1. Another Slideshow from Ed Dolan’s Econ Blog Why hasn’t the US become another Greece? A Comparison of Two Budget Crises Posted April 4, 2013
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2. Not Long Ago the US Looked a Lot like Greece
Not so long ago, the trajectory of the US government budget deficit looked a lot like Greece. Both countries seemed to be headed down the same rathole
Since then, Greece has moved from crisis to disaster while the US has begun a slow but steady recovery
What has made the difference?
April 4, 2013 Ed Dolan’s Econ Blog

3. Reason 1: Greece was already Worse Off than we Thought
The first reason the US and Greek crisis have not continued in parallel is that already in 2009, the Greek economy was worse off than we then thought
This diagram compares recent data for the Greek deficit in with the vintage 2010 data available three years ago
The Greek government has admitted that some data from that period were falsified to make the deficit look smaller than it really was
April 4, 2013 Ed Dolan’s Econ Blog

4. Reason 2: The Advantages of a Sovereign Currency
A second reason the US economy has done better than that of Greece is that the US has its own sovereign currency, the dollar
Greece, by contrast, is a member of the Eurozone. It has no independent control over its currency.
Having an independent currency has helped the United States in two ways
April 4, 2013 Ed Dolan’s Econ Blog

5. A Sovereign Currency Allows More Exchange Rate Flexibility
One advantage of a sovereign currency is greater exchange rate flexibility
This chart shows real effective exchange rates for the US and Greece—a broad measure of international competitiveness
The US dollar has depreciated more during the crisis, helping US exports
The Greek exchange rate, linked to those of strong economies like Germany, has depreciated less
April 4, 2013 Ed Dolan’s Econ Blog

6. A Sovereign Currency Helps Keep Interest Rates Low
Another advantage is that a country with its own currency can, if need be, always issue enough new currency to pay its debts, but one with a shared currency cannot do so
The ability to issue additional currency to pay debts reduces the risk of default
Reduced default risk, in turn, lowers interest rates
Dramatically lower interest rates have made it far easier for the US to manage its debt during the crisis
April 4, 2013 Ed Dolan’s Econ Blog

7. Using the Output Gap to Track the Business Cycle
A country’s business cycle can be tracked using its output gap
The output gap is the amount by which real GDP exceeds or falls short of potential real output
Potential real output means the economy’s real GDP when it is operating along its normal trend, neither in a slump nor in a boom
April 4, 2013 Ed Dolan’s Econ Blog

8. Procyclical vs Countercyclical Fiscal Policy
Ideally, a country’s fiscal policy should be countercyclical. Such a policy would moderate the business cycle by stimulating the economy with tax cuts and new spending during a recession and using tighter policy to prevent overheating during a boom
In contrast, a policy that makes the business cycle worse by adding stimulus during a boom and applying austerity during a recession is procyclical
April 4, 2013 Ed Dolan’s Econ Blog

9. The Underlying Primary Fiscal Balance
A country’s underlying primary fiscal balance (UPB) provides a good indicator of whether its policy is stimulating or restraining the economy
The UPB is the government’s budget surplus or deficit, adjusted to remove the effects of the business cycle on taxes and spending, as well as for one-off items like privatization revenue and tax amnesties
April 4, 2013 Ed Dolan’s Econ Blog

10. Procyclical Fiscal Policy in Greece
Fiscal policy in Greece has been strongly procyclical over the past decade, as indicated by the fact that the UPB and output gap have moved in opposite directions
During the boom years of the early 2000s, the underlying primary balance moved toward deficit, causing the economy to overheat
After 2009, at the insistence of its EU partners, Greece undertook stringent austerity measures. Its underlying primary balance rose into surplus as its output gap plunged into a deep recession
April 4, 2013 Ed Dolan’s Econ Blog

11. Procyclical Fiscal Policy in the United States
Fiscal policy in the United States has also been procyclical , but not as strongly so as in Greece
As in Greece, during the boom years of the early 2000s, the US underlying primary balance moved toward deficit, causing the economy to overheat
In 2008 through 2010, the US at first used countercyclical stimulus to reduce the severity of the recession
After 2011, the US began to tighten fiscal policy. The UPB rose toward balance, but not into surplus. The recovery was slow but it did not stop completely
April 4, 2013 Ed Dolan’s Econ Blog

12. April 4, 2013 Ed Dolan’s Econ Blog
The Bottom Line
The United States did not become “another Greece” for three reasons:
The Greek crisis was worse to begin with
A sovereign currency gave the US government more room to maneuver, especially in terms of interest rates and exchange rates
Both Greece and the United States have followed destabilizing, procyclical fiscal policies, but to a much greater degree in Greece than in the US.
April 4, 2013 Ed Dolan’s Econ Blog

13. March 29, 2013 Ed Dolan’s Econ Blog
For further discussion of the issues raised in this slideshow, see “Why Hasn’t the US become another Greece?”, Ed Dolan’s Econ Blog, April 4, 2013
Click here to learn more about Ed Dolan’s Econ texts
March 29, 2013 Ed Dolan’s Econ Blog