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Forget Greece, U.S. Should Focus on Own Worries

Irwin M. Stelzer

There comes a tide in the affairs of men . . . and the one sweeping from Greece, across Europe and into the US is washing away support for austerity.

Barack Obama is delighted at this support for his refusal to cut spending in the face of mounting deficits, and the Republicans are feeling beleaguered at what they see as the disinterment of the works of John Maynard Keynes.

No longer must the President sit at G8 meetings and hear only the voice of German chancellor Angela Merkel, extolling the virtues of thrift, austerity and balanced budgets.

Now he has France’s socialist President, Francois Hollande, to preach the virtues of spending, “the indispensable stimulation of the economy,” and high taxes.

Secretary of State Hillary Clinton expressed the administration’s delight at Hollande’s “different political approach.”

Take that, Mrs Merkel and all you Republicans who want to cut entitlement spending and retain the Bush tax cuts that benefit “millionaires and billionaires” (Obama shorthand for families earning more than $250,000 a year).

The austerity hardliners remain impervious to experience.

Austerity, German style, is producing such rapid contractions in Greece, Italy, Spain and elsewhere that debt burdens are rising rather than falling as the economies shrink faster than the deficits.

But all the fault does not lie with Germany.

Rather than emphasise spending cuts, many national politicians have chosen huge tax increases as their preferred austerity measure, ignoring the negative effect of high taxes on growth.

Hollande plans to raise marginal tax rates on France’s highest earners to 75 per cent, and even Britain’s Tory Chancellor of the Exchequer is relying heavily on tax increases to bring down his country’s deficit.

So while it is reasonable to criticise Germany for its single-minded emphasis on budget balancing, it is equally reasonable to criticise some politicians for relying too heavily on growth-stifling tax increases rather than spending cuts to stanch the flood of red ink.

Americans are nervous about Europe and that was heightened when some traders at the London office of JPMorgan Chase lost about $US2 billion ($2bn) in trades that their boss Jamie Dimon says he doesn’t understand.

So twitchy investors decided Greece’s problems would lead to default (correct), which would lead to a run on Greek banks (under way), and to serious losses for banks in Germany, France and elsewhere (certainly), with unpredictable Lehmanesque consequences for the US’s financial institutions (unlikely).

After all, if even Dimon, the nation’s most talented banker, can get it spectacularly wrong, how can we be certain our banks are immune to Europe’s problems?

All those Republicans who remind us that unless we change our profligate ways the US will be the next Greece, just might be making a valid connection between Europe’s problems and our own.

It is not the clearest logic, since the mechanism by which Europe’s problems would be transmitted across the ocean remains elusive.

US banks are in far better shape than their European Union counterparts: indeed, they are winning customers as European banks pull out of the US market.

US money-market funds have reduced their exposure to European banks; the US economy is growing (not rapidly but growing) while the EU economy is headed into recession; the headline unemployment rate in the US is about two percentage points lower than that in the EU; exports account for a small part of the US’s GDP, and exports to the EU are far less important than exports to Canada and Mexico, so a drop in Europe’s demand for US goods would not be a significant drag.

Still, many Americans believe in the contagion theory: today Europe, tomorrow the US.

I believe Americans would do better to tend their own garden.

The tenuous connections that get us from Greece’s problems to a US recession should be less of a worry than home-grown political developments. At the end of the year the US again hits its statutory debt ceiling of $US16.4 trillion, and will be unable to borrow unless that ceiling is raised.

Last week the Republican speaker of the House of Representatives, John Boehner, made clear his party would not support an increase in the ceiling unless the Democrats agreed to equal or greater spending cuts, which they won’t.

Unless voters break the stalemate, we will enter next year with divided government.

Left-leaning Democrats intent on maintaining the welfare state will face off against right-leaning Republicans opposed to all tax increases and the result would be a lot more troubling for the US than a Greek default.

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