No wonder it doesn’t feel much like a recovery. According to statistics from the U.S. Census Bureau, the “recovery” has been tougher on most Americans than the recession we are supposed to be recovering from. During the recession - between December 2007 and June 2009 - median income fell 3.2 percent. Astonishingly, since the recession officially ended more than two years ago, median income has declined twice as much as it did during the economic downturn, falling 6.7 percent.
This helps to explain the unprecedented pessimism Americans now express to pollsters about their own economic prospects, and those of their children. After all, it’s hard to maintain faith in the American Dream that your children and grandchildren will be better off than you are when your own fortunes have declined so precipitously.
The hard truth is, unless we get our spiraling debt situation under control, we are going to be facing an austerity so severe that it will make the last decade of economic stagnation look mild by comparison.
For a sobering example of what happens to the standard of living in a country that fails to deal with ruinous levels of deficit spending and national debt, look to Greece. That nation hit the fiscal tipping point when its debt reached 137 percent of gross domestic product (GDP). In 2010, eurozone members and the International Monetary Fund agreed to a first bailout of Greece only on the condition that Athens accept a pre-approved austerity plan.
Even the draconian cuts in that package have been insufficient to close the deficit gap as the EU scrambles to avoid a calamitous Greek default and the government in Athens resorts to selling off state assets, more layoffs of government workers and additional tax increases.
The effects of the austerity measures imposed on Greece are dramatic, to say the least. Already one of the most highly taxed countries in Europe, the austerity plan requires a 3 percent increase in total tax revenue, a major source of which will be an expanded, across-the-board Value Added Tax on consumer goods. Athens has also been forced to cut almost 3 percent from its budget over the next five years, largely through a dramatic cut in Greece’s equivalent of Social Security. Spending on benefits for retirees will be cut by 10 percent, the retirement age will be raised from 61 to 65, means-testing will be implemented and monthly pensions for government employees will be slashed 20 percent for those 55 and over, 40 percent for those under 55.
As for current government employees, public-sector wages will be cut by 15 percent across the board and the workforce will be cut by 20 percent. Almost 2,000 schools will be closed or merged to reduce education costs. These dramatic cuts affecting Greece’s large number of public-sector employees are not the worst of it. Post-tipping point, the unemployment rate has more than doubled to nearly 20 percent and interest rates on five-year government bonds have soared to almost 30 percent. Investment is dead, and the economy is shrinking at the rate of more than 5 percent a year.
What would such sudden, drastic and painful austerity measures look like in the United States if we should reach a similar tipping point on our exploding national debt? Current Social Security recipients have complained in recent years when they have not received cost-of-living increases. But if Greek conditions prevailed in the U.S., Social Security recipients would be looking at cuts in their benefits rather than annual increases, and a retirement age of 70 or 71 rather than 66. Future means-testing would mean that many who paid into Social Security would receive no benefits at all on retirement.
If the federal government in Washington were to have to downsize like Athens is downsizing, it would mean nearly 100,000 government workers suddenly unemployed, and those fortunate enough to keep their jobs would receive an average pay cut of $11,500. Pensions for government retirees would be cut immediately by $5,000, while current government workers would receive about $10,000 per year less in pension than they were promised.
More importantly, in the nightmare scenario of a Greek-style meltdown, the United States would suffer a loss of nearly $1 trillion in GDP, and add another 11 million to the ranks of the unemployed on top of the 14 million Americans currently unemployed. We would be looking at an economic catastrophe that rivals the Great Depression.
We can comfort ourselves with the thought that “it can’t happen here,” but the mere fact that our economy is 50 times larger than Greece’s should not deceive us into believing that we can continue to pile up debt without consequence. Eventually, the loose monetary policies of the Federal Reserve will tighten, interest rates will rise, and the era of cheap borrowing will come to an end.
Rep. Todd Rokita is a Republican from Indiana.
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By Rand Paul
Obama acts as though we no longer have a Constitution