How to Keep America From Turning Into Greece

Greece, in the throes of a debt crisis, is running a deficit near 10 percent. The United States is also running a deficit near 10 percent. So the headline is inevitable: Are we Greece?

We're not.

Paul Krugman produces this graph of the countries' short-term deficit projections

Now, that's short-term. Before you interpret those shrinking red bars as evidence that we're in the clear by 2012, remember that the United States' projected pain is slated to begin later in the decade, when health care inflation hitches a ride on the retirement of tens of millions of baby boomers, sending the government's Medicare responsibilities soaring into the 2020s.

We're not Greece for a lot of reasons: we control our own currency, we're more productive, we have a much stronger economy and while we suffer from tax avoidance like many countries, Greece faces epic shortfalls.

But we are like Greece in the simple respect that we've conditioned the electorate to expect more services and fewer taxes ad infinitum. And We the People consistently elect politicians who promise to preserve that imbalance. I've been asked a few times to produce something like a dream budget for America 2020. Here's a start:

1) Institute a revenue-neutral VAT with off-sets to employer payroll taxes to make it slightly progressive, but grow the VAT to 8 or 10 percent over the next five to ten years. (I'd also entertain arguments for a carbon tax, but I'm less sold on Pegouvian taxes as dependable money machines and we'll need a dependable money machine before we "solve" the medical inflation conundrum.) Eliminate the mortgage interest deduction. Broaden the corporate income tax base by eliminating loopholes especially on repatriated income, but lower the rate.

2) Raise the retirement age for Social Security, indexed to longevity. It's important to do something with Social Security before Medicare because it's easier to move the full retirement age than to put a straitjacket around medical inflation. Tweaking this entitlement would be an important signal to international investors that we can be serious about our deficit drivers. (We should be open to other SS adjustments, like raising the taxable income ceiling.)

3) Put a freeze on discretionary spending -- not on each department, but the whole thing, to allow for flexibility. Keep PAYGO. Convene a commission on defense spending to find costly weapons programs to cut, bases to sell, and other savings.

In the next decade, we'll need to work out Medicare, which is a hydra of at least three heads: tax rates, benefit levels and organization, and medical inflation. It's a beast. And fodder for another article.