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 means the debt their governments owe to others. Dubai had $26 Billion that couldn’t be paid and was bailed out by their cousins in Abu Dhabi. Greece, meanwhile, had flirted with bankruptcy until the EU recently came to its rescue with a nearly $1 trillion package.
What you probably aren't hearing is that Portugal, Ireland, Italy and Spain are having similar problems, and that these problems have been visible and building for years. All of these countries have debts that we believe are unsustainably large. What made Greece stand out was that suddenly foreign buyers became reluctant to hold Greek debt, sending bond yields soaring. This had the effect of making it much more expensive to fund the Greek’s huge debts which made it harder to pay its bills which made the interest rates go up more and so on.
This, of course, is exactly the fear that haunts economists when they look at us: that at some point, the world's bond buyers will lose confidence that America can and will pay its debts . This is also 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 primarily in today’s government spending (although that is troubling) but in the amounts promised to future retirees. David Walker, former head of the U.S. Government Accounting Office, explains that America is executing an unprecedented reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation. He points out that we are doing exactly what the Greeks have done before us: making promises that we can’t keep until we end up in a crisis that can only be solved by making someone pay.
Take Social Security as an example. Social Security was passed during the Great Depression when the average person's lifespan was 65. 65 also happened to be the program’s retirement year, which meant that many citizens collected no Social Security benefits at all; back then, only those who lived longer than average would get back the money that was paid into the system. Today, average U.S. life expectancy is over 78 years and rising. The same is true of Medicare; when it was enacted, people were expected to receive benefits for a year or two, not additional decades. In all, if nothing changes, the Government’s General Accounting Office states that using reasonable assumptions, “roughly 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020”.
Greece never went through anything like the current wave of Tea Party activism. So the US may still have a chance to channel all of the anger into a solution. But, as we are learning from European countries in much deeper trouble than us, the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance--and perhaps most importantly, demonstrates a willingness to sacrifice our way back to solvency. Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires. The government must also take drastic action to get Medicare and Medicaid back on an affordable path. He tells us what we already know and what Greece and some of its neighbors are experiencing first hand: what is true for families is true for countries: if we spend above our means for long enough, we run out of money. And likewise, the only way back from the edge for both nations and households is to spend less.
But with nations, the numbers are just a whole lot bigger.