I quit teaching political science 28 years ago this week, and I’ve happily managed to avoid the subject for most of the ensuing period. However, in a not-so-encouraging sign of the times, over the last couple of months, I’ve been doing a lot of thinking about politics and politicians, and what they can and should do to influence the economy. One conclusion I’ve reached is that governments, like many of us, only make unpleasant decisions when a pending crisis leaves them no choice. The ongoing Greek debt debacle and the apparent stalemate over the U.S. debt ceiling are two cases in point.
I can’t claim to be the only one who looked at Greece’s fiscal revelations in spring 2010 and concluded that it would never be able to repay its debt as currently structured. Once we found out that the Greek emperor was dressed only for the country’s famed nude beaches, we also discovered that other countries around Europe’s periphery were similarly attired. Although we could face one small country’s sovereign debt default, once the Irish, Portuguese, Spanish, and Italian dominoes lined up, the specter of 2008 rose again. That’s a crisis.
According to the Greek finance minister, the country will impose a series of budget cuts, tax increases and public asset sales “regardless of the political cost” in hopes of shrinking the deficit. Unfortunately, the austerity measures already implemented during the past year have left Greece with higher unemployment, a weaker economy and lower government revenues. In my opinion, last year’s austerity measures were never thought of as a true fiscal solution. Rather, I believe they were simply “the pound of flesh” that European authorities and Greece’s creditors demanded before assuming the political and economic risks of putting up cash to prevent an immediate default and eventually accepting less than the full and timely repayment of Greece’s outstanding bonds.
While Greece cannot sell bonds in the open market, the U.S. can still issue 10-year Treasuries at near 3%. However, even though the markets are still purchasing U.S. government debt, congressional Republicans have threatened not to raise the debt ceiling and, in doing so, I believe have created a debt crisis from what has always been a routine matter. Indeed, things have gotten so serious that the U.S. Senate will work over the holiday weekend (imagine that)! However, I’m certain our representatives will find a face-saving way to avoid a default on our government’s debt. Insofar as tough economic issues finally being on the table, I believe budgetary politics have changed for the better.
I’ll have more to say about the debt ceiling debate as it proceeds, but for now, let’s just say it’s preferable to have a political crisis before we have a financial one.
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