This weekend, Greece goes to the polls and the winners will not likely be able to form a government that can solve the county’s intractable economic problems. Americans should pay close attention—the United States is becoming too much like Greece and could easily end up in the same place.
Greece’s troubles began with an uncompetitive private sector instigated by unrealistic labor market policies and a single currency with Germany. Exports became too expensive, domestic industries could not adequately compete with imports, the private sector grew too slowly, and unemployment rose. Youth unemployment and underemployment became endemic.
In the United States, huge trade deficits on oil and with China are slowing growth—both are caused by government policies. With more offshore drilling and better use of abundant natural gas, the US could cut oil imports in half. Regarding China, the United States could take action against China’s undervalued currency and protectionism but doesn’t. Consequently, unemployment is stuck above 8 percent and too many college graduates are waiting on tables or at counters at Starbucks
To tap down unemployment, Greece permitted workers to retire too young and spent too much on pensions, and the government spent lavishly on education, health care, and other services to create jobs.
In the United States, state and local governments are spending too much on social security and employee pensions. Federal government spending has permanently increased, under the guise of temporary stimulus, to create government jobs and to subsidize a very inefficient health care system. States are spending too much on inefficient educational and transit systems, and other services, and on skyrocketing Medicaid mandates and health care benefits for employees and retirees.
The federal deficit has rocketed from $161 billion in 2007 to about $1.3 trillion, and has been above $1 trillion for four years. The US has lost its prized AAA credit rating, and its credit worthiness will continue to fall if the huge federal deficit is not curtailed. President Obama has no credible plan to bring down the deficit.
As federal and state debt mounts up, the U.S. credit rating will continue to be downgraded, and investors will become reluctant to hold US bonds without receiving much higher interest rates. As in Greece, high interest rates on government debt will drive federal and state governments into insolvency, or the Federal Reserve will have to print money to buy government bonds and hyperinflation will result. Calamity would result, either way.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.