How Greece Has Outperformed Washington

The broke nation has enacted the kinds of spending cuts budget-cutters in Washington can only dream about.

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It's fashionable to sneer at Greece. Maybe it shouldn't be.

The seaside nation at the bottom of Europe has become the poster child for unmanageable government debt, with bills so large that it would default on its obligations if not for a three-year bailout from other nations adding up to about $145 billion. That plan, hastily arranged in May 2010, calls for a series of payouts to Greece, each contingent on reforms meant to bring Greece's banana-republic economy closer to European standards. They include steep cuts in pay and benefits for Greece's nepotistic federal workforce, a crackdown on millions of tax cheats, privatization of bloated industries run by the government, and steep cuts in other kinds of government spending.

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The pain felt by ordinary people has thrown Greek politics into turmoil and raised big questions about whether Greece will be able to follow through on its promises. That's why European leaders and the International Monetary Fund, which has ponied up part of the bailout money, have threatened to withhold a payment due in mid-July unless the Greek parliament passes even more draconian austerity measures. If the payment doesn't go through, Greece will promptly run out of money and default on debt it already owes. That's stoking fears of a financial contagion that could quickly swamp European banks, one of the big "uncertainties" that's been weighing on the global economy and unnerving investors.

The drama pits sophisticates in Europe's glittery capitals against what is arguably the continent's most backward economy. Yet it's worth pointing out that over the last year or so, Greece has put in place the kind of searing and necessary reforms that other nations—including the United States—will need to institute sooner or later, but so far have only talked about. "Greece hasn't been in full compliance with the program, but we shouldn't underestimate what they've done," says Jacob Funk Kirkegaard of the Peterson Institute for International Economics. "They've come a long way." Those angry protests in the streets of Athens, in a way, are a testament to the effectiveness of the Greek reforms: They've cut so deep that citizens are revolting.

It's true that it took imminent insolvency to force Greece to mend its ways, but it's also true that Washington and other over-indebted nations probably won't fix their own problems without the threat of a crisis, either. Greece still has a lot more work to do, and some analysts feel the cutbacks and other reforms that are still needed could push Greek citizens and politicians past a tipping point where they'd rather deal with the ramifications of default than make the continued sacrifices necessary to get bailout money. It also seems certain that more aid, beyond what's already been pledged, will be needed to fully repair Greek finances over the next two years. Still, the painful steps that Greece has already gone through are a useful guide to what the United States and other nations may face in coming years. Here's what it takes to dig out of a profound debt crisis:

Deep spending cuts. The Greek government has cut total spending by about 11 percent since 2009, according to the latest progress report on Greece from the IMF. That's an abrupt cutback in a short amount of time. If Congress were to cut the U.S. government's budget by the same proportion, it would amount to about $400 billion in cuts in a single year. That's more draconian than even the most aggressive budget-cutting plan proposed by anybody in Washington.

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Rep. Paul Ryan, chairman of the House Budget Committee, is leading the Republican charge with a plan to cut spending by $5.8 trillion over 10 years, or about $600 billion per year, but that's offset by $4.2 trillion in tax cuts meant to ease the pain. In Greece, by contrast, taxes are going up at the same time that government spending is going down. Besides, Ryan's plan, which would slash spending on Medicare, has encountered a firestorm of resistance, suggesting it has no chance of passing. President Obama's latest plan is gentler, cutting spending by about $2 trillion over 12 years, for about $170 billion in spending cuts per year. Neither of those plans, of course, has endured the stress-test of actual implementation, which usually results in cuts getting watered down or even restored, as favored lobbyists plead their cases. Just coming up with $38 billion in spending cuts earlier this year entailed an ugly partisan battle that nearly shut down the government. And that was a mere one-tenth of what Greece has already accomplished.

Determined budget-cutters might want to know that in Greece, the 11 percent cutback in federal spending has triggered a deep recession far worse than what we just experienced here in the United States. So far, the Greek economy has contracted by about 9 percent, with unemployment rising from 9 percent to nearly 16 percent. In the United States, the devastating recession that just ended only shrunk the economy by about 3 percent, with unemployment peaking at 10.1 percent. That alone has provoked seething anger and worries of national decline among American voters. So maybe it's no surprise that enraged Greeks are rioting in the streets.

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Sharp pay cuts. Part of the problem in Greece has been a bloated, uncompetitive, and overpaid federal workforce that sucks up way too much of the nation's wealth. So reforms have included sharp cuts in pay, pensions, and other benefits for government workers, and an increase in the official workday from seven hours to eight. That would please taxpayers in any nation, except that pay cuts and other reforms in Greece's public sector have spread to the private sector as well, thanks to rising unemployment and the competitive nature of wages. That's why Greek labor unions are among the most vociferous opponents of austerity.

It's good news for Greek employers, since labor costs—otherwise known as wages—are being pushed down until they're closer to wages in other nations whose economies are similar to Greece's. Over time, that will make Greece more competitive. But no worker wants to absorb a pay cut, another reason why politicians in every country wait until there's virtually no other choice but to make hard decisions that will make voters uncomfortable. If it seems like it could never happen here, think again. Even though U.S. wages have stagnated recently, the United States still has high labor costs compared with nations like China and India that can now build many of the same things we can, with the same quality. There's no guarantee wages won't fall further, especially if the government sector starts to hemorrhage workers.

Social Security cuts. The Greek government has cut spending on social benefits by about 10 percent. In the United States, spending on Social Security and Medicare for seniors goes up every year, which is one of the biggest threats to the government's solvency. Yet proposals to rein in that spending routinely generate outrage. When AARP, the powerful lobbying group for seniors, recently signaled it might drop its longstanding opposition to any kind of Social Security reform, protests rained down on the group from critics and its own members. It's quite plausible that a cut in benefits for seniors of 10 percent or even 5 percent could incite the same kinds of riots in Washington or Chicago or Miami as those that make Athens seem like a hothouse filled with fanatics.

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Overall debt. Even after all that austerity, debt levels in Greece are still way too high, with the nation's total gross debt equal to about 150 percent of GDP. The United States is in better shape, with gross debt equal to about 100 percent of GDP. But Greece, at least, has a plan to start reducing its debt, assuming it sticks with its austerity measures and continues to draw bailout funds. Washington has no such plan yet, and debt levels seem bound to keep rising for at least the next several years.

The United States has advantages that Greece doesn't. Much of America's debt is held domestically, which makes it less likely that foreigners can dictate the terms of any debt workout. Washington also controls its own currency, which means it can inflate away some of its debt, which Greece can't do since it's bound to the euro. And there remains robust demand for U.S. government debt, which allows Washington, for now, to borrow at rock-bottom rates. But there's also a measure of arrogance that comes with those special advantages, as if Washington doesn't have to play by the same rules as everybody else. Someday that may no longer be true, and by then, we may wish we had emulated Greece a lot sooner.

Twitter: @rickjnewman