We’re Not Greece

By Paul Krugman

It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.

True. I just finished a week in dc fighting back against the bipartisan move to cut social security.

The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.

So, how do America and Greece compare?

Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?

One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P.

That has nothing to do with it. Japan’s debt is near triple ours, and their 10 year rates are about 1.3% for example.

True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war.

Not true. With us govt spending not operational revenue constrained the way greece is, we are always able to spend (or cut taxes) however much we want to. It’s a political decision without external constraints.

But we still entered the crisis in much better shape than the Greeks.

Yes, because we are the issuer of the dollar and greece is not the issuer of the euro. Greece is like a us state in that regard.

Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.

For the same reason. We can manage our aggregate demand because our fiscal policy is not operationally constrained by revenue the way Greece is.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus

Yes, mostly the automatic stabilizers with some help from the proactive measures congress has taken, however misguided.

and expansionary policies by the Federal Reserve.

I don’t agree with this but that’s another story.

I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues.

True, however the output gap is finally stable at best as it remains tragically wide.

Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.

Yes, with our only hope for lower unemployment being an increase in private sector debt that exceeds that. Not my first choice in mending what ails us.

Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation.

Should have been said this way-

‘If Greece had its own currency and was running its deficits in local currency market forces would have caused the currency to depreciate.’

But since it doesn’t, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

True. And worse. The proactive cuts and tax hikes can slow the economy to the point the deficit doesn’t come down, and might even increase, making matters even worse.

It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.

It is all the difference.

Hard to see why that isn’t obvious. US, UK, Japan, etc. Etc. With one’s own non convertible currency and floating exchange rates, interest rates are necessarily set by the central bank, not by markets.

And govt securities function to support interest rates and not to fund expenditures

And note the uk economy is on the mend. Even housing has found a bid, with the main risk being a govt that doesn’t get it and tries to balance the budget.

In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.

Wrong reason- we are the issuer of our own currency, the dollar, while Greece is the user of the euro and not the issuer.

That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading

First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.

Wasn’t my first choice of which tax to cut to support the private sector. I’d have cut fica taxes and i continue to propose that.

And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy, that of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.

And liberals have artificially constrained themselves with the misguided notion that spending is operationally constrained by revenues, and fail to understand the ‘right sized’ deficit is the one that coincides with full employment and desired price stability.

Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing:

An understanding of national income account and monetary operations shows deficits are driven by ‘savings desires’ and any proactive attempt to increase deficits beyond savings desires results in inflation.

the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”

Wrong causation. What he calls our ‘fiscal future’ is the size of future deficits and they will always reflect future ‘savings desires.’ if we proactively get them smaller than that the evidence will always be unemployment.

So while cutting health care costs may be a ‘good thing,’ when the time comes, future deficits need to reflect future savings desires to keep us fully employed.

So here’s the reality:

The mistaken, political reality.

America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem,

Unfortunately, this kind of talk makes him part of the problem, not part of the answer.

which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes.

Wonderful, with screaming shortfall in aggregate demand as evidenced by tragic levels of unemployment, the celebrity voice from the left is calling for spending cuts and tax hikes not to cool an over heating economy, but to reduce non govt savings of financial assets.

(govt deficit = non govt savings of financial assets to the penny as a matter of national income accounting, etc)

But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

This is one of the current iteration of the ‘deficit dove’ position.

It does not cut it.

It is part of the problem, not part of the answer.

Doing the best i can to get the word out.

Please distribute to the max!

10 Responses

  1. Just my two cents, but I don’t think you’ll make a dent in the popular mind until you change your vocabulary. The average American is deeply imbued with the idea that spending and debt are irresponsible. The ideas of spending and debt make literal sense in the context of a gold-backed currency. They make no sense in the context of MMT, because they refer to accounting realities. When issuing currency, the gov’t isn’t spending anything. So why use the term? A gov’t deficit in a fiat currency is no problem at all, so why use the term. It is totally counterproductive. Rather than trying to convince the public that deficits are ok. Why not attack the term itself and substitute it for something that is immediately intelligible to the public? MMT is using a technical vocabulary that makes sense only to specialists, not to the man in the street. You will never win on that basis–you don’t have the time. You are too easy a target. For example, here is Fox news ripping James Galbraith apart:


    You will not beat these people by sputtering that deficits are actually ok. You got to re-frame the entire argument, so that it accords with grassroots values, and also shows the other side as destructive of these values, despite appearances. You have got to change your language. Words are everything here. A good start was made with such metaphors as the football game and the scorreboard points. But this is far from being sufficient.

  2. “And govt securities function to support interest rates…”

    Since the EU itself doesn’t issue any securities, how does the ECB support interest rates?

  3. they have been using repos and rev repos in the money markets and now they are issuing term interest bearing deposits

  4. Warren,

    First, it looks like Richard Blumenthal is self-immolating in the CT Senate race. How is the campaign going? Are you within striking distance?

    Second, I read on your campaign blog that you met with Rep. Grayson (Alan Grayson is part of the problem with politics in Washington by the way, but that’s a separate issue) and Sen. Lieberman. Did they understand MMT when you explained it to them? Were they surprised by the consequences? I just wanted to get a sense of whether they already had a grasp of MMT but felt for political reasons they had to talk about spending, borrowing, and taxes in conventional terms when addressing the media. I know that you have had similar communications with Lieberman in the past.

  5. still probably polling at 0, but making some progress

    I just said hello to Grayson and worked with his staff on the mechanics of the fed’s swap lines. they are VERY good.

    Sen Lieberman is also very astute. Let me just say wheels are turning, though slowly

    1. Warren,

      Maybe its because I’m a shyster lawyer who likes to see things written down, but perhaps it’d be useful to ask a Member to have your proposals (I’m looking at your Sept. 25 draft above) drafted in legislative language. Here’s an example of what legislative language looks like– Section 14 of the Federal Reserve Act ( the “before picture” for your Fed proposals).

      Instead of actually having to, well, convince a majority of the House and Senate of your plan’s merits, perhaps the law’s implementation could be made contingent upon the president signing an executive order. Treasury could hardly object since no one is voting to change policy, the President is simply being given more policy options. So there’d be no harm in, say, the Senate leadership accommodating a senator who’s blocking a debt limit vote unless this innocuous bill is included (after all, the President isn’t required to execute any of it).

      Of course, President Nixon ended up with the power to impose wage and price controls only because the Economic Stabilization Act of 1970 gave him the authority (but not the obligation) to impose such controls by executive order. No one was more surprised than Nixon when he ended up using that authority a year later.

      So the Economic Stabilization Act of 2010 (its too late at night to come up with a clever name thats also an acronym) could break out your proposals in 5 sections:
      I. Proposals for Banking System
      II. Proposals for FDIC
      III. Proposals for Federal Reserve
      IV. Proposals for Treasury
      V. Proposals for Aggregate Demand

      1. One error I made- the Federal Reserve Act Sect. 14 I linked above is statutory language. Legislative language is actually even less comprehensible (that’s why Congress employs dozens of specialist legislative draftsmen). Here’s an example from the new unearned income Medicare tax:

        A) FICA.—Paragraph (2) of section 3101(b) of the Internal Revenue Code of 1986, as added by section 9015 of the Patient Protection and Affordable Care Act and amended by section 10906 of such Act, is amended by striking “and” at the end of subparagraph (A), by redesignating subparagraph (B) as subparagraph (C), and by inserting after subparagraph (A) the following new subparagraph…

  6. “And govt securities function to support interest rates and not to fund expenditures”

    Thanks for spelling this out! I read the following paper and without understanding much got that impression.

    BORIO, C. & DISYATAT, P. (2009) Unconventional monetary policies: an appraisal. BIS Working Papers. Basel, Bank for international settlements.

    Do you have any references that spell this out in ‘7 innocent fraud’ level language?

  7. The Problem With the Euro
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    The problem with the euro is not Greece. Nor is it Portugal, Italy, Spain or Ireland. It is not even the French or German financial institutions that may hold the debt of these governments.

    The problem with the euro is the euro.

    We are now hearing a multitude of silly claims by the Keynesian money-manipulators that every country needs its own currency, so they can be devalued “when necessary.” Actually, that is what Europe had only a decade ago, and it was so wonderful that they abandoned it in disgust.

    Rather, the problem is that there is no proper management protocol for the euro. The European Central Bank is basically crossing its fingers, hoping that financial turmoil won’t lead to currency turmoil.

    Group prayer is a poor way to manage a currency. The fundamental problem here is that the ECB doesn’t have an effective protocol, or method of operation.

    Let us assume that the fear is that financial turmoil will lead to a decline in the value of the euro. If that problem appears, the simple solution is to reduce the numbers of euros in circulation, thus increasing their scarcity value. Technically, this is known as a “reduction in base money,” and is accomplished by selling government bonds off the ECB’s balance sheet, taking euros in return, and effectively making the euros disappear. It sometimes goes by the name of “unsterilized intervention.”

    This method is 100% effective. In fact, it constitutes the normal operating procedure of currency boards, which are in use worldwide with considerable success.

    Let’s assume that the ECB discovers its proper operating procedures, and is able to maintain the euro’s value even in the midst of considerable financial turmoil. What then?

    In that case, let the weak governments default. Greece has spent 105 of the past 200 years in default. This is nothing new. Perhaps a collection of governments would then default soon after.

    A government default is not necessarily a bad thing for the economies of those countries. Let’s say you ran a nice beachfront inn in the Greek Isles. The sun still shines. The sand is still there. Tourists from Britain and Sweden keep showing up. What difference does it make if the government in Athens didn’t make their latest payment?

    The immediate effect of default would be that the laughably corrupt Greek government would no longer be able to issue debt. The politicians’ credit cards would be cut off. Also, the government wouldn’t be paying the 6% of GDP it now pays as interest on that debt.

    Two things that, arguably, might be good.

    As it is, the ECB is demanding that the Greek government reduce its deficit from 13% of GDP to 3% of GDP in three years, a reduction of 10% of GDP. Under the default scenario, the deficit would go to zero, but that would be a contraction of 7% of GDP in one year, because the government wouldn’t pay interest on the debt.

    It’s basically the same thing. Ten percent in three years or seven percent in one year.

    Government default is often accompanied by a currency implosion, as expectations run high that the government will attempt to finance itself with the printing press. However, in this case, the euro would prevent that outcome.

    The second thing that often happens is that the government goes on the rampage, appropriating the wealth of private citizens by any means possible. This could mean higher taxes, capital controls, nationalization, and other forms of outright theft. This is a tough environment for private business.

    But it doesn’t have to be that way. Greece should follow the Magic Formula for economic management: Low Taxes + Stable Money.

    The euro would provide the Stable Money. Then, we need Low Taxes. How about a 13% flat income tax? This would be the best thing the Greek government could do to get its economy fired up again.

    This idea is so far from today’s conventional wisdom that some people probably think I’m crazy. Cut taxes when the government can’t pay its bills?

    No, I’m serious. It would work. How do I know it would work?

    Because Russia did it in 2000. Remember, Russia defaulted on its bonds in 1998. The economy was in ruins. Russia’s leaders decided that the best thing they could do to get the economy running again would be to reduce taxes dramatically. They implemented a 13% flat tax in 2001, replacing a system with a top income tax rate of 30%. In 2002, corporate tax rates were cut from 35% to 24%.

    It worked: from 2001 to 2007, the average income of Russian workers increased by a mind-blowing 30% per annum in nominal terms. This was not only a nice recovery, it was the best economic expansion in Russia in over a hundred years.

    The ECB has to learn how to make its money stable, by using direct adjustment of base money supply. Greece has to learn how to lower taxes, following the example used in Russia and imitated throughout Eastern Europe. The effects of proper implementation of the Magic Formula would be … like magic.

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