Why Republicans should stop gloating over Greece

For years — at least since President Obama took office — GOPers have warned that America's growing national debt will spark a catastrophic financial crisis. But it hasn't happened. Interest rates have remained super low, the dollar has strengthened, and the economy continues its recovery from the 2007-2009 downturn.

Some Republicans have noticed this inconvenient reality. And they have adopted a secondary position — essentially, "we're not wrong, we're just early." The day of reckoning will eventually arrive, they continue to argue. Until then, they say, keep an eye on Europe and its ongoing debt and currency troubles for a preview of bad things soon coming here. In particular, look at Greece's long depression as a cautionary tale about overspending, big government, and what happens when left-wing politicians, to quote Margaret Thatcher, "run out of other people's money." Or as Paul Ryan has put it, "We are on the same path as Greece. We're just not where they are right now."

After Sunday's referendum rejecting a European bailout plan, it seems that Greece has once and for all run out of other people's money — notably Germany's — and will soon be headed out of the euro and into more years of economic suffering. For many on the right, this is a simple morality tale of sloth, profligacy, and well-deserved comeuppance. As conservative talk radio Hugh Hewitt tweeted Sunday night:

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Similar sentiments from popular conservative blogger David Burge:

All of which is roughly true, as far it goes. Greece is not Switzerland on the Aegean. Greece is a poorly run, uncompetitive country with a fat welfare state. It ranks 130th on the Heritage Foundation's Index of Economic Freedom, right between Suriname and Bangladesh. A little touch of South America in Europe. Greece fibbed its way into the eurozone with dodgy budget statistics, benefiting greatly from membership therein. Guilty on all charges.

If that's where it ended, GOP gloating on Greece as a cautionary tale for America would be on point. But there is much more to the story of Greece's collapse.

Greece is the guy who lied to the bank and blew all the loan money — but then he lost his job because the company he worked for was incompetently managed. Greece made lots of mistakes, but so did the inflation-phobic European Central Bank. Europe's version of the U.S. Federal Reserve failed to do its job and respond effectively to the financial panic that began in the United States in 2007 and then spread to the eurozone. As the region's economy began tanking in 2008, the ECB raised interest rates. And then in late 2010, again worried about inflation, the ECB began a second cycle of monetary tightening. These two massive monetary mistakes "seem to have not only caused [Europe's] two recessions but sparked the sovereign debt crisis and gave teeth to the austerity programs," writes economist David Beckworth in a new working paper, "The Monetary Policy Origins of the Eurozone Crisis."

You can see a similar story here. Even though the U.S. economy was already in recession in 2008, the Fed left interest rates unchanged between April and October while its policymakers talked tough about inflation. The subprime crisis may have caused the initial downturn, but the Fed helped turn it into the Great Recession. Eventually, of course, the Fed began slashing rates and buying bonds through its quantitative easing program. So did the ECB, only much later. If the ECB had been at least as aggressive the Fed, there is good reason to think Europe's recession would have been milder, especially for the more fragile nations, like Greece. Instead, the Greek economy has contracted by 25 percent over the past six years, while its debt load has risen by 50 percent. And when your economy isn't growing, debt burden become much harder to handle.

It's not surprising this expanded story has little attraction for Republicans. If the ECB failure's played a big role in Greece's problem, then it might mean accepting that the weak U.S. recovery is at least as much about bad Fed monetary policy as it is about "Obamanomics" — if not far more so. Likewise, the debt-only explanation for Greece's troubles ignores the dampening effect of tax hikes and spending cuts on its weak economy, effects worsened by the ECB's tight money policy. But that policy combo — tight money plus fiscal austerity — is the policy solution that many Republicans and conservative "supply-side" economists have been recommending for the U.S. economy.

Sorry, Republicans, but Greece is as much a cautionary tale about bad, deflationary macroeconomic policy as it is one about too much debt and big government. Save the schadenfreude.