More on the Parallels between Greece and the U.S.

Two articles showed up after our last blog about the similarities between the Greek crisis and the fiscal situation in the United States.

The first, from the NY Times suggests that without extensive budget cuts and increases in taxes, the US debt will reach 140% of GDP within 20 years. The blame, of course, lies with the people that have come to expect more and more government services without having to pay for them ... tax someone else. This applies to almost everyone. Thus, we elect politicians that will promise us something for nothing. We once considered running for office (we didn't because marathons were easier) but no one would vote for us. We were promising tax increases on individuals, lower taxes on corporations to stimulate growth enhancing investment and the legalization of most recreational drugs to reduce the crime and enforcement costs. Economically sound policies just don't sell to the electorate.

The second article is from Bloomberg that explains in greater detail the effect of using easy policy to monetize the debt - an option not available to Greece or the individual states like New York and California.

We also bring your attention to Professor Paul Krugman's blog where he questions the validity of the NY Times debt projections. His argument relies on a U.S. economic growth rate that may not be sustainable. The United States' biggest market for exports is Canada (20.1%). Now, we may be biased but Canada seems to be in pretty good shape. However, China, Japan, UK and Germany account for another 20% (Source: CIA Factbook). A collapse in the euro, as explained in detail in the Bloomberg article puts growth in European exports in jeopardy. Japan shouldn't expect any growth in the foreseeable future and no one is sure what China will do with respect to the yuan. Don't count on domestic spending. Increases in taxes and decreases in spending, as required to reduce the debt, using arguments from Krugman's textbook will have a contractionary effect on the domestic economy.

Professor Greg Mankiw doesn't agree with Professor Krugman. In his (best selling) textbook, a reduction in the deficit/debt may actually improve business and consumer confidence and have expansionary effects.