This slideshow compares fiscal policy in Greece and the United States during the past ten years, before, during and after the global financial crisis

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
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http://commons.wikimedia.org/wiki/File:Greek_riot_police_3.jpg
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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