Heritage Economist on Greece and the US

Paul Krugman has some fun rightfully mocking this:

If U.S. policy makers and the public take away only one key lesson from what’s happening in Europe right now, it should be to put the budget on a path to balance during good times such as these.

Paul may a few good points but permit me to go further starting with this opening line. As Paul and others have noted, this call for fiscal austerity risks another recession which is the real lesson we should be drawing from the Greek tragedy. The toxic mix of fixed exchange rates and fiscal austerity has plunged Greece into a massive recession which is the main reason its debt/GDP ratio keeps rising. But the folks at the Heritage Foundation would not ask us to adopt some sort of gold bug philosophy – would they?

the United States also creates its own money, enabling it to devalue its currency and debt to avoid defaulting on payments for a lack of cash. This power, when abused, can lead to steep inflation setting off very bad economic consequences that can harm those relying on their savings to get by the most.

While this acknowledges the beneficial role of devaluation, it immediately goes into inflationista mode suggesting the folks at Heritage are indeed still gold bugs. But what bothers me most is this reliance on some this IMF report:

lessons from nine country case studies on how changes in fiscal policy coupled with structural economic reforms, such as labor-market liberalization, drive increases in economic growth.

Read the IMF report for yourself but I’m not convinced that this report makes a strong case for supply-side economics. Yet the folks at Heritage argue:

Growing spending on public benefits threatens to overwhelm the U.S. economy in the long term. At the federal level, Social Security, Medicare, Medicaid and other health programs consume more than half of the budget, and spending on these programs is growing steeply. After accounting for other benefits, transfer payments make up about 70 percent of all spending in the United States today. Implementing important reforms to unaffordable and outdated benefit programs has proved to be a difficult feat politically. However, waiting too long on reforms diminishes the ability to phase in major changes gradually, in a way that will protect those who rely on benefits the most and leave others time to adjust to new fiscal realities. Waiting for a major crisis to force reforms, as Greece has done, brings unnecessarily painful austerity.

Let’s be clear – reforms and austerity are two very different things. And yet the real agenda here is to reduce Federal spending on health care and Social Security, which will likely be neither reform nor austerity if these spending reductions are nothing more than means to pay for more tax cuts for the rich.