Bleeding Europe — MY COMMENT

by John Brian Shannon

In one of Paul Krugman’s latest blogs (which are always great reads) entitled “Bleeding Europe” our favorite Professor takes the side of all the Eurozone nations — except for the one that has to pay the bills — Germany!

Which is fine, because those countries have been beaten up by everyone including, well, everyone. They need as many powerful voices on their side as possible, so that they can continue to run huge deficits forever — and have Germany foot the bill.

And, why not? It’s all Germany’s fault for WWI and WWII, isn’t it? Ergo, they are punishing Germany and it feels good!

The fact is, that all of the people who started both wars are long dead, as are most of the brave soldiers who were told to fight brother Europeans because the politicians of the day on both sides couldn’t get their diplomatic acts together.

But it’s a great relationship while it lasts, isn’t it? Spend like drunken sailors and have Germany’s grand-kids pay for it and if they so much as dare to hint this is a bad deal, then browbeat them with WWII-era propaganda until they stop.

It is not a sustainable relationship — even for the Germany-haters. Why? Because the combined debts and deficits of southern Eurozone nations are so large, soon even Germany won’t be able to cover the losses at the casino and they will all sink into the economic abyss together. (Then it will be; “Hey, South Korea, wanna buy the Eurozone, cheap? Their assets are mortgaged to 200% of their value, but maybe you could kick-start it.”)

It is not a sustainable relationship for 21st-century German taxpayers either, all of whom have nothing to do with WWI or WWII by the way, and are tired of paying for the neighbour’s “no wine is good enough for us” trips to the casino!

But in the end, all of this will come to a crashing halt when German voters have had enough of footing the bill for spendthrift nations who badmouth Germany at every opportunity.

And then watch what happens. Not only will the good ole days of eat, drink and be merry on Germany’s tab be well and truly OVER, the credit-ratings agencies themselves will dictate what kind of budgets countries like Greece are allowed to run. A sudden transition to balanced-budgets would be quite the shocker! If you happen to be visiting southern Europe when that happens — be sure to duck.

I think German Chancellor Angela Merkel is the smartest woman on the planet. For now, she is paying their way, biding her time, no doubt biting her tongue and just waiting for the almost inevitable day that the credit-rating agencies finally take control of overspending Eurozone member-state economies.

If and when that happens she will suddenly be recast as the sweet and gentle fairy-godmother of Europe who convinced her countrymen and women to pay the bills for her free-spending southern neighbours for as long as humanly possible. Sie haben meine Bewunderung, große Dame!

JOHN BRIAN SHANNON

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Looking Through the Wrong End of the Telescope Won’t Fix the Economy

by John Brian Shannon

Quick, think fast! Why is there a huge liquidity trap in America?

If you can answer that question, then you’re not ‘looking through the wrong end of the telescope’ blaming the symptoms, instead of the root causes of the present American economic problem. Which, some other people (not you and me) are probably doing right now.

Let’s call some of those people 2012 Republican politicians.

The present excess-liquidity situation has come about as a result of some economic policies of the United States, which gained traction during President Reagan’s first term in office. It was a different world then and the 40th President acted swiftly and responsibly to restart the U.S. economy. I quote the New York Times reportage of President Reagan’s inauguration speech.

He said “progress may be slow,” but his “first priorities” would be to “get government back within its means, and to lighten out punitive tax burden,” a reference to his campaign pledge to balance the Federal budget and cut personal taxes to 30 percent in three years. – The New York Times, quoting President Ronald Reagan’s inaugural speech of January 20, 1981.

Personal and corporate tax rates have dramatically fallen since then and the plan to cut the tax rates and add unprecedented billions of dollars of stimulus spending to the economy (much of it went to U.S. defense contractors) worked to grow the American economy and the economies of other Western nations, such as the UK, Canada and Spain. Yes, it was that much stimulus.

Cold War allies such as Canada, received generous NASA and U.S. defense-related contracts from the administration, which in turn helped to boost the economies of Western alliesthereby helping the U.S. economy.

How’s that?

During Ronald Reagan’s terms in office, most cars and trucks registered in Canada were manufactured by U.S. corporations and the same held true for so-called ‘white goods’ (refrigerators, stoves, dishwashers, etc.) and large volumes of many other products — especially construction industry products and materials. Not to mention Canada’s purchase of 110 F-18’s in 1981.

When your allies have money, they place orders with U.S. corporations. When your allies don’t have enough money to purchase American goods and services, sales fall off dramatically.

Of course, there was much more to it than that. America was deep in the economic doldrums in 1980/81 and the American psyche was still reeling from the Vietnam War, a recession and a loss of American prestige following the dual shocks of the Arab Oil Embargo and the American hostages in Iran.

President Reagan stepped up and hit a ‘home-run’ every day for the U.S.A and got America to believe in itself again. The President authorized the Chrysler bailout, other bailouts and some exceptional mergers so that companies would not be forced to shut their doors and take all those middle-class jobs with them.

Economically speaking, by adding significant hundreds of billions of stimulus dollars to the U.S. economy (perhaps as much as 1 trillion dollars, depending on who is doing the counting) and lowering personal and corporate tax rates, the Reagan administration employed a two-pronged approach to foster growth in the American economy. And it worked.

Fast-forward to 2012. Trying to employ those same policies now when we have reached a state of diminishing returns on them (as there isn’t much left to cut without shutting down America) can only be called tinkering with the economy. Back in the 1980’s huge cuts in tax rates were possible and allowed a decade-long spending spree by American citizens and corporations.

Now that personal and corporate taxes are so low and have been for some time, there is no longer room for huge tax cuts of 10% or more. All the juice has been squeezed out of that lemon.

The policies which allowed huge growth in the 1980’s (mega-stimulus and tax cuts) were financed by running massive deficits which were never paid off — as President Reagan had responsibly promised would eventually happen.

When governments run obscene deficits designed to stimulate the economy during times of economic crisis it is an utterly logical thing to do. When successive governments don’t return to balanced budgets and don’t paydown the accumulated government debt during the ‘good times’ as John Maynard Keynes suggested, governments ability to assist in subsequent recessions are constrained (for a telling article on that, read here) – but this time around the constraint is the liquidity trap.

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Now we have people writing to members of Congress, to the media and to each other, asking for fixes to the symptoms of the economic problem, instead of the cause. It gets worse, we now have candidates for high office blaming the symptoms instead of the cause.

Why are we in a liquidity trap? The answer my friend, is right below.

A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth.

A liquidity trap is caused when people [or corporations] hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels. – Wikipedia

How can injections of cash into the private banking system by a central bank lower the interest rates when the interest rates are effectively zero?

What we are left with; The banks are full to the top with deposited money from individuals and corporations. There is low demand for goods and services. There is little demand for money to loan. There is little incentive for banks to loan money as there is presently such a small ‘spread’ between prime rate and mortgage rates. There is little room for personal and corporate tax rate cuts — as the largest cuts have already taken place over the past 30 years.

What all of this means is the government has little in the way of actual controls over the economy. When both major levers (monetary and fiscal) don’t work, all that is left is minor tinkering.

When two of the most important economic levers are temporarily out of order, we just can’t stand around blaming the symptoms or wishing for a better day. It is now the time to bring in other levers to spur the economy like a reasonable (export) tariff of say, 5-8% on all raw resource exports, such as petroleum (the U.S. is a net exporter of petroleum) coal, minerals and metals.

This would begin to add cash to the federal coffers from day one and every penny should be used to stimulate actual jobs.

The U.S. could hire 100,000 additional police as President Clinton once did – many of whom are still paying taxes and contributing to their local economies, by the way.

Also, more teachers, or teachers with higher credentials could be educating a better future workforce.

‘Shovel-ready’ national infrastructure programs could create jobs for out-of-work and under-employed labourers.

Want to create demand in the economy? Give a few million Americans jobs! Watch how much tax revenue is generated. Watch the sales of everything from work-appropriate clothing, to cars, gasoline, home appliances and so much more, skyrocket in less than a year and continue to contribute to the economy.

People don’t want food stamps if they have a good-paying job. People don’t want welfare if they have a decent job. And people don’t want to burden social agencies when they can afford to live independently.

Looking through the right end of the telescope, there’s nothing but solutions in all directions. A moderate tariff on raw resource exports is a good place to start.

John Brian Shannon

ABOUT JOHN BRIAN SHANNON

I write about green energy, sustainable development and economics. My blogs appear in the Arabian Gazette, EcoPoint, EnergyBoom, Huffington Post, United Nations Development Programme, WACSI — and other quality publications.

“It is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.”

Green Energy blog: http://johnbrianshannon.com
Economics blog: https://jbsnews.wordpress.com
Twitter: @JBSCanada

 

Stimulus or Austerity: Can Either Succeed?

by John Brian Shannon

In the age-old debate between stimulus and austerity, many commentators fail to realize both schools of thought could be correct — and in fact, both are.

For one, look at the uncountable billions of stimulus added to the American economy during President Reagan‘s two terms. Unprecedented billions were directed towards defense, R&D, infrastructure — and even to Chrysler — although, strictly speaking, those were loan guarantees.

Do loan guarantees count as stimulus? Almost. And those guarantees tied up billions of U.S. Government dollars until they were no longer required — and served to establish and add gravitas to a new momentum in the U.S. economy. Courtesy of President Reagan’s leadership, I hasten to add.

When we look at historic stimulus, it works. When the stimulus is added at the first sign of recession it is most effective. Once all those factories are shuttered, trying to add stimulus to improve the economy is an uphill battle, every day.

The Marshall Plan to rebuild Europe at the end of WWII is a classic stimulus success story. Anyone who visited 1945 Europe and then visited again in 1960 can attest to that! About $40 billion dollars were used to stimulate the European economy — a lot of money in those days, even by United States’ standards.

Think of stimulus spending as emergency funding to keep the economy functioning. It really only works when applied immediately and at the first sign of recession.

For two, austerity does work. Although, it must be said, removing obscene debt and irresponsible deficits from a large economy constitute a major structural change. It is no band-aid solution — although as I said above, band-aids do work.

Austerity fixes the underlying structural problem — while stimulus fixes the symptoms, if you will.

There is no doubt about the Baltic austerity success story and there are others. You need only look as far as Canada in the 1990’s. Canada’s credit rating was on the rocks, the economy was in the tank and economic vital signs were heading in the wrong direction.

Prime Minister Jean Chretien and his astute Finance Minister Paul Martin, decided to adopt aggressive Canadian-style austerity and it worked (short-term pain for long-term gain) better than anyone had imagined. It just took some political leadership, unusually good communications with voters and some serious brainstorming.

A final word on economist’s everywhere. European economists work for Europe’s well-being, Chinese economists work for China, er, directly! While American economists work to arrange things to America’s advantage — you can’t begrudge any side for ‘playing for the home team’.

If the New York Times, Nobel Prize winning economist Professor Paul Krugman believes that it is in America’s best interests to float the economy with stimulus money, then he is right. Of course while agreeing with him, I always point out that stimulus is a merely a temporary fix and that additional deficit-financing (and accumulated debt) should be ‘pared down’ during the boom times.

Just as John Maynard Keynes suggested.

When this is not done, decade after decade, or should I say, recession after recession, it adds to the unbalanced economy and the entire economic structure is thereby weakened.

For now, stimulus — although it is almost too late for band-aids. Then, during the next boom, adroit movement towards zero-deficit financing — then, once that is achieved, regular scheduled debt paydowns after that.

Stimulus will stop the worst of the present economic malaise from taking an even higher toll — and later, austerity will begin to improve the entire structure of the U.S. economy.

John Brian Shannon

The Prescription for America’s Economy

by John Brian Shannon

As much as I’d like to simply jot down the prescription to cure what ails the American economy, I won’t.  Not before discussing it with you first.

Any doctor will tell you it is better to question, test, diagnose — and then prescribe. So, on that doctorly note let us commit to what ails the U.S. economy before I go off writing prescriptions.

It seems that America is not feeling too well, although she is still plenty powerful. Just sort of an uneasy feeling, a lack of confidence and somewhat limited flexibility. Underneath it all, she is sitting on top of a mountain of debt which just feels wrong.

Ed Hall’s excellent website has numerous links for visitors who may be interested in America’s debt and deficit information.

Here is a snapshot of what it said today:

The Outstanding Public Debt as of 28 Jul 2012 is:
$ 1 5 , 8 8 3 , 9 7 2 , 7 6 5 , 4 7 2 . 1 6

The estimated population of the United States is 313,211,460 so each citizen’s share of this debt is $50,713.26.

The National Debt has continued to increase an average of $3.90 billion per day since September 28, 2007!

If we add to that debt, the total unfunded liabilities and expenses of the United States, the total  liability of the U.S. federal government rises to an estimated 130-140 trillion dollars when all entitlement spending obligations are factored in. Ouch.

Not quite a ‘Code Blue’ condition, but a little too close for comfort. Time to call a doctor – and a good one!

Economist and former senior federal economic policymaker, J. Antonio “Tony” Villamil, the dean of the business school at St. Thomas University, who served as U.S. undersecretary of Commerce for economic affairs during the George H.W. Bush administration, commented in the Miami Herald on America’s debt situation.

The federal debt/GDP ratio is on an unsustainable path, with the federal debt held by the public surpassing 100 percent of GDP in a few short years, according to the non-partisan Congressional Budget Office (CBO). If we desire stronger economic and employment growth, we need a market-credible, long-term fiscal plan that places the federal debt/GDP ratio on a declining scale. Read the entire article here…

Dean Villamil has labeled the present era as “The New Normal” with cyclical (short-term) and fundamental (long-term) factors at play “that suggest a continued period of sluggish economic activity and slow employment growth…”

He expects the cyclical problems — such as the burst real estate bubble and a huge build-up of private debt, both of which conspired to create the largest economic contraction since the Great Depression — will diminish over the next 12 months leaving America with (only!) some fundamental economic challenges to solve.

[Fundamentally]… at this stage of an economic cycle, the economy should be expanding at a 3-percent to 4-percent annual rate, not at the tepid 2 percent or less, as is the case today. – Prof. Tony Villamil

Professor Villamil believes as I do, that growth-based policy is the better way to solve the economic juggernaut squarely ahead of us. When GDP grows faster than the federal debt, the debt-to-GDP level falls correspondingly, which is a happy side-effect of more and better-paying jobs for citizens, higher revenues for governments and a better educated workforce on account of all those parents who can now afford to send junior to university.

Canada took the ultimate shortcut towards these goals some time ago and it was hailed as a spectacular success. The Canadian government instituted a 7% Goods and Services tax on practically everything sold in Canada, from bubble-gum to skyscrapers and everything in between. This raked in uncountable billions of dollars for the government which allowed it to eliminate the huge deficit, make significant paydowns on the accumulated debt, finance massive job creation programs and restructure it’s financial obligations. It’s an outstanding and well-documented success by any measure.

This success story illustrates a major economic leap for Canada and one easily tailored to the U.S. situation. It should be carefully considered by U.S. policy-makers.

One problem Canada wasn’t required to face, was an economy awash in trillions of dollars of ‘easy money’  which led millions of American consumers towards insolvency when the economy began changing in response to economic events occurring outside the U.S.A. in 2008.

For example, the monetary base, due to Fed action, has exploded to $2.6 trillion as of May 2012. This could create an inflationary spiral in the longer term, causing another great recession. Read Dean Villamil here…

For those who support a massive injection of cash into the economy by the government, this is a fine short-term way to stimulate the economy, provide employment, increase taxation revenue for governments and to temporarily stabilize the economy. It is a fine idea and worthy of serious consideration by American policy-makers.

But while stimulus spending would help the economy short-term, it does not address the core issue of the non-growth government policies which caused America’s economic woes in the first place.

I promised you a prescription America, and here it is;

  • A federal 7% Goods and Services Tax on everything sold inside the country beginning in 2013. Some amount of revenue-sharing should occur. If 50 billion dollars of GST are collected in the state of California by the federal government by Jan 1, 2014, for example, California should receive half that amount back from the feds — which the state can then use to spend on it’s own infrastructure and debt-reduction program.
  • Of the federal government’s portion of the GST — half of it should go to paydown the federal deficit until there is no deficit.
  • The other half of the federal government’s portion of the GST should be used for ‘shovel-ready’ infrastructure projects designed to cut unemployment levels in every state.
  • The planned budget cuts to U.S. military spending and other federal spending cuts should still occur as they are necessary and overdue, but could benefit from a relaxed implementation schedule.
  • A comprehensive, results-oriented, duplication of services and waste reduction study by all federal departments with the emphasis on cost-reduction and streamlining of services.
  • Which easily-treatable illnesses could increase American productivity if that cost was covered by government? We need a list! Spending mere pennies per worker here, can save the country many billions of dollars of lost productivity.

Short-term stimulus, combined with a national sales tax – the proceeds of which to be evenly split with the states, eventual elimination of the federal deficit, massive spending on national infrastructure projects, continued cuts to military spending on a slightly-relaxed schedule, national waste/duplication elimination, along with increases to productivity courtesy of free (minor disease) health care – will have America feeling back to her old-self within ten years — and after that, feeling ever better!

In fact you’re looking better now America — just reading your prescription!

Related articles
About John Brian Shannon

I write about green energy, sustainable development and economics. My blogs appear in the Arabian Gazette, EcoPoint, EnergyBoom, Huffington Post, United Nations Development Programme, WACSI — and other quality publications.

It is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Green Energy blog: http://johnbrianshannon.com
Economics blog: https://jbsnews.wordpress.com
Twitter: https://www.twitter.com/#!/JBSCanada

The Canadian Austerity Success Story

The Canadian Austerity Success Story | 12/07/12
by John Brian Shannon John Brian Shannon

The Canadian success story on deficit elimination, debt reduction and significantly, strengthening the economy by adding jobs and improved economic performance during troubled economic times has been well-documented.

The Canadian icon known as MacLeans Magazine featured an outstanding piece by LEAH McLAREN in the October 10, 2011 edition entitled I told you so – which covered Prime Minister of the UK, David Cameron‘s speech to a joint session of the Canadian Parliament (both the Senate and the House of Commons) where PM David Cameron made a number of positive comments regarding Canada’s economic success.

Cameron commented:

“Canada got every major decision right” in the past few years of global market turmoil. He lauded the strength of both the Canadian banking system and our economic leaders, who, he said, “got to grips with its deficit” and were “running surpluses and paying down debt before the recession, fixing the roof while the sun was shining.”

Cameron’s admiration for Canada’s relatively peachy fiscal position stands in stark contrast to his dim view of his Eurozone neighbours. On the topic of Europe and the U.S. getting their own houses in order, Cameron said; “This is not a traditional, cyclical recession – it’s a debt crisis…”

He went on to say;

“When the fundamental problem of the level of debt and the fear of those levels, then the usual economic prescriptions cannot be applied.” – MacLean’s Magazine.

Read the entire article here…

MacLean’s is not the only publisher to write on this topic. Canada’s Globe & Mail have also published articles discussing the Canadian economic success story of the 1990’s and early 2000’s.

A seminal article by LOUISE EGAN and RANDALL PALMER ran in the Nov 21, 2011 edition of the G&M entitled The lesson from Canada on cutting deficits — a short excerpt of which appears below. Please take the time to read and save the entire article.

“Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid.

Sounds like today’s Italy or Greece?

No, this was Canada in 1994.

Bids eventually came in, but that close call, along with downgrades and The Wall Street Journal calling Canada “an honorary member of the Third World,” helped the nation’s people and politicians understand how scary its budget problem was.

“There would have been a day when we would have been the Greece of today,” recalled then prime minister Jean Chrétien, a Liberal who ended up chopping cherished social programs in one of the most dramatic fiscal turnarounds ever.

“I knew we were in a bind and we had to do something,” Mr. Chrétien, 77, told Reuters in a rare interview.

Canada’s shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.

“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank, Macdonald-Laurier Institute, who has examined the lessons of the 1990’s.

But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.

It would eventually oversee the biggest reduction in Canadian government spending since demobilization after the Second World War. The big cuts, and relatively small tax increases, brought a budget surplus within four years.

Canadian debt shrank to 29 per cent of gross domestic product in 2008-09 from a peak of 68 per cent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.

For Canada, the vicious debt circle turned into a virtuous cycle that rescued a currency that had been dubbed the “northern peso.” Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

It is far from a coincidence that the recent recession was shorter and shallower in Canada than in the United States. Indeed, by January, Canada had recovered all the jobs lost in the downturn, while the U.S. has hardly been able to dent its high unemployment.

“We used to thank God that Italy was there because we were the second worst in the G7,” said Scott Clark, associate deputy finance minister in the 1990’s.

Canada’s experience turned on its head the prevailing wisdom that spending promises were the easiest way to win elections. Politicians of all kinds and at all levels of government learned that austerity could win.”  read more…

For those unfamiliar with examples of successful austerity, Canada holds great promise. There are others to discuss in the coming days – which will illustrate austerity can actually lessen the unfavourable effects of decades of excessive spending by governments and improve the economic position of a nation.