May 14, 2012
Can Obama Learn from the Successful Economies?By Warren Beatty
Will Obama learn from Sweden? Will he learn from Canada? Or will he cling to the European socialist economic model that is currently failing?
Anders Borg, Sweden's finance minister, reduced Sweden's deficit and created economic growth. There is one thing that Borg did: "Since becoming Sweden's finance minister, Borg reduced the size of government and cut taxes. His 'stimulus' was a permanent tax cut."
Canadian Prime Minister Stephen Harper said that Forbes magazine selected Canada as the No. 1 country in the world in which to do business. Forbes stated, "Credit a reformed tax structure." On New Year's Day, 2012, Canada's corporate tax rate -- both federal and provincial rates combined -- fell to 25%, giving Canada the lowest rate in the Group of Seven countries and a more competitive economy on a global basis. In annual steps, Canada lowered the federal rate from 22% to 15%, while the provinces now have a common rate of 10%. The gradual lowering of the corporate tax rate appears to have resulted in little loss in corporate tax revenue.
Between 1992 and 1996, Canada's central government departments saw their budgets cut by an average of 20%. Aware that efficiency savings and pay freezes alone would be insufficient, the prime minister Jean Chrétien (Canadian PM from November 1993 until December 2003) ordered that all non-essential national government spending be cut. Under a system called Program Review, a committee of senior civil servants demanded that all departments nominate spending programs that a lean national government should not be funding.
Canada, in April 2012, added far more jobs than expected and marked the biggest two-month employment gain in more than 30 years. With a Canadian population one-ninth the size of that of the United States, it would be as if the U.S. economy had added about 1.3 million jobs in two months. Economists say the Canadian unemployment rate would be 6.4% if reported in the way the U.S. calculates its rate. The Canadian economy has recovered all the output and jobs, including full-time positions, that it lost in the 2008-09 recession.
Now let's look at what has not/is not working in what is increasingly becoming socialist Europe -- namely, the European Union (EU); its (mostly rejected) austerity program; and France, Greece, and Spain.
European Union and austerity
In place of austerity, there is a growing belief that there may be some magical, pain-free way out of this economic crisis, but this is an illusion. Resolving the eurozone crisis depends upon the continuing willingness of Germany to bail out irresponsible economies. But why should Germans continue to write checks for people who are not prepared to accept the consequences of their own fiscal irresponsibility?
German chancellor Angela Merkel, on Thursday, May 10, 2012, told new France president Françoise Hollande, an avowed socialist, that there is no alternative to spending cuts and deficit cutting, stating that "growth through debt" would hinder Europe's economic recovery. But that is not the message Hollande wanted to hear. He proposes to raise taxes on the rich and to pour money into France's public service, actions he says will create thousands of new jobs. (Where have we heard that before?) Merkel delivered a message of her own, telling France and Greece not to abandon debt-cutting policies as a result of elections that saw both countries turn against austerity. Said Merkel, "Growth through debt would throw us back to the beginning of the crisis."
France is struggling with weak economic growth, a huge trade deficit, 10% unemployment, and strained public finances that prompted ratings agency Standard & Poor's to cut its AAA credit rating to AA+ in January 2012. But did those facts keep France from electing François Hollande, an anti-austerity advocate? No! Hollande was elected on the basis of speeches advocating growth instead of austerity. After his election, Hollande told supporters, "Austerity can no longer be inevitable! In all the capitals ... there are people who, thanks to us, are hoping, are looking to us, and want to finish with austerity." That would be wonderful if it were remotely realistic.
Further, Hollande wants the "Treaty on the European Stability Mechanism," seen as crucial to ensuring the survival of the single currency, to focus more on encouraging growth instead of austerity. Benoît Hamon, spokesman for Hollande's Socialist Party, said that the "politics of austerity" was failing to improve the continent's financial crisis. "We want to renegotiate [the treaty]. If nothing moves, the treaty will not be submitted for ratification."
Greece's banking system is insolvent, its national credit is plummeting, the flight of capital continues unabated, and businesses are going bankrupt in record numbers. Youth unemployment has overtaken Greece and is now an almost unbelievable 53.8%. Greece's overall unemployment rate is 21%. "With unemployment continuing to rise, it may yet push more Greeks into voting for anti-austerity parties," said Alastair Newton, senior political analyst at Nomura, a Japanese multinational financial services conglomerate.
Germany warned that Greece would not receive more financial aid unless it fulfills all the conditions of its international bailout and implements austerity measures. Alexis Tsipras, the leader of the Left Coalition, declared Greece's austerity policy pledges under its EU/IMF rescue null and void. That declaration brought this response from Martin Schulz, a German politician and president of the European Parliament: "The agreements must be respected. I don't think we can or should renegotiate."
Socialist Party leader Evangelos Venizelos was the third party leader this week to fail at the task of creating a coalition Greek government. Greek voters, furious at austerity measures taken in return for international bailouts worth €240 billion, rejected Greece's two formerly dominant parties, the socialist PASOK and the conservative New Democracy. The anti-bailout Radical Left Coalition, or Syriza, led by Alexis Tsipras made the most parliamentary gains. It campaigned on a pledge to throw out austerity measures.
Greece is also saying that the EU must keep supporting it, or the chaos caused by disorderly default and exit will bring the euro down.
Moody's Analytics warned that Spain cannot sustain its current borrowing costs and faces a "high risk of default." The Spanish government says that without "urgent action," included heavy buying of sovereign bond by the European Central Bank, it could need a Greek-style international bailout or may even have to quit the euro. And, Standard & Poor's cut Spain's sovereign debt rating to BBB+, warning that the government's budget situation is worsening and that is likely to have to prop up its banks.
All of this comes amid double-dip recession and unemployment woes. Spain's government is expected to say that its economy shrank by 0.4% between January and March, plunging it into a technical recession after gross domestic product fell 0.3% in the fourth quarter of 2011. Spain has been plagued by high borrowing costs and bailout speculation. In order to tackle its deficit, it has been forced to implement austerity plans, which prompted tens of thousands of Spaniards to take to the streets of Madrid in protest.
Spain warned that it is mired in a "crisis of huge proportions" as it faced record unemployment. Spain's unemployment rate was 24.4% in the first quarter of 2012. That rate is the highest in the industrialized world. At least 1.7 million households now have no wage-earner. Retail sales for March 2012 fell for the 21st consecutive month, as the country's recession reduced consumer spending. "The figures are terrible for everyone and terrible for the government," said José Manuel García-Margallo, the foreign minister. "Spain is in a crisis of huge proportions."
And what did economist Paul Krugman, who Obama thinks is brilliant, have to say about all this? Rather than address the cause of the economic crisis, he suggests separate currencies so countries could devalue! Regarding austerity, Krugman said, "The French are revolting. The Greeks, too. And it's about time."
I think Telegraph View says it best: "[T]o borrow your way out of a recession caused by excessive borrowing would be both irresponsible and economically ruinous. The only rational course of action is for governments to spend less. Yet the weekend's elections show that a great many voters are now happy to suspend logic and go for the soft option, which will of course cost them far more dearly in the long run."
So with all these economic lessons on which to draw, will Obama learn from Sweden and Canada and the EU? Will he see that the U.S. cannot continue to live beyond its means, that debts will come due and must be paid, that China and Japan are waiting in the wings?
Dr. Beatty earned a Ph.D. in quantitative management and statistics from Florida State University. He was a (very conservative) professor of quantitative management specializing in using statistics to assist/support decision-making. He has been a consultant to many small businesses and is now retired. Dr. Beatty is a veteran who served in the U.S. Army for 22 years. He blogs at rwno.limewebs.com.
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