ROBERT SIEGEL, host: The U.S. is hardly alone. Many other countries have faced debt crises before or do so now. Some are doing well, some not. And the U.S. can draw lessons from them all. NPR's Tom Gjelten looks at three cases: Canada, Britain and Spain.
TOM GJELTEN: First up, the Canadians. They had a debt crisis of their own in the mid-'90s -overspending, a big budget deficit, the country put on a credit watch, looking at a possible downgrade. And then, the final jolt, David Henderson, a Canadian-born economist, recalls two articles in The Wall Street Journal.
DAVID HENDERSON: One referring to the Canadian dollar as the northern peso, and the other thing that Canada was becoming a Third World country, which is clearly an exaggeration. But it was scary to a lot of Canadians.
GJELTEN: That's all it took. The government swung into action with an austerity program - mostly spending cuts, some tax increases. The debt was driven down. Canada now enjoys economic growth and an unemployment rate almost two points below the U.S. level. Lesson for the U.S.: When faced with a debt problem, act promptly and decisively. Of course, it helped that Canada has a parliamentary system. The head of the government is also the leader of the majority party. No divided government there, says David Henderson, now at the Naval Postgraduate School.
HENDERSON: The downside of a parliamentary system is, you can get a lot of bad policy quickly. The upside of a parliamentary system is, you can get a lot of good policy quickly.
GJELTEN: The Canadians must be rolling their eyes right now as they consider what's going on in Washington. Second case: Great Britain, also with a big debt problem. The conservative-led government that took office last year promptly cut spending and increased taxes. The rating agencies were pleased, and the country kept its triple-A status. Simon Johnson is with the Peterson Institute for International Economics.
SIMON JOHNSON: The good part of the U.K. story is that they tried to get ahead of the problem and undertake some austerity before the financial markets started pushing up their interest rates.
GJELTEN: Again: Get ahead of the problem.
GAYLE ALLARD: That's the big mistake Spain made, just to dawdle over the structure of reforms for months and months and months and months.
GJELTEN: Gayle Allard is at the Instituto de Empresa in Madrid. Here then is what we see from Canada and Britain on the one hand versus Spain on the other: Political squabbling will hurt you. Investors in financial markets decide you're not moving quickly enough. The credit rating agencies downgrade your debt. It's harder to get banks to loan you money. By then, says Gayle Allard, the damage is done.
ALLARD: Once markets turn against you, your interest rates are up and you've got higher borrowing costs for a time.
GJELTEN: Making it all the harder to reduce your debt. That's part of Spain's problem now. Plus, there's something else. The overall Spanish economy has gotten smaller. This is a debt issue, because a country's debt weighs more heavily when its economy is not growing. The richer you get, the more debt you can handle. The more your economy shrinks, the more your debt becomes a burden. What counts is the debt to GDP ratio.
KEMAL DERVIS: You want to get it down by a combination of reducing the debt but also growing GDP.
GJELTEN: Kemal Dervis of the Brookings Institution notes that India once had a big debt problem but simply outgrew it. This is where Spain is failing. It's making some progress on its deficit, finally, but it's not getting the economy to grow. And this could turn out to be a problem for Britain as well. Kemal Dervis wonders whether the spending cuts and tax increases will take so much money out of the British economy that they will hamper growth.
DERVIS: I do believe that Britain has a serious debt problem and so I'm sure that, you know, efforts are definitely required but one has to look at both the growth side and the debt side simultaneously.
GJELTEN: The question is whether debt reduction efforts might in some cases make it harder for a country to grow its way out of a debt hole. Simon Johnson of the Peterson Institute says Britain could be a test case.
JOHNSON: The jury is still out, actually. It remains to be seen what happens to the economy, what kind of adjustment they get.
GJELTEN: So, the lesson here for governments: Aim not only to make the deficit shrink, but to make the economy grow. And repeating the other lessons: Act swiftly and boldly, stay ahead of the markets, lest they turn on you, and remember: economics is never separated from politics - not in Canada, not in Britain or Spain, and clearly not in the U.S. Tom Gjelten, NPR News, Washington.
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