Debt Woes: Could America Go the Way of Greece?

by Fareed Zakaria

Time
July 3, 2011

As Europe confronts another act in its Greek drama, many are watching and wondering, Is the U.S. next? Could our debt-ceiling debate be the beginning of a crisis that makes the world lose faith in American credit? Anything could happen, but it's worth noting the big differences between Greece and the U.S.

Greece faces three problems. First, it has an uncompetitive economy that cannot generate growth. Its labor is too expensive, it exports few products, and its people are not rich enough to power an expansion. This is not a recent problem. Greece has never been an economic dynamo.

Greece also has a long history of borrowing too much and being unable to pay its debts. Over the past 179 years, it has been in default about 50% of the time. Its debts are huge and could not be paid under any plausible scenario. Finally, because it is part of the euro zone, Greece does not have control over its currency, which means it cannot make its goods cheaper on world markets.

The U.S., by contrast, remains one of the world's most competitive economies. It is home to the leading companies in the most advanced industries, houses the largest capital markets and continues to spawn new companies and, indeed, whole new industries. It exports everything from aircraft to entertainment to health care products around the world. Its demographics are strikingly healthy: it will be the only rich country in the world to actually increase its population over the next 30 years — which means more young workers, producers, entrepreneurs and taxpayers. It also has control over its currency. Finally, America's credit history is impeccable. The U.S. has never defaulted on its debt.

Greece faces a set of terrible choices. In order to get more funds to pay its loans and bills, it needs to make draconian spending cuts and tax increases that will surely choke economic growth. The situation in the U.S. could not be more different. The solutions to America's deficit problems are relatively straightforward, almost simple.

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