U.S. is on path to its own Greek tragedy

The crisis in Greece should serve as a warning to all Americans, especially our political and business leaders. Greece undersaved, overspent and over-borrowed, and it used financing gimmicks and accounting tricks to mask its true financial condition. It lived beyond its means, and now the bill must be paid. Investors are no longer willing to buy Greek government bonds to finance the country's huge budget deficit, as they aren't convinced that the government will be able to make payments on the bonds. This could happen here.  Investors may soon begin avoiding the general-obligation bonds of states such as California, New Jersey and New York, which face seemingly intractable budget problems, and whose bonds of that type are slipping toward junk. California's bonds are rated BBB by Fitch Ratings Ltd., one step above junk, while Moody's Investors Service rates them BAA1 — subject to moderate credit risk. New Jersey and New York are rated only a little higher. Each faces, in effect, its own Greek crisis. But because the U.S. dollar is the prime currency for the world's business transactions — and the one to which investors flee when uncertainty strikes elsewhere — our government could soon face a similar crisis. So far, the Greek government hasn't been able to put into place a fiscal plan to deal with the budget deficits, and Greek workers have demonstrated against the salary cuts and tax increases needed to dig the country out of its financial hole. That is, the citizens have shown that they aren't willing to accept the cuts in living standards that will be needed to set the country on the right track, and so far, the politicians have been unwilling to force them. Does this sound familiar? The politicians in California, New Jersey and New York likewise have been unwilling to make the spending cuts necessary to dig their states out of trouble. In all these states, government spending has risen far faster than inflation, population growth and revenue. And the voters are resisting cuts in services and increased hikes. Given the high income taxes in these states — they are among the top 10 in the nation — significantly increasing tax rates isn't an option. At the same time, politicians can't bring themselves to cut spending enough to get rid of their budget deficits. Like the Greek government, they are frozen. Likewise, the federal government has been unable to rein in its spending as the budget deficits have grown. The financial crisis, recession and stimulus plan have aggravated the deficit even more. As a result, the federal debt, not including Social Security and Medicare, had risen to more than $12 trillion as of January. Most economists think that a federal deficit of 3% of gross domestic product is bearable because of natural growth of the economy over time. But 10-year projections in President Barack Obama's 2011 budget see the deficit of 10.6% of GDP this year falling to 3.6% by the middle of the decade and then rising to 4.2% by 2020. There is no easy solution. Corrective action will require massive spending cuts, including cuts in so-called entitlement programs, and tax increases. Both will have to be designed carefully and phased in gradually so they that don't make the situation worse by slowing an economic recovery. Although some in Congress have complained about Mr. Obama's creation of a panel to propose ways of attacking the deficit, Congress, and particularly the Senate, had an opportunity to take action and failed. Therefore, his panel may be the nation's last, best hope for preventing ever-larger deficits from leading to a Greek-style financial crisis when investors refuse to buy U.S. government debt, either because they fear that the government will default or, more likely, inflate its way out of debt. Of course, the panel's efforts, no matter how brilliant, will be for naught if Congress lacks the courage to enact the resulting proposals. And with the current Congress, that courage isn't much in evidence.