Why Greece Matters: What We Can Learn From Its Financial Crisis

The Union Leader recently printed the below Guest Op-Ed that I wrote jointly with Fred Tausch, the founder of NH STEWARD. Using his extensive business experience, Fred has built NH STEWARD into one of the state's strongest grassroots organizations. NH STEWARD is committed to holding politicians in Concord and Washington accountable to taxpayers, and I strongly support the organization's mission.
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By Charlie Bass and Fred Tausch
Printed in the Union Leader on 5/20/10

Greek tragedies traditionally depicted the downfall of a hero or heroine based, in part, on some flaw or error in judgment. Today’s Greek tragedy, coming in the form of massive government spending cuts and unexpected tax increases, is no different. It could and should have been avoided. While Greeks riot in the streets, the rest of the world should pay attention. Indeed, the current Greek fiscal crisis is not only a tragedy for the people of Greece; it also threatens to spread across Europe, and – most frighteningly – could foreshadow a similar crisis here in the U.S.

As the Greek government undertakes draconian austerity measures to stave off financial ruin, the very fabric of the European Union is being tested. There is legitimate fear this financial crisis will spread to Spain, Portugal and Ireland among others. As the crisis grows, the citizens of more financially responsible nations debate the extent to which they are willing to subsidize nations choosing to live beyond their means.

The Greek meltdown is a cautionary tale for the United States. Our nation's deficit as a percentage of Gross Domestic Product (GDP) in 2009 was 9.9%, lower than Greece's 13.6%, and our publicly traded national debt is 87% of our GDP compared to Greece's 113% (up from 89% in 2007). While we are not as far along on this dangerous path, we are heading in the same direction. Even the most optimistic government estimates indicate that our national debt is increasing at a rate similar to Greece’s and that it will exceed 100% of our GDP by 2015.

The tragic mistake made by the Greek government is being made by our government today: accepting chronic, structural deficits and prioritizing short term and politically expedient needs over the long term integrity of the system. The good news is that unlike in Greece, there is still time for us to take back our government, demand that our elected officials reform their spending habits, and build a strong economic foundation for future generations.

The fact that investors continue to lend money to our government should not delude us into thinking that our country is on sound financial footing. When things go bad, it happens fast: last October, investors were willing to lend money to Greece for roughly the same rate they charged the US Treasury. Last month, investors demanded over 15% to lend money to Greece, compared to 1% for the US Treasury

As investors sold Greek bonds over the last several months, it became prohibitively expensive for the Greek government to refinance. As with the United States, the average duration of publicly traded Greek national debt is about 4 years, so the impact of higher rates is immediately devastating to citizens. As interest payments on debt skyrocketed over the past few months, the Greek government was forced to dramatically reduce retirement benefits, slash pay and benefits for government workers, and raise taxes.

Unless we make changes, projections indicate that the yearly interest payments on our national debt will exceed 1/3 of total revenue by 2015. As a result, we may well face the types of rising interest rates that are currently forcing Greece to rapidly and painfully cut its spending.

Some economists argue that the United State’s position is different from Greece’s because we have the ability to inflate ourselves out of debt: literally printing more money, rather than reducing spending. Such an approach would be devastating to our seniors, however, devaluing the assets and retirement savings of tens of millions of Americans.

The answer also isn’t to raise taxes. Over the past half century, raising taxes above the point they are today (roughly 18.5% of GDP) has slowed economic growth, actually reduced revenues, and resulted in increased unemployment.

Instead of firing up the printing presses or raising taxes on the backs of working families, the next Congress should make reform of entitlement spending its highest priority. Since the enactment of the federal income tax in 1912, without a requirement that budgets be balanced, there has been no check on the spending appetite of Washington. In order to reverse this imbalance, mechanisms and procedures must be put in place to offset the tendency to spend with the tendency to save. Such mechanisms should include an annual up or down vote in Congress on a rescissions and line item "veto" package on appropriations; as well as required periodic review and reauthorization of entitlement programs.

Reducing spending is always painful and unpopular, but the longer it’s put off, the more painful the inevitable final reckoning will be. It is up to the chorus of American voters to send leaders to Washington committed to doing what is in the country’s long term best interest to avoid a Greek tragedy playing out right here at home.

Charlie Bass is a Republican candidate for Congress in New Hampshire’s 2nd District. Fred Tausch is a financial expert and founder of NH Steward.