Could Americans handle Greek-style austerity?

Greece has adopted the kinds of searing and necessary reforms that other nations, including the US, will need to face.

By MSN Money Partner Jun 23, 2011 12:34PM

By Rick Newman, U.S. News & World Report, and MSN Money staff

 

Updated June 29, 2011, 1:30 p.m.


It's fashionable to sneer at Greece. Maybe it shouldn't be.

 

The seaside nation at the bottom of Europe has become the poster child for unmanageable government debt, with bills so big it would default on its obligations if not for a bailout from other nations.


Greece's unpopular austerity plan, which has caused civil unrest in Athens over the past few days, was approved by Parliament on Wednesday. Leaders voted 155 to 138 in favor of a five-year, 28 billion-euro ($40.3 billion) plan that is required for the country to receive the next installment of a 110 billion-euro bailout.


Post continues after this video from Athens on Wednesday:

Among the plan's highlights, as outlined by CNBC:

  • Higher taxes this year and even higher taxes over the next three years
  • Higher property taxes
  • Luxury taxes on yachts, pools and cars
  • Public-sector wages cut by 15%
  • Less spending on defense, education, Social Security and health care
Greece still has a lot more to do, and some analysts feel the cuts and other reforms that are still needed could push Greek citizens and politicians past a tipping point where they'd rather deal with the ramifications of default than make the continued sacrifices necessary to get bailout money. It also seems certain that more aid will be needed to fully repair Greek finances over the next two years.

Still, the painful steps that Greece has already gone through are a useful guide to what the United States and other nations may face in coming years.

 

Here's what it takes to dig out of a profound debt crisis:


Deep spending cuts. The Greek government has cut total spending by about 11% since 2009, according to the latest progress report from the IMF. That's an abrupt cutback in a short time. If Congress were to cut the U.S. government's budget by the same proportion, it would amount to about $400 billion in cuts in a single year. That's more draconian than even the most aggressive budget-cutting plan proposed by anybody in Washington.

 

Rep. Paul Ryan, the chairman of the House Budget Committee, is leading the Republican charge with a plan to cut spending by $5.8 billion over 10 years, or about $600 billion per year, but that's offset by $4.2 trillion in tax cuts meant to ease the pain. In Greece, by contrast, taxes are going up at the same time that government spending is going down.

 

Besides, Ryan's plan, which would slash spending on Medicare, has encountered a firestorm of resistance, suggesting it has no chance of passing. President Obama's latest plan is gentler, cutting spending by about $2 trillion over 12 years, for about $170 billion in cuts per year.

 

Neither plan, of course, has endured the stress-test of actual implementation, which usually results in cuts getting watered down or even restored, as favored lobbyists plead their cases.

 

Just coming up with $38 billion in spending cuts earlier this year entailed an ugly partisan battle that nearly shut down the government. And that was a mere one-tenth of what Greece has already accomplished.

 

Determined budget-cutters might want to know that in Greece, the 11% cutback in federal spending has triggered a deep recession far worse than what we just experienced in the United States. So far, the Greek economy has contracted by about 9%, with unemployment rising from 9% to nearly 16%. In the United States, the devastating recession that just ended only shrunk the economy by about 3%, with unemployment peaking at 10.1%.

 

That alone has provoked seething anger and worries of national decline among American voters. So maybe it's no surprise that enraged Greeks are in the streets.

 

Sharp pay cuts. Part of the problem in Greece has been a bloated, uncompetitive, overpaid federal work force that sucks up way too much of the nation's wealth. So reforms have included sharp cuts in pay, pensions and other benefits for government workers, and an increase in the official workday from seven hours to eight.

 

That would please taxpayers in any nation, except that pay cuts and other reforms in Greece's public sector have spread to the private sector, thanks to rising unemployment and the competitive nature of wages. That's why Greek labor unions are among the most vociferous opponents of austerity.

 

It's good news for Greek employers, since labor costs -- otherwise known as wages --- are being pushed down until they're closer to wages in other nations whose economies are similar to Greece's.

 

Over time, that will make Greece more competitive. But no worker wants to absorb a pay cut, another reason why politicians in every country wait until there's virtually no other choice but to make hard decisions that will make voters uncomfortable.

 

If it seems like it could never happen here, think again. Even though U.S. wages have stagnated, the United States still has high labor costs compared with nations like China and India that can now build many of the same things we can, with the same quality. There's no guarantee wages won't fall further, especially if the government sector starts to hemorrhage workers.

 

Social Security cuts. The Greek government has cut spending on social benefits by 10%t. In the United States, spending on Social Security and Medicare for seniors goes up every year, which is one of the biggest threats to the government's solvency. Yet proposals to rein in that spending routinely generate outrage.

 

When AARP, the powerful lobbying group for seniors, recently signaled it might drop its longstanding opposition to any kind of Social Security reform, protests rained down on the group from critics and its own members.

 

It's quite plausible that a cut in benefits for seniors of 10% or even 5% could incite the kinds of riots in Washington or Chicago or Miami as those that make Athens seem like a hothouse filled with fanatics.

 

Overall debt. Even after all that austerity, debt levels in Greece are still way too high, with the nation's total gross debt equal to about 150% of GDP. The United States is in better shape, with gross debt equal to about 100% of GDP. But Greece, at least, has a plan to start reducing its debt, assuming it sticks with its austerity measures and continues to draw bailout funds. Washington has no such plan yet, and debt levels seem bound to keep rising for at least the next several years.

 

The United States has advantages that Greece doesn't. Much of America's debt is held domestically, which makes it less likely foreigners can dictate the terms of any debt workout. Washington also controls its own currency, which means it can inflate away some of its debt, which Greece can't do since it's bound to the euro.

 

And there remains robust demand for U.S. government debt, which allows Washington, for now, to borrow at rock-bottom rates.

 

But there's also a measure of arrogance that comes with those special advantages, as if Washington doesn't have to play by the same rules as everybody else. Someday that may no longer be true, and by then, we may wish we had emulated Greece a lot sooner.

 

More from U.S. News & World Report