job security and the short hours.  Until the music stopped.  But a big bureaucracy by itself isn't a problem if it's what the public wants.  Sure, it slows growth, but not when combined with,
2. Greece didn't collect taxes- If you've got a big government, you better pay for it.  Greece didn't want to pay for it.  Luckily, since Greece was in the EU, credit markets decided that Greece's bonds were backed by the full faith and credit of... Germany.  Similar to the way markets assumed Fannie Mae and Freddie Mac would be bailed out in a government in the years leading up to the financial crisis (even though no such guarantee actually existed), borrowers just assumed that if Greece couldn't pay, Germany and France would. So Greece paid their bloated public sector with debt that markets assumed were guaranteed by the Germans, and covered up their deficits, in part, with accounting gimmicks designed by hired hands at Goldman Sachs.  Eventually, the con ran out.  Greece went belly-up, interest rates on Greek bonds skyrocketed as markets realized that Germany really didn't feel like paying for Greece's debts, and Greece had to make savage cuts to their public sector.  The normal recipe for that kind of bust is rapid expansion of credit to encourage businesses to invest and hire workers, and, as a side effect, to depreciate the currency so that you can export more (if Greek labor is cheaper, Greek-made goods become cheaper in Germany and the US).  Unfortunately, Greece had a third problem; the most significant of the three,
3. Greece was stuck on the Euro.  In boom times, the fiscally irresponsible Greeks who spent most of their modern history in varying stages of default on their debt, after joining the EU, got unlimited financing at Germany's interest rates.  The dark side of the coin was that, when Greece went bust, they were stuck with Germany's monetary policy.  So while Greece desperately needed loose money to encourage investment, Germany decided it wanted tight money to suppress inflation.  Combined with cuts to the public sector, Greece was stuck with massive unemployment, which made servicing its debt all but impossible.  Even if Greece were to balance its budget (and that's not really feasible), the resulting drop in growth would depress their tax revenues and keep them from paying their debt.  In effect, being on the Euro keeps Greece from having its own monetary policy, which keeps it from growing its way out of its problems; debt matters as a proportion of GDP (the more your economy produces, the more taxes you collect, the more you can afford to pay in debt service), and if cuts shrink Greece's GDP, it won't matter that the debt is shrinking, too.

Now, I've got an opinion on what Greece should do (leave the Euro, default and devalue), but that's an issue for another post.  The topic here is why the US is NOT like Greece.  In short, here's why.
1. We collect taxes- Steadily we've been collecting less and less, but tax fraud isn't widespread in the US.  Unless you're a hedge fund manager or a leveraged buyout baron, you're probably paying some taxes, and we've got plenty of room to raise at least a bit more revenue to fund the government.
2. Our public sector is small- The US government is small- Republicans might complain about overpaid bureaucrats, and all that.  It's nonsense.  If you look at a pie chart of the federal budget, the US government is essentially an insurance company with a military (in Paul Krugman's words).  Over 80% of the budget consists of Medicare, Medicaid, Social Security, the military, and interest on the debt.  And, rhetoric aside, only medical costs are growing out of control.  Figure out how to slow the growth of health care spending (easier said than done, but it's doable), and the "budget problems" disappear.  Cutting the National Endowment of the Arts or HUD, contrary to popular belief, does absolutely nothing to address the budget issues because, in a $15 trillion economy, the $500 million or so we spend on them is absolutely nothing.  And not "every penny counts" nothing, but 1/20th of 1% of the budget nothing.
3. We have our own currency- This is the biggest one.  Unlike Greece, which has Germany's money, the US borrows in dollars, and has a monetary policy that is responsive to its needs.  That means when the US economy is distressed, the Fed can lower interest rates and ease liquidity.  Sometimes (now, for example), that's not enough.  Interest rates are at zero, but unemployment is still around 9%.  Textbook economics tells you we need fiscal stimulus; the problem is... Mitch McConnell.  Though that's an issue for another post.  The real issue, when you come down to it, is that what keeps Greece from doing fiscal stimulus is that credit markets, for good reason, are afraid to lend money.  In contrast,
4. Credit markets are desperate to lend the US money- If you don't believe anything else, take one look at the price of US Treasuries and compare them to Greek bonds.  Investors are running away from Greek 10-year bonds like they're infected with Ebola.  A Greek 10-year bond yields 17%.  Now let's look at the US.  A US Treasury 10-year bond yields... under 3%.  Investors are falling all over themselves to lend to the US.  Now, I don't like comparing governments to countries-- a country shouldn't be run like a corporation-- but if you're a business owner who can get a 10-year loan at under 3% interest, indebted or not, you're gonna take that cheap money and invest in new equipment, new computers, new telephone lines, and whatever else will make your company more efficient.  On the government level, that would mean the government investing in roads, rail, improved internet, bridges, and all manner of infrastructure that will improve our national efficiency.  Unfortunately, since Mitch McConnell thinks we're Greece, that opportunity is falling by the wayside.  Even as bond investors like PIMCO's Bill Gross (the manager of the world's biggest bond fund) argue that fiscal stimulus is just what the economy needs right now.

The biggest threat to the US's credit isn't stimulus spending in a contracted economy.  It's investors listening to the words of Mitch McConnell and thinking that they're ready to throw away the US's fiscal future in the name of politics.  Cuts will have to be made eventually, to rein in our runaway healthcare spending.  But, with investors more desperate than ever to loan money to the US government, the US is pretty much the exact opposite of Greece.  And will stay that so long as no one listens to the advice of clowns like Mitch McConnell.