The Hankyoreh (South Korea), March 22, 2010
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No, the United States government is not about to follow Greece in being swallowed up by a credit crisis, so the Chicken Little crew can go read something else. However, its underlying economic problem bears important similarities to the crisis facing Greece, so its crisis does offer some insights.
Much of the business media is so fixated on budget deficits that they can see little else. While Greece certainly does have a problem with its current budget deficit and its accumulated national debt, it actually has a much bigger problem with its trade deficit. In 2009 its trade deficit was just under 10 percent of GDP, the equivalent of more than $1.4 trillion in the United States. This is more than 50 percent larger than its budget deficit.
Those who want to blame Greece’s trade deficit on its budget deficit will have to combat some serious arithmetic problems. In 2007, Greece’s trade deficit was 14.2 percent of GDP, while its budget deficit was just 3.6 percent of GDP. In short, there is no story here. Its trade deficit plunged even as its budget deficit soared.
The reason that Greece has a trade deficit is that its production costs are too high relative to other countries in the euro zone. The obvious solution for a country in this situation is to devalue its currency. If its currency fell by 25 percent, then this would be comparable to imposing a 25 percent tariffs on all imports and giving a 25 percent subsidy on all exports. That would go far towards restoring the international competitiveness of the Greek economy. This is exactly the route that countries have pursued for centuries to improve their trade position.
However devaluing its currency is not presently an option for Greece for the simple reason that is part of the euro zone. Greece has no more control over the value of its currency than the state of California. The big difference in California’s favor is that California receives large amounts of money from the federal government. For cultural and linguistic reasons, it is also much easier for people living in California to move to more prosperous areas of the country than it is for Greeks to move elsewhere in the European Union.
However, the key point is that Greece will likely suffer a prolonged period of slow growth and high unemployment because it cannot devalue its currency in order to improve its trade position. The United States does in principle have the option to devalue the dollar. It can always opt to intervene in international currency markets by supplying vast amounts of dollars in order to reduce its value. In that sense, currency is like almost everything else, if you increase the supply, the price will fall. And, we can supply as many dollars as we want in order to make the dollar fall as far as we want.
The government could even counter China’s currency peg by establishing a peg of its own of the dollar against the yuan. It could offer to buy yuan at a considerably higher value than the official Chinese rate, thereby putting upward pressure on the Chinese currency. If China tried to counter such a move, they would end up paying vast amounts of money to acquire over-valued dollars. They lose big in this story.
However, the Obama Administration, like the Bush and Clinton administrations before it, has opted not to try to push down the value of the dollar. In fact, as a matter of official policy, the Obama Administration claims to be committed to a strong dollar.
If the United States is not prepared to take steps to lower the dollar, then we are pursuing a policy that makes us like Greece. We have an over-valued currency that makes our goods and services uncompetitive in international markets. Therefore we run huge trade deficits and cannot get back to full employment without enormous stimulus from the government sector.
The big difference between the United States and Greece in this story is that the United States has an easy path to lowering the value of our currency, if we only had the political way. By contrast, Greece really is in a bind, now that it has tied itself to the euro. But if our political leaders refuse to take advantage of the policy levers available to them, then we have better hope of getting the economy on a sustainable growth path than Greece.