Small Points

For our text today, let's look at a couple of claims that were repeatedly made during the late, unlamented election campaign:

1. The US is heading towards becoming another Greece.

Greece is suffering for these reasons. It has historically ---

• been unwilling or unable to enforce its own tax laws, so tax evasion is so endemic it's become the norm.
• earned its revenues largely from a few industries: tourism, olives, wine.
• had very high public employment (as a percent of total employment)+

All this produced a low-output economy, with a low-energy (if you will) society. If you've ever spent a week vacationing on a Greek island, you probably, at this point, say, "Opaaa!!!" The Greeks have (or had) a society and a culture that was a pleasure to experience, at least as a visitor: devoted, seemingly, to a relaxed pace and an appreciation of life's little pleasures: sipping coffee or wine in the sun for two or three hours in the afternoon; slow, easy late afternoons, late dining, late rising in the morning. Sounds nice, no?

And then came the Euro. German productivity, German GDP/debt ratios, and so forth became the standard for ... Greece! Whatever you know or don't know about those two countries, does that make sense to you?

A full analysis would be long and complicated. But here is a simple fact:

• The US has its own currency and its own central bank. Greece does not.

What does this mean: First, that the US (via the Federal Reserve) can control the interest rates it pays, because those rates are set by the central bank. And when external economic pressures become too great, or creditors begin demanding interest rates that are too high, the US can also let the value of its currency float.  The pressures will drive the currency down in value, which has two benefits to the US: (1) it can repay debt with cheaper dollars*, and its exports become cheaper, thus improving thehealth of the manufacturing and other sectors that produce these exports. Greece can do neither of these things. The only thing Greece can do, and it is a slow and painful thing to do, is reduce salaries and benefits internally. This takes a long time, seriously harms the population's standard of living, and exacerbates the deficit problem because it (like the austerity that has been insisted upon by Germany, and which has further harmed every country where it has been tried) reduces the total amount of money in the economy and the resulting tax receipts.

In contrast, if the international investment community (bond buyers) decides it does not have confidence in the US economy, it will refuse to buy US Treasuries, consequently bidding down the price (which is the same as bidding up the interest rate). This is what has happened to Greece (and Spain, but Spain is a different case). Greece cannot afford the debt service on its national debt, at 6% or 7%. The US, through its central bank, can choose to let rates rise; but if it does not the value of the US currency will fall, which accomplishes the same thing in some ways.

Interestingly, even with the debt-ceiling crisis, the interest rate on US Treasuries has remained at an historic low for the past few years. Also note that there has been a steady chorus of doom-sayers predicting runaway inflation unless the US embarks on a huge austerity program. These people have been wrong for four years now; and those who made bets on higher interest rates have lost a lot of money.

But what is clear is that the U.S. bears no resemblance to Greece, and no matter how bad our debt situation becomes, a Greece-like situation is, practically speaking, not possible.

*Another way of looking at all this is that if you have your own currency, and your debts are denominated in that currency, you control your own fate. If you use a currency controlled by others, others will control your fate.

2. Obama has resolutely ignored the recommendations of his own Bowles-Simpson Commission, including the recommendation to cut individual tax rates substantially.

In fact, there was no "Bowles-Simpson Commission Report." The 18 members of the Commission were unable to agree on a report, in part because of member Paul Ryan's "no" vote on the report proposed to be issued.

This is true, Look it up. It is the reason we are facing the "fiscal cliff," at least the "sequester" part of it. If B-S (!) didn't produce a report  that would be accepted by Congress, the agreement was that Congress (through its "Supercommittee") would produce a deal itself, or the sequester would automatically occur on 1/1/13. All this was according to the Budget Control Act of 2011.