How the United States Is Like, and Unlike, Greece

by Richard A. Posner

The Becker-Posner Blog
November 6, 2011

The economic situations of the United States and Greece are more alike than one might think. In both countries, the government is insolvent, in the sense that its taxing power, constrained by politics, is insufficient to finance the government’s liabilities, which include not only bonds but also entitlements (such as social security and medicare) and essential public services (such as defense). (See my post, “Is the Federal Government Broke?,” Aug. 29, 2010, regarding our government’s insolvency under standard principles of bankruptcy.) In both countries, government is cutting spending when (from an economic standpoint) it should be increasing it, to take up the slack in private investment and stimulate employment and in turn consumer spending (which drives business spending, which increases the demand for labor). In both countries a major cause of the current economic problems was cheap interest rates that encouraged the governments to finance public services by borrowing rather than taxing—taxing would have generated opposition to the extravagant level of those services. And in both countries another major cause of the current problems was the opacity of key financial data, a result in part of regulatory laxity and in part of the complexity and scale of modern financial instruments and operations. And finally, both countries have dysfunctional governments, made more so by the depression triggered by the financial collapse of September 2008.

There is another, slightly less obvious, parallel between the United States and Greece: neither country can stimulate its economy by devaluing its currency. Devaluation is a traditional response to depression, because it reduces the price of exports while increasing the price of imports. This has a dual effect: exports expand, and since they are (by definition) domestically produced, the domestic demand for labor rises; and imports decline, which increases the domestic demand for domestic over imported products (unless imports are a substantial input into exported products), further stimulating the domestic demand for labor. (According to Keynes, the high rate of English unemployment in the 1920s, which is to say even before the 1930s depression, was due to the fact that the British pound was overvalued.) Greece cannot devalue its currency because it doesn’t have its own currency; in that respect it’s like a U.S. state. The U.S. has the capability of devaluing its currency simply by selling dollars abroad, but would be reluctant to devalue substantially because the dollar is the major international reserve currency (the currency used in international transactions between companies that don’t trust their local currencies), which creates a large demand by foreign central banks for U.S. dollars even when those dollars don’t buy U.S. goods, and so is a source of wealth for the United States, in part because dollars cost nothing to produce. Its status as the major international reserve currency would be imperiled if its value fluctuated as much as local currencies in many countries do.

And still another parallel between the two countries: Greece spends a much larger percentage of its budget on defense than any other member of the European Union. Greece and the United States are two of the very few countries in the world in which defense expenditures exceed 4 percent of GDP.

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