It was none other than Albert Einstein who taught that to keep repeating the same thing while expecting a different result is the definition of insanity. More recently, economists Carmen Reinhart (University of Maryland) and Kenneth Rogoff (Harvard) demonstrated the proof of Einstein’s wisdom in their best selling tome, “This Time It’s Different,” which offers a panoramic analysis of the history of financial crises dating from England’s fourteenth-century default to the current crisis in the United States. Analyzing information gleaned from 800 years of economic history, Reinhart and Rogoff show how prolonged excessive government deficits and debt over 90% of GDP (which the United States under President Obama has now surpassed) invariably lead to contraction or collapse. Reinhart and Rogoff also show how each crisis has been precipitated by political leaders who believed they could escape the consequences of their own profligacy because they believed that “this time it’s different”.
Well, it isn’t different and, as Einstein might have observed, pursuing the European model of excess spending and debt and expecting different results is, frankly, insane. So-called liberal progressives believe the purpose of government is primarily to provide services to the people, rather than to create a climate conducive to economic growth and then providing services primarily to those who cannot really serve themselves. Entitlements are, to the so-called progressives, sacrosanct. Their agendas demonstrate they believe we should always increase the number of people who receive some largess from the taxpayers. Deficits are mere details. Debt is for another generation to pay (and pay they will); and the dollar can be debased with impunity because we’re America and the dollar is always good as gold. Really? Gold hasn’t doubled in value in the past few years because it has, somehow, achieved some new contribution to economic growth. It contributes nothing to economic growth. It has increased in value in direct proportion to the dollar’s loss of value.
We don’t have to wonder where all of this can lead. We can watch it play out every night on our television screens and in our newspapers. Let’s take a look. Spain is the fourth largest economy in Europe. There is, as we complete this essay, extreme violent civic disorder in Spain. Spanish Prime Minister, Mariano Rajoy, has pushed through a budget (now that the proverbial horse had fled the burning barn) that incorporates reduced spending instead of increased taxes in an attempt to stabilize its economy, quell serious civic disorder and head off a growing independence movement in the province of Catalonia, the country’s richest region. The people in Catalonia who pay taxes (to support lavish entitlements) far in excess of what they receive in return from the government have had enough. Spain’s deputy prime minister, Soraya Saenz de Santamaría, warned that the government would stop any attempt at a unilateral referendum, effectively challenging the Catalans to either desist or break the law and face the consequences. This is very serious stuff.
The tension between Madrid and the Catalans in Barcelona is fierce. Spain is battling to rein in deficits in order to placate the Eurozone bankers on whom the Spanish banks and Madrid may soon have to rely for their own bailout.
Greece is in utter turmoil and leftist French President Francois Hollande has acknowledged that his country must slash its deficit by more than 30 billion Euros after promising, during his election campaign against Nikolas Sarkozy, to go on a public sector hiring binge including 150,000 hires for unskilled labor and 60,000 new teaching posts. But the election is over and that’s just not going to happen. France has lost its AAA credit rating, and its absurd labor laws that penalize work (yes you read that right) have bankers questioning France’s ability to grow. Today, it’s the PIIGS that roil the financial markets, tomorrow it may well be the FIIGS.
Greece continues to become even more unglued as it prepares for a third bailout having failed to meet the terms of its prior two bailouts. Greece’s glued-together coalition has just agreed to a controversial austerity package without which its creditors, who have already taken massive haircuts, will simply turn their backs. Greece, like Portugal, Italy, Ireland and Spain, went drunk on debt and the chickens came home to roost in late 2009, provoking an economic crisis that has decimated the country’s economy, and brought down its government, unleashed increasing social unrest and threatened the future of the Euro. Antonis Samaras, the conservative Prime Minister has wrung agreement from his two left-wing coalition partners, both of whom were loath to impose further austerity. Now the package goes to EU bankers for approval and then to Athens’ 300-seat parliament. Street clashes immediately erupted as soon as the tentative agreement was announced to rein in unsustainable entitlements. Hold on to your hat.
Then there’s Italy, the world’s eighth-largest economy. “Momma mia,” as the Italians like to say, things are not going well in Italy with debt larger than the whole economies of Ireland, Portugal, and Greece combined. As The Atlantic reported last year, “The euro zone simply might not have the political will or financial resources necessary to backstop those enormous obligations. As one analyst observed, the country is “too big to fail, too big to save.”
Up to 30,000 members of two of Italy’s biggest unions are marching through Rome as we write this essay to protest against Prime Minister Mario Monti’s cuts in public spending. Opposition to austerity policies aimed at steering the country out of its economic crisis is growing as the recession tightens its grip and unemployment continues to rise.
Europe is in the grip of a vicious cycle. As recession spreads across the continent, as it currently is, tax revenues will plunge, exacerbating the ability to deal with the crisis.
So what’s the message here? Need we ask? We are doing, and have done for many years, that for which Europe is now paying a very stiff price. We will have the same fate if we keep doing the same thing (and we are…in spades), or, perhaps, Einstein was simply wrong.
Our solvency today is a function of printing growth and borrowing growth and not economic growth. In fact, as we write today, the dismal estimated second quarter GDP growth of 1.7% has just been downgraded to 1.3% growth. Obama is spending, with complete abandon well beyond our means, running up trillion dollar deficits year after year. Our debt is now greater than our entire economy (remember Reinhart and Rogoff) and we will have to raise our debt limit again in February another $1 trillion to $2 trillion, the bill for which we will send to our children and grand children.
The President insists we are on the right track, and the polls seem to suggest there are those naïve enough to believe him. Don’t count us among the 76-Trombone crowd following Professor Harold Hill. This Administration should have one goal and only one goal right now. That is to embrace policies that will stimulate real economic growth and avoid anything that will retard economic growth. That’s not happening.
Manufacturing growth in the United States is petering out according to the just released Chicago Purchasing Managers Index for September, a key gauge of manufacturing activity, which came in far below expectations and showed a contracting economy for the first time since 2009. The report tells the story of ongoing weakness in the U.S. economy. And alas, the University of Michigan’s consumer sentiment index for September also came in below expectations.
Europe IS an object lesson for the United States and it is a lesson we ignore at our own peril. Ponder this: the US’s total debt to GDP ratio rose from 66% in 2007 to 104% today and probably will rise to 110% a year from today under current circumstances (90% being the tipping point at which many economists like Reinhart and Rogoff believe economies will contract if not collapse); the annual US budget deficit is 8%. In comparison, Spain has a debt to GDP ratio of 68.5% and an annual budget deficit of 8.5%.
Washington is giving PIIGS a run for the money. WIIGS anyone?