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In Greek Downgrade, Lessons for the United States
Standard & Poor’s cut Greece’s debt rating further this morning. It’s now “B” for long-term credit and “C’' for short term. Greece’s rating is five notches below investment grade and the same as Belarus, Ghana, and Lebanon. If you’re willing to risk it, Greek two-year notes are yielding 25 percent. In March, European leaders cut the interest rate (to just 3.5 percent) on the emergency $160 billion in debt they extended to Greece and lengthened maturities from three years to seven. In their book, This Time Is Different, economists Carmen Reinhart and Kenneth Rogoff, examine eight centuries of financial crises and conclude that they inevitably lead to more debt, slower growth, higher unemployment and, for weak economies, either sovereign default or a debasement of the currency (so that governments can repay creditors at a lower rate). Greece has had five separate instances of default or rescheduling of its debt since 1826; Germany, eight; Spain, thirteen. The decline of Greece has multiple causes. I explored one of them in a long piece in Commentary last year: Membership in the European Union allowed Greeks to borrow at low rates and live far beyond their means, preferring, as many other Europeans have, leisure over work. Another way to understand Greece is that policymakers in that nation forgot that growth is the most important economic goal, and you can’t get significant growth when government spending is out of control and taxes represent 40 percent of GDP. As Louis Woodhill, a software entrepreneur, recently wrote in Forbes, “The lesson for America is simple: economic growth now or debt default later.” Greece’s debt problems are further evidence that the U.S. needs to get on a growth track immediately, or suffer the consequences. We can’t thrive — in fact, we can’t even get out from under our debt burden — if we grow at a sustainable rate of just 2 percent or 2.5 percent, as the Congressional Budget Office and leading economists are predicting. We must set 4 percent growth as a goal and direct public policy and private practice toward achieving it.
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