Monday 16 Jul 2018 | 11:17 | SYDNEY
Monday 16 Jul 2018 | 11:17 | SYDNEY

Reader riposte: Is the US another Greece?

17 August 2011 14:11

Peter Layton writes:

Stephen Grenville makes several good observations and suggestions about America's self-imposed fiscal crisis. A couple of points. Firstly, this current problem is of recent making. At the end of the Clinton era — only just over ten years ago — the Federal Government was running a surplus and there was talk of the end of government debt. How as this so?

The second point: at the end of the Clinton administration tax revenue was about 20% of GDP, as Stephen points out is is now a bit over 14%. It seems that simple. The Americans are no more than Western hemisphere Greeks, they have made a conscious choice to spend more than they receive in tax. S&P may have a point in their downgrade. The politicians in Congress are attuned to domestic factors and may not necessarily put overseas bond holders in front of a reelection that may be jeopardized by cutting public services, Defense and entitlements.

So the answer is easy: Congress simply has to raise taxes — or cut spending — by just over 5% of GDP. That would be roughly speaking a 25% increase in the tax take or a 25% cut in the fiscal size of the Federal government. These are big numbers.

Given issues of such magnitude, it is hard to be optimistic that the Congressional debt 'supercommittee' of 12 will deliver anything except for partisan rancor and the automatic trigger to cut US$1.2 trillion from federal agencies and Defense. Balancing the books, as Stephen points out, 'is not sensibly achieved by a random reduction of funding', but this would seem the more probable outcome.

In all this America's friends, allies and partners are just a source of money and/or irrelevant white noise. Congress's 1930 Smoot­-Hawley tariff act helped make the Great Depression great; there should be no expectation Congress or other arms of the US government will act more prudently this time round. US Treasury Secretary John Connally advised President Nixon to kill the Bretton Woods, the global trade and financial system of the time, to help his reelection prospects. Connally summed up his approach: 'My basic approach is that foreigners are out to screw us. Our job is to screw them first.'