Greek Crisis Looming for America?

Will the recent debt crisis in Greece one day be echoed here in America? There is a lot of reason to believe it will, and soon, unless we get our government deficits at federal, state, and local levels under control.

In "European and American debt crises signal an era of austerity,"in today's Washington Post, columnist Michael Gerson points out that "In 2009, the federal government spent $1.67 for every $1 it collected in taxes." The extra 67¢ has to be borrowed and becomes part of our national debt.

Our national debt is bankrolled in large part by China and other foreign countries. Banks in those lands buy securities issued by the U.S. Treasury. To get them to do that, the Treasury pays the banks interest. Right now the interest rate is low, because the perceived likelihood of our failing to pay back our solemn debts is nil.

But as the size of the accumulated debt rises with respect to our annual GDP, our creditors will rightfully become nervous and insist on higher interest rates.

That's what's loomed over Greece in recent months. Certain other European nations may be in the same boat. And we may be soon, too. Post columnist Robert J. Samuelson writes in "The welfare state's death spiral" that:

Greece is exceptional only by degree. In 2009, its budget deficit was 13.6 percent of its gross domestic product (a measure of its economy); its debt, the accumulation of past deficits, was 115 percent of GDP. Spain's deficit was 11.2 percent of GDP, its debt 53.2 percent; Portugal's figures were 9.4 percent and 76.8 percent. Comparable figures for the United States -- calculated slightly differently -- were 9.9 percent and 53 percent.

The welfare state's death spiral? Dramatic phrasing but, maybe, yes.

The "welfare state" is what "entitlements" such as Social Security and Medicare are all about. Government entitlement programs are duty bound to provide people with money to cover certain of their needs such as financial security in old age.

The recently passed health care reform is an entitlement. It subsidizes those who cannot afford health insurance, while at the same time making sure that adequate insurance coverage will be available to them.

Where does the money come from which the government duly provides to those who are deemed entitled to it? If it doesn't come from tax revenues, it has to come from somewhere else. For every dollar Uncle Sam collects in taxes, he has to find an additional 67¢ elsewhere. Hello, China!

Pundits are saying we can't keep it up. The 67¢ figure, already high, is due to rise dramatically. As the deficit soars, our national debt will too.

George F. Will, in "Greece and GM: Too weak to fail":

America's projected $9.7 trillion in budget deficits in this decade will drive the nation's debt to 90 percent of GDP (Greece's is 124 percent).

What can we do? Some options:

• Raise taxes — i.e., impose higher tax rates on incomes and other things
• Impose new kinds of taxes like a value-added tax
• Lower non-entitlement government expenditures
• Reform entitlements — e.g., raise the minimum retirement age
• Grow the economy such that incomes and other things we pay taxes on go up

The pundits are pessimistic about all of these, and there is no magic bullet.

Other solutions get mentioned, such as devaluing the dollar so the goods we make are cheaper for foreigners to buy. If they buy more from us, it will help fuel economic growth and bolster tax revenues.

All of these solutions are politically or economically problematic. Raising tax rates and/or imposing new taxes offends the political right. Entitlement reforms offend powerful interest groups who usually support Democrats. Reducing non-entitlement expenditures is easier said than done. And if there's a way to juice the economy, we'd be doing it already.

Post business columnist Steven Pearlstein writes in "Solving the deficit problem requires an open mind, common sense and courage" of his blueprint for a solution:

... we can safely run a deficit of 2 percent of GDP. That suggests a "hole" to fill of about 5 percent of GDP.

Federal outlays are due to be about 26 percent of GDP, while tax revenues will come to about 19 percent. The difference is 7 percent. If we shrink the deficit to 2 percent of GDP, we'll be OK. But how do we fill that 5 percent "hole"? Pearlstein:

The compromise I propose is a 50-50 split between tax increases and spending cuts in the medium run, rising to 60 percent spending cuts as limits to entitlement spending start to compound.

Pearlstein wants to:

• Hold federal health spending increases (Medicare, Medicaid, premium subsidies) to GDP growth plus 1 percentage point a year, rather than the GDP-plus-2.5 percent that has been the norm.
• Raise the eligibility age for Social Security and Medicare by one month for each two-month increase in average life expectancy.
• Slowly reduce the cost of living increases on Social Security benefits for wealthy seniors ... while slowly increasing their Medicare premiums.
• Limit growth of "discretionary" spending -- defense as well as domestic -- to the rate of inflation, except to pay for wars, natural disasters and safety-net spending during recessions.
• Impose a new, broad-based value-added tax of 6 percent, with rebates to low-income households. (A value-added tax is a fancy sales tax. It would hit low-income families the hardest, since a greater portion of their income is used to buy stuff.)
• Raise corporate tax revenues by 5 percent by closing loopholes, while at the same time lowering corporate tax rates.
• Tax wages and salaries and short-term capital gains at only three rates: 17 percent for income from $50,000 to $150,000, 27 percent for income between $150,000 and $250,000 and 37 percent for income above that. This would represent a tax hike for the well-to-do, while an increase in the standard deduction and personal exemptions will mean no tax is paid by a family of four with income under $50,000.
• Reduce the Social Security payroll tax slightly to 12 percent and over time impose it on wages and salary up to $150,000, up from the current cap of about $110,000.
• Raise the Medicare payroll tax slightly, to 3 percent, and apply it to all income.
• Replace the federal gasoline, diesel and jet fuel taxes with a carbon-based transportation fuels tax, set at a rate that would raise $25 billion more annually. (This carbon tax might help reduce greenhouse emissions and forestall global warming.) All revenue from the tax would go to a new transportation infrastructure fund, so it could be considered an investment in America's economic future.
• Eliminate the inheritance tax, but require all estates to pay any deferred and unpaid capital gains taxes on all assets before any distribution to heirs.

Most of these wonky changes are calibrated, equal-opportunity offenders. Lowering their tax rates, for instance, might mollify corporate poohbahs somewhat, in exchange for their tolerating closing cherished loopholes.

Let's assume that Pearlstein's laundry list would just fill in the 5 percent hole. What would happen, then, if even one of his proposals couldn't get enacted, owing to political opposition? The hole wouldn't get completely filled in, unless Congress approved compensating replacement measures. Such measures would be sure to be politically more anathema than Pearlstein's, not less.

In other words, good luck.

Wonky, incremental, politically calibrated changes of the sort Pearlstein recommends, if they could ever be enacted as a package, might do the trick. But the odds are long that they could be bundled together and overcome the vaunted Senate filibuster. If they couldn't get passed, and if China and others wouldn't let us get away with not filling in the hole, then what?

Non-incremental change is the only other alternative. The death spiral of the welfare state ...