While Washington is aswirl with all sorts of Congressional Committee investigations, important lessons are being taught in Europe. I just wonder whether anyone is watching or listening?
If one plots economic growth and compares the US economy to that of Europe, one might be shocked to see that the US is and has been doing far better than our friends across the Atlantic. While Germany is showing positive growth, that growth is still insignificant compared to the US. What? Why is Europe dragging?
The quick answer is that European countries have adopted an “austerity” budget which is throttling growth at the expense of getting borrowing and debt under control. Keynesians point out that “if only Europe adopted stimulus” their economies could grow again. Hmmm.
Memories sometimes are so short.
Recalling the 2000’s, Iceland, Ireland, Portugal, Spain, Italy, and of course, Greece followed Wall Street’s lead. They borrowed and invested. Their investments did lead to employment and for a few years, life was quite good. Then the days of reckoning arrived. It was time to pay back the bankers.
Sustained economic growth comes from wise investments coupled with wise expenditures. In Europe, most of the countries who got in trouble poured billions into real estate development like new housing. It offered everyone something. Jobs all around and new digs for those who signed up. Soon, however, the bubble burst. European countries woke up to the unpleasant fact that there were too many homes compared to the number of people who could afford them. Even worse, it turned out that many who could afford them were dependent upon government jobs. When these home owners were laid off (due to austerity), even more homes flooded the market.
Free enterprise may be something like bulimia. There is a naturally biased to over consume or over produce, and then vomit and act as if nothing has ever happened. Free Enterprise advocates never see a bubble, and when it bursts, advise bankruptcy. They believe markets will correct. Most governments, while recognizing this, decide to “soften” the collapse just the same. In the US we got “too big, to fail” for our bankers. In Europe, bankers as well as certain large corporate employers received favorable treatment from their governments even when they have participated in some foolish business deals.
So what’s the lesson Europe is teaching?
- Don’t cut government expenditures to sharply. Economies which have large segments of government spending must be weaned carefully or risk a sharp contraction overall.
- Government expenditures aimed at helping the economy must have “sound investment” characteristics. In other words, the expenditures must anticipate a “pay back”. The pay back must come in the form of greater tax revenues such as road or port fees, greater VAT from increased manufacture, or wage/income taxes from higher employment. Most European countries (except Germany) seemed to overlook this.
- Public welfare payments (including unemployment, food stamps, housing assistance) while necessary for domestic peace must also have components that fosters less dependence in the future.
So now the really big question.
Do you think Congress is up to such a challenge?