Let Cyprus be the lesson
Greece's chronic overspending led to economic near-collapse last year. Now it is Cyprus' turn.
Were it not for years of overspending, Cyprus might have been able to bail out its banking sector. Instead, the EU and IMF are faced with yet another European economy in financial distress. This time, though, the EU has put a price on its aid to Cyprus.
And that price will be paid for by people who have money in Cypriot banks. It turns out that what used to be their money is now collateral put up by Cyprus in order to secure a $13 billion EU bailout.
But this isn't a story about Greece or Cyprus (last year's and this year's casualties) or even about Italy, Portugal or Ireland (in all likelihood next year's casualties). It is a story about nearly everyone, because nearly every Western country suffers from the same disease: governments that spend well beyond their means.
How can the United States avoid the fate that awaits this growing list of countries? The answer to this question is as easy factually as it is difficult politically: The United States must balance its budget.
This means taming all spending to the point where, each year, our government spends only that which it can afford. Runaway debt destroys economies, and it will destroy ours just as readily as it will destroy Cyprus'.
So what will it take to balance the federal budget? The ruling class will not care for the answer given its recent collective convulsion over a 1 percent sequestration cut, but that will not make the answer any less true or the measures any less necessary.
All that is required is discipline, that rarest of all D.C. birds. Our politicians have learned that what they cannot get from taxing the people, they can get by borrowing from future generations — the ultimate in taxation without representation. This behavior will have to be unlearned. So here is what we must do.
Since the 1950s, federal tax revenue has averaged 18 percent of GDP. A few years ago, it dipped to 14 percent, but has been climbing and currently sits at 16 percent.
Assuming that tax revenue returns to 18 percent of GDP, that GDP grows 3 percent to 4 percent a year, and that the Fed holds interest rates at current levels (all of which are reasonable assumptions), a balanced budget is possible within five years. How?
Washington must cut spending by 10 percent next year, then hold it constant — not even adjusting for inflation — for the next four years. This will sound like Armageddon to Washington, but it's a reality that American businesses, workers and families live with all the time. That's how normal people (read: people who cannot borrow money indefinitely) deal with economic downturns.
We can do this and live with the pain now, or we can wait for the government to confiscate our savings later. There will be pain either way.
It would be better to address the problem of a government that spends more than it has ever had right now. Let Cyprus be the lesson.
Antony Davies is associate professor of economics at Duquesne University and an affiliated senior scholar at the Mercatus Center. James R. Harrigan is a fellow of the Institute of Political Economy at Utah State University.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Man dies in jump from Route 130 overpass onto passing tractor-trailer in Hempfield
- Starkey: Penguins’ season impressive so far
- Penguins a love affair for Evancho sisters
- Pitt football team working to fatten up QB sack total on defense
- Pirates again approach Polanco about contract extension
- North Versailles couple faults construction company for damage to property
- Pirates’ search for division title rests on starting rotation’s health
- Hornqvist’s net-front presence with Penguins could be valuable asset
- Police investigate pair of fatal rush hour incidents in Shaler, Marshall
- Poll shows Clinton slipping in trustworthiness among voters
- Figure in probe of improper influence in federal investor visa program gave Rendell $15K illegally