NYT vs. NYT on the Big Fat Greek Question

It’s New York Times columnist vs. New York Times columnist, again.

Back in April, it was Paul Krugman and Andrew Ross Sorkin who were feuding—Krugman didn’t like the way Sorkin described his position on bank nationalization.

This time, it’s Krugman vs. David Leonhardt, and the feud appears to be far less personal. But the question that divides them—Is the US like Greece?—has quickly become a divining rod for a related debate about the nature of U.S. debt and what should be done about it.

The gentlemen from the Times aren’t the only ones to be weighing in on this issue.

The FT’s Clive Crook took on the question early in the week, writing that he’s not too worried about “Greece as fiscal harbinger.” Crook’s bigger concern is that “secondary effects…and any widening emergency” could put the brakes on the U.S. recovery.

And conservatives who like to complain about the evils of big government were quick to embrace the Greek crisis as a stark illustration of a public sector run amok.

This was Mona Charen in National Review last week:

Public-sector unions are growing in the U.S. More than 50 percent of all union members are now public employees, and their unions have negotiated sweet deals with local, state, and federal governments. As economic historian John Steele Gordon points out, “Federal workers now earn, in wages and benefits, about twice what their private-sector equivalents get paid. State workers often have Cadillac health plans and retirement benefits far above the private sector average: 80 percent of public-sector workers have pension benefits, only 50 percent in the private sector. Many can retire at age 50.” While private employers were shedding jobs during the recession, state and local governments hired 110,000 new workers.
Greece is in flames, but if you look around, you can smell the smoke here as well.

Krugman and Leonhardt strike a very different tone. And they seem to agree on one point: the main problem for the U.S. is the long-term deficit.

But these two experts have very different ways of looking at the are-we-or-aren’t-we question, and very different outlooks on the federal debt. Is it any wonder the rest of us find this difficult to navigate?

Here’s how Leonhardt framed it on Wednesday:

In Greek Debt Crisis, Some See Parallels to U.S.
The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

You could almost hear Krugman rushing to his keyboard. Late Wednesday morning, he fired back on his blog.

Um, that’s comparing a (highly uncertain) projection of debt 20 years from now — a projection that’s based on the assumption of unchanged policy — with actual debt now. Actual US federal debt is only about half that high now. And it’s worth pointing out that Greek debt is projected to rise to 149 percent of GDP over the next few years — and that’s with the austerity measures agreed with the IMF.
Basically, the United States can expect economic recovery to bring the deficit down substantially; Greece, which has a larger structural deficit and also faces a grinding adjustment to overvaluation with the eurozone, can’t.

Krugman’s conclusion on the blog: “Yes, the United States needs fiscal adjustment….But we really don’t look much like Greece.”

But with his Friday column, the professor was even clearer.

We’re Not Greece

Krugman convincingly pointed out that 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.”

A few factors explain that, he said, including America’s lower overall level of debt relative to GDP and the country’s “clear path to economic recovery.” And one other important difference between the two countries: Greece’s participation in the euro, which means the country can’t use devaluation to restore its competitiveness. Without that option,

… 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.

Despite all we’ve learned about the eurozone in the last few weeks, Leonhardt’s column fails to mention the constraints of the currency.

Brad Delong noted the omission (among others) in his critique:

Should financial markets begin at some point in the future to lose confidence in the long-term fiscal stability of the United States, that does not mean that the United States turns into Greece. Greece does not control the currency in which its government borrows. The U.S. does. That makes a huge difference.

Leonhardt acknowledges that the U.S. probably won’t face a Greek-style crisis. “But the basic problem is the same. Both countries have a bigger government than they’re paying for.” And he puts the blame squarely on the shoulders of “the people,” for failing to make hard choices about what we want from our government.

It’s true that I haven’t run to the IRS to volunteer for a tax increase, and I haven’t tried to send back the education money that makes it to my daughter’s school. But I also haven’t seen our political leaders out there explaining these and other tradeoffs. Aren’t they supposed to be leading, at least a little?

The Washington Post’s Steve Pearlstein did his part this week. He took out a calculator and actually ran some numbers, sketching out a budget framework that he said was “economically coherent and politically viable.” It’s worth a look at his math, at least to get an idea of what’s at stake. But here’s his big picture:

As a matter of economics, it is simply not possible to close that gap entirely with tax increases on the rich, as Democratic liberals want so desperately to believe. At the same time, political reality dictates that it is impossible to close that gap entirely with spending cuts, as Republicans would like despite decades of being unable to identify the cuts they have in mind. The compromise I propose is a 50-50 split between tax increases and spending cuts in the medium run, rising to 60 percent spending cuts as limits to entitlement spending start to compound.

Krugman, meanwhile, says trimming health care costs would do a lot to improve the country’s long-term fiscal outlook. It’s not enough, of course, and he says “a moderate rise in taxes” is probably necessary, too.

But he warns that many in the America-is-Greece crowd are trying to use the current crisis as a stalking horse. (Here, I think he’s talking Charen, not Leonhardt.)

[W]e 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.

Or maybe that’s a Trojan horse.

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Holly Yeager is CJR's Peterson Fellow, covering fiscal and economic policy. She is based in Washington and reachable at holly.yeager@gmail.com.