A GENERAL strike; protesters on the streets; parliamentary battles over austerity measures needed to unlock rescue funds; and a sinking economy with an ever bigger debt burden. The situation in Athens this week is grimly familiar—and not just because Greece has had so many similar weeks over the past couple of years. There are also eerie echoes of the developing-country debt crises of the 1980s and 1990s.
The experience of dozens of debt-ridden countries in Latin America and Africa holds lessons that Greece’s rescuers ought to heed. For years, the IMF and rich-world governments tried to help them with short-term rescue loans. But the most indebted started to recover only when their debts, including those owed to official creditors, were slashed. In Europe, Poland also provides a precedent: its economy took off in the 1990s after it too was given a break by its creditors.
Greece is in the same boat. Provided that the country’s parliament passes the 2013 budget on November 11th, a fresh infusion of rescue funds will stave off imminent catastrophe (see article). Yet Greece’s economy won’t recover until it has more debt relief. That should involve, broadly, a two-part process: first, agree on a plan to reduce debt if certain targets are met; then cut the debt in stages over the next decade.
Frogs, as everyone has heard, will sit quietly in a pot of steadily warming water until they are boiled alive. This is not actually true. In reality, frogs will jump out of the pot as soon as it gets too hot, because scalding water hurts like hell. Similarly, anxiety about student-loan debt has reached a boiling point over the past year, and the American public seems increasingly inclined to bail out of the higher-education system.
The first signs appeared last fall, held above the heads of Occupy protesters who saw their indenture to banks as an intergenerational betrayal. “I went to college like I was told I should, and now I owe $45,000, $80,000, $125,000, in a ruined economy with no jobs to be found,” they said. The numbers were designed to shock, and they did, appearing on newscasts and Web petitions nationwide.
Last year also saw the emergence of one of those sticky shorthand statistics that defy conventional wisdom: $1-trillion in accumulated student-loan debt, more even than credit cards. Credit cards! Anyone who lives in this country has a gut sense of how much stuff charge-happy Americans buy with their Visa and American Express cards. Whole mountains and oceans of consumer goods. And somehow college costs even more than that?
One trillion is the last big number in modern life, the only sum that can still impress us with incomprehensible size. Why, people wondered, are our colleges hanging a weight that big around our necks? Sending your kids to college used to be an occasion for pride and a little sorrow, a passage to adulthood and the next phase of life. It has become a looming financial chasm for middle-class families, a source of constant, growing dread.
The recession officially ended nearly two and a half years ago, in June 2009, but for the generation of young adults who’ve been trying to take their first steps into adulthood, its effects could shape the future for decades to come.
Why is this recession different from other sharp downturns? The standard economic indicators fail to tell the whole story. Yes, unemployment rates for young people remain at the record-high levels they hit at the Great Recession’s peak in 2007, but this is typical for young workers, who tend to be the last group that recovers after a recession—and tend to feel its effects far after the economy has rebounded. The young baby boomers who bore the brunt of the 1981-1982 recession had lower earnings even 15 years after the economy recovered, and during that downturn the economy only lost half as many jobs as during the Great Recession. For youth entering the workforce today, not has the sour economy delayed their careers; they are entering a workforce that offers historically low wages and, unlike their parents, they’re coming in with massive amounts of student-loan debt.
Dēmos, the think tank for which I work, together with Young Invincible, a policy and advocacy group focusing on young people, recently released “The State of Young America,” a report that shows just how hard young people have been hit (editor’s note: Dēmos is the Prospect’s publishing partner). A poll we commissioned of young people ages 18 to 34 shows that 32 percent of employed college graduates—and a shocking 53 percent of young workers with only a high school diploma—are working jobs that do not advance their careers. Given that the Federal Reserve, in its most recent projection, predicts unemployment will remain at about 8 percent until the end of 2013, and 7 percent until the end of 2014, that means many young workers will not get their first career-track job for another two or three years. As with the youth of the 1980-81 recession, the late career start will in turn lead to lower lifetime wages. Combine a dead-end job with a pile of student loans, and you can see just how much this might affect the country’s future middle class. Twenty-five percent of young college grads have more than $25,000 in student loan debt; 46 percent have more than $10,000. That’s many times what their parents borrowed. In 1997, the sum of all outstanding student loan debt, public and private, in the U.S. totaled just $92 billion dollars. Today, that total is $920 billion and climbing, a 900-percent increase. Millennials’ soaring debt burden is largely due to crushing college tuition rates that have risen far faster than inflation. In 1968, when the first boomers entered college, a student could have paid for tuition and fees at a public university by working just 6.2 hours a week at minimum wage; today, they’d have to work full-time just to cover tuition costs.
EVER since the euro zone’s sovereign-debt crisis began in earnest two years ago, the common fear has been that the sheer bulk of Italy meant it was too big for other countries to bail out, should it sink.
A quieter hope was that Italy’s size might also save it. If investors rushed out of Italian bonds, went the whispered argument, there were few big markets where they could then park their euros and still get a decent return (the smaller German bond market could not accommodate everyone without yields falling sharply). Scared investors often rush into the big and liquid market for US Treasuries, despite anxieties about America’s public finances. That safety-in-numbers logic ought to keep Italy from trouble, too.
Some hope: Italian bonds are now a badge of shame for banks who are rushing to dispose of them (see article). Their ten-year yields have jumped beyond 7% and, once euro-zone yields reach these levels, they tend to spiral out of control.
For some this proves that Italy is an oversize Greece: a country with a debt burden that is too heavy for it to bear and, unlike Greece, for others to help shoulder. There are uncomfortable parallels. Both countries’ public debts have long been bigger than their annual GDP. Both suffer crippling rigidities in their economies. But there are enough differences in Italy’s finances, and enough potential in its economy, to mean it could stay solvent if its borrowing costs could be capped at, say, 6%.
Start with the finances. One reason why markets eventually shunned Greece, Portugal and Ireland was the uncertainty about how far their debts might rise. All three had huge budget deficits (so were adding to their debts at an alarming rate) and were struggling to keep their economies on track, while at the same time cutting spending and raising taxes. Greece’s public debt was forecast to rise towards 190% of GDP, before some of its private-sector creditors agreed to a bigger write-off of what they are owed. Italy’s public debt, by contrast, is set to stabilise at around 120% of GDP in 2012. Its government will run a small surplus on its “primary” budget (ie, excluding interest costs) this year, and an overall deficit of less than 4% of GDP, below the euro-area average.