“Mayor Bloomberg may join President Obama’s administration. If he does, it will cost about $3 million. They’ll have to lower every door knob in the place.” – David Letterman
“Last night in only his second Oval Office address, President Obama announced the end of Operational Iraqi Freedom. He said we have given the Iraqis a Western-style government. Well, we certainly have, haven’t we? Their economy is in shambles, their Congress is corrupt, the country is broke, welcome aboard!” – Jay Leno
The credit agency Moody’s just downgraded Ireland’s credit rating, citing weak prospects for economic growth and increasing debt levels. This is sad news for a nation once thought to be a bastion of good fiscal policy.
We’ve seen in Greece what happens when a country’s debt levels rise and credit rating falls: Investors start demanding higher interest rates because they fear that the country may default. That means the country faces higher interest payments, and those higher interest payments mean a worse budget crunch and even high deficits. It’s a vicious cycle that doesn’t end well.
Moody’s warned in March that it would have to consider lowering the United States credit rating if we don’t get our debt under control. We need to take action now so that we don’t follow Greece’s—or now Ireland’s—path.
USA Today has an interactive graph today showing the growth of U.S. and international debt since 1943. In the last 30 years, debt-per-American has increased from $10,210 to $38,655. However, the trend line in the last four years might be the most astonishing thing on the page.
Viewers can compare debt-as-a-percentage-of-GDP between several countries. Greece’s ratio still far outpaces the U.S.’s, but both have moved up in recent years.
The Washington Posttoday has a story by Howard Schneider and Anthony Faiola that leaves European leaders with egg on their face: despite warnings that the continent should help Greece out of its budget hole or risk the world economy, they fiddled while Athens burned.
While this story provides an important look back at what went wrong across the Atlantic, in Washington, and in U.S. states and cities, government leaders should take it as another clear sign to wake up to what Americans already know – our nation is barreling down a dangerous fiscal path; unless we change course before the crisis hits, we face dire, perhaps irreparable harm to our economic and fiscal future.
“It’s been a rough day in the stock market. It’s so bad, today, President Obama had to lay off two teleprompters…the economy is so bad, Joe Biden had to cash in his swear jar….the economy is so bad, I saw the governor of Arizona eating at Taco Bell.” — Jay Leno
“Does the Euro recover, or does it keep on nose-diving? Because what I’d like to be able do is go to Europe this summer and, with a roll of dimes, just buy something from the Louvre.” — Stephen Colbert
“Greece’s trouble’s threaten to spread to the rest of Europe. Over the weekend, fears of a total collapse caused the value of the Euro to plunge to a $1.25. At this rate, the average European won’t be able to go anywhere during their annual 15 weeks of vacation.” — Stephen Colbert
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“Oh man, and the stock market. Another bad day. The market is so bad, BP had to lay off 15 senators.” — Jay Leno
“They put a cap on ATM transaction fees, though a lot of the senators didn’t want to discuss it because they’ve never used an ATM. The Senate has mobile cash machines — they’re called ‘lobbyists.’” — Jimmy Kimmel
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“You know who out there could use a handful of painkillers? Greece. Their economy is on the verge of complete collapse. Rioting broke out last week after the government announced pay cuts and raised the retirement age. Things are so dire, they even laid off the Oracle of Delphi…she never saw it coming.” — Stephen Colbert
Greece is living out a fiscal nightmare. Violent, deadly riots in protest of the Greek government have erupted in the streets of Athens. How did things get so bad? And could it possibly happen in the US?
We answer these critical questions in our new short video “The Greecing of America, Simplified” – which shows how the Greek crisis came to be and how the U.S.’s spending and debt problems compare.
Check it out and, if you like it, pass it along:
Runtime: 2 minutes and 25 seconds
As is illustrated in the video, the problem in Greece is that its government has created a society heavily dependent on government spending. The Greek government spends a lot of its taxpayers’ Euros on retired workers. But Greece’s population is aging, meaning less workers to pay for more retirees, so there’s no way the government can pay for its spending promises to the retirees.
Rather than learning from the failed efforts in Greece and other European countries, the United States is doing the exact same thing. Like Greece, the US is promising money that it does not have to an aging population.
As a result, total U.S. government spending as a percent of the economy has risen to 41.5%. That’s notfar below the levels of Greece (51.3%) and the European Union (50.7%). And it’s far abovethe recommended level of 25% or less.
In 10 years, this overspending will lead to a debt that’s 90% of the size of the US economy. A broader measure from the International Monetary Fund forecasts a more pessimistic debt level of over 100% within just five years. Either way, that’s not far below Greece’s level today (115%). It’s morethan the European Union (79%). And it’s far abovethe recommended level of 60% or less.
It’s too late for Greece. It’s not too late for us…but it will be soon. We must cut spending to avoid a fiscal nightmare like Greece is now experiencing. If you enjoy our video, please pass it along to others.
Source: The Country Statistical Profiles 2009: Greece report from the Organization for Economic Co-operation and Development says Greece’s population over 65 will rise from 18 percent to 25 percent in 20 years.
As a result, Greece is drowning in a debt that’s 115% the size of its entire economy.
That’s two times the level most experts recommend.
Source: Based on recommendations in the Choosing the Nation’s Fiscal Future report from the Committee on the Fiscal Future of the United States and the European Union’s Stability and Growth Pact. The first report suggests that the appropriate U.S. federal debt level as a percentage of GDP is 60 percent. The EU’s Stability and Growth Pact said member states must keep their GDP to debt ratio to under 60 percent.
Like Greece, the US is spending money – that it does not have – on an aging population (total unfunded liabilites.)
Source: $106.4 trillion represents the net present value of the federal government’s unfunded liabilities as calculated in Forbes by former Treasury Department economist Bruce Bartlett based on actuarial tables from the Social Security Administration and data from the Medicare Trustees Report.
In the U.S., total government spending as a percent of the economy has risen to over 41 percent.
Source: Based on the General Government total outlays Table 25 from the Organization for Economic Co-operation and Development.
That’s not far below the levels of Greece and the European Union. (Greece – 51.3; EU – 50.7)
Source: Based on the General Government total outlays Table 25 from the Organization for Economic Co-operation and Development.
And it’s far above the recommended level of 25% or less
Source: A study Optimum Size of Government from the Institute of Market Economics finds that the government sector should be no larger than 25% to maximize GDP growth.
In 10 years, this overspending will lead to a debt that’s 90 percent of the size of the US economy.
Source: Under the President’s budget, debt held by the public would grow to 20.3 trillion (90 percent of GDP) at the end of 2020, according to the CBO’s Estimate of the President’s Budget report.
A broader measure from the International Monetary Fund forecasts a more pessimistic debt level over 100 percent within just 5 years.
In December 2008, International Monetary Fund (IMF) officials were directly questioned about whether fiscal stimuli could be problematic since debt levels were so high. They responded, essentially, by saying that desperate times call for desperate measures. Economic counselor Olivier Blanchard said:
In normal times, the Fund would indeed be recommending to many countries that they reduce their budget deficit and their public debt. But these are not normal times, and the balance of risks today is very different. If no fiscal stimulus is implemented, then demand may continue to fall. And with it, we may see some of the vicious cycles we have seen in the past…
Less than 18 months later, the IMF is advising countries to change course. As The Hill reports, “The IMF predicts that the United States [should] reduce its structural deficit by the equivalent of 12 percent of GDP… Greece, in the midst of a financial crisis, needs to reduce its structural deficit by just 9 percent of GDP, according to the IMF’s analysis.” As we’ve said, how ironic that the very organization that was urging stimulus spending is now calling on the same countries to reduce deficits.
The IMF’s change in position doesn’t take anything away from its findings. Americans have known for some time that the federal government is headed toward financial disaster, but the numbers the IMF provides are quite simply astonishing: within five years the U.S. debt will exceed 100 percent of GDP.
It’s important to note that the IMF report uses a broader measure for calculating debt than either the Congressional Budget Office or Office of Management and Budget. These two U.S. institutions leave out the long-term aspects of the U.S. spending burden, including health care reform. As the IMF explained in a March 2010 paper (emphasis added):
The CBO additionally produces biannual ‘baseline’ projections of the Federal budget under the assumed continuation of current laws and policies (i.e., not taking into account any proposals that are yet to be legislated). None of these projections are meant to provide an objective prediction of fiscal balances in the medium-term … The IMF’s fiscal projections usually take the President’s Budget Proposal as a starting point, making adjustments for differences in underlying economic assumptions and for the likelihood of the enactment of various policies…
It doesn’t matter whether you use the OMB, the CBO, or the IMF’s numbers. No matter how you slice it, this country needs to get its fiscal house in order. The IMF has a history of advocating for tax increases to close budget gaps, but we applaud its inclusion of spending cuts in its latest policy prescription.
Americans overwhelmingly want the government to cut spending – not increase taxes – to cure this problem. Not only is that the most popular solution to this problem, it is also the most fiscally sound solution. The simple truth is that if the U.S. simply reduced spending per household to the average level it was in the 1990s (about $21,000 per household) we could balance the budget within a couple of years.
The Senate has been debating a financial reform bill that is supposed to help prevent another crisis in the financial sector. The extent to which it will help or hinder financial markets is being debated right now. The measure includes one new entity, the “Financial Stability Oversight Council,” that is specifically charged with looking out for practices and problems that pose a systemic risk to the financial system and broader economy. If the bill becomes law, it will entail reams of new regulation and rules requiring greater transparency in an attempt to head off future economic crises.
We think it’s worth asking: if Congress is going to create an entity focusing on identifying systemic risks to our economy, shouldn’t that body begin with examining Congress’s spending habits? Certainly, Washington’s reckless overspending and the exploding national debt threatens to undermine our global competitiveness and potential to grow.
Ironically, in the process of creating this very legislation, Congress is demonstrating that it shouldn’t be giving financial planning advice to anyone. This legislation is estimated to cost $17 billion, and should be subjected to PAYGO rules, but bill sponsors are looking for ways to avoid making changes to comply with PAYGO.
It was just two months ago that Congress passed PAYGO — legislation that requires that that Congress offset new spending by reducing other outlays or raising revenue. It was heralded as evidence that Washington is fully committed to fiscal responsibility. As the President put it: “It’s pretty simple. It [PAYGO] says to Congress … You can’t spend a dollar unless you cut a dollar elsewhere. This is how a responsible family or business manages a budget. And this is how a responsible government manages a budget, as well.”
Yet since that time, Congress has regularly blown off PAYGO, and the same politicians that championed PAYGO have demonized those who have tried to enforce it.
Today, many warn that the U.S. is on the road to economic disaster as our debt explodes to unprecedented levels. What’s happening in Greece could happen here. If Congress is really worried about “systemic threats” to our economic system, it should reduce spending to levels that facilitate growth.
“Greece is a relatively small country. It would be like a state over here. But it overspends, it over borrows, it promises expensive pension plans, it over-taxes, it over-regulates business. So, the state it would be here would be California.” — Jay Leno
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“On Thursday the Dow fell a thousand points because someone entered a billion instead of a million. How is that possible? How is there not a back-up system? When I delete a picture on Facebook it asks me if I’m sure.” — Seth Meyers on SNL’s Weekend Update
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“I love you Greece, but your retirement age is 54. Really? Greek people in America work the register at the diner til they die.” — Tina Fey, on SNL’s Weekend Update
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“And the other reason the market may have plunged were the Greek riots. Really, Greece, you have to get it together. You’re in crippling debt and you don’t want to make spending cuts? Really? Where do you think your money’s going to come from? Royalties for inventing civilization?” — Seth Meyers on SNL’s Weekend Update
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“Although it seems like nothing is getting accomplished in the Gulf, and the situation is getting worse every day, the government has been involved in the clean-up effort since the beginning. They said that, as proof of their involvement, nothing has really been accomplished and the situation is getting worse every day.” — Jay Leno
