The Root of Greece’s Problem (and Ours)

 

Will it be the Euro or Drachma for Greece?  It’s down to the wire as Greece and the European Union negotiate the necessary conditions for Greece to remain in the Eurozone.  I have devoted several recent posts to the Greek fiscal crisis, pointing out the parallels between the Greek situation and our own.
Greece needs a bailout because its public debt is nearly 180% of GDP.  Our own public debt is “only” 74% of GDP at the present time but is predicted by the CBO to reach 175% of GDP by 2040, just 25 years from now.  Furthermore, Greece is currently receiving very favorable lending conditions from the European Central Bank, much better than are likely to apply in the U.S. in the long term.  This means we’re likely to have another deep crisis on our hands much sooner than 25 years from now.
CaptureConsider the data in the above charts from today’s Wall Street Journal.  It shows that Greece is spending 14.4% of GDP on pensions, more than any other major European country.  Furthermore, the efficiency of its VAT revenue collection is the poorest in the EU.  In other words, Greece has a very high rate of entitlement spending and has a poor tax collection system to support it.
Capture1In a general sense the U.S. is in a similar situation.  Today we spend about 13% of GDP on mandatory, i.e. entitlement, programs, compared to a total tax revenue level of 18% of GDP.  Just entitlement spending alone is projected to rise to 18% of GDP by 2050, unless changes are made.
Just as Greece needs to tighten up on pension spending, improve revenue collection and get its economy growing faster, the U.S. needs to tighten up on entitlement spending and speed up its stagnant economic growth as well.
We’re not yet as bad off as Greece is today.  But we’re headed in that direction with no one to bail us out when we get there!

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