We borrow, of course, from the 1927 lyrics by Nathaniel Shilkret and Gene Austin, “Look down, Look down, that Lonesome Road, before you travel on.” Could anyone offer better advice to the United States of America today? We think not. We need to take a collective, long look down the lonesome road on which we currently are before we continue on, because soon it becomes a one-way street. The signposts might be in Greek, or Spanish, or French, or Italian or Portuguese, or the king’s English, but they all tell us the same thing – runaway entitlements, huge deficits, ever-mounting debt all lead to the same place: declining growth, an endlessly fragile economy, high unemployment and underemployment, a perpetually insecure workforce and a young generation that, for the first time in our history, has little certainty of doing better than their parents. Why in the world would we choose to travel down such a road?
It was precisely this week two years ago that we first warned that Greece was the proverbial canary in the coal mine, and that it was a precursor to what we might expect when other countries, including our own, lived on perpetual deficits and habituated themselves to debt greater than the size of their entire economies. Many liberal economists, at the time, scoffed at the notion that the Eurozone was problematic or that the problems in Greece envisaged anything threatening to the larger and stronger countries of Europe. Well, the first signpost on the lonely road about which we write may have been in Greek, but since then we have passed similar road signs in Italian, French, Spanish, Dutch, Portuguese, and, yes, English — both of the royal tongue and as well as good old Yankee English.
Let’s deal with the irresponsible levels of debt we and the other so-called advanced nations of the industrialized world are carrying. Leading economists have produced impressive work that shows that public debt in excess of 90% of a nation’s GDP invariably leads to economic contraction. Why would that surprise anyone? Such debt, especially when it is growing, creates ever-mounting debt-service costs that erode national treasuries. And as debt mounts to levels greater than the economies that must support it, interest costs, sooner or later, increase, often precipitously. Funds to provide appropriate and needed government services are sacrificed and market capital to finance private sector growth (from which government mines its tax revenue) is crowded out by gluttonous government appetite for those same funds, and a crippling vicious cycle soon begins spiraling in the wings. That’s where much of the industrialized world now finds itself including, perhaps, America.
Just two months ago, the non-partisan Congressional Budget Office (CBO) warned that if the United States stays on its current course, economic growth would begin to contract as early as next year. The CBO analysis only considers what it refers to as “public debt”, that is, debt in the form of instruments held by the public. CBO estimates that such public debt will reach 77% of GDP next year, but that really understates the problem because it doesn’t count gross debt, which includes the money our government owes to the Social Security Trust Fund (and other government agencies). The government vacuums the social security taxes it collects from the so-called trust fund as fast as it comes in and transfers it into general revenues in order to pay its bills. The missing trust fund money is then replaced with Special Issue Treasury Notes, which are not counted as public debt. But it is debt and if it were also counted, as it should be, our debt would be 106% of GDP instead of 77% of GDP.
The well-respected International Institute for Management Development (IMD) based in Lausanne, Switzerland defines bearable or sustainable debt as debt that is no more than 60% of GDP. Of thirty-two nations analyzed, we rank 25th with only Ireland, Portugal, Iceland, Italy Greece and Japan in worse shape.
America is desperate for vibrant and sustainable economic growth, yet the Obama Administration seems to have priorities that are antithetical to a strong pro-growth agenda. Obama is not the first president to have flirted with expanding the government’s role in planning and managing the economy. So-called progressives have been infatuated with the European leftist model for decades. It is a road well traveled and a road on which we don’t want to be. We, like the Europeans, have bet on high debt and fast printing to fund a wholly ill-advised and unrealistic national agenda. The jury is no longer out on whether or not it is a good bet. It isn’t. Let’s take a closer look at the Euroroad we’re traveling.
Unemployment along the Euroroad is at a 15-Year High. The jobless rate in the 17-nation euro area is now hovering at about 11.0 percent, with Spain in the worst shape with nearly 25% of the work force out of work. The UK has slipped into recession, as has Spain, Netherlands, Belgium, Ireland, Italy, Portugal, Slovenia, Denmark, Czech Republic along with Greece, and France may well be next. The EU has pumped 1.3 trillion dollars into the debt-ridden nations of Europe, yet interest rates, after a brief pause, are, once again, soaring in France, Italy, Spain and, of course, Greece. Manufacturing in most of the euro-area is contracting well beyond what was projected only a month ago, and, particularly troubling, unemployment in Germany, the region’s largest economy, has unexpectedly ticked up.
Meanwhile, voters in Europe’s troubled countries are not in the mood to cooperate with fiscal reformers. French voters have just given the boot to French President Nicolas Sarkozy in favor of Socialist Francois Hollandem who wants to boost government spending; and in Greece voters chose, last week, two parties that want to scrap the rather extraordinary bailout deal which resulted in a 75% haircut for lenders. The voters didn’t like the belt tightening that was part of the deal.
The entire EuroZone is sputtering badly. An index of manufacturing in the EuroZone fell from 47.7 in March to 45.9 in April, which is the lowest it has been in almost three years. Readings below 50 indicate contraction. The report also indicated that job losses at factories increased and that there was “weak” demand from both domestic and export customers.
Increased joblessness along with a simultaneous need for reduced spending has created a Hobson’s Choice dilemma throughout Europe. Out-of-control debt, chronic deficits and burgeoning public payrolls have to be addressed, and that means varying degrees of long overdue austerity is required. Politicians, obviously mindful of angry voters, still have to figure out how to boost economic growth while imposing austerity measures at the same time. Mario Draghi, President of the European Central Bank, has called for a “growth compact” to offset the impact of new mandatory, belt-tightening fiscal rules. Buyers of sovereign debt are, understandably, getting very nervous as evidenced by the sharp increases in EuroZone borrowing costs.
For the time being, interest rates are still very low in the United States as we continue to maintain our coveted position as the nation in the least worst shape. We think, however, the odds are pretty strong that we might see another round of so-called quantitative easing by the Fed (which acts to depress interest rates) as our own economy, once again, shows signs of stalling. Our economy, last month, added far fewer new jobs (115,000) than was anticipated and far less than the number required to simply accommodate those men and women who are entering the job market each month. Simultaneously, our economic woes are being compounded by the current decline in what the Bureau of Labor Statistics refers to as the civilian labor force participation rate, which has dropped to 63.6 percent of the eligible civilian work force. To put this decline in perspective, this means that 2,693,000 workers have left the labor force in the past twelve months. Today, over 5 million workers have been unemployed for 27 weeks or more. Ironically, as the percent of people who are too discouraged to seek employment increases, the unemployment rate decreases (currently 8.1%) as we only count as unemployed those who are actively seeking work.
As we have written so frequently, we believe economic growth should be the top priority of the Obama Administration. Indeed, perhaps, it should be the only priority right now. It is not, however, the top priority. In fact, it seems to be of no priority at all. We are borrowing and printing money at an alarming rate, issuing thousands of pages of new regulations and demonizing those who pay the lion’s share of the taxes in America. Europe is a case-study-in-progress of where such policies lead. The President and his left-leaning acolytes do not see the road we are on as the Lonesome Road to Europe, but rather, it seems, as the Yellow Brick Road to the Emerald City. They are wrong and we must change course.