July 3rd, 2011
02:04 PM ET

Could America go the way of Greece?

By Fareed Zakaria, CNN

Watching the return of the Greek crisis, many people in America are wondering, are we next?

Will America face the same financial disaster that the Greek government faces, with a soaring deficit and debt, markets that have lost faith in it and a downward spiral of budget cuts that then further depress the economy?

It might, but let us understand something really important: America stands in a fundamentally different place than does Greece.

Greece has two problems. First, it has a big budget deficit and markets have lost faith that it can ever repay its loans.

Second, it is an unproductive economy and cannot generate enough economic growth over the next few decades. In economics-speak, Greece has a liquidity problem but also a solvency problem.

The United States, by contrast, does not have a solvency problem. The American economy remains one of the world's most competitive, with many of the fastest-growing companies in most of the advanced industries. It houses the best capital markets in the world, the greatest universities and the most dynamic society.

America is demographically vibrant, thanks to immigration. It will be the only rich country that will see its population grow over the next 25 years.

America could face a liquidity problem - that is, it could have difficulty financing its debts and deficits if markets lose faith in it. But, again, let's be clear: This has not happened yet. In fact, right now the world is lending to America more cheaply than ever before.

The most important difference between Greece and America is this: America has many paths to solve its deficit problem. Were it to implement the Simpson-Bowles Deficit Reduction Plan, for example, it would instantly give America among the strongest public finances of any rich country.

Would Congress simply allow the Bush tax cuts to expire - returning rates to where they were under Bill Clinton's presidency when America created almost 25 million jobs - that one action would provide the federal government with $3.9 trillion in revenues over the next decade and basically solve the deficit problem. We would still face the long-term problem of entitlements, especially health care costs, like every other rich country, but the short and medium-term crisis would be over.

Greece, Portugal and Ireland have no such economic answer to their problems. Europe is choosing between only terrible and dangerous options in resolving the Greek dilemma - massive, unending bailouts or a default that could turn into a Lehman Brother collapse type of event.

Now, America's economic problems might have a simple solution, but our political system seems utterly unable to get us to this solution. One party refuses to even think about tax increases, the other will not take seriously the problem of entitlement reform. The result is paralysis.

If we do end up losing the trust of markets, and it can happen, it will not be because they lost faith in America, in our economy and our society, but because they despaired at the country's selfish and self-defeating politicians.

On July Fourth weekend, that's a pretty depressing thought.

For more on this, you can read my column at TIME.com.


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