Is America, or Illinois, or Chicago the next Greece? The answers are “Yes, if . . . ,” “No, but . . . ,” and “Perhaps.” Greece joined what was then the European Economic Community even though it had no business applying for admission, and the existing members had no business allowing it entry, as the community’s finance ministers concluded, only to be overruled by France and Germany, whose leaders were hoping to construct an institution that would make another continental conflagration impossible: Full speed ahead, economics be damned. Greeks did not speak any of the languages common in the larger EEC countries, or English, the language of international commerce. Their country’s stage of economic development was described delicately by the Hellenic Republic Ministry of Foreign Affairs in its official narrative as “diverging from the average ‘community’ development level,” meaning the country was more developing than developed, and that law-abiding, German-style taxpayers were thin on the ground. Politics was, er, primitive, with Communist and fascist elements unreconstructed.
Once admitted to “Europe,” and then to euroland, the Greeks proceeded to party, with the help of creditors who seemed to believe that lending to Greece was the same as lending to Germany and charged low interest rates reflecting that misapprehension. The Greeks reacted as they had when receiving the first post-independence loan in 1824. John Dizard, writing in the Financial Times, notes that J. Emerson Tennent, Count Pecchio, and W. H. Humphreys wrote in their book A Picture of Greece in 1825, published in London in 1826, “The majority of [them] do not rightly comprehend the meaning of a ‘loan,’ but very simply conclude that it is some European method of making a present.” Presents need not be repaid, so instead of putting them to use developing the country, Greeks past and present spent them. Greeks have had enough loans lavished on them by lenders to support early retirement, generous payments for not working, construction of a rules-ridden corrupt economy, with no need to collect those annoying taxes other countries struggle with.
In short, Greece partied. And creditors, in ignorance of or ignoring John Taylor’s admonition, “Don’t lend to a country with an unsustainable public debt,” continued on a course that would eventually force them, in essence, to pick up the bills. So lenders continued to lend. Until they wouldn’t. More precisely, until they took a pause to impress on the Greeks that they are broke—as in, you have no money and your ATMs are almost running on empty—and that when I lend thee not, Chaos is come. The pause also gave German chancellor Angela Merkel time to concoct terms for a third bailout so severe that her critics at home, who for some reason resent working until age 65 while Greeks retire at 50, became merely sulky, rather than mutinous. As this is written, the Europeans are prepared to do the can-kicking for which they have become famous, and fork over another 86 billion euros ($96 billion) in return for renewed promises to reform and privatize sections of the Greek economy. Presumably, the Greeks will throw themselves into the reform process and create an economy sufficiently robust to permit them to repay the 86 billion euros in new debt taken on by a country unable, even if it were willing and thought it right and proper, to repay the debts it has already incurred.
On to America, and to the recently often-asked question, “Could America become the next Greece?” Romina Boccia, research manager at the Heritage Foundation, concludes—with some quite sensible caveats—that indeed we could: “Greece and other struggling European countries offer Americans a window to the future.” Unlike President Obama, who finds the view from that window to the future quite agreeable—an America more like Europe—most observers would prefer not to become Grecian when it comes to fiscal matters.
Fortunately, to become the next Greece we would have to take several steps, including continuing the expansion of the entitlement state, as Democrats would have us do; refusing to fund the inevitable cost of our aging demographic and a larger defense establishment, as the watch-our-lips, no-new-taxes Republicans would have us do; and refusing to make the obvious reforms and investments that would transform an economy that will likely be growing at around 3 percent by year-end into one that can grow at 4-5 percent. That sort of fiscal vandalism would require a significant increase in our reliance on borrowing—fly now, pay later.
But even that series of policy errors would not convert America into Greece. For we possess a weapon the Greeks surrendered long before they reluctantly went to war on their deficit—sovereignty, our own currency. Faced with a large trade deficit, a nation with its own currency can allow it to depreciate, making its exports cheaper and imports more expensive. Greece does not have that luxury, so it must continue to compete with Germany when its currency, the euro, is woefully overvalued and Germany’s, that self-same euro, is as woefully undervalued. And faced with a huge debt burden that even the International Monetary Fund now admits can never be repaid, Greece cannot print money in order to pay its creditors with devalued drachmas, as we can with devalued dollars.
There is still another question concerning forecasts that we are headed for the fiscal rocks. We are not certain the Congressional Budget Office and other prognosticators that are painting what Boccia rightly characterizes as a “dismal U.S. fiscal outlook” have got it right. The massive periodic revisions in their forecasts do not inspire confidence in their current appraisal of where we are headed. In mid-July, the White House budget office revised its February forecast of the deficit down by 22 percent—quite a change in five months. It wouldn’t take much of a drop in revenues or an increase in expenses to produce an equal or greater upward revision in the deficit forecast.
For now, the credit rating agencies are satisfied with the U.S. fiscal condition. Moody’s considers our Aaa rating “stable,” a key buzzword for investors, who look to the future, citing in our favor the size and diversity of our economy and the status of the dollar and Treasury bond market as “global benchmarks.” Fitch, which had put a negative outlook on U.S. debt in November 2011, concurs, in part because of our “unparalleled financing flexibility as the issuer of the world’s pre-eminent reserve currency.” Standard & Poor’s, which cut America’s rating one notch from Aaa to AA+ in August 2011, a few months after a government shutdown was avoided at the usual last minute, retained the latter rating and labeled it “stable” because of our “diversified and resilient” economy and our role as the issuer of the world’s reserve currency. In a separate report, the agency notes that the average time between losing and regaining an Aaa rating is 13 years, almost enough time for the policies of the next two-term president to return us to the exalted ranks of the Aaa rated, at present a nine-member club. No hint of America becoming Greece in any of those. But lest I lose my right to be counted a dismal scientist, let me point out that this is the same bunch that assured us of the Aaa safety of a bundle of mortgages headed for foreclosure, on a theory that parallels the one that contends that two drunks are safe so long as they can hold each other up. As a consequence, in February, S&P paid $1.5 billion to the feds and several state governments to resolve a collection of lawsuits over its ratings on mortgage securities that soured in the run-up to the 2008 financial crisis. And Fitch does worry about the risk of a “deterioration in the coherence and credibility of economic policy making,” although further deterioration is difficult to imagine.
Only one thing is certain: Barring some catastrophe that cripples our diverse and resilient economy, and displaces the dollar as the world’s reserve currency, whatever debtors’ doom might await us is far enough off to permit us to devise and implement policies that would make honest borrowers of us, repaying debt and in dollars’ worth approximately what they were when lenders handed them over. Alas, that day of reckoning is also far enough off to encourage our policymakers to adopt the ostrich position, secure in the knowledge that the exposed rear end will not be theirs, but their successors’.
Unfortunately, America’s relatively sound fiscal condition—our long-term outlook is a bit more worrying—is not reflected in the condition of our states and cities, some of which find themselves in a situation more like Greece, with Illinois, New Jersey, and Chicago being good examples. No sense talking about Puerto Rico in any detail: Bankruptcy in some form is inevitable. It has a debt pile almost equal to that of New York state even though it has only one-fifth of the Empire State’s population and 7 percent of its GDP, and Governor Alejandro Garcia Padilla has run up the white flag. “The debt is not payable. . . . This is not politics, this is math.” Puerto Rico has no currency to inflate, but at least its people can and do flee to America, leaving the island’s debts for others to worry about.
Like Greece, America’s states and cities do not have their own currencies, and so cannot inflate their way out of their problems. Like Greece, many state and city governments are confronted by trade unions that can and do impose long-term pension obligations that have not been funded. No surprise there, since taking on long-term obligations is the stuff of which political careers are made—voters don’t realize what has happened until it is too late, and meanwhile the politicians loading burdens onto future generations receive campaign funds from grateful union leaders. Worse still, the Illinois courts have ruled that cutting pensions might well be unconstitutional.
Illinois and Chicago politicians have had an easy solution to their pension problem: Don’t fund them. The present value of the assets in Chicago’s fund comes to only 34 percent of the value of its obligation; for Illinois that figure is 39 percent. New Jersey is in somewhat better shape: The present value of the assets it has accumulated comes to 65 percent of the value it will have to pay out. Still, the shortfall was enough to prompt Moody’s to downgrade New Jersey’s credit in April, citing the state’s weak fiscal position and history of inadequate pension contributions. (The gap between the asset and liability values is very interest-rate sensitive—for technical reasons I leave to the really interested reader to explore.)
No, not quite Greece, because among other things the growth potential of these U.S states and cities far exceeds that of Greece. Americans pay their taxes for the most part, and corruption in Illinois has not reached Olympian heights, although four of the last seven governors have gone to prison. But there are worrying similarities, which if left uncorrected can make it difficult for the state and its largest city to meet entitlement and debt-repayment obligations. Pension obligations that can’t be met. No sovereign currency. Trade unions determined to fight to the last lawyer to prevent any reduction in pension obligations. Taxpayers unwilling to have their private-sector paychecks further raided to support the lifestyles of public-sector workers who work less hard, can’t be fired, and retire earlier.
Wisconsin’s Scott Walker has converted his solution to the problem of out-of-control public-sector benefits into a presidential bid and a lead in Iowa polls; no sign yet that politicians in his neighboring state are prepared for such a fight. And with Republicans in control of both chambers on Capitol Hill, the chance that the heavily Democratic states of Illinois and New Jersey or President Obama’s home town of Chicago will be bailed out by the federal government, which has already said “no” to Puerto Rico, seems remote.
One of two outcomes seems possible. A moderate version of the Greek deal, calling on some give-backs by the unions and existing creditors in return for higher taxes on wealthier residents, who might find the charms of Chicago’s Miracle Mile sufficiently attractive to prevent them from fleeing to a lower-tax jurisdiction merely because of a modest tax hike. Or as Duke professor Mitu Gulati and Cleary Gottlieb attorney Lee Buchheit have suggested in the case of Greece, existing creditors might be persuaded that they can minimize the damage to their portfolios by granting new lenders a senior position over existing bond holders, giving these potential lenders additional safety and a greater incentive to make fresh funds available. Then Illinois, Chicago, New Jersey, and similarly situated states and cities can merrily increase their debt burdens, achieving the sort of can-kicking “relief” so popular with current officeholders in Europe.
Irwin M. Stelzer is a contributing editor to The Weekly Standard and a columnist for the Sunday Times (London).
