The United States of Greece

greece_flag300pxLast weekend, while we were celebrating Independence Day, Greek voters went to the polls to vote on a number of issues, including whether or not to impose new austerity measures such as reducing generous government entitlement spending and remain in the European Union with its currency fixed by the value of the Euro.  The austerity measures demanded by the European Union in order to extend further credit to Greece were in reality modest.  One of the principle ones was a reduction of the government-paid pension plan, arguably the most generous in the EU if not in the entire world, by 1% of Gross Domestic Product (GDP)—about the equivalent of US$2.4B.  The Greek voters rejected even this modest reduction.  Even worse, if Greece is expelled from the Euro (they would be the first member to do so) and return to the drachma then their currency will quickly inflate to the point of being worthless paper as the drachma will have no foreign exchange value.

Comparing government debt among different economies can be difficult and misleading with factors such as standard of living, local buying power of the currency, and other factors confusing the baselines.  One of the most reliable means of comparing government debt is to examine it as a percentage of GDP.  Since 1995, Greek debt has skyrocketed, primarily due to generous government entitlement spending including universal free health care, virtually unlimited unemployment benefits, and pensions that are close to the workers’ full pay when they were employed.

greece_01

In less than nine years, Greek debt as a percentage of GDP as risen from 100% to $177%.  How has Greece sustained that debt?  By heavily borrowing from other EU countries and the International Monetary Fund (IMF).  And now that source of funding has been shut off until Greece puts its economy and government spending onto something that bears a slight resemblance to sustainability.  BTW, the sharp decline of the ratio in 2013 has been attributed to an astonishing burst in GDP of 2%, an unlikely figure that many claim was not real growth but the Greek government cooking the books to keep foreign lending coming.

The effects of this loss of foreign credit has been devastating.  Greek banks, which were originally to be closed for one week are now indefinitely closed.  Account holders are limited to ATM withdrawals of 60 Euros per day.  But ATM machines with cash in them are becoming harder and harder to find as banks lack the cash to replenish them.  The Greek government estimates that only 1.1B Euros remain in circulation in the country.  Long lines are routine for gasoline and diesel at stations that still have supplies.  Basic staples are disappearing in Greek supermarkets as people are hoarding them as much as they can on 60 Euros per day.   Medical care is evaporating as health care providers are spending their days standing in blocks-long lines for an ATM and then, if the ATM doesn’t run out of cash before their turn, they are spending the rest of the day and evening scouring markets for food and other stables.  Last week, before the election, ambulances in Athens ran out of fuel and were unable to obtain more.  Police units are reporting more and more inoperable vehicles because of a lack of repair parts that foreign suppliers won’t ship without payment in advance.

Good thing that this can’t happen here in the United States.  But it can and, if our budget priorities remain unchanged, it will. It is just a matter of time.  Let’s look at some of the numbers.

The 2015 US budget has revenues of $3.18T with outlays for Federal government cabinet departments and other agencies, plus entitlement spending, at $3.7T, leaving a deficit of $486B on top of a $17.1T national debt.

Liberals and Libertarians claim that that we can solve our debt crisis by cutting Defense spending.  Libertarians, in particular, hold that by withdrawing all of our foreign-based military and ending Navy missions beyond our littoral waters, we can reduce or balance the budget deficit.  Where the Liberals and Libertarians differ is in domestic civilian spending.  The Libertarians want to cut “wasteful” Federal spending such as the Education, Health and Human Services, and of course, greatly reduce the IRS if not eliminating it completely.  Liberals want to divert Defense cuts to domestic programs, leaving nothing to reduce the budget deficit or the national debt.

Okay, lets try hypothetically taking some of those reductions and see what happens.

Reduce the Defense budget by 25%.  That will save $154.8B this year, assuming that this spending is eliminated and not re—directed to domestic programs as the Liberal want.  Note: that includes cutting all overseas contingency operations by 25% or $13B.  Coupled with the absence of forward deployed forces, that would mean reduced humanitarian relief, reduced responses to NATO military emergency missions, and no response to Chinese show-of-force operations in the Straits of Taiwan and the Spratly Islands, among other things.

Reduce the civilian Federal cabinet departments and agencies by 10%.  That will save another $184B.

So, with draconian cuts that the taxpayers would never tolerate, we can reduce the Federal budget by $338.8B.  Now comes the problem.  Entitlement (mandatory) spending is $2.45T per year.  In other words, the Federal government spends the equivalent of our proposed discretionary budget reductions on entitlements every 50 days.

What are the projections then for our increasing national debt?

greece_02

As you can see, the projection of debt-to GDP ratio keeps increasing.  Even if we maintain the projection of 2012 (and there is no reason for us to expect that to happen—it will likely be revised upward again after the 2016 elections), we will have a national debt-to-GDP ratio that is 100% by approximately 2020, only five years from now.  By 2030 or sooner, according to many estimates, we will be in Greek territory.  That is at most 15 years away.  And while it took us 30 years to get from 40% debt-to-GDP to 100% debt–to-GDP, the increasing slope of the projections could saddled us with a debt-to-GDP ratio of 200% as early as 2040, if not sooner.

Our Federal government has two choices.  The first is to increase taxes and borrowing.  That will drive the debt-to-GDP ratio higher and faster, as higher taxes will decrease GDP activity and increased borrowing increases the debt.  The second choice is to reform entitlement spending.  Notice that I did not say that we should end or reduce entitlement programs.  Rather we need to re-focus these programs to assist those who truly need assistance and end the revenue barriers that are causing entitlement outlays to far exceed revenue.  Here are few reform suggestions:

* Means Testing.  Social Security and Medicare were originated as a safety net to prevent the elderly from being homeless, hungry, and sick.  Why should these benefits be paid to someone who earned 6-figure incomes in the second half of their working life?  Qualification for retirement benefits could be based on an examination of the applicant’s last three, four, or five Federal income tax returns.

* Eliminate Caps on Payroll Taxes.  Beginning in 2015, only the first $118,500 you earn is subject to FICA payroll taxes.  Why should someone earning $350,000 per year only pay payroll taxes on one-third of their income?

* Return Social Security and Medicare to being minimum assistance plans.  Far too many employers have ended defined benefit pensions and retired medical care, dumping their retired employees onto Social Security and Medicare.  Provide corporate tax incentives, if not dictated by law, for employers to provide defined benefits pensions that are fully vested after five years of employment and provide retired health insurance for employees who have been with the company a specified number of years and reached a certain retirement age.

* Raise the minimum age for Social Security for healthy workers.  When Social Security was first passed in 1935 with benefits beginning at age 65, the average life expectancy of a retired worker was 65.  Today it is 76 for men and 78 for women.  Social Security was never intended to provide a retirement benefit for an average of 11 to 13 years for healthy workers, esp. for those who don’t really need it.

Popular?  Not in the least, but the only alternative is far worse.  In Greece, the political tradition for decades has been popularity and not leadership.  In the United States popularity has been derived from demonstrated leadership.  Can we maintain/return to that tradition or will we become the United States of Greece in 15 years or less?


MD Russ is a retired senior military officer, a former executive in three Fortune 100 Defense corporations, and has been an independent consultant to several Defense companies on business strategies in a national security environment that is in a constant state of flux.

Сейчас уже никто не берёт классический кредит, приходя в отделение банка. Это уже в далёком прошлом. Одним из главных достижений прогресса является возможность получать кредиты онлайн, что очень удобно и практично, а также выгодно кредиторам, так как теперь они могут ссудить деньги даже тем, у кого рядом нет филиала их организации, но есть интернет. http://credit-n.ru/zaymyi.html - это один из сайтов, где заёмщики могут заполнить заявку на получение кредита или микрозайма онлайн. Посетите его и оцените удобство взаимодействия с банками и мфо через сеть.