No matter how it eventually is resolved, the problem in Greece is clear. Its government spent decades making promises it could not honor. It offered pensions to be paid with taxes -- and then never collected the taxes to make good on the payments. Greece borrowed money to cover its deficits, and then ran out of money to pay even the interest on the loans. And because, as part of the "Eurozone," it doesn't have its own currency, it couldn't simply print the money to make good on its promises.
Now, why does that sound familiar -- except for the last line? The United States has been moving in the same direction, with the great exception being that the United States can -- and does -- "print" the money to make good on its promises. And our currency is in great demand in times of uncertainty.
So, is the United States immune to this kind of crisis? Can we overspend and borrow forever -- and never be called to task by our lenders? True, we are a strong, powerful economy -- unlike Greece -- but we are not immune to the financial laws of nature. Here are five lessons the United States can learn from Greece.
1.Balanced budgets matter. A country can get away with overspending for a while, but eventually its creditors want to see signs that the government is in balance, and able to make the interest payments on its debt. Sensible tax and spending policies are a must.
2.Austerity imposed at the wrong time can destroy an economy. Of course, Greece got into trouble because its socialist government made promises to labor that it could not deliver -- especially in a time of global economic slowdown. Its creditors demanded austerity: big cuts in pensions and in other government spending, along with big tax increases. But compliance with some of those demands only slowed the Greek economy, raising the unemployment rate to over 25 percent, resulting in less in tax collections and more demand for government unemployment payments. It became a vicious downward cycle. The U.S. narrowly missed taking this path in 2007.
3.Economic growth is the only way out. The economy of Greece depends on tourism -- and the crisis that limits cash withdrawals has cut deeply into their largest source of revenue. If cutting back won't solve the economic crisis, then the government must focus on stimulating growth in order to generate tax revenues. But it's harder to do that when you start deep in the hole. A reminder to us: Don't get deeper in the hole!
4.When confidence in the financial authorities is lost, people react predictably. Greek businesses and citizens withdrew billions of Euros from their bank accounts in the weeks before the ultimate crisis. It was clear that in the event of a default, the banks would close and credit would dry up -- further destroying the economy.
Think it can't happen in the United States? Well, we came close in the inflation of the 1970s, when everyone wanted to exchange dollars for gold or commodities or farmland or art. Or in 2007, when the Fed was tempted to force money market mutual funds to "break the buck" by pricing assets at a discount when shareholders tried to redeem their cash.
5.Politics and economics don't mix well. Politicians and economists have different goals -- and even economists differ on tactics. But politicians need to get re-elected -- and that means "buying" votes by being generous to the voters -- with the voters' own money. They did that in Greece, and many in Washington walk that same path.
As British Prime Minister Margaret Thatcher once said: "The problem with socialism is that you eventually run out of other people's money." Greece has reached that point. For America, it's a lesson worth thinking about. And that's The Savage Truth.