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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




                                                                      Photo source: Athens Indymedia via
                                                                      http://commons.wikimedia.org/wiki/File:Greek_riot_police_3.jpg




             Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free
             to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like
             the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.
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
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 2007-2009
  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
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
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
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
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
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
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
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
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
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
 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

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Why Hasn't the US become another Greece?

  • 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 Photo source: Athens Indymedia via http://commons.wikimedia.org/wiki/File:Greek_riot_police_3.jpg Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.
  • 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 2007-2009 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. 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.  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