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How An American Debt Crisis Will (Might) Be Different From The Greek Debt Crisis

In 2009, George Papandreou led his party to an election victory in Greece using the slogan "the money exists."  Basically, his platform was to promise to spend a lot of money the country didn't have and then deal with all of the real world difficulties after the election.  As this clip of Paul Ryan and Tim Geithner shows, President Obama is planning to run for reelection using a George Papandreou-style strategy.  Geithner basically agrees that his strategy is to borrow now, spend now, only increase taxes on high earners now (and the scary looking debt graph is with Obama's proposed tax increases factored in), leave entitlements unreformed and then go broke.  Well either that, or spring huge middle-class tax increases and huge benefit cuts on the voters after the election. 

Papandreou became Prime Minster and it turned out that the money really wasn't there.  Papandreou pretended that he thought that the money had really existed, and that the previous government had lied about the extent of the government's debt.  He was half right.  The previous government really had lied about the extent of the government debt, but Papandreou had to know that government spending was unsustainable whatever the exact details.  He knew he was writing a check he couldn't cash.

Papandreou's election promise to spend wasn't part of some master plan.  It was just what he needed to say to get from Point A to Point B.  As Prime Minster, Papandreou continued to just say whatever would get him through the day and then let tomorrow take care of itself.  The result has been higher taxes (and some effort to improve tax collection), pension cuts for current retirees, health benefit cuts, labor market liberalization, planned civil service layoffs, planned privatization of state-owned enterprises, and over 20% unemployment.  Somewhere in there Papandreou was forced to resign in disgrace.

So a campaign of promise now and deal with reality later would look like a bad deal for Obama.  Maybe, but I think that Obama believes that a Papandreou election strategy can work in an American context.  I think that Obama believes that he has a strategy by which America's debt can be brought down to a sustainable level in an Obama second term.  He just doesn't believe that he can win reelection by running on that strategy. That is because the strategy is middle-class tax increases and centralized cuts in health care spending.

I think this works in two steps.  First, get reelected on green energy subsidies and promising not to touch entitlements and on only raising taxes on the top 2%.  Then let the debt crisis get a little closer.  Here is the thing: the closer we get to a debt crisis, the more a debt reduction strategy of tax increases and IPAB-style Medicare cuts becomes the most plausible path to a sustainable budget.  People on old age entitlements have structured their live around the promises of those programs.  You can institute changes, but they have to be gradual so that each cohort can adjust during their working years.  It is possible to put together a premium support plan for Medicare that gradually reduces government costs while allowing the medical system to develop more efficient delivery systems.  Instituting such a plan under emergency conditions as Medicare spending was suddenly cut by tens of billions would be politically impossible.  As a political matter, it would be much easier to increase middle-class taxes and empower a government board to deny care (and maybe push to adopt single-payer for the working-aged as Obamacare pushes insurance premiums higher.)  It won't be popular exactly, but it might be the least unpopular alternative and Obama won't be running for reelection anyway.  And once instituted, those changes would be hard to undo.

Obama is betting that his unsustainable promises will get him though the election.  He is then betting that an emergency situation in his second term (an emergency he is doing his part to engineer) will help him transition the United States to a higher level of taxation and more centralized control of health care.  Obama might be betting wrong, but that is the game he is running on us.  Who will tell the people? 
Categories > Politics

Discussions - 2 Comments

Who will tell the people? Not the Democrat-controlled media, you may be sure.

Repeat after me...

Socialism works until you run out of other people's money.

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