OPINION:
The titanic 772-point drop in the Dow Jones Industrial Average since Tuesday should serve as a wake-up call to Washington’s big spenders. The domestic unease facing Greece sent economic shock waves felt around the globe, and, unless we change our current ways, what happened there will happen here.
Athens was the scene of a clash between police and thousands of demonstrators who were angered that exorbitant salaries for civil servants would be cut, overly generous pensions could be slashed and nonproductive employees might be fired by employers armed with newly flexible labor regulations. The violent response of apoplectic union organizers to these sensible austerity measures left three dead, 59 injured and 25 arrested.
This tragedy shows that a country grown accustomed to lavish government benefits does not willingly give them up. It is far too easy for politicians to dole out benefits without worrying about the consequences of paying for them later. When countries falter in making good on these neglected debt obligations, their credit risk increases, with a corresponding jump in the interest rates demanded by worried investors. With that increase in rates, what already are difficult loans suddenly seem impossible to pay back.
To overcome this steep financial hurdle, the European Union and the International Monetary Fund are offering Greece a sweetheart deal - below-market interest-rate loans of $141 billion in exchange for the aforementioned cutbacks in the country’s wild spending habits.
While America’s red ink has yet to reach Greek levels, we are headed in that dangerous direction. According to the World Bank, Greece’s external debt stands at $582 billion, an amount equal to about 170 percent of its gross domestic product (GDP). By contrast, the external debt of the United States is $13.8 trillion. With our larger economy, that debt constitutes 96.5 percent of GDP - a lower but still troubling number.
University of Maryland economist Carmen M. Reinhart and Harvard colleague Kenneth S. Rogoff showed in a study published earlier this year that countries with a gross public debt exceeding 90 percent of GDP gave up about 1 percentage point of growth each year when compared to countries with less debt. It is hard to see less debt in America’s future, given the demands of public-sector unions for ever-increasing salaries and pension benefits and the state of our entitlement programs.
The Centers for Medicare and Medicaid Services indicate that President Obama’s health care program will cost much more than estimated just a couple of months ago. Medicare itself faces unfunded liabilities of $89.3 trillion. Combined with Social Security’s excessive promises, this country faces a staggering $106.8 trillion in promised benefits, the bills for which will soon begin to come due. That puts us squarely in the Greek debt league within a decade, without the benefit of having a larger nation to which we can turn for a bailout.
The situation in Greece confirmed investors’ worst fears, and the market is sending the statement that it does not like what it sees.
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