You’ve probably been hearing a lot about Greece recently, and before that about Dubai–two countries that were in danger of defaulting on what economic geeks call ‘sovereign debt,’ which basically means their country’s equivalent of Treasury bonds. Dubai’s problem was $26 billion in debt issued by Nakheel, its most prominent real estate developer, which was tacitly backed by the government. Order was restored last December when neighboring Abu Dhabi provided Nakheel with a $10 billion loan. Greece, meanwhile, has $28 billion in government debt due in April and May, and as you read this, the European Union is debating when and how to come to its rescue.
What you probably aren’t hearing is that Portugal, Ireland, Italy and Spain are having similar troubles, and that in all cases, the problems were visible, and warnings were raised by economists, years before the budget crises came to a head. According to a report by The Economist, Greece’s debt is now up to 112.6% of its gross domestic product. Ireland’s is 65.8%, Spain’s is 54.3%, Portugal’s is 77.4% and Italy’s is 114.6%. What makes Greece stand out is that suddenly foreign buyers are shying away from its government securities, sending the yield on ten-year notes soaring to 7.1%, and raising the cost of rolling over the debt–sending deficits even higher.
This, of course, is exactly the fear that haunts U.S. economists: that at some point, the world’s bond buyers will lose confidence that America will ever get its debt situation under control. It also may be the underlying fear among people who attend the Tea Party rallies around the country. The real deficit problems in the U.S., however, are not found in government spending, per se, but the amount of money promised to future retirees in various forms. Lately, various financial planning conferences have heard presentations by David Walker, former head of the U.S. Government Accounting Office, now president of the Peter G. Peterson Foundation. Walker gives a terrific speech on how America is executing a reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation. He does exactly what economists were doing in Greece for twenty years before the meltdown: tells us that the longer we wait to solve the problems, the more likely we are to face an unsolvable crisis.
Perhaps the easiest example to understand is Social Security, which was enacted during the Great Depression, at a time when the average person’s lifespan was 65. 65 also happened to be the normal retirement year, which meant that most citizens collected no Social Security benefits at all; only those who lived an unusually long time would get back the money that was collected into the government retirement system. Fast-forward to today, when the average U.S. life expectancy is 78.2 years, and it is not uncommon for people to live to age 100. The same is true of Medicaid; when it was enacted, people were expected to receive benefits for a year or two, not additional decades. In all, according to “The Complete Idiot’s Guide to Economics,” 23% of the U.S. budget is spent on Social Security, 12% on Medicare, 7% on Medicaid; recently, Congressman Randy Forbes estimated that mandatory entitlements now represent 62% of all federal spending.
Greece never went through anything like the current wave of Tea Parties and activism. This may be a chance to channel all the anger over budget deficits into a real solution. But, as we are learning from European countries that spent too much for too long, the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance–and perhaps most importantly, a willingness to sacrifice our way back to a balanced budget. Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires. The government will have to ration health care and put it back on a budget. He tells people what you already know, what Greece and some of its neighbors are learning: it doesn’t work any differently for governments than it does for people; the numbers are just a lot bigger.